Annie Garrigus
10/10/11
Ecosystem Mini-Project
Teleradiology:
Evolving Technologies and Business Models
With an aging population, an increase in people living with chronic diseases, and
rising healthcare spending, the U.S. needs ways to improve the quality and reduce
the cost of care. Teleradiology exemplifies one such solution. Though the
technology has been around since the 1990s, major improvements in network
speed and security have allowed teleradiology to provide greater efficiencies in
recent years.
This analysis will focus on teleradiology in the U.S. market with specific focus on the
business model of Virtual Radiologic Corporation, or vRad. VRad seized the number
one position in the U.S. market for teleradiology services when it merged with the
market leader, NightHawk Radiology Holdings, Inc. (“NightHawk”), in December
2010. Both vRad and NightHawk were publicly-traded companies with $172 million
(as of 8/7/08) and $130 million (as of 10/16/08) market capitalizations,
respectively, during 2008. Virtual Radologic was taken private in July 2010 when it
was acquired by Providence Equity Partners.
Diagnostic Imaging
Diagnostic imaging describes non-invasive procedures used to take pictures of
internal anatomy and processes using film or digital technologies. These pictures
and videos are used to diagnose a wide range of medical conditions on an
emergency or non-emergency basis. There are several types, or modalities, of
diagnostic imaging including computed tomography (CT), magnetic resonance
imaging (MRI), positron emission tomography (PET), radiography (X-rays),
ultrasound, and mammography. Diagnostic imaging services are increasing faster
than the supply of radiologists. These scans can be a way to rule out the need for
more invasive procedures, reducing cost and amount of care. The growing demand
for imaging combined with the shortage in radiologists necessitates more efficient
radiology services.
Teleradiology
Teleradiology is the practice of sending digital medical images from the imaging site
to a remote location for study by a radiologist. Traditional radiology services
require a radiologist to live near a hospital or medical practice where he is
employed or affiliated and travel there to interpret images. Teleradiology allows
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the radiologist to receive images at an off-site location – a home office or
centralized reading center – in an encrypted format via a fast and reliable
connection. In the 1990s, teleradiology was mainly used in emergency situations
to send scans to radiologists at home. Today, teleradiology companies – essentially
virtual radiology practices – have emerged. These practices consist of radiologists
located off site across the country or world who are licensed and credentialed
across multiple hospitals and states. They submit reports to the site of care often
faster than on-site radiologists could do so given their administrative duties and
other on-site distractions.
According to a 2004 Radlinx Group survey, 87% of radiology practices that
responded used teleradiology. In other words, they were able to receive and read
diagnostic images electronically. They did not necessarily contract with an outside
teleradiology company. Even after the merger of the number one and two players,
the teleradiology market remains fragmented with many small, private companies.
Companies are differentiated by their ability to recruit and retain radiologists as
well as obtain licenses and credentials for employed physicians in many states. The
market opportunity remains attractive, as a 2008 Frost and Sullivan report
estimates continued growth of the U.S. Marketing for Teleradiology Services at 15%
annually.
Radiology Service Providers
There are two primary sites for radiology services – hospitals and radiology clinics.
Hospital radiology services are usually provided by a radiology practice, a group of
affiliated radiologists, that contracts with the hospital and determines the staffing
schedule. Depending on the size, a radiology practice may provide coverage for
one or more hospitals. Radiology practices may also operate independent clinics
that receive referrals from other physicians. To manage night shifts when fewer
radiologists are on site and periods of high demand, some radiology practices enter
into contracts with teleradiology companies. The imaging site sends digital images
to the teleradiology company which assigns each study (set of images) to one of its
radiologists (often referred to as a telerad). The telerad interprets the images and
sends a report back to the on-site radiology practice. These steps require the use
of both general and proprietary technologies.
Technology that Enables Teleradiology
In order to send images between imaging sites or from an imaging site to
teleradiology company for reading, facilities must be equipped with picture
archiving and communication systems (PACS), computers or networks that store,
retrieve, distribute, and present images. PACS are used in lieu of film and fullcapability PACS can handle images from all modalities. Customers send PACS data
to outsourced providers via a reliable and secure Virtual Private Network (VPN).
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DICOM (digital imaging in communication) is a set of industry standards that allows
for the transfer of medical images and information between computer networks and
diagnostic imaging equipment made my different manufacturers. Hospital and
radiology practices can choose between many different PACS that are compatible
with DICOM to be able to take advantage of teleradiology services. The
teleradiology provider may assist the radiology site in determining the best PACS
for its needs. When teleradiology companies receive a set of images for a patient,
their workflow management systems immediately assign the study to a telerad
based on a set of criteria. The criteria depend on the workflow system and may
include backlog, licenses, credentials, and subspecialty areas.
The Virtual Radiologic Business Model
Before merging with NightHawk in December 2010, Virtual Radiologic maintained a
network of radiologists located almost entirely in the U.S. The company enters into
two-year contracts with radiologists that automatically renew unless broken by
either party. Almost all radiologists work out of home offices, reading images
primarily between the hours of 8pm and 10am. Radiologists tend to work 7 nights
in a row then take 7 nights off. They perform both preliminary and final reads,
though preliminary represent the majority. A preliminary read is an initial diagnosis
made shortly after the image is generated. A final read is a more thorough
analysis, taking into account the patient’s history and providing a more detailed
reading of the image with measurements and other specifics. Only final reads are
reimbursed by Medicare and commercial insurers.
When interpreting a set of images, a telerad may want to speak with the referring
physician to get additional patient information and provide a better report. VRad
has an operations center that connects telerads to referring physicians, minimizing
the time it would take a telerad to track down a referring physician on his own.
The NightHawk model differs based on the geography of the radiologists and the
location of work. NightHawk operates two centralized reading centers in Zurich,
Switzerland and Sydney, Australia. Most radiologists have relocated from the U.S.
and they have U.S. licenses and credentials and U.S. hospitals. NightHawk
radiologists can work local daylight hours while reading scans for U.S. hospitals,
clinics, and imaging centers during their overnight hours. NightHawk only performs
preliminary reads, as insurers require that final reads be performed by U.S.-based
physicians.
Other companies locate radiologists overseas in lower-cost labor markets such as
India. However, physicians must be licensed in the state and credentialed by the
hospital from which the scan was sent to interpret the scan of a U.S. patient.
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Doctors who have the same training, licenses, and credentials as U.S.-based
radiologists will demand similar compensation, so there is little benefit to locating
telerads in these markets.
For both vRad and NightHawk, most scans are received from clients’ emergency
rooms. Greater than 75% of the orders received are CT scans. Telerads are able
to provide preliminary readings in 15-20 minutes vs. an average of 30 minutes for
on-site readings. They typically provide final reads within 24 hours vs. 72 hours
on-site. More than 75% of vRad radiologists are subspecialty trained.
The Virtual Radiology business model relies on several proprietary applications. In
early 2010, vRad’s request for a patent covering its workflow, order forecasting,
and radiologist scheduling applications was approved. Its workflow technology
called “Multiple Resource Planning System” receives images (in groups called
orders) over the Internet and applies rules to allocate orders to radiologists based
on subspecialty training, licensing, credentialing, workload, hospital preferences
and other factors. The vRad PACS is a cloud solution, hosted and managed on the
Internet. VRad also offers cloud storage for digital images through its vRad Vault
product. The company now licenses these applications to radiology practices. The
technology especially helps practices that cover multiple facilities (hospitals or
clinics), allowing them to “load balance,” or even out the orders assigned to
radiologists at different sites.
Teleradiology Value Vision
The primary value of teleradiology is the ability to scale limited radiologist
resources to accommodate the increasing volume of diagnostic images.
Teleradiology provides additional coverage during periods of high demand and
overnight when hospitals are thinly staffed. Over 50% of emergency diagnostic
imaging takes place at night, when fewer radiologists are on duty. Without
teleradiology, on-site radiologists would have to work longer and less desirable
hours. Otherwise, turnaround time for reads would deteriorate, hurting patient
outcomes in emergency situations. On average, telerads provide quicker
turnarounds of initial and final reads than their on-site counterparts. Telerads are
able to be more productive due to advanced workflow management applications
that provide them with a steady supply of orders to interpret, spreading the work
as evenly as possible across telerads on duty. Telerads do not have any
administrative duties or distractions that consume on-site radiologists’ time.
Teleradiology provides another significant benefit to radiology practices that lack a
range of specialties, namely smaller and rural hospitals and clinics. It is difficult for
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one practice to attract a full complement of subspecialists, but teleradiology
provides such access. Workflow management systems are able to efficiently
allocate cases to subspecialists when appropriate.
The software teleradiology companies sell to help radiology practices manage
information and scans also provide significant value. VRad’s solution, vRad
Enterprise Connect, provides the platform to manage, read and store studies. It
compiles information from different locations and radiology technologies onto one
platform for workflow management. VRad also offers an Internet-based Radiology
Information System (RIS), including fully integrated voice dictation. These
products make radiologists more productive, improving patient care and lowering
costs.
Aligning the Actors in the Teleradiology Ecosystem
The teleradiology ecosystem consists of teleradiology companies, teleradiologists
(telerads), radiology practices, hospitals, referring physicians, insurers (public and
private), and patients. The role, incentives, and benefits for each are outlined
below. Radiology practices are the key actor that must see the benefit in
teleradiology, as the practices contract with the teleradiology companies. However,
as vRad shifts its business model over time, payors and hospital systems will be the
most important actors, as they stand to gain from efforts to control costs.
Teleradiology companies are taking advantage of the growing need for
productive radiology interpretation services, as the growth in diagnostic imaging is
outpacing the growth in radiologists. Currently, these companies have a fee-forservice model. They receive most of their revenue directly from radiology
practices, as the majority of reads are preliminary and not eligible for
reimbursement by insurers (payors). As vRad and other teleradiology companies
with U.S.-based doctors perform more final reads, they will benefit from higher
margins but also incur more direct exposure to payors. As reimbursement rates
decline for radiology services, so do the fees collected by teleradiology companies.
Technology licensing fees represent a small percentage of total revenue (less than
10%), but they are growing and help to offset compression in service fees.
Teleradiologists are attracted to the higher potential compensation and more
flexible schedule associated with teleradiology. As telerads are more productive
than on-site radiologists, receiving and reading more images per hour, they
generally have higher annual incomes. One Bank of America analyst report
estimates that the average NightHawk telerad collects $600,000 per year vs.
$300,000 to $400,000 for the average on-site radiologist. The typical vRad
schedule of 7 nights on, 7 nights off provides flexibility to take vacations and
pursue other interests. Doctors typically enter into contracts with vRad for 1,600 to
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2,200 hours per year which translates to a reasonable 33-46 hours per week
assuming 4 weeks of vacation (48 working weeks a year).
VRad radiologists have the flexibility to work from home and live anywhere in the
U.S. They also have the ability to see a higher volume of images in their
subspecialties given the superior workflow management.
Radiology practices, both hospital-based and independent, are able to provide
the level of coverage required to maintain service contracts (with hospitals or
physician groups) by contracting with teleradiology companies. They are also able
to better attract and retain radiologists, which are in high demand, by not requiring
them to work overnight shifts or weekends.
Practices also benefit from licensing a teleradiology company’s proprietary software
because it allows them to better balance workload among sites and radiologists.
Licensing software also saves practices the capital expense required to develop
their own solution.
Hospitals generally prefer to have doctors on site, but teleradiology is the next
best option, allowing access to productive resources during a time when 50% of
emergency scans take place. Telerads are likely to be more awake than those
working overnight shifts, resulting in more accurate reads. Ideally, hospitals should
see that teleradiology results in improved patient care - faster reads by nonfatigued radiologists with greater access to subspecialists. In reality, though,
hospitals tend to view teleradiology as a necessary evil – the necessary alternative
to having doctors on site
Referring physicians, the doctors treating the patients who receive diagnostic
imaging procedures, have little say in contracting with teleradiology companies
unless such contracting yields inferior results. They may prefer the faster
turnaround time teleradiology provides, allowing them to diagnose and treat
patients more quickly, improving outcomes. Teleradiology also allows them to get
copies of imaging reports on their iPhones or computers to use real-time. These
benefits should outweigh the drawbacks of being able to have a face-to-face
discussion with a colleague in the radiology department.
Payors (Medicare, Medicaid, and private insurers) are essentially indifferent
between on-site radiology and teleradiology given the current fee-for-service
model, as cost is similar. Ideally, payors would recognize teleradiology’s ability to
provide higher quality care. If teleradiology companies like vRad migrate to a fixed
rate model, payors stand to benefit.
Patients benefit from teleradiology’s ability to provide quicker reads, especially in
emergency situations. Faster turnaround times facilitate faster diagnoses. Patients
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benefit from higher quality reads by non-fatigued doctors with a range of
subspecialties. As patients rarely interact with radiologists, they do not miss the
face-to-face communication.
Evolution of vRad’s Business Model
In response to fee compression faced by radiologist practices that gets passed onto
teleradiology companies, vRad aims to transform its business model from fee-forservice to fixed rate on a per member basis. VRad seeks to contract directly with
independent physician practices, hospital networks, and payors. VRad would quote
a fixed rate per member (patient) to manage all radiology costs. This model
requires vRad to have on-site radiology groups in addition to telerads. VRad would
get more volume from exclusive contracts, and customers would benefit from
predictable (fixed) costs, better care, and more satisfied members. Managing a
patient for a fixed cost rather than receiving a fee for each imaging event would
incentivize vRad to maximize radiologist productivity and accuracy, containing costs
and lessening the likelihood that a patient will receive additional imaging.
The key challenge to this transition is the need to ultimately displace vRad’s current
customers – radiology practices – which currently contract with hospitals and
payors. VRad plans to make this transition gradual, starting with large physician
groups, which do not overlap with radiology practices’ current market. VRad will
need to convince current and potential customers that the new model offers more
benefits than the existing one.
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Teleradiology Ecosystem
Teleradiologists
(telerads)
Teleradiologist
Companies
(e.g. vRad)
Limited interaction
with payors to get
reimbursed for final
reads
contract
Send patients
for radiology
services
Radiology
Practices
Reimbursement for
“professional” part of
imaging bill
Referring
Physicians
Return reports
used for diagnosis
and treatment
contract
Hospitals
Reimbursement for
“hospitall” part of
imaging bill
Payors
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