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  1. 1. The Market Environment and Investment Opportunities in Teleradiology Mariusz Kociubinski Mohammed H. Petiwala Mohan Naidu Natalie Raines June 1, 2006 Submitted to Professor Greenstein MGMT 463 – Management of Technology
  2. 2. Teleradiology Contents Executive Summary.....................................................................................................................3 1.Introduction to Teleradiology ..................................................................................................4 1.1Growing Need for Teleradiology Services.........................................................................4 1.2Background on the Technology..........................................................................................5 1.3Benefits of Teleradiology...................................................................................................6 1.4Major Hurdles and Barriers to Diffusion............................................................................7 1.5Direction of Teleradiology Services Industry.....................................................................8 2.Analysis of Key Players in the Teleradiology Service Industry ..............................................9 2.1U.S. Based Teleradiology Service Providers......................................................................9 2.2Global Teleradiology Service Providers...........................................................................12 2.3Hybrid Teleradiology Service Providers..........................................................................13 3.Investment Opportunity..........................................................................................................15 4.References...............................................................................................................................17 2
  3. 3. Teleradiology Executive Summary The radiology department within healthcare facilities provides a critical service in analyzing and reporting on different types of images taken on patients. Although radiology reports play a critical part in the diagnosis and treatment of patients, the physicians themselves are often not in direct contact with the patient. By the use of Picture Archiving & Communication Systems (PACS) & Radiology Information Systems (RIS), radiologists can effectively perform their duties without a need for direct patient contact. To harness this separation, a set of new businesses is developing in the recent years called teleradiology. This paper analyzes current teleradiology market state and the incumbent firms’ strengths, weaknesses, assets, capabilities & strategies to determine which firms are best positioned to serve these customers. The paper also proposes investment options in this industry based on this analysis. Even though there is some activity in the international market, this analysis only examines the U.S. market and service providers. Based on the infancy of this industry, the following discussion addresses market developments and advantages among service providers over the next five years. As a result of a thorough analysis of U.S. teleradiology service providers and their market environment, our recommendation is to invest in NightHawk Radiology Services (NASDAQ: NHWK). NightHawk is the biggest and best-known player in the hybrid nighthawk space, has a strong reputation, and is well positioned strategically to expand its nighttime and daytime teleradiology services. In addition, the company has strong fundamentals with a solid history of income and revenue growth and is reasonably priced with the forward P/E ratio of 26. 3
  4. 4. Teleradiology 1. Introduction to Teleradiology Within the U.S. and across the globe, the healthcare industry is experiencing a significant increase in demand due to an aging population. In addition to increased costs across all channels within the industry from hospital procedures to pharmaceutical products, there is a constant shortage in supply of skilled healthcare workers. Each of these factors combine to intensify demand for improved service, communication, price and quality of care. Improvements in technology have cultivated the field of telemedicine whereby physicians can videoconference, transmit images to monitor and diagnose patients remotely. Such technological advancements reduce costs and allow physicians to spend more time treating patients instead of answering pages or writing prescriptions. 1.1 Growing Need for Teleradiology Services Demand for radiology services is expected to increase as a result of the aging American population. Projections for inpatient and outpatient imaging procedures will grow to nearly half a billion outpatient and 100-million inpatient scans in 2008.1 With the increased use of digital technology and workstations within hospitals, the transition to teleradiology has become a natural evolution as institutions increasingly phase out X-ray films and look to lower their operational costs. As the only widely available form of medical care during after-hours and weekends, the emergency medicine department (ED) currently delivers close to 10% to 15% of the healthcare in this country.2 With increasing medical care being shifted to the ED, greater demands are put on radiological services – one of the major support systems to emergency medicine. The increase in emergency-related scans is applying additional pressure on an already small pool of radiologists. In fact, a recent survey showed more than 65% of the responding radiologists rated 4
  5. 5. Teleradiology being on-call as the most stressful part of their profession. Call scheduling has become a focal point of conflict within radiological groups, sometimes even exceeding compensation. Further stretching this pool of radiologists, over 40 percent of emergency radiology scans occur at night – when fewer doctors are available to read them.3 Small, rural hospitals and clinics with no staff radiologist can send images to teleradiology providers, making it possible to have images read within minutes rather than days.4 This technological advancement has produced a major surge in demand of radiological services. 1.2 Background on the Technology Although Teleradiology as a technical innovation has the potential to completely reshape the field of radiology, currently its impact has been rather limited. Unlike many high tech innovations, the technology required for teleradiology services has been available for over a decade. Almost every hospital of considerable size already has a PACS1 & RIS2 that radiologists use to read and dictate on images. Such systems enable the radiology department to outsource the interpretation of some of their examinations to remote service providers. Facilities need only to a high-speed Internet connection (T1 line, DSL or cable), access to a web browser and the ability to send their DICOM3 images to the service provider. Most service providers do not require the purchase of any equipment or software and many provide a full service IT staff in case of connectivity or network problems. When an image is taken at a teleradiology-affiliated hospital, it is sent to service provider across the Internet through their virtual private network. The workflow software at the service provider then identifies the most appropriate radiologist based on his or her specialization, 1 Picture Archiving & Communication System 2 Radiology Information System 3 DICOM - Digital Imaging and Communications in Medicine, a standard in the field of medical informatics for exchanging digital information between medical imaging equipment (such as radiological imaging) and other systems. 5
  6. 6. Teleradiology hospital credentials and workload capacity. Upon receipt, the teleradiology provider performs a preliminary evaluation of the scan and then dictates a report. The patient data and report are sent back to the originating hospital, and if the evaluation requires immediate attention, the local physician may be contacted to discuss the findings that night. If the evaluation does not require immediate attention, the scan undergoes a primary evaluation the following morning by the local radiologist.5 Some facilities may also outsource the interpretation of their daytime exams to other U.S. based teleradiology providers. This process simplifies the workflow since the interpretation is final and does not require another radiologist’s approval; however this practice is not highly pervasive at the current time. 1.3 Benefits of Teleradiology From the hospital point of view, there are quality and financial benefits since some part- time radiologist positions can be eliminated. For the referring clinician, teleradiology provides more rapid assistance and better patient care. For hospitals without a full time radiologist, it can supply coverage where none existed and can provide consultation with experts and training at a distance.6 Finally, because the compensation for nighttime radiologists is shared by multiple groups in the teleradiology network, the overall cost of the after-hours coverage is far less than the cost would have been had the hospital hired their own radiologists for this purpose.7 From a radiologists’ perspective, there are several benefits. First, their time is used more efficiently since one or two radiologists can cover 30 to 40 hospitals within a system instead of serving as one radiologist on call per hospital. In addition, because they are constantly reviewing urgent or emergency cases, they become specialists in the field of emergency radiology. This expertise improves the quality of diagnosis and increases efficiency by which reports are generated and returned to the hospital and patient. Finally, and perhaps most importantly, the 6
  7. 7. Teleradiology quality of life for the radiologists is significantly improved, as they are not awakened in the middle of the night and can provide diagnoses from home without driving to the hospital.8 1.4 Major Hurdles and Barriers to Diffusion Several issues regarding billing, licensing, and liability make it challenging for teleradiology providers to distribute their services to a larger market. While nearly all large commercial insurers cover teleradiology, the U.S. Medicare system does not allow payment for services that are outsourced overseas. The only service for which Medicare does permit payment is for preliminary interpretations, which will pose a significant limitation on the diffusion of the technology. The governmental and legal liability of treating patients that are not physically present in the state has opened the door for considerable problems if a Board Complaint or Malpractice Suit is filed against the physician. Physicians practicing teleradiology must protect themselves by obtaining a full medical license or teleradiology license in each state where they will be accepting teleradiology contracts. Licenses are available at minimal cost, but it is the responsibility of the service provider to ensure all practicing teleradiologists are properly accredited. Finally, the American College of Radiology (ACR) states in its teleradiology standards that physicians, in addition to the facilities using teleradiology companies, must “have appropriate medical liability coverage for the state in which the examination was obtained” and from the state in which the examination is read. This can pose a significant hurdle since obtaining adequate insurance coverage can be expensive, particularly for smaller health systems.9 At present, these hurdles have kept the technology’s diffusion at bay, with most facilities using teleradiology only for preliminary interpretations of image studies run during the night. 7
  8. 8. Teleradiology 1.5 Direction of Teleradiology Services Industry The pace of development and adoption in the telemedicine industry is driving adoption of teleradiology services in the U.S. and across the globe. According to a 2003 report from MedMarket Diligence, the U.S. market for telemedicine products and services is estimated at $243 million. By the end of 2006, the payments for telemedicine visits are expected to be near $10 billion. In addition, the proportion of total home telemedicine care visits that are telemedicine-enabled is expected to grow from approximately 10% in 2004 to 16% in 2011.10 As this technology continues to evolve, telemedicine will continue its diffusion and radiology services will have the potential to be almost completely outsourced. Since more than 90% of conventional x-ray, MRI, CT and ultrasound examinations could potentially be handled in this manner, it is expected that the teleradiology industry will meet and likely exceed growth estimates for the telemedicine market by 2011.11 In view of the benefits of off-shoring in IT, one may suspect that teleradiology will move in the same direction relatively quickly. However, most radiology practitioners argue that such drastic change is unlikely because of such issues as certification, cognitive, market, and cost factors12 . It would require “dramatic change in the regulatory and market situation” before it becomes feasible to outsource the primary reads to low cost countries where radiology services cost a fraction of what they do in the United States. Thus within the next five years most of the action in the teleradiology arena will involve U.S. trained and accredited radiologists providing “nighthawk” services. Pure foreign competition that would utilize non-U.S. accredited radiologists will be a non-issue in the foreseeable future.13 14 8
  9. 9. Teleradiology 2. Analysis of Key Players in the Teleradiology Service Industry In order to successfully compete in the teleradiology arena over the next five years, companies must have certain capabilities. The following continue to emerge as most important in order to achieve a sustainable competitive position: • Ability to comply with stringent U.S. regulations (requires a staff of U.S. trained and licensed radiologists) • An up-to-date technology infrastructure (largely not an issue anymore) • Reputation and track record of high quality services • Ability to perform nighttime reads at competitive prices • Ability to address patients concerns about quality and privacy For the purpose of this analysis, we constrained our client market to include only U.S. radiology practices (hospitals, independent clinics, etc). However, when considering the various types of teleradiology service providers, we analyzed the prevalent arrangements that cater to our U.S. market. The following sections discuss the various types of teleradiology service providers, their assets, capabilities and likelihood of their success in this environment. The service providers can be divided into three major categories based on their geographical locations: U.S. based, global and hybrid providers. 2.1 U.S. Based Teleradiology Service Providers The U.S. based teleradiology service industry has developed overtime from the need to cater to remote and rural hospitals15 where it was difficult to staff full-time radiology professionals due to their high fees and unwillingness to re-locate. Teleradiology service providers in this space are sub-divided based on the value proposition and expertise they offer. 9
  10. 10. Teleradiology The first sub-category are the incumbent established urban hospitals like Massachusetts General Hospital16 , Children’s Memorial Hospital17 , and Arizona College of Medicine18 ; with a full-time specialized radiology staff that provide teleradiology service to neighboring county and state healthcare facilities and hospitals. These providers do not compete on the cost of service but offer the expertise of their practitioners. These services are used mostly as value-added second opinions or in emergency cases where it is difficult to transport the patient to the urban facilities. The radiologists providing this service have accreditation from the incumbent hospitals and are certified by the ACR and Joint Commission on Accreditation of Healthcare Organizations (JCAHO19 ). Another sub-category of U.S. based service providers are the 3rd party specialized teleradiology centers like Quality Nighthawk20 , Reddy Solutions Inc (RSI)21 , Virtual Radiologic22 , U.S. TeleRadiology23 . Each provider is based in the U.S. and runs radiology and diagnostics services from centralized locations and facilities. They recruit U.S. based radiologists that have the necessary certifications and credentials to serve the U.S. healthcare industry. These service providers address the liability insurance and other legal issues while the hospitals and healthcare facilities using their services are only responsible to pay for each diagnosis report. This type of service providers serve as nighthawks and dayhawks for smaller and remote healthcare facilities that cannot afford to hire full-time dedicated radiology staff on- site. The third sub-category of teleradiology U.S. based service providers is very similar to the one above but is smaller in size and is decentralized. The primary teleradiology provider employs or sub-contracts the radiology diagnosis work out to other 3rd party radiologists based in the U.S. This type of arrangement works well for self-employed radiology professionals who 10
  11. 11. Teleradiology provide their own insurance coverage and accreditation. The main difference between this type of service and the former centralized category is that the patient scans and images are sent to the remotely located radiologists work/home site (within the U.S.) as compared to radiologists traveling to work at the centralized teleradiology service provider location. In general, the U.S. based teleradiology providers are well positioned to offer “overflow” and specialized services to radiology practices that are in remote locations, are understaffed, or do not have the on-staff expertise for specialized cases. However, the current growth of daytime outsourcing services has not been significant. According to a recent survey by Auntminnie24 , while the “nighthawk” preliminary interpretations are common, there is little acceptance of daytime outsourcing. Furthermore, these providers are at a disadvantage to hybrid providers when it comes to offering nighttime reads, which are currently much more common. In order to provide these popular services, U.S. based providers require their staff to work during the night, which is generally loathed by the practitioners. In turn, radiologists demand a 30% premium for their services performed during unusual hours, which in turn leads to less competitive prices as compared with hybrids. In short, the U.S. providers are in a strategically inferior position when it comes to meeting the currently fast growing “nighthawk” opportunity. Another disadvantage of these U.S. based providers is that they currently don’t have a large installed base. So, even if the industry turns its attention to the practice of outsourcing the daytime reads, the hybrid nighthawk providers will be in a better position to offer their clients those services because they already have established relationships and processes.25 26 11
  12. 12. Teleradiology 2.2 Global Teleradiology Service Providers A number of teleradiology providers located outside of the U.S. have sprung up across the globe – notably in India, Brazil, Russia, Israel, and China in the last 3 or 4 years. This service model is very closely based on the success of outsourcing of services in the Information Technology (IT) and customer support ‘call-center’ industries. The primary benefit touted by this category of global service providers is the significant cost savings by exporting the work outside the U.S. For example, a radiologist in India charges $25,000 per year as compared to $350,000 charged by a certified and approved radiologist based in the U.S. Global teleradiology service providers have yet to succeed largely due to strict legislation and high importance on quality of service norms of the U.S. healthcare industry. Many unsuccessful attempts have been made in the past by global service providers to enter the U.S. teleradiology market. Most notable is the experiment carried out by Wipro Industries of Bangalore India, in partnership with Massachusetts General Hospital. In this case, U.S. patient scans and images were sent for preliminary diagnosis to the Indian radiologists (ones who did not possess U.S. board certifications and approvals) for a first-pass diagnosis and then validated and authorized/signed by U.S. certified radiologists. Based on security of information and other related issues, this experiment was ultimately suspended by U.S. authorities. The proven track record of outsourcing IT services still has some pundits predicting that the same will happen in the field of teleradiology. However, the global teleradiology providers are positioned rather poorly to compete in this field over the next several years. Unfortunately, the legal, regulatory and licensing hurdles make it impossible for these providers to gain a foothold in the U.S. market.27 Furthermore, the certification process is lengthy and constrained by U.S. institutions that are already at or near capacity. Finally, there is very little that these 12
  13. 13. Teleradiology global providers can do to address the problem. They can neither influence the policy or regulations, nor can they have all staff members trained and board certified. All of these issues create a very difficult strategic position. Another difficulty that the global providers face is the issue of assuring quality and the perception of quality by the patients.28 When it comes to healthcare, Americans are more concerned about quality and privacy than about the cost, and global providers would have to overcome the perception of second-rate quality. Because these providers are not governed by the rigorous U.S. regulations, patients and practitioners perceive them as lower-cost and lower quality providers, which is a serious disadvantage. Their biggest selling point is lower costs, which implies worse quality, yet quality is the primary consideration in this market. 2.3 Hybrid Teleradiology Service Providers The hybrid category of service providers includes those with headquarters in the U.S. who are registered as U.S. companies but have external teleradiology operations.29 The most successful example of a hybrid is NightHawk Radiology Services30 (NASDAQ: NHWK), a provider of nighttime, weekend and off-hours emergency radiology services to radiology groups and hospitals across the U.S. Operating remotely from centralized facilities in the U.S., Australia, and Switzerland, NightHawk's team of American Board of Radiology-certified, U.S. state-licensed and hospital-privileged radiologists use a proprietary workflow technology to provide 24/7 radiological interpretations, or reads, for its customers. The company is able to leverage its highly efficient and scaleable operating model to service nearly 463 customers and more than 860 hospitals throughout the U.S. Due to success of NightHawk Radiology Services several other companies (Technology Solutions31 , Radlinx Group Ltd.32 , NighHawk Pros33 ) have copied their business model and 13
  14. 14. Teleradiology established teleradiology service centers across the globe. These hybrids now compete to some extent on cost of service but mainly on turnaround time (average turnaround time is between 30 to 60 minutes) of the results as well as efficiency of diagnosis. These service providers do not claim to compete with the U.S. based radiology professionals but count themselves as complementors. By utilizing U.S. trained and certified radiologists, hybrid service providers are uniquely positioned to compete in the teleradiology field over the next several years. There are currently plenty of radiologists who would like to live in exotic countries that offer the same or higher quality of life.34 This allows hybrid providers to overcome the most significant hurdle of licensing, certification and the “legal minefield.” Their radiologists already have all the necessary licenses and certifications and can legally perform preliminary interpretations from distant locations. Outsourcing nighttime reads is the primary reason why hospitals first consider teleradiology. Physicians in the U.S. do not want to work at night and such services performed by U.S. based radiologists usually command a significant premium. In this regard, the hybrid providers have an advantage over the U.S. providers. They are well-positioned to offer cost savings because they can capitalize on the time difference. Their radiologists can work during the day at “day prices” but because of the time difference, the reads happen to occur at nighttime in the U.S. This allows hybrid providers to forego the nighttime premium and offer lower prices. Because hybrids only utilize U.S. trained and certified radiologists who carry full malpractice insurance and obey by the U.S. regulations, the quality concerns are usually not a problem. Some have even made the argument that this arrangement leads to higher quality reads 14
  15. 15. Teleradiology because a radiologist who is awakened in the middle of the night is not as rested as his counterpart in Sidney who has just begun work. 35 The strategy of hybrid providers is to first enter the market by offering preliminary reads. This allows them to claim that they do not directly compete with the staff radiologists and that their services only complement their local practices. Because of this, nighthawk types of services have enjoyed a strong rate of acceptance and are currently used in about 10% of nation’s facilities.36 Thanks to the large existing installed base, hybrid companies will be best positioned to take the radiology services outsourcing to the next level. Rather than offering only “preliminary” reads, in time they could offer “final” reads as well. The prerequisites needed for this step are already in place, the technology infrastructure would not need to undergo major changes and the existing workflows could easily be adjusted. Most importantly, once the client hospital is assured of a satisfactory level of quality, the client would likely take the relationship to the next level. Granted, there are still some legal barriers that would allow hybrid providers to offer “final” interpretations, but once they are clarified, which doesn’t seem to be far off, they would be in an excellent position to offer such services. 3. Investment Opportunity Out of the three types of service providers, the hybrid nighthawk service providers are most likely to grow and succeed over the next five years. These providers currently capitalize on the most prominent trend of facilities outsourcing nighttime reads. Also, because of their existing relationships with customers, they are most likely to benefit by the impending wave of outsourcing daytime reads. One company that is currently the best candidate for investment is NightHawk Radiology Services (NASDAQ: NHWK). It is the biggest and best-known player in the hybrid nighthawk 15
  16. 16. Teleradiology space, has a strong reputation of providing quality interpretations and has solid relationships with a large installed base of client hospitals. NightHawk is also well positioned strategically to expand its nighttime business as the need continues to grow as well as sell daytime services to its existing customers. To expand its capabilities into daytime services NightHawk has made a strategic acquisition of DayHawk Radiology Services in January 200537 , thus effectively increasing its coverage to daytime hours. Finally, the company has strong fundamentals with a solid history of income and revenue growth. NightHawk is reasonably priced with the forward P/E ratio of 26. As a result of these quantitative measures in addition to our qualitative analysis of its opportunity, we recommend NHWK as the best candidate for investment in the teleradiology field over the next five years. 16
  17. 17. Teleradiology 4. References 17
  18. 18. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 “Teleradiology Growing” by Henry L. Davis, Buffalo News, 18 January 2005 37 be764d418c73/01-04-04.pdf