The ACR is helping the specialty navigate current economic pressures through evidence-based economic analysis, payment advocacy and engagement with policymakers.
FROM THE CHAIR OF THE COMMISSION ON ECONOMICS
Radiology is in the midst of an unusual economic experiment. For years, Medicare reimbursement for radiology services has moved in one direction: downward. At the same time, the market price of the labor required to produce those services (radiologists) has moved in the opposite direction and, in fact, has risen substantially. It’s been driven by strong demand for imaging, increasing study volume, complexity and, perhaps most importantly, a constrained supply of radiologists. As a result, payment for imaging services has failed to keep pace with the cost of providing them.
This is not a new economic phenomenon. There have been many instances in which the price of a product or service was constrained while the cost of a scarce labor input increased. During periods of wartime price controls in the 20th century, for example, governments attempted to hold down the prices of goods while labor markets continued to exert upward pressure on wages. The result was not simply lower wages: Businesses adapted through changes in production, substitution of capital for labor, productivity improvements and, eventually, pressure to change the controlled prices.
Healthcare has experienced similar episodes. Nursing shortages have periodically produced sharp increases in nurse compensation even when hospitals have been unable to increase reimbursement proportionately. Hospitals have responded with higher wages, agency staffing, productivity initiatives, changes in staffing models, new technology and, in some cases, reductions in services.
The key point is that the price of a radiology service and the price of radiologist labor are determined in very different markets. Medicare establishes an administered price for the service. Commercial insurers generally anchor contracted rates to a multiple of that Medicare price. This price is set independent of either supply or demand. Separately, the labor market determines what a radiologist must be paid to recruit and retain that physician. Those two prices do not have to move together.
Once everything that can be squeezed has been squeezed to the max, who absorbs the difference between the price of the service and the cost of the labor required to provide it?
Consider a simplified example. Suppose a radiology practice receives $50 for a unit of physician work. If the cost of the radiologist’s labor to produce that unit is $25, there is $25 left to cover overhead, technology, administrative costs and margin. If the market shortage of radiologists pushes the labor cost to $40, Medicare still pays the same $50. The practice has not become less efficient — the economics of producing the service have changed. The scarce resource, the radiologist, has captured a greater share of the revenue. The administered price of the service has become increasingly disconnected from the market-clearing cost of producing it.
Radiology practices can initially absorb the difference through reduced margins. They can ask radiologists to work longer hours, reduce nonclinical activities, consolidate administrative functions, use technology to improve workflow and pursue better commercial contracts.
But those strategies have limits. Once everything that can be squeezed has been squeezed to the max, who absorbs the difference between the price of the service and the cost of the labor required to provide it? There is only a handful of possibilities.
Technology can substitute for some of the labor. Regulations can be loosened to allow cheaper labor alternatives. The organization providing the service can accept lower margins. Hospitals can subsidize professional services. Or, eventually, the supply of services can decline.
There is another possible consequence that deserves attention: consolidation. As the gap between reimbursement and the cost of radiologist labor grows, smaller practices may find it increasingly difficult to absorb the volatility. Larger organizations may have advantages in negotiating commercial rates, spreading administrative costs, investing in technology and managing staffing shortages. Ultimately, hospital stipends may become such a significant share of even a large practice’s revenue that it no longer makes sense for the practice to be the intermediary.
None of this means that rising radiologist compensation is inherently problematic. In a competitive labor market, scarce physicians should command higher compensation. The market is doing exactly what markets are supposed to do: directing additional resources toward a scarce and valuable input. But the dissociation of radiology reimbursement from the labor market creates an environment that is ripe for disruption. If the two diverge far enough, the result will be a profession that may look very different from the radiology we know today.
ACR has an important role to play in helping our specialty navigate these economic pressures through evidence-based economic analysis, payment advocacy and engagement with policymakers. The challenge is to ensure that payment policy reflects the realities of delivering radiology services and supports a sustainable future for the profession.
Radiology at the Edge of Great Power Conflict
Radiology plays a bigger role in large-scale combat operations than many realize, and it’s important to understand how to make sure it’s accessible in combat.
Read more
A New Appreciation for CPT Codes
The James M. Moorefield, MD, Economics Fellowship offers a behind-the-scenes look at the advocacy and policymaking work that shapes the practice of radiology.
Read more
Access on the Go
The emergence of mobile lung cancer screening has given patients better access to the care they need, while reducing screening disparities.
Read more
