Technology advances, cost pressures fuel rise of national radiology groups

By Brandon Glenn, MedCity News

January 24, 2011

The radiology outsourcing market was once was dominated by disparate, local groups, but in recent years national and regional players have begun gobbling up more and more customers.

And that’s made radiology outsourcing companies – which typically perform radiological services both on-site at hospitals and remotely in what’s known as teleradiology — an increasingly attractive target for investors.

The trend is being driven largely by technology advances and healthcare cost pressures, which have combined to create a lucrative market for the companies stepping up to provide radiology services as hospitals look to save cash any way they can.

The global market for teleradiology, which refers to off-location reading of images like x-rays, MRI and CAT scans, was valued at $6 billion in 2008, and is growing at double-digit annual rates, according to a London research firm.

“We’re at a tipping point of a pretty major transformation in this business,” said Koleman Karleski, a managing director with Chrysalis in Louisville, Kentucky. Karleski has good reason to be a radiology outsourcing enthusiast: Chrysalis backs Pittsburgh-based Foundation Radiology Group, which raised $9.5 million last year to fuel its expansion.

The 75-employee company has 20 clients in five states: Pennsylvania, New York, Virginia, Kentucky and Michigan, said Barbara Beaudin, Foundation’s chief financial officer. Nationally, the field is led by Minnesota-based Virtual Radiologic, which last year bought rival NightHawk Radiology for $170 million. Other national and regional radiology players include Alabama-based Optimal Readings, California-based Imaging Advantage, and Cleveland-area Radisphere National Radiology Group, which raised a $27.5 million investment round last year.

Karleski estimates the U.S. market for radiology services at about $3 billion annually.

Most of the national and regional players contract with smaller, community hospitals, whose radiology groups might not have a wide range of expertise in the field’s numerous subspecialties, like muscoskeletal and neuroradiology. And even if the hospitals could find radiologists with a range of subspecialty expertise, they can’t afford to pay several of those subspecialists to be on the clock all day. That’s where teleradiology comes in.

Much of the reason for the rise of teleradiology simply stems from the nature of radiology work. Radiologists can analyze images any time and anywhere (as long as the technology allows it) because there doesn’t need to be a direct, physical doctor-patient relationship, said Susan Luria, a vice president with Cleveland-based biomedical business development group BioEnterprise.

“You don’t know the radiologist who’s reading your films, you just want to know that somebody highly capable is reading them,” Luria said.

As new, more powerful technology has come on the market, it’s become easier and cheaper to outsource radiology services. The widespread availability of broadband, plus radiology outsourcing companies’ investment in their own technology, has made sending images over the Internet simple and fast. It also allows companies like Foundation to make radiologists of any subspecialty available to clients around the clock, Karleski said.

“The technology and workflow enables productivity enhancement like no other service business that I’ve seen,” Karleski said.

Radisphere has invested massively in its own, proprietary software, and considers its technology a big point of differentiation between it and its competitors, said Clay Larsen, the company’s senior vice president of client and network development. When the company announced its $27.5 million investment round, it said it would use much of the cash to enhance its “radii” technology platform. In addition to image sharing, the technology helps users manage workflow, licensing, credentialing and other functions, Larsen said.

Radisphere employs about 100 full- and part-time radiologists throughout the country, about 130 support staff, and services 35 community hospital clients. The company splits its work between on-site and remote services for clients, according to Larsen.

While the national and regional players like Radisphere and Foundation appear on their way to carving out a lucrative niche, the technological progress that fueled their rise could be followed by new advances that further change and disrupt the market for radiological services. So if the past holds any lessons, it’s likely that radiology outsourcing companies will need to keep investing in their technology while they simultaneously fight for market share.

“I’d expect when you wake up five years from now the delivery of radiology services will look very different than what it does today,” Karleski said. “And it certainly looks very different today than it did five or 10 years ago.”