A Feasibility Analysis for a Fixed

MRI Unit

Amy Everage Hendrickson

University of Kentucky
Martin School of Public Policy and Administration
Masters of Healthcare Administration
Capstone Project
Spring 2008
 Overview
 Product Review
 Literature Review
 Purpose of the Study
 Managerial Question
 Background and Retrospective Analysis
 Methodology
 Data Sources and Collection
 Prospective Situational Analysis
 Limitations
 Recommendations
 Product Review
Magnetic Resonance Imaging (MRI) is a
noninvasive diagnostic technique that
produces computerized images of internal
body tissues and is based on nuclear
magnetic resonance of atoms within the
body induced by the application of radio
waves*

*Merriam-Webster (2008)
 Product Review

*Iglehart (2006)
 Literature Review
Financial Feasibility and Future Success of
MRI Services
 Optimal success in the capture of imaging
revenue tied to appropriate staffing and
technology.
 Literature Review
 Imaging revenues have historically been one of
the two most profitable business lines for
hospitals*
 All hospital in this study reported strong MRI
volumes contributed to volume growth and
financial success*
 MRI Technology is offering physicians precisions
in surgery and accuracy of diagnosis,
particularly Cancer

*The Advisory Board Company (2005)

 Literature Review
 Future of MRI Technology*
 1.5T vs. 3.0T
 Spine and breast images are inferior to the 1.5T
 Coils not yet available for some services
 Open vs. Closed
 Limited image quality due to lower magnetic
strength

*Tannenbaum (2005)
 Literature Review
 Competition for MRI Services
 Hospitals, radiologists, non-radiologists
physicians and independent testing facilities*
 Hospital did have greater capture of services
over others.*
 Importance of CON Law and application of the
Stark Law

*Mitchell (2007)
 Literature Review
 MRI Market Potential
 6% of all outpatient imaging volume and 30%
of all imaging profits come from MRI*

*Advisory Board Technology Watch (2005)

 Purpose of the Study
To analyze the feasibility of establishing a
permanent, fixed MRI service at Newco
Hospital
 Managerial Question
Can the organization anticipate revenues
adequate to justify this new service?
 Methodology
 Retrospective Analysis
 SWOT Analysis
 Prospective Situational Analysis
 Financial Proforma
 Breakeven Analysis
 Data Sources and Collection
 Interviews
 Direct Observation
 Inpatient and Outpatient MRI Volumes
 Manual Reports and Documents
 Automated Decision Support Tools
 National, State, and Area Development
District specific data
 Journal Articles
Background and Retrospective
Analysis
 Organizational Setting &
Description
 96 bed, acute-care, rural hospital
 Not-for-profit
 1 of 9 hospitals
 Located in Eastern Kentucky
 Provides services of a community hospital
 Full-service imaging department
 Goals and Objectives
 Mission: Improve the health and promote the
well being of the people
 Formalized strategic planning process for the
organization and for the hospital
 Organizations grand strategy is to be a
financially viable ongoing entity
 Support system objectives: by growing volume
and market share, improving patient satisfaction,
and establishing quality with staffing and
technology.
 Governance
 Reports to manager of radiology
 Administrative Responsibility/Community
CEO
 Reports to organizational president/CEO
 Governed by Board of Trustees
 Profile of Existing Service
 MRI service available
 Mobile Contract Service
 Two days a week
 Maximized within the 1st year of operations in
2001
 Patient Satisfaction 3.35 on a 4.0 scale,
below industry benchmark of 3.55
 No current marketing plan or strategy
 Revenue Cycle Management
 Established charge and billing structure
 Information Systems
 Integrated information system in place
 Digital picture archiving system
 No automated patient scheduling system
 Fiscal
 2007 work stoppage
 Declines in volumes, revenue cycle
efficiency, cash flow
 2007 operating loss of $6 million
 Non-restricted days in cash is 23
 Human Resources
 Employees represented by USW
 Negotiated salary and benefits in market
place
 Materials Management
 Centralized materials management
functions
 Member of large GPO
 Good Leverage for competitor pricing
 Regulatory & Legal
 Well established organizational policy and
procedures
 Approved certificate of need
 Volume and Market Analysis
 Current market share is 43.08%
 MRI volume decline in 2007 due to:
 Private physician competitor went into business
 Work stoppage by union
 Limitation of a two day a week service
 National use rate is 61.5/1000
 Socioeconomic demographics and epidemiology suggest
61.5 is a conservative estimate in this market
 Slight population increase over next five years
 MRI Utilization
Newco Hospital Service Area FY 2007

3000
2604
2500
# MRI Scans

2000

1500
1122
1000

500

0
Total MRI Scans at Newco Total MRI Scans in the Service
Area
 Payor Mix for Newco Hospital MRI Services

Medicaid
25%
34%
Medicare

Self-Pay
8%
Commercial & Managed
33% Care
 Community and Medical Staff
Support
 Local Advisory committee
 Medical Staff
 Government officials
 Business leaders
 Facility and Physical Plant
 No vacant space in the hospital
 Good undeveloped space adjacent to the
west end of hospital
 SWOT Analysis
 Strengths
 Well Established Physician Referral Base
 Vacant space available for development
 Ample Parking at site for new construction
 Location of hospital
 9% Imaging volume growth over the past 5 years
 Competitive salary & benefit packages
 Experienced manager in medical imaging
 Existing contract with interpreting radiologists
 New PACS imaging system
 SWOT Analysis
 Weaknesses
 No existing space available
 Part-time mobile MRI service
 Poor marketing and advertising for MRI
 Congested centralized registration in imaging
department
 Congested centralized imaging waiting room
 Expensive benefit packages
 SWOT Analysis
 Opportunities
 Increased referral potential with full time
service
 Draw commercial patients into upscale setting
 Make services available 24/7
 Kentucky CON laws
 SWOT Analysis
 Threats
 Unions
 Aggressive physician practice & diagnostic
competition
 Tertiary care centers within one hour
 Two strong hospitals in primary service areas
 Increasing trend for physician and radiologists
to compete for imaging business
 Potential for Kentucky to Lift CON law
Prospective Situational
analysis
Projected Volume Growth of MRI
Scans at Newco Hospital
1800
1600
1400
Outpatient MRI
1200 Scans
1000 Inpatient MRI
800 Scans
600 Total MRI Scans

400
200
0
)

)
ity

7%

0%

5%
iv

(2

(4

(4
ct

2
tA

3
ar

ar

ar
en

Ye
Ye

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 Scope of Service
 24/7 Service
 M-F 8-4:30
 Nights and weekends emergency on call
service
 Population service: Cradle to Grave
 Full-range of MRI services
 Capital Equipment and
Construction
 Construction:
 Modular addition and renovated space
 Completed architectural plan
 Hard bid construction estimates
 Total construction 1976 sq. feet
 Cost estimate $617,089

 Equipment:
 1.5 T closed MRI
 Cost $1,307,279
 Workforce Assessment
 Modality based staffing model
 Experienced MRI Technologist candidates
available
 Training provided by vendor
 Marketing
 New Marketing Director hired
 Strategic marketing plan
 Advertising and direct marketing visits
 Outcomes Evaluation
 Measures
 Volumes
 Operational expense
 Patient satisfaction
 Quality
Financial Analysis
 NEWCO HOSPITAL
MRI PROJECT PLAN PROFORMA

Current
Activity Year 1 Year 2 Year 3

Statistics
Projected growth 27% 40% 45%
Inpatient MRI Scans 86 109 120 125
Outpatient MRI Scans 1,036 1,312 1,450 1,502

1,122 1,420 1,571 1,627

Revenues

Inpatient 180,342 234,846 272,688 296,548

Outpatient 2,172,492 2,829,069 3,284,938 3,572,371
Other - - - -

Gross Revenues 2,352,834 3,063,915 3,557,626 3,868,919

Less Revenue Adjustments:

Charity 28,508 37,124 43,106 46,878
Medicaid 430,677 560,838 651,209 708,190
Medicare 471,403 613,872 712,790 775,159
Estimated Uncollectible 134,396 175,013 203,214 220,996
Other Revenue Adjustments 603,762 786,233 912,925 992,806
Total Revenue Adjustments 1,668,746 2,173,080 2,523,244 2,744,028

Net Revenue 684,088 890,835 1,034,382 1,124,891

29% 29% 29% 29%

Expenses

Salaries - 70,782 72,906 75,093

Mobile MRI services 321,600 - - -
Payroll Taxes & Empl. Benefits - 21,235 21,872 22,528
Annual service agreement on MRI - Warranty 110,000 110,000
Supplies (5 days inventory on hand) 79,415 103,556 117,952 125,830
Lease (MRI 5 years with buy out option) 235,310 235,310 235,310
Marketing (Intercompany standard 2% of revenue) - 30,639 35,576 38,689
Corporate Overhead (MRI = 23% of Rads 7%) 33,773 34,786 35,829 36,904
Hospital Overhead (see corporate overhead) 106,586 109,783 113,077 116,469
Minor equipment purchases 434 250 325 100
Interest Expense 75,578 73,701 71,688
Depreciation - 33,040 33,040 33,040

Total Expenses 541,808 714,959 849,588 865,651

Excess Revenues over Expenses 142,281 175,876 184,794 259,239

20.8% 19.7% 17.9% 23.0%

Incremental Net Revenue 33,596 42,514 116,959

^ Minor equipment purchases consists of equipment with a purchase value of less than $1,000.

NPV @ 6% 167,732
Breakeven Analysis
# of Patients 1143
Total Net Revenue 714,981

Cost Description Fixed Cost ($)

Variable Costs
Supplies (5 days inventory on hand) $ 103,556

Fixed Costs
Salaries $ 70,782
Payroll Taxes & Empl. Benefits $ 21,235
Annual service agreement on MRI Warranty
Lease (MRI 5 years with buy out option) $ 235,310
Marketing (Intercompany standard 2% of revenue) $ 30,639
Corporate Overhead (MRI = 23% of Rads 7%) $34,786
Hospital Overhead (see corporate overhead) $109,783
Minor equipment purchases $250
Interest Expense $75,578
Depreciation $33,040

Total Fixed Costs $ 611,403

Total (Variable Cost + Fixed Cost) 714,959.00 Break even in year 1

 Breakeven Graph
$1,400,000

$1,200,000

$1,000,000

$800,000 Net Revenue

Revenue

Fixed Cost
$600,000 Total Costs

$400,000

$200,000

$-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Months
 Limitations
 No information is collected by any agency
relative to outpatient service statistics
 The need to rely on experiential
information from expert subjects
 No reporting requirements for hospitals in
Kentucky, Tennessee, or Virginia
 No data sources for utilization of services in
the private sector for physicians or
independent diagnostic centers
 Limitations Continued
This means that all projections, while
based to the extent possible on proprietary
utilization data and national use rates,
required educated assumptions to be
made from the experiential data
 Recommendations
Proposal for a permanent fixed MRI
service be approved and that full
implementation, under the direction of the
Manager of Radiology, be achieved within
six months
 References
 Iglehart, John K., (2006). “The New Era of Medical Imaging – Progress and Pitfalls.”
New England Journal of Medicine, 354:2822-2828
 Merriam-Webster’s Medical Dictionary. (2008). “Magnetic Resonance Imaging”
http://medical.merriam-webster.com
 Mitchell, Jean M. (2007). The Prevalence of Physician Self-Referral Arrangements
After Stark II: Evidence from Advanced Diagnostic Imaging. Health Affairs,
26:3, 415-424.
 Tanenbaum, Lawrence, N., (2006). Clinical 3T MRI: Mastering the Challenges.
Applied Radiology, 35:11, 34-50.
 The Advisory Board, H*Works: Structure and Responsibilities of Diagnostic Imaging
Departments, Original Inquiry Brief, May 24, 2005.
 The Advisory Board, MRI: New systems, applications herald future volume growth,
Technology Watch, November 4, 2005. www.advisory.com
 Special Thanks To:
 Committee Chair: Leonard Heller Ed.D.
 Committee Member: Sarah Wackerbarth Ph.D.
 Committee Member: Adetokunbo Oluwole Ph.D.
 Outside Advisor: Trena Hall
Clinical Director of Corporate Projects
Appalachian Regional Healthcare
Questions?