Doctors? MRI Center Raises Fears of Higher Costs

To become an investor in Fayetteville MRI LLC, a doctor would need to put in only $100.

But earning returns on that investment will depend solely on how many patients the doctor refers to Fayetteville MRI, which currently operates as Clearvue Medical Imaging in a strip mall in Lowell, according to the company’s confidential private offering memorandum obtained by Arkansas Business and the Northwest Arkansas Business Journal.

The memorandum indicates that Fayetteville MRI — led by four Northwest Arkansas doctors — is seeking 50 physicians to invest a total of $5,000. It anticipates annual profits that would quickly exceed $2 million from a controversial business plan that relies on self-referral.

State and federal laws forbid self-referral to imaging centers that accept Medicare and Medicaid patients, so Fayetteville MRI will not accept patients insured by those government programs, the memo said.

At least 25 states, including California and Florida, ban self-referral to diagnostic imaging centers — even if the patients aren’t covered by government insurance programs, said Jean Mitchell, a professor of public policy at Georgetown University who has studied physician-owned imaging centers.

“If Arkansas had a state ban on self-referrals, this would clearly be in violation of the law,” she said of Fayetteville MRI’s plan. “These, to me, are just disguised kickbacks.”

Studies have shown that doctors who are investors in such centers will order more imaging tests than those who aren’t investors, she said.

“These types of businesses are an instant success because physicians control the demand and supply,” Mitchell said. “You have the incentive to send everybody who walks in the door [to the clinic for testing] because you’re profiting off of each patient.”

More tests means higher health care costs, which are eventually passed on to the patients in the form of higher health insurance premiums, she said.

“The problem is the employers are not screaming enough,” Mitchell said. “The insurance companies, they pay bills. They have no incentive [to crack down on the practice]. The only people who are getting screwed by all this are the employees and the taxpayers.”

Dr. David Brown, a neurologist who practices at the Neurological Association PLC in Fayetteville and holds a 17.5 percent ownership of Class A stock in Fayetteville MRI, said the business model isn’t illegal because the imaging center wouldn’t accept Medicare or Medicaid patients.

He also said he didn’t think other physician investors would refer patients to the center just to make money.
“I don’t use it on every one that I can use it [on],” Brown said. “You use the machine that you think is best for the patient.”

Tim Ezell, an attorney with Friday Eldredge & Clark LLP of Little Rock and who is representing Fayetteville MRI, wasn’t happy that Arkansas Business obtained a copy of the private offering memorandum. It was mailed to the newspaper by an anonymous tipster identified only as “A Concerned Doctor.”

“It’s really troubling to me that the contents of this offering memo are out there for public consumption because it really is supposed to be confidential,” he said.

Ezell also said the business model isn’t violating kickback laws.

“Those kickback laws are applicable to situations where there are … government health care beneficiaries involved, like Medicare and Medicaid,” he said. “There are no government beneficiaries involved in the Fayetteville MRI transaction.”

The Offering

On Feb. 1, Fayetteville MRI issued the private offering. Ezell said that he wasn’t certain if any shares have been sold. The offering ends on Oct. 1.

The offering warns potential investors of several risks involved with buying shares of the company.

“Federal and state laws generally prohibit activities and arrangements which are designed to provide kickbacks to induce referrals to health care entities,” the offering said. Violations could result in fines or criminal penalties.

The offering also warned that Fayetteville MRI hasn’t sought “and will not obtain” an opinion from its attorney that the company will be in compliance with all federal and state regulations.

Still, the offering said, “the Company believes that federal and state enforcement authorities will not view the Company as violating the Anti-kickback Statute. However, the law is both unclear and susceptible to a broad interpretation.”

Fayetteville MRI is currently leasing the equipment and office from SSMRI LLC, which is doing business as Lowell Medical Imaging, for $35,000 a month. SSMRI’s owner is Dr. Dan Riner of Springdale, whose specialty is diagnostic radiology.

Fayetteville MRI expects to generate $3.7 million in revenue and $1.6 million in profit, according to its year one pro forma income statement. By year three, the company’s pro forma income statement shows the company anticipates $5.2 million in revenue and $2.6 million in profit.

In addition to Brown, other Class A investors include Dr. Luke Knox, a neurosurgeon in Fayetteville, and Drs. Steve Moon and Michael L. Morse, neurologists in Fayetteville, who also work with Brown. All of the doctors own 17.5 percent of the Class A stock. None of the other doctors returned calls for comment.

Brown said the financial reward for investing in the company since it formed was “not great.” Its net income at the end of Feb. 29, 2008 was listed at $42,000.

More MRI Tests

A 1993 U.S. General Accounting Office study found that physician owners of Florida diagnostic imaging facilities had higher referral rates for all types of imaging services than did non-owners.

“The differences in referral rates were greatest for costly, high technology imaging services: physician owners had 54 percent higher referral rates for MRI scans, 28 percent higher referral rates for computed tomography (CT) scans and 25 percent higher referral rates for ultrasound and echocardiography,” the report said.

Other studies also show that if doctors are in a position to order more tests on their own equipment, they will, said Shawn Farley, a spokesman for the American College of Radiology in Reston, Va.

He said patients take it on faith that their doctor is referring them for a test because it’s in the patient’s best interest, not so the doctor could make money off the tests.

Most imaging centers are owed by radiologists, who have to rely on other doctors for referrals, said Dr. Guy Clifton, president of Save Our Healthcare, a nonprofit based in Washington, D.C.

He also said it’s easy for doctors to order MRIs.

“MRIs have no particular risk, so you can’t hurt anybody by doing it,” Clifton said. “So if there’s any doubt, you do it.”

Arkansas Blue Cross & Blue Shield, the state’s dominant insurance carrier, said its provider agreements don’t address physician ownership or self-referrals to physician-owed diagnostic imaging centers.

QualChoice/QCA of Little Rock also said it doesn’t have any policies against physicians self-referring.

“The main thing that we look at is not so much that it’s self-referral, but is it really a procedure that’s medically necessary,” said QualChoice’s CEO Michael Stock. “If it is, we’re going to pay for it.”

Stock also said that high-tech imaging services need to be pre-authorized.

But Clifton said the insurance companies are rarely in a position to second-guess the doctor. And preauthorization requirements also contribute to higher administrative costs because the insurance company has to hire people to judge whether the tests are necessary, he said.

“It just adds costs to the whole thing,” Clifton said.

Mitchell said she is surprised that the self-funded insurers haven’t done anything about the practice.

“They could put a stop to this in no time flat,” she said. “The employers should be screaming. All they are doing is making the employees pay an increase (in health insurance premiums).”

Free-standing imaging centers also are hurting hospitals, said Tami Hutchinson, senior vice president of Washington Regional Medical Center.

Hutchinson said the hospital uses its imaging center to subsidize the charity care that it provides to uninsured patients. She said she had also noticed more imaging tests are being ordered at the free-standing clinics.

“It’s an increase in the consumption of health care, which means the nation’s costs are rising,” she said.

Brown, one of the investors in Fayetteville MRI, said what’s driving up the health care costs are the attorneys who file malpractice claims against doctors.

“We have to cover our butt on everything,” Brown said. “We know we could be sued and they always are looking in retrospect what tests I do that are not needed for my clinical care.”

So if he orders tests, it’s to protect himself from plaintiff’s attorneys in the event of a lawsuit, he said.

“It’s all to cover myself from lawyers,” Brown said. “It has nothing to do with padding my pocketbook.”