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Costs for diagnostic imaging capital expenditure

Applied Economics Pty Ltd
Final Report. Prepared for Australian Government Department of Health and Ageing, July 2010

Applied Economics

TABLE OF CONTENTS II

TERMS OF REFERENCE VI

ABOUT THIS REPORT VII

LIST OF ABBREVIATIONS VIII

EXECUTIVE SUMMARY IX

SERVICE CHARACTERISTICS IX

ORGANISATION OF SERVICE DELIVERY IX

EQUIPMENT IX

INFRASTRUCTURE X

CONSUMABLES X

EQUIPMENT SUPPLY XI

DEPRECIATION XI

RELATIVE IMPORTANCE OF CAPITAL EQUIPMENT COSTS XI

REMUNERATING CAPITAL XI

CRITERIA FOR INVESTMENT IN EQUIPMENT XIII

PROCUREMENT OF EQUIPMENT XIII

EQUIPMENT PRICES XIII SIZE OF THE EQUIPMENT MARKET XIII

HOW CAPITAL EQUIPMENT MAY IMPROVE PRODUCTIVITY XIV

CONCLUSIONS XIV

RECOMMENDATIONS XIV

Marginal cost remuneration xiv

Defined useful life remuneration xv

MRI xv

Contents

Terms of reference

Executive summary

1. Background on diagnostic imaging: services, organisation and equipment

1.1 Overview of equipment and service markets

1.2 Service modalities

1.3 Service characteristics

1.4 Organisation of service delivery

1.4.1 Points of service delivery

1.4.2 Service market shares

1.4.3 The specialist workforce

1.4.4 Mutation of the corporate model

2. Equipment, infrastructure and consumables

1.5 Hard anatomical equipment

1.5.1 Hard anatomical: key issues

1.6 Soft anatomical equipment

1.6.1 Soft anatomical: key issues

1.7 Procedural equipment

1.8 Functional equipment

1.9 Dual-modality equipment

1.9.1 SPECT/CT and PET/CT

1.9.2 CT coronary angiography

1.9.3 MRA, MRI/SPECT and MRI/PET

1.10 Infrastructure and support systems

1.10.1 Digitisation

1.10.2 PAC RIS

1.10.3 Other infrastructure

1.11 Consumables

1.12 Regulation of equipment in Australia

1.13 Sources of supply

1.13.1 Equipment supply

1.13.2 Consumables supply

3. Capital costs and remuneration

1.14 Depreciation

1.15 Relative importance of capital equipment costs

1.16 Recognition of capital in remuneration

1.16.1 Defined useful life payment criteria

1.16.2 Capital and infrastructure in distributed imaging networks

1.16.3 Network disposition

1.16.4 Paying for imaging with economies of scale

1.16.5 Full cost remuneration with a defined useful life of capital

1.16.6 Marginal cost remuneration

1.17 Current MBS fee settings

4. Acquisition of equipment

1.18 Criteria for investment in equipment

1.19 Public sector investment guidelines

1.20 Procurement of equipment

5. The equipment market

1.21 Equipment prices

1.22 Size of the equipment market

1.23 How capital equipment may improve productivity

6. Conclusions and recommendations

1.24 Structure of diagnostic imaging industry

1.25 Payment for capital

1.26 MRI

1.27 Industry returns

1.28 The future

7. APPENDIX 1

1.29 Pattern of diagnostic imaging services attracting Medicare benefit

8. REFERENCES

9. GLOSSARY

This report was written by David Gadiel with assistance and comments from Peter Abelson, Anatoly Rozenfeld, Michael Lerch and Aman Pabla

Disclaimer

This report has been prepared by Applied Economics Pty Ltd for the Department of Health and Ageing. Applied Economics Pty Ltd prepares its reports with diligence and care and has made every effort to ensure that evidence on which this report has relied was obtained from proper sources and was accurately and faithfully assembled. It cannot, however, be held responsible for errors and omissions or for its inappropriate use.

The report is to consider questions that include the following:

• Does capital equipment improve productivity? If so how?

• What is the cost of purchase for the following diagnostic imaging equipment?

• Ultrasound

• Computed tomography

• Nuclear medicine imaging gamma camera

• PET scanner

• Angiography equipment

• X-ray

• Mammography

• Fluoroscopy

• Orthopantamography

• Magnetic resonance imaging

• PACS / RIS and other information technology (digital imaging)

• Combination of equipment (e.g. PET/CT, PET/MRI)

• How does the cost vary with equipment capacity and / or specifications?

• What consumables are necessary for various diagnostic imaging disciplines?

• How are consumables paid for and what is their cost?

• What other infrastructure costs exist other than capital equipment?

• How do businesses acquire diagnostic imaging equipment?

• How and from where is equipment sourced?

• What is the size of the diagnostic imaging equipment market in Australia?

• What is the availability of finance for businesses?

• How are new capital equipment purchases made?

• What is the method of deprecation?

• What are the tax implications of equipment purchase?

• Does the current taxation system affect equipment purchase?

• How are purchases structured to take advantage of the tax system?

• How do interest rates and currency conversion rates affect equipment purchase?

About this report

This report addresses its terms of reference in the context of the Government’s declared intention to extend rules for capital sensitivity in remunerating diagnostic imaging modalities. The new rules are intended to explicitly recognise the capital component of the Medicare benefit paid for diagnostic imaging services.

The Government’s chosen method is to acknowledge full service cost, but to restrict payment for diagnostic imaging equipment to the cost of its depreciation over a defined useful life (that will vary according to equipment type and assume that equipment will be thereby 100% depreciated).

The current Medicare remuneration for diagnostic imaging is a de facto full cost method of remuneration that by default allows imaging services to determine the useful life of their equipment.

If the Government seeks to formalise benchmarks for capital sensitivity and remunerates equipment according to its useful life, it will be helpful to have information about the characteristics of equipment, its durability, how it is procured and paid for as well as its price and the factors that influence the equipment market.

The material in this report is accordingly organised as follows:

Part 1 provides background on the nature of the diagnostic imaging industry, the services it provides and its organisation.

Part 2 provides a broad description of diagnostic equipment and associated infrastructure, its uses in the context of Medicare, the consumables it uses, its regulation and a description of its major suppliers.

Part 3 describes capital equipment costs and methods of capital remuneration, including an exploration of the conditions of diagnostic imaging production and competition as these affect its capital costs and argument for and against full and marginal cost remuneration and their variants.

Part 4 describes how imaging services acquire diagnostic imaging equipment, with a focus on strategic and financial criteria, lease or buy considerations, the influence of macroeconomic variables on the demand for equipment as well as a review of public sector purchasing guidelines.

Part 5 offers an account of equipment prices for major imaging modalities, market factors that may influence their price, the size of the market for equipment and the contribution of equipment to productivity and health gain.

Part 6 contains conclusions and recommendations on remunerating capital costs.

Information in the report was obtained from stakeholder consultations, industry trade sources and published sources, including articles in learned journals, Government reports, newspapers, periodicals and data from Medicare Australia.

Stakeholder consultations were conducted between February and May 2010. Some stakeholders responded to a structured list of questions. Those interviewed included State and Territory health jurisdictions, major suppliers of equipment, financial organisations, selected public and private diagnostic imaging services, the Australian Diagnostic Imaging Association and the Australasian College of Scientists and Engineers in Medicine. The RANZCR and the ANZAPNM were invited to participate in the consultation process but were unavailable.

LIST OF ABBREVIATIONS

ADIA Australian Diagnostic Imaging Association

AMWAC Australian Medical Workforce Advisory Committee

ANSTO Australian Nuclear Science and Technology Organisation

ANZAPNM Australian and New Zealand Association of Physicians in Nuclear Medicine

ARI Australian Radio Isotopes

ARTG Australian Register of Therapeutic Goods

ATO Australian Taxation Office

ANAO Australian National Audit Office

CE Conformité Européenne

CPOE Computerised provider order entry

CM Computed mammography

CR Computed radiology

CT Computed tomography

DALY Disability adjusted life year

DICOM Digital Imaging and Communications in Medicine

DM Digital mammography

DR Digital radiology

FDA Food and Drug Administration

FDG Fluorodeoxyglucose

GMP Good manufacturing practice

GMS Global Medical Solutions

GP General practitioner

GST Goods and services tax

HL7 Health Level Seven

IPN The Independent Practitioner Network

IT Information technology

ITA Invitation to apply

LSPN Location Specific Practice Number

MBq Megabecquerel

MBS Medicare Benefits Schedule

MES Managed equipment supply

MOU Memorandum of Understanding

MRI Magnetic resonance imaging

MSAC Medical Services Advisory Committee

MTAA Medical Technology Association of Australia

NGO Non-government organisation

PACS Picture archive and communication system

PBS Pharmaceutical Benefits Scheme

PET Positron emission tomography

QALY Quality adjusted life year

RANZCR Royal Australian and New Zealand College of Radiologists

RIS Radiology information system

RPA Royal Prince Alfred Hospital

SPECT Single photon emission computed tomography

T Tesla

TGA Therapeutic Goods Administration

WACC Weighted average cost of capital

Diagnostic imaging equipment is part of a high technology, knowledge-intensive industry, subject to rapid technological change, that includes hardware and software, manufacturing and services. Its market depends on the demand for diagnostic imaging services, which are funded almost entirely by third party payments, mostly from Medicare.

Both equipment and service markets for diagnostic imaging are dominated by oligopolies. The equipment market is controlled largely by three or four major suppliers that vigorously compete with each other in all areas of the market.

There is also ‘product’ competition between different diagnostic imaging modalities that can provide imaging studies with close-to-equivalent results for a range of diseases.

Service characteristics

During 2008/09, 17.3 million diagnostic imaging services attracted a Medicare benefit at a cost close to $2.0 billion, distributed mainly between diagnostic radiology (50% of total services), ultrasound (34%) and CT (12%). Between 2006/07 and 2008/09 the volume of services grew by 5% a year. Fastest growth areas were nuclear medicine (10% during 2008/09), followed by MRI. Diagnostic radiology, dominated by X-ray, has fallen by 6% since 2006/07.

Organisation of service delivery

Diagnostic imaging is provided from public hospitals, large private corporate networks, independent private networks and smaller public and private ‘satellite’ services. In various configurations and locations, all of them may treat some public hospital inpatients, public hospital emergency outpatients and private patients.

While Medicare benefit data show only the cost of private services to Government, they are the best available indicator of the dollar value of the ‘market’ for diagnostic imaging services. In 2008/09 about 53% of their cost was attributable to large corporations, 30% to independent services and 16% to public hospitals. The high degree of concentration in imaging service provision may have reflected an attempt to rationalise the extensive investment in new equipment and infrastructure necessary to operate imaging businesses.

The specialist imaging workforce consists of radiologists and nuclear medicine physicians. In the private sector this embodies a complex matrix that includes staff specialists, owner operators and private employees. Specialists are supported by clinical and technical staff including sonographers, radiographers, nurses, medical physicists and administrative personnel.

Many imaging specialists have recently left corporate medicine to establish their own independent networks. This has led to a decline in the influence of the large corporate imaging model.

Equipment

The delivery and organisation of diagnostic imaging services is associated with costly equipment and plant involving considerable capital investment.

A major feature of technical development in imaging equipment has been the progressive and almost seamless development of its diagnostic, interventional and therapeutic capabilities in areas such as angiography and minimally-invasive guided surgery. The primary concern of this report, however, is with equipment used largely for diagnostic imaging. This is characterised by four broad types of functionality and their hybrids as follows:

Hard anatomical—so-called because it utilises relatively high energy ionising radiation; it includes X-ray, bone densitometry and CT;

Soft anatomical—also referred to as ‘soft’ tissue imaging technology because it utilises relatively low energy photons (non-ionising and ionising); it covers ultrasound, MRI, mammography and thermal and optical imaging equipment;

Procedural—sometimes referred to as interventional radiology; it includes fluoroscopy and angiography;

Functional or molecular imaging—associated with nuclear medicine imaging and includes the gamma camera, SPECT and PET; and

Dual modality technology—straddling both the hard and soft anatomical and functional modalities; it includes CT coronary angiography, SPECT/CT and PET/CT—all of which can provide complementary diagnostic information; MRI/SPECT and MRI/PET hybrids are not available for clinical purposes in Australia.

Infrastructure

Most imaging equipment is digitised and relies upon a range of application programs that may direct the performance of particular types of scans, image reconstruction and post processing. Digital storage of imaging records allows professionals to access and view images regardless their location or where studies were conducted through a PACS RIS.

Other site-specific diagnostic imaging infrastructure includes personal radiation protection areas and environmental radiation monitoring systems for X-ray and scanning equipment, shielding for nuclear imaging and liquid helium cooling systems for MRIs. Imaging premises also need to embody adequate structural integrity. A busy imaging service might occupy floor space of at least 1,000 square metres, but in a teaching hospital up to 4,000 square metres.

Consumables

Contrast agents may be required to attenuate X-rays in radiographs and CT images or to enhance magnetic resonance and ultrasound signals. Angiography and venography use (disposable) catheters to add contrast agents to make blood in various organs visible.

Complexities attend the supply of radioisotopes used by nuclear imaging modalities. Their short half-life reduces the exposure of human organs to radiation but adds considerably to the cost of their dispensing. Isotopes used in PET/CT studies must be produced by cyclotrons in proximity to points of service. Lack of access to a cyclotron thus limits access to PET/CT services.

Equipment supply

There are no major domestic producers of equipment in Australia. Leading suppliers are GE Healthcare, Philips Medical Systems, Siemens and Toshiba, based in the United States, the Netherlands and Germany where equipment is manufactured.

However, many Australian businesses support the diagnostic imaging industry by way of repair and maintenance, the supply of building fit out services, the supply of ancillary support services such as IT and software, the supply of peripherals and workstations, radiation protection and equipment testing services, equipment reconditioning, etc.

Many consumables for diagnostic imaging services are supplied mostly by international businesses with operations in Australia or their local agents.

Depreciation

The capital costs of delivering diagnostic imaging services are represented by the costs of consuming the services of imaging equipment and its associated infrastructure over its useful life. Various factors may affect useful life, including:

• wear and tear associated with service volume

• the care with which equipment is maintained

• technical change or changes in the clinical or legal environment

• equipment upgrading

Private imaging providers calculate their depreciation using the straight-line method over estimated useful life, generally in accordance with Tax Rulings.

In public sector jurisdictions, depreciation of equipment usually adheres to recommended and maximum acceptable reinvestment timelines—although these may not necessarily be formalised.

Relative importance of capital equipment costs

Published financial information in financial statements is insufficiently disaggregated to relate specifically to diagnostic imaging equipment. The Consultant was supplied with data indicating that the share of depreciation, representing the capital consumption component of costs in a typical private imaging practice, is about 10%. This would include infrastructure and buildings. The net share of depreciation attributable to equipment could be about 6% of practice costs. Depreciation may be lower if imaging businesses finance their equipment by way of an operating lease. However, lease costs would be part of operating costs.

Remunerating capital

The Medicare benefit design for most medical services has traditionally been linked to remuneration for labour. Because of its capital requirements, diagnostic imaging has been considered differently. Since 1997 equipment for CT services that is older than 10 years has attracted half the benefit on equipment less than 10 years old. This was introduced to minimise the risk of elderly equipment being sweated’.

The Commonwealth now proposes to apply a modified principle to other diagnostic imaging equipment—with rules for capital sensitivity to provide for capital depreciation and amortisation limited to a defined useful life—10 years in the case of CT.

A defined ‘useful life’ method of remuneration would embody full cost pricing (assuming 100% depreciation) during an administratively determined useful life of capital and would vary according to equipment type. Other methods of remunerating diagnostic imaging services include:

• full cost remuneration for the full operating life of the equipment—until written off by the imaging service; and

• marginal cost remuneration—which would exclude any allowance for case-specific capital equipment from the Medicare fee, but have it paid separately.

The objectives of remuneration should be to encourage both efficient investment in quantity and type of equipment and its appropriate and efficient use.

A specific argument against the capital sensitivity rules for a defined useful life method of remuneration is the difficulty of predicting useful equipment life. It could also be wasteful of upgraded equipment that was perfectly serviceable (and hence under-remunerate capital).

A general argument against any full cost remuneration is the existence of economies of scale and a natural inclination by providers to make best use of their equipment. Long run average cost is falling so that average cost exceeds marginal cost. This is partly because average cost includes depreciation, whereas marginal cost excludes it.

Fees should provide no financial inducement to expand the volume of imaging services (subject to request) in excess of clinical need. Reimbursing at full cost, including for use of imaging equipment, may risk causing marginal revenue to exceed marginal cost and hence create incentives to overuse capital as well as allowing for its perpetual deprecation. The defined ‘useful life’ method of remuneration addresses the problem of excessive payment for capital, but not the risk of its overuse.

The risk of equipment overuse is aggravated because practices from competing imaging networks tend to cluster in strategic locations (often replicating and in proximity to public hospital imaging services). In competitive local settings there is excessive market fragmentation, jeopardising the benefits of scale sought by practice networks. Indeed, if local needs were satisfied where a practice operated equipment at a point where their average cost were falling, there could be potential for considerable expansion of services in excess of clinical criteria. Opportunities for this are increased where imaging services are bulk billed, especially for imaging services that could be considered ‘elective’.

Marginal cost remuneration addresses the risk of overuse. Where equipment is used for imaging services that are case-specific (as distinct from being used on every imaging patient, e.g. digital infrastructure), the correct price signal to avoid its overuse would be its marginal cost—or the incremental cost of producing an extra service. However unless some other satisfactory mechanism is found for equipment funding, there may be under-investment in equipment. Separate arrangements would then have to apply for remunerating case-specific capital equipment. This is already often the practice when equipment is funded externally by specific purpose grants.

A merit of marginal cost remuneration is that it may permit a focus on incremental cost elements such as digital image storage that are not always recognised in full cost accounting. A shortcoming is that separate provision of capital funding by way of a specific purpose budgetary payment may be susceptible to being politicised. Private practices would clearly be reluctant to accept public funding for equipment with stringent conditions attached. If a separate form of capital funding cannot be found, then remuneration may need to be at average cost.

Based on evidence from Queensland hospital data, the majority of diagnostic imaging modalities may not be covering average costs, with practically no provision for the amortisation of capital equipment at existing remuneration levels. If defined useful life were applied to existing levels of remuneration, it may not therefore necessarily accommodate all modalities at their full cost (even though full cost remuneration is often thought of a being ‘generous’ to capital).

Criteria for investment in equipment

There are differences between strategy for the acquisition of capital equipment in private imaging companies and State and Territory jurisdictions. In the public sector, large investments in imaging equipment in most jurisdictions are generally subject to a satisfactory ‘business case’ which may not fully reflect the cost of capital. In the private, for-profit sector, imaging providers, especially if they are publicly-listed companies, must weigh the returns from invested capital against their weighted average cost of capital.

Evidence on the impact of macroeconomic variables on the demand for capital equipment is mixed.

Procurement of equipment

Imaging services may purchase equipment under a variety of terms and conditions including cash, a financial lease, an operating lease, a fully maintained operating lease, etc.

The method by which equipment is acquired will depend on the financial circumstances and creditworthiness of the purchaser. For instance, if corporations have access to banking accommodation or debt or internal finance that is cheaper than the interest rate on a lease, they will generally purchase for cash. Equipment ownership hence usually offers greater tax advantages through depreciation. State and Territory health jurisdictions generally require all equipment to be purchased for cash but some permit a level of autonomy to local health services who may exercise their discretion as to the most propitious method of acquisition, but they generally purchase for cash.

Equipment prices

2009/10 equipment prices were obtained for all modalities from a variety of sources including suppliers, leasing sources, health jurisdictions and public tender documentation available on the Internet.

Prices of like equipment can be subject to significant unexplained variation. Even with detailed specifications of functions, equipment from different manufacturers can never be homogeneously defined. Quality of equipment performance can affect relative prices. Price volatility can sometimes be attributable to exchange rates.

Even for identical model numbers, prices may vary at the same point in time for different customers. Explanations include supplier competition, bulk purchase arrangements, manufacturer grants for research, etc. It is thus convenient and appropriate to specify price for each type of equipment with reference to an indicative range around a central estimate.

Size of the equipment market

Between 2007 and 2009, based on central estimates, the market for diagnostic imaging equipment expressed in 2009/10 values grew from $494 million to $631 million, representing a 28% growth in real terms. Ultrasound represented 27% of the total market in 2009 and was its largest single area. CT, MRI and nuclear imaging respectively constituted 19%, 18% and 12% of the total.

However, ultrasound’s relative contribution since 2007 has fallen. The main source of market growth between 2007 and 2009 was MRI, whose relative contribution to total sales grew by 50%. There are different explanations for sales of each of the modalities. The availability of benefits for

MRI is strictly controlled and sales of MRI are highly sensitive to the release of Medicare licences; CT is influenced by the diminishing significance of the large corporate imaging model and the growth of independent networks buying equipment for the first time; CR and DR sales are a function of the shift to digitisation; mammography equipment is highly sensitive to specific purpose funding available to BreastScreen; sales of PET/CT are also largely a function of specific purpose funding as well as access to a cyclotron, etc.

How capital equipment may improve productivity

There is general agreement amongst stakeholders that in permitting the interpretation, transmission and manipulation of complex images, digitisation has contributed to productivity.

Except for work commissioned by ADIA, evidence on the cost effectiveness of diagnostic imaging in Australia is sparse. An ADIA study uses data from the literature to examine the cost effectiveness of imaging modalities for six different diseases, using various assumptions about diagnosis, treatment, the progression of each disease, etc. It does not, however, provide any general evidence about the overall value of diagnostic imaging in Australia.

Evidence of the cost effectiveness of particular imaging studies under idealised scenarios does not constitute evidence of their appropriate ordering and use where Medicare entitlements exist.

Conclusions

Investment in equipment is a necessary but not sufficient condition for better and less costly pathways for patient management. Diagnostic imaging equipment is an ‘information product’ that becomes valuable only when its requesters understand about its uses, capabilities and limitations and there are no incentives to under- or over-use the equipment.

A priority in obtaining value from Australia’s imaging services will be to implement decision support to guide requesters in their ordering of imaging studies. Access to defined common order sets and their proper sequencing for symptoms and indications in accordance with clinical guidelines linked to CPOE may be a critical step in securing value for money. The migration from paper to digital has been the first step in this direction. Remuneration that offers financial incentives to efficient equipment utilisation and disposition would complement adoption of rational ordering criteria.

Recommendations

Marginal cost remuneration

Marginal cost remuneration encourages efficient use of equipment. However, when unit costs are falling, it may result in under-investment in equipment and there could be practical difficulties in its general implementation.

It is recommended that marginal cost remuneration be piloted for new modalities that are predominantly the domain of the public sector, such as PET/CT, that have been mainly funded with specific purpose grants. For modalities for which alternative funding to support marginal cost remuneration is not practicable, remuneration will have to be at full cost (average cost).

Defined useful life remuneration

If the Commonwealth were to implement its proposed defined useful life method of remunerating capital (in preference to its current de facto full cost arrangements), it would constitute formal recognition of the existence of capital in MBS remuneration—hitherto of equivocal status. As a corollary, in the interest of competitive neutrality, changes to the remuneration of imaging services receiving separate capital funding that do not consequently incur user costs of capital would be appropriate.

It is accordingly recommended that imaging services whose equipment is financed by external public capital funding, from grant, donation or research money, (even though it may be subject to notional amortisation) be ineligible to receive the full cost useful life margin in the Schedule Fee. Grantfunded equipment would hence effectively reduce to marginal cost remuneration.

The capitalised value of any external operational funding for equipment should be treated in the same way as capital funding.

To be competitively neutral, defined useful life remuneration would thus involve a two-tier remuneration system for identical pieces of equipment—depending upon the source of finance.

It also recommended that useful life assessments should re-set the depreciation clock when equipment has been upgraded in accordance with vendor specifications.

MRI

All stakeholders reported insufficient access to Medicare-licensed MRI equipment. By spilling over into excessive and inappropriate CT and ultrasound services, shortages of MRI are likely to distort use of diagnostic imaging services.

Policy to control MRI may be a legacy of questions raised about the probity of equipment ordered in the lead up to 1988/89 Budget. As a first step to neutralising this situation, it is recommended in the case of MRI equipment which is not currently Medicare-eligible, that consideration be given to writing a Schedule Fee benefit simply to meet the cost of a specialist reading fee for high field scanners. Use of equipment so remunerated and its likely impact on CT and ultrasound services could be monitored before possibly gradually expanding MRI remuneration in consideration of other criteria.

1.1 Overview of equipment and service markets

The market for diagnostic imaging equipment is a ‘derived’ demand originating in the demand for diagnostic imaging services, which are funded almost entirely by third party payments, mostly from benefits paid through Australia’s Medicare insurance system.

Both equipment and service markets for diagnostic imaging are dominated by oligopolies. The equipment market, with estimated sales in Australia in 2009 of some $630 million is controlled largely by three or four major suppliers that vigorously compete with each other in all areas of the market for imaging modalities and for most of the associated infrastructure.

Equipment is part of a high technology, knowledge-intensive industry that crosses the boundaries between hardware and software, manufacturing, and services. It is subject to rapid technological change as well as the progressive convergence between its application in purely diagnostic work and other areas of medicine.

About 35-40% of all imaging services are provided by public hospitals and 60-65% by private, for profit imaging businesses, dominated by an oligopoly of three major networks (ADIA 2008a, Attachment I p 50). Some private imaging businesses perform contract work for public hospitals and many non-inpatient public hospital services may attract a Medicare benefit. There is thus crossover and competition between the roles of private and public imaging services.

There is also competition between different diagnostic imaging modalities that can provide imaging studies with close-to-equivalent results for a range of diseases.

Medicare claims data provide the most reliable description of the service pattern of diagnostic imaging in Australia since its benefits fund about 70% of all imaging services (ADIA 2008a, Attachment I, p 50). Many services for which non-Medicare funding agencies may eventually become liable may nevertheless be included provisionally in Medicare data, preparatory to their settlement against other third party payers.

Benefits paid by Medicare Australia for diagnostic imaging services during 2008/09 represented some 13.6% of the total benefits paid for all medical services in that year ($14.3 billion) (Medicare 2010a). On Medicare Australia’s ‘broad type of service’ classification, diagnostic imaging represented the third largest area of benefit cost to government (close to $2.0 billion), after ‘unreferred consultations’ and ‘all pathology services’. During 2009/10, with the increasing emergence of molecular imaging modalities and other new technologies, payments for diagnostic imaging are likely to surpass those for pathology (a trend already evident in year-to-date data at the time of writing). ADIA claims that diagnostic imaging is the fastest growing component of medical costs worldwide (ADIA 2008a).

Several factors may be responsible for the expansion of imaging services, including:

• the impact of Australia’s ageing population;

• the availability of increasingly sophisticated diagnostic and prognostic information offering the potential to improve health outcomes;

• the increasing volume of investigations associated with the practise defensive medicine;

• the critical importance of diagnostic imaging services in the total management of patients, including in consultation, diagnosis studies, discussion of treatment options and treatment progression and optimisation;

• a dependence on diagnostic studies (associated with rapid technology diffusion and uptake) to support clinical decision-making, partly replacing thereby traditional clinical examination; and

• the increasing sensitivity of diagnostic imaging technology in identifying abnormalities of uncertain clinical importance, causing a cascade of further imaging (ICES 2007).

1.2 Service modalities

Medicare classifies diagnostic imaging according to six major service groups. These consist of diagnostic radiology (static X-rays, non-screening mammography, fluoroscopy, angiography, contrast media studies, etc), ultrasound, CT, MRI, nuclear imaging and miscellaneous services (Appendix 1). As will be shown below, various types of equipment and infrastructure are specific to each of these imaging service groups.

For Medicare purposes, the definition of diagnostic imaging excludes major interventional procedures that use procedural imaging technologies which are undertaken for therapeutic reasons—often in conjunction with diagnostic procedures using similar equipment. This work may be performed by cardiologists, gastroenterologists, urologists and vascular and neurological surgeons—even though diagnostic radiologists may retain a professional interest in this area and have interdisciplinary joint training programs with other Colleges concerned with these areas of practice. This study concentrates on diagnostic imaging equipment issues and needs associated specifically with the diagnostic imaging service group as defined by Medicare.

1.3 Service characteristics

The demand for diagnostic imaging services provides information about the stock and type of equipment required and the potential for shifts in imaging utilisation volumes and patterns to ultimately affect the demand for equipment. In addition, revenue from imaging services (in the private sector, especially) provides the main source of funding or leverage for the acquisition of equipment.

During 2008/09, the17.3 million diagnostic imaging services that attracted a Medicare benefit were distributed mainly between diagnostic radiology (50% of the total), ultrasound (34%) and CT (12%). Between 2006/07 and 2008/09 the volume of services grew by 5% a year. Fastest growth areas were nuclear medicine (10% during 2008/09), followed by MRI. Diagnostic radiology, dominated by Xray, has fallen by 6% since 2006/07 (Appendix 1).

In 2008/09, diagnostic imaging attracted a total benefit of $1.95 billion, which included $613 million for ultrasound, $562 million for CT and $433 million for diagnostic radiology. The average benefit cost of diagnostic imaging was $113 in 2008/09, after growing in current values by 3.6% a year over the three previous years.

Data on service utilisation are generally consistent with a diminishing prominence of diagnostic radiology and the emergence of newer imaging modalities and their hybrids, but whose use in many instances has been subject to cost containment involving restrictive criteria for accessing Medicare benefit—notably in the case of MRI and PET/CT. Although ultrasound and CT and are imperfect substitutes for MRI, stringent licensing of MRI for purposes of attracting Medicare benefit may be deflecting service demand into these alternative modalities, especially CT.

A more detailed account of the utilisation of diagnostic imaging services is provided in Appendix 1.

The period 2006/07 – 2007/08 were years concluding the term of two MOUs between the

Government, ADIA and the RANZCR which sought to cap overall growth in Medicare payments for diagnostic imaging to 5% per year (with the exception of nuclear imaging, some ultrasound and some cardiac angiography).

1.4 Organisation of service delivery

As will be shown later in this report, the structure and organisation of imaging services and the nature of competition that ensues, is of great consequence to the disposition of its capital, how it is utilised and the capital costs incurred.

1.4.1 Points of service delivery

Imaging services are provided from five broad service points as follows, with variations in levels of specialisation, staffing, equipment and infrastructure:

• Public hospitals, supplying comprehensive services to public inpatients, emergency department outpatients as well as to private inpatients and to outpatient clinics. Clientele treated in outpatient clinics represent de facto private patients. In 2007/08 public hospitals in all jurisdictions provided 3.4 million ‘non-inpatient’ diagnostic imaging services (Productivity Commission 2010, 10.21)

• Public corporations, dominated by three companies providing services from widely distributed networks consisting of practices that may have been bought or merged into larger entities—some freestanding, others located in both public and private hospitals

• Independent private providers operating from standalone practices—although sometimes networked on a smaller scale

• Outsourced teleradiology reading and reporting, typically operating at all hours of the day and (as discussed below), facilitated by interoperability and technical convergence between PACSs

• BreastScreen, which delivers mammographic screening administered by States and Territories but funded jointly with the Commonwealth. Because it is screening, its services are not covered by Medicare, although they are sometimes collocated in public hospital diagnostic settings

In some large teaching hospitals, services provided to public hospital inpatients and emergency department outpatients may account for up to 60% of the diagnostic imaging workload (ADIA 2008a). These services may be delivered by hospitals themselves or delivered under contract by private providers who may be corporate entities, VMOs or external reading services. All other hospital services fall within the category of ‘private care’ and almost all are captured through the Medicare claims experience for the six major diagnostic imaging service groups (Appendix 1).

Applied Economics

Source: Primary (2009 p 3); Sonic (2009 p 4); Diagnostic imaging trade sources1

1.4.2 Service market shares

While Medicare benefits paid on diagnostic imaging services relate only to the cost to Government of private services, they remain the best readily available indicator of the dollar value of the ‘market’ for private diagnostic imaging services.

The actual value of this market would be somewhat larger. It would include in addition copayment gaps paid by patients who were not bulk billed and fell outside the Government’s ‘Safety Net’ arrangements; benefits equivalent to 25% of the MBS fee charged to private inpatients; benefits paid by the Department of Veterans’ Affairs; and a relatively small number of private payments for imaging services not claimable from Medicare (e.g. to non-residents).

Chart 1.1 shows that there is concentration in the provision of private diagnostic imaging services—a feature that distinguishes it from other medical services apart from pathology. During 2008/09, of the $1.95 billion benefits paid by Medicare on diagnostic imaging, approximately 53% related to three large imaging corporations: about $530 million went to the I-Med Network and some $250 million went to each of Sonic Healthcare and Primary Health Care. About $600 million (30%) went to independent private practices. Some 17% was for private services provided by public hospitals.

Concentration in imaging may have been stimulated to justify extensive investment in equipment, technologies and new information systems to rationalise infrastructures supporting diverse points of service (IBIS 2010, Jones 2007).

I-Med Network is exclusively a specialist diagnostic imaging company formed in October 2004 when publicly-listed DCA Limited merged its I-Med Limited business with MIA Group Limited. I-Med is now owned by CVC Asia Pacific, a private equity firm that took over I-Med in September 2008.

Sonic is an Australia-based international laboratory services company that later became involved in imaging. Including its small New Zealand imaging business, imaging now represents about 12% of Sonic’s total sales. Each of I-Med’s and Sonic’s respective imaging businesses derives from the purchase and horizontal integration of existing radiology practices and groups and their incorporation

1 Medicare benefits paid are approximations. Strictly speaking, total private imaging revenues would have exceeded benefits paid by the amounts not rebateable by Medicare, as described in the text.

into comprehensive networks. The retention of imaging specialists in companies they have taken over has been facilitated under service contracts inhibiting them (until recently) from competing. Sonic has long enjoyed a strategic partnership with IPN, the largest operator of multidisciplinary primary care practices in Australia. In October 2008, Sonic assumed total control over IPN, which now represents about 5% of its total revenue.

Primary originated from a network of general practices with vertically integrated, in-house radiology on site, staffed by salaried radiologists. In February 2008 Primary acquired Symbion Health, a health conglomerate which also possessed a significant network of imaging practices that (after Primary had divested Symbion’s pharma and pharmacy businesses later that year) began to resemble more closely the I-Med and Sonic diagnostic imaging models. Primary’s imaging business now represents about 24% of its total revenue.

1.4.3 The specialist workforce

The medical specialist imaging workforce consists of specialist radiologists and nuclear medicine physicians. In the private sector this embodies a complex matrix of labour that includes the following permutations and their variations:

• Staff specialists employed by public hospitals but with rights of private practice, enabling them to oscillate between public and private work. In the latter capacity they may treat private hospital inpatients or outpatients or work in, or operate independent private practices (often in proximity to, and competing with hospitals with whom they have a specialist appointment)

• Specialist shareholders of services controlled by large corporate services, whose practices were amalgamated into corporate networks

• Specialist owner-operators of, or partners in independent private imaging services

• Private employees of large corporate or private independent services (usually junior specialists)

1.4.4 Mutation of the corporate model

An increasing trend has been the gradual attrition of large corporate imaging services as contract terms of many specialists employed in I-Med in particular expired. Groups of specialists thus became free to relinquish their corporate appointments to re-commence their own independent practices in competition (NSW Supreme Court 2008).

Tension between the priorities of radiologists as professionals and the corporate objectives of large imaging houses may have contributed to this trend (Sexton 2008). The peak of corporatisation in imaging may thus have passed and some argue that private independent groups are destined to represent the future growth of diagnostic imaging in Australia (Galloway 2008).

The delivery and organisation of diagnostic imaging services described above is associated with costly equipment and plant involving considerable capital investment—a feature that distinguishes diagnostic imaging from most medical care which is generally thought to be highly labour intensive (Productivity Commission 2005, p 25). In one specialist diagnostic imaging business for which public data are available, imaging revenue was $28.3 million in 2008/09. Its equipment was worth $11.0 million or about 38.9% of its annual production (Capitol Health 2009). This is roughly comparable to capital output ratios in pathology (Deeble 1991). However as discussed elsewhere, labour remains the largest single area of cost for diagnostic imaging and it is more labour intensive than pathology.

One of the main features of technical development in imaging equipment has been the progressive and almost seamless development of its diagnostic, interventional and therapeutic capabilities in areas such as angiography and minimally-invasive guided surgery. The primary concern, however, will be with equipment that is used largely for services described by the Medicare diagnostic imaging service groups in Appendix 1. This equipment is characterised by four broad types of functionality, within which there are various imaging modalities as illustrated in Figure 1 and described below.

1.5 Hard anatomical equipment

Hard anatomical functionalities (in the lower right quadrant of Figure 1)—so-called because their technologies utilise relatively high energy ionising radiation (X-rays), include:

• planar X-ray equipment, providing two dimensional images using (passive) film / OSLS (optically stimulated luminescent screens) or (active) planar imaging detector arrays—which would constitute the bulk of the baseline equipment used in the Medicare diagnostic radiology service group;

• bone densitometry equipment (similar to planar X-ray equipment but utilising dual energy X-rays), listed under Medicare’s ‘Diagnostic procedures and investigations’ category and hence not included in the data for this study; and

• CT scanners, using similar X-ray radiation to produce, high contrast resolution projections that can be combined to create three-dimensional axial volume slices which may be used in both diagnostic and interventional settings now also available in very fast, low dose, multi-slice and multi-detector, super high-resolution configurations. Slice views of internal body structures overcome the problem of superimposed structures of plain film.

1.5.1 Hard anatomical: key issues

X-ray equipment constitutes a standard technology available in all imagining services. The major issue with X-ray has been associated with streamlining its workflow environment by installing or upgrading bucky rooms to CR or replacing them with DR. Few practices still rely on X-ray film and chemistry.

Bone densitometry is a niche technology not widely distributed in practices in Australia and because of the restrictions on its use under Medicare, it is relatively infrequently used.

CT scanners represent more complex technology and are likely to be found in services with larger infrastructures. In a basic configuration, 16-slice (or less), CT may be used to supplement X-rays and ultrasound. High end, multi-slice CT scanners (e.g. 64-slice and above) and multi-detector models cost considerably more but are faster and reduce radiation exposure. They may also add value in highly specialised studies, including functional work, requiring competencies likely to be found mainly in teaching hospital settings or equivalent sophisticated practices.

Figure 2.1: Schematic taxonomy, different diagnostic imaging modalities

Applied Economics

1.6 Soft anatomical equipment

Soft anatomical functionalities (in the upper left quadrant of Figure 1) are generally referred to as ‘soft’ tissue imaging modalities because they utilise relatively low energy photons (non-ionising and ionising). They cover:

• ultrasound equipment (ranging from portable hand-held units to more sophisticated systems with the ability to produce three dimensional reconstructed images or Doppler-based images), using sound reflectivity and acoustic impedance differences to construct an image of a volume, including blood flow direction and speed (in the case of Doppler); it may also be used in both diagnostic and interventional settings;

• MRI equipment exploits the intrinsic proton Lamor precession frequencies of different tissue types under the influence of static and pulsed magnetic field gradients, combined with radio frequency pulse absorption and subsequent emission to produce images of much greater contrast of the soft tissues than CT; it is sometimes enhanced by contrast agents for blood flow studies, etc and is increasingly being used in a functional capacity, analogous to functional CT;

• mammography (included in the diagnostic radiology service group for diagnostic staging, as distinct from screening work delivered by BreastScreen), using relatively low energy

ionising radiation, optimised for soft tissue contrast; and

• thermal and optical imaging equipment that uses differential heat or optical spectroscopic signatures for certain (generally site-specific) vascular, endoscopic, gastrointestinal and cervical diagnostic services—beyond the scope, however, of Medicare’s definition of a diagnostic imaging service.

1.6.1 Soft anatomical: key issues

Basic ultrasound equipment is a mainstay in many practices and because of its versatility in its general-purpose mode, it has many diagnostic applications. With a transducer applied to the body surface, it is commonly used in pregnancy (to check the development of the foetus), in musculoskeletal assessments, cardiac stress testing as well for second-line breast screening or diagnosis. Tissue strain applications of ultrasound, for instance, are a recent non-invasive, real time method of detecting evidence of malignancy in organs such as breast, thyroid, prostate, etc (Bonner 2010). With transducers inserted into the body, other variants can also investigate the solid organs of the abdomen.

Ultrasound has the potential to be regarded as a tomographic modality and to be combined with other tomographic modalities such as MRI or CT (Freiherr 2008). Three dimensional ultrasound echocardiography is now an important tool for examining heart structure. Ultrasound, however, requires the special competencies of sonographers (in short supply) to capture, modify and optimise information collected by the image.

MRI equipment is not as widely distributed in Australia as CT because it is much more costly and its introduction has been carefully controlled through strict Medicare licensing; and (as mentioned above) patient access to MRI scanning is limited to requests only from specialists. At the time of writing, 128 MRI machines possessed Medicare approval1.

While MRI scanning has not provided advances in diagnostic capability comparable to the initial impact of CT (Busch 2005), it has facilitated imaging of the circulatory system and nerve endings with much greater clarity and precision than possible with CT. It is a very sensitive modality for breast imaging but of less specificity than mammography.

Contrast agents are not always used since for MRI studies of the brain, haemoglobin can act as a trace (it behaves differently depending on its state of oxygenation). Magnetic resonance angiography

(MRA) may also serve as a subtraction mask in angiography for diagnosis of stroke, using ‘time of flight’ to assess the differential flow of blood to create image contrast.

MRI equipment is characterised by features such as physical dimension (e.g. wide bore aperture) or magnetic field strength—specified in terms of the Tesla (T). Equipment is generally in the range of 1.5T magnet strength which is adequate for most studies, although some high-end equipment may possess field strengths of up to 3T which will offer superior resolution with greater speed and (with availability of appropriate specialist skills) may add value to neurological investigations.

1.7 Procedural equipment

Procedural scanning (in the upper right quadrant), sometimes referred to as interventional radiology, is covered within Medicare’s definition of diagnostic imaging services under the diagnostic radiology service group. Radiology services for which its equipment is used include real time fluoroscopic examinations and angiography, using digital subtraction techniques. As remarked above, diagnostic radiology services exclude fluoroscopic techniques used primarily for therapeutic reasons by cardiologists and vascular surgeons. More generally, however, procedural scanning equipment is used for:

• real time imaging modalities used in image guided surgical procedures, such as fluoroscopy for image intensification in orthopaedic trauma surgery;

• digital angiography X-ray; and

• various other (non-diagnostic) image systems in radio-guided surgery and interventional procedures.

Among the big advances in digital angiography X-ray systems is the introduction of CT-like imaging with a C-arm rotating around a patient to create a three dimensional image. This can be used as an overlay for better anatomical reference and to help visualise stent positioning.

1.8 Functional equipment

Functional imaging (in the lower left quadrant) is sometimes referred to as molecular imaging. Its equipment is used to deliver diagnostic imaging under Medicare’s nuclear imaging service group and covers:

• the gamma camera—a generic terminology covering scintillation-based equipment used in conjunction with tracers that emit gamma radiation. In their most rudimentary form, they provide site-specific, single head 2D planar projection imaging and temporal radiotracer uptake imaging (e.g. for breast, lung pulmonary extrusion, bone studies). This equipment can be upgraded in a limited way with software to enable a tomographic image to be reconstructed from multiple projections as a single head is rotated around the subject;

• SPECT—similarly used for site-specific diagnosis with a gamma emitter, but providing superior multiple projection images more rapidly, using two heads orthogonally placed on the same gantry. SPECT studies are used mainly where hard anatomical views are not a priority—e.g. for gall bladder and GI feeds as well as for ambulatory cardiac work. Advanced cadmium zinc telluride (CZT) detectors can be manipulated by algorithm to yield three dimensional data sets, similar to other tomographic techniques (e.g. 3D cardiac perfusion and brain function studies). SPECT equipment is now almost exclusively sold in Australia as a SPECT/CT configuration, which offers much greater versatility than standalone SPECT; and

• PET which relies on positron emitting isotopes and coincident gamma photon detection for whole body or brain scanning (especially for diagnosing and staging of cancers as well as other functional disorders). This equipment uses the positron emitter to visualise and measure organ function and metabolism. To optimise diagnostic usefulness, a PET image is superimposed on a CT image so as to overlay the functional information of PET with the anatomical CT image. New PET equipment is available now only as a combined PET/CT system (see below). Time-of-flight PET systems have also recently become commercially available and improve the spatial resolution of PET images.

1.9 Dual-modality equipment

Dual modality technologies straddle both hard the anatomical and functional modalities as well as the soft anatomical and functional modalities. Technologies straddling the former include CT coronary angiography—now feasible with multi-slice, including multi detector equipment—and hybrid SPECT/CT and PET/CT, systems which can provide complementary diagnostic information.

1.9.1 SPECT/CT and PET/CT

For cardiac SPECT work, some new software may correct attenuation without the extra cost of a built-in CT scanner—especially if the part of the heart under investigation is already known (Bolan 2009). For oncology applications, however, a CT is necessary. Some standalone SPECT systems currently available can be upgraded to SPECT/CT at considerable cost, involving major additions to software and hardware. Older SPECT equipment cannot be upgraded.

A combined PET/CT system has become the imaging standard for the staging of oncology. Standalone PET systems cannot be upgraded to PET/CT configurations. PET/CTs can produce volumes that register and quantitatively measure functional metabolic and biochemical information from a PET scan in conjunction with structural or anatomic data from a CT scan. The Consultant was told by one major imaging provider ―that hybrid imaging overlying molecular on anatomical structures represented the way of the future for the imaging industry in Australia‖.

Accurate anatomic localisation of tracers in oncology is possible only with dual-modality PET/CT attenuation; or if a scan is performed separately on a standalone PET machine, only if it is superimposed on a CT ‘grid’ with software fusion (although Medicare benefit would not be payable in the case of the latter). PET thus becomes the ‘functional’ contrast agent for CT. A separate Medicare benefit is payable for CT, provided it is done simultaneously in SPECT/CT studies and used to assist in diagnosis (MBS item 61505). Nevertheless the Consultant has been told that for some combined SPECT/CT equipment, the quality of the CT image is so poor that image fusion has become a financial rather than a clinical imperative.

Although SPECT/CT and PET/CT use different tracers which follow different metabolic pathways, there are overlaps between their capabilities (such as examination of blood supply in the brain), but the advantage of the former is its availability and its cost; its radioisotope generation technology is also longer-lasting and much less expensive than for PET/CT (see below). The potential for dual isotope imaging is also a major benefit of SPECT/CT.

At the time of writing there were 23 PET/CT machines in Australia which, under the Health Insurance Act Regulations, can be located only in hospital imaging services (or at least in locations connected to a hospital by a covered walkway). Five PET/CTs are operated by private imaging corporations. Benefit is payable only on equipment that meets specified criteria and has the approval of the Commonwealth.

For logistic reasons discussed below, PET/CT machines must also be close to cyclotrons. With the exception of equipment at seven specified teaching hospitals (who are authorised to collect data for MSAC assessment), use of this equipment is limited under Ministerial Determination to six indications on a restricted list of MBS item numbers2. This Determination is currently under review.

1.9.2 CT coronary angiography

CT coronary angiography has been available for a limited number of indications on Medicare (e.g. for excluding pulmonary embolism) since November 2007 (but not for the imaging of coronary arteries). This is a rapidly expanding application in the United States (Lapado 2009). There are some 25, high end multi-slice / multi-detector CT machines most suited for this type of work in Australia (Box 5.1, below)—a 64-slice machine is considered the minimum. Although it requires contrast media, the technique avoids invasive catheterisation and may thus be a substitute for the ‘gold standard’ of fluoroscopic angiography (Kopp 2004); it is also reported to represent a significant threat to SPECT/CT, because it avoids the cost of an isotope.

Whilst 128-, 256- and 320-slice CT scanners decrease procedure times and increase resolution, high quality studies have nevertheless yet to validate that all multi-detector, high-slice systems are diagnostically superior in coronary work to a more typical 64-slice system (Bolan 2009). Moreover, the width of the detector on 320-slice machines limits their high speed work to coronary and cranial studies. For other work they become equivalent to 64-slice machines. Dual source CTs, however, are more versatile at higher speeds. They can also scan at any heart rate without pre-preparing the subject with beta-blockers—although it is also claimed that heart rate control is now becoming less important in obtaining satisfactory datasets.

1.9.3 MRA, MRI/SPECT and MRI/PET

Dual-modality equipment, straddling the soft anatomical and functional quadrants, such as MRA, may be employed especially for neurological work, with time of flight technology’—as discussed above, generally avoiding the use of contrast media.

MRI/SPECT and MRI/PET technologies, allowing for the simultaneous measurement of anatomy, functionality and biochemistry may be found in some academic research environments in the United States, but only for neuroscience applications. They are extremely costly in Australia and remain in the prototype stage. There are five preclinical MRI/PET units being trialled in Australia in animal health.

One supplier told the Consultant that MRI/PET technology is expected to reach ―mainstream imaging‖ in the near future. This will be facilitated by new solid state technologies consisting of silicon-based photomultipliers and avalanche photodiodes that overcome the sensitivity of traditional photomultiplier tubes to magnetic fields. This could lead to rapid mainstreaming of MRI/PET and possibly MRI/SPECT. It may be also be possible to retrospectively upgrade some existing MRI scanners (Judenhofer 2008).

1.10 Infrastructure and support systems

1.10.1 Digitisation

Although a few imaging services such as in Joint Health Command (within the Department of Defence) continue to rely on wet film X-ray equipment (and it is still occasionally purchased), modern imaging services will generally seek digitiser technology to convert archival patient X-ray records stored on film. Most imaging practices and jurisdictions have now upgraded to CR (as an interim step) or completely re-equipped with DR. The decreased availability of support and parts for analogue X-ray equipment and increased costs of consumables such as film and chemicals have encouraged this process. Long term digital archiving protocols in their current form are not, however, standardised or fully tested to the standards of reliability of older archiving methods (film, tape etc).

CR equipment enables a cassette to be inserted into a plate reader which sends an image to a workstation. Multiple workstations can be integrated into a single database (but with retention of the film screen). DR eliminates the plate reader and introduces a wireless workflow integrating directly into a picture archive. It is much faster than CR, but more costly.

Digital imaging saves considerable storage space and allows for the immediate capture and visualisation of images. As there is no need to process film, it reduces screening times and improves the productivity of radiographers. Digital systems are nevertheless temperature sensitive (as are their servers) and require room temperature controls (DoHA 2009a).

In general terms, the digitisation of images improves ability to review images at time of capture and provides a better overall service to patients. It also improves the ability of imaging specialists to review, analyse and manipulate in real time both planar and volumetric displays.

Imaging technologies other than X-ray are completely digitised and embody a range of application programs which may direct equipment such as ultrasound, CT, MRI, SPECT/CT and PET/CT, etc to perform particular types of scans, image reconstructions and post processing applications. Typical post processing requires radiographers to routinely process 200 – 500 scan slices. Digital storage of imaging records allows professionals to access and view images regardless of where they may be located or where studies were conducted.

Rapid advances in digital equipment have contributed to significant overall productivity gain amongst all imaging professionals, substantially reducing thereby the cost of many imaging investigations (Hagans 2009). This has differentiated diagnostic imaging from most other areas of medicine where doctors are generally selling their time.

1.10.2 PAC RIS

Suitable servers are necessary to archive digital images, using a PACS. This comprises hardware and software that enables digital communication, archiving, processing and viewing of images and imagerelated information. It requires a storage subsystem, acquisition interfaces and special display stations. Secure systems complying with HL7 standards in hospitals are required to transmit and receive images and reports to, and from other imaging sites or points of diagnosis or patient service through a comprehensive RIS. The latter represents an essential aspect of services in rural areas or for the operation of any centrally managed, distributed imaging service network. Digital storage of information is also important for peer review and second opinion analysis (especially in mammography) as well as for recording baseline data and to create future opportunities for improvement of image reconstruction.

Most imaging providers, both public and private, are installing proprietary PACSs which are sold by major equipment and image platform vendors. Platforms may differ from one Health Service to another—even within a jurisdiction—although they are likely to support DICOM interfaces, developed by the American College of Radiologists. To remain competitive, most private imaging services would have the capacity to stream at least an electronically-generated radiologists’ report into a requesting doctor’s compatible desktop patient management program.

To realise maximum benefits and efficiencies, PACS network infrastructures need to possess synergies and interoperability between each other, so as to communicate directly with all other imaging services and patient record systems. In the NSW jurisdiction, for instance, there is good interoperability within Area Health Services; and as part of its Information Communications Technology Program, NSW Health is working with a major equipment supplier towards a state-wide satellite-hub PACS RIS with standard business rules (NSW Department of Health 2009).

The data volume for 3D reconstruction of a single patient record can be very large (up to 1-2 gigabytes) so that to facilitate satisfactory image transfer rates, any wide area PACS needs to be supported by very fast hardware and bandwidth of the order of 200 Mbps. In addition, in accordance with medical practice regulations, imaging records need to be maintained for at least seven years. Hence although files can be compressed, there are also still large storage requirements—all of which requires significant capital investment. Downstream storage costs are likely to be considerable and are likely to grow exponentially.

Ultimately there could be a linkage between State and Territory imaging archives as well as the possibility (if privacy issues can be resolved) of incorporating at least the reports of imaging specialists into the impending national electronic health record (eHR) (RANZCR 2008). ADIA (2008a) appears to favour a public-private model with retention of private archives, linked via global patient identifiers (along the lines of Canada’s Health Infoway) to national and state registries. Given the sensitivity and amount of data associated with such a system, there could be a case for the Commonwealth taking responsibility for funding a national archive.

By eliminating duplicate records and minimising the risk of unnecessary imaging and possible radiation exposure, access to a public infrastructure archive could clearly contribute to superior care. If properly designed and managed, it could become an invaluable resource for data mining to optimise existing staging and treatment protocols as well as to expand them.

1.10.3 Other infrastructure

Other diagnostic imaging infrastructure involves hardware such as table positioners, operator consoles, peripheral devices and, in older services, equipment to display and store film. Extensive cabling is required as well as a suitable (three-phase) power supply (respective loads of MRI, CT SPECT and PET/CT typically being 5 – 6 kW).

To comply with ionising radiation medical regulations, radiation protection for X-ray and scanning equipment is necessary. The shielding for nuclear imaging must also include beds and toilet facilities as the patients themselves become radiation sources. Radiation dosimetry equipment is required for systems involving ionising radiation for quality assurance purposes. MRIs require a liquid helium cooling system and buildings housing equipment need to embody adequate structural integrity.

Services with nuclear imaging modalities must maintain adequate facilities for receiving, storage and disposal of tracers and other consumables. Spent tracers, syringes, gloves and gowns, etc must be safely stored for extended periods (depending on the specific radiotracer) before being disposed of according to the appropriate guidelines. A busy imaging service might reasonably be expected to occupy floor space, of at least 1,000 square metres, but in a busy teaching hospital may be up to 4,000 square metres.

In addition to the capital and material inputs associated with operating a diagnostic imaging service, human capital infrastructure includes, as remarked above, specialist radiologists and nuclear medicine physicians. Each one of these is typically supported by seven or eight hands-on clinical and technical staff, including radiographers, sonographers, trainees, medical physicists, IT personnel, clerical personnel and contract maintenance and engineering personnel.

1.11 Consumables

Contrast agents may be required to improve X-ray and CT images or to enhance magnetic resonance and ultrasound signals. Iodine and barium are most commonly used for enhancing anatomical X-ray studies; gadolinium is used for MRI and microbubbles for ultrasonic echocardiograms. Angiography and venography use (disposable) catheters to add contrast agents through the femoral artery or vein to make blood in various organs visible under X-ray imaging—though consumables used simply for imaging catheterisation are less extensive than for catheterisation involved in treatments.

Services that have not digitised will require medical X-ray film, medical recording film, laser imaging film, duplicating and subtraction film, etc and associated chemistry supplies.

Greater complexities attend the supply of radioisotopes. These are used for diagnosis with nuclear imaging modalities to measure the intensity distribution of radiation emitted from a patient’s body. They are produced either by nuclear reactors that produce ‘neutron rich’ isotopes or by cyclotrons which produce ‘proton rich’ isotopes. The former are for SPECT and SPECT/CT studies and are used in more than 80% of all nuclear imaging work; the latter are for PET/CT studies.

Radiotracers used in nuclear imaging studies have a relatively short half-life which reduces exposure of human organs to radiation. Molybdenum-99 has a half life of 66 hours and can be transported to hospitals where its decay product, technetium-99m for SPECT and SPECT/CT studies, has a six-hour half-life. Larger imaging services dispense technetium-99m via a molybdenum generator located in a specially shielded ‘hot’ laboratory. Generators are usually delivered weekly to imaging services, with spent generators returned from recharging. Imaging services that do not possess their own ‘hot’ laboratories may have time-specific technetium-99m delivered at short notice from contract dispensers.

The average dose of FDG produced by cyclotrons for PET/CT studies embodies about 350 MBq of activity and is associated with a half-life of 109 minutes. To minimise travel time between the production and administration of FDG, cyclotrons must be situated in, or in proximity to services in which the studies are being undertaken. There are at present ten clinical cyclotrons in Australia—in Sydney, Melbourne, Brisbane and Perth.

The activity rate of decay of FDG is exponential, hence as travel times increase (usually measured in half-life multiples), the prohibitive costs associated with the higher amounts of radioactivity needed necessarily limit the use of PET/CT equipment that does not possess ready access to a cyclotron. Logistical problems and cost attend the operation of PET/CTs in Adelaide and Hobart, and prospectively, one in Canberra. One of the advantages of SPECT is that the long half-life of the tracers its uses negates the need to produce them on-site.

1.12 Regulation of equipment in Australia

Diagnostic imaging equipment and consumables sold in Australia are subject to a regulatory environment administered by the TGA (2002). All imaging equipment including software is classified as a Class IIa ‘Active device for diagnosis’ and subject to approval under the Therapeutic Goods Amendment (Medical Devices) Act, 2002.

Approved equipment is listed on the ARTG—a special area of which represents the central register of all imaging equipment authorised for use in Australia. To be approved for use, manufactures and sponsors need to provide satisfactory evidence of safety and performance.

Before it may be used for services listed on the MBS, new imaging technology or a new application of technology is generally subject to cost effectiveness evaluation by an MSAC inquiry.

In June 1998 Australia signed a Mutual Recognition Agreement with the European Union, which paved the way for a ‘harmonised’ regulatory system. Equipment suppliers told the consultant that in practice there was little difficulty in listing equipment on the ARTG that possessed FDA or CE approval, but that the associated paperwork was time consuming and the application process complicated and prolonged.

In New Zealand equipment with FDA or CE approval automatically gains marketing approval, whereas in Australia delays of up to two years can be common. This can retard patients’ access to new technology (which was of concern to some providers) and contributes to the cost of suppliers doing business in Australia. A typical TGA application for equipment can be expected to cost in the region of $400,000.

The RANZCR believes that ―the current processes for identifying and introducing new (diagnostic imaging) technology is ad hoc and lacks strategic focus. Australia lags well behind other developed countries in the take up of technology placing both clinical practice and research at a disadvantage‖. It proposes ―the establishment of a coordinated program for health technology assessment specific to diagnostic imaging‖ led by clinicians (RANZCR 2008).

The MTAA (2010) believes that ―because of delays in the MSAC approval procedure, there are systemic disincentives for the suppliers of medical technology to bring the technology into the Australian market and many beneficial technologies and procedures are not made available‖.

All diagnostic imaging practices need to be accredited3. Part of the Standards for Accreditation requires the maintenance of an equipment inventory, demonstrating that it is safe and effective, as evidenced by records verifying that it has been serviced by qualified persons according to manufacturer guidelines and the requirements of radiation safety standards. Where there is exposure to radiation, it must be as low as reasonably achievable. In addition, for Medicare benefit to be payable, all diagnostic imaging practices need to be registered with Medicare, for which purpose they are allocated a LSPN.

1.13 Sources of supply

1.13.1 Equipment supply

The supply of diagnostic imaging equipment is sometimes internationally regarded as major explanation growth in its utilisation (Ross 1999). There are no major domestic producers of equipment in Australia. Leading suppliers are based in the United States, the Netherlands and Germany where equipment is manufactured and from where it is imported. Major international suppliers have subsidiary companies or branch offices in Australia or are represented by locally-based agents.

Equipment is widely marketed on purely commercial grounds. Imaging companies are provided with detailed projections of the profits obtainable from the equipment at different levels of its utilisation. There are ‘canned’ demonstrations at trade shows. However, Australia’s control over equipment registration provides authorities with a measure of authority over how equipment may be marketed.

Apart from the principal suppliers of equipment, there are innumerable Australian businesses supporting the diagnostic imaging industry by way of repair and maintenance of equipment (sometimes under contract to principals), supply of building fit out services (usually under sub contract to principals), the supply of ancillary support services such as IT and software, the supply of peripherals and workstations, radiation protection and equipment testing services, equipment reconditioning, etc.

The requirement for local approval of equipment for listing on the ARTG has especially contributed to the growth of local evaluation, testing, medical physicist and engineering services. It is nevertheless unclear whether such a requirement would necessarily have been the most efficient method of encouraging the development and application of local expertise (if this were indeed a policy consideration).

As in the case of equipment, many consumables for diagnostic imaging services such as non-ionic tracers, contrast media, catheters, epidural sets, lubricants (for ultrasound), blood filters, swabs etc are supplied mostly by international businesses with operations in Australia or their local agents or representatives.

Some Australian research is undertaken into imaging hardware and software at many Australian

Universities such as at The Centre for Magnetic Resonance at the University of Queensland at the Department of Medical Imaging and Radiation Sciences at Monash University and at the Centre for Medical Radiation Physics at the University of Wollongong.

The leading suppliers of equipment are GE Healthcare, Philips Medical Systems and Siemens Medical Solutions—all of whom compete vigorously in similar product lines in the main imaging modalities (Table 2.1). Toshiba Medical Systems is a significant competitor in the areas of CT, ultrasound, X-ray and DR and procedural imaging. In the nuclear imaging area, Philips equipment is marketed and supported by InSight Oceania, Sydney. In addition, GE, Siemens and some specialist vendors offer and support cyclotrons in Australia.

Other significant, but more specific equipment suppliers include Shimadzu Medical systems,

Carestream Health (Kodak), Agfa-Gevaert, Fuji Film, Konica Minolta and Jacobs Medical (an

Australian company) mainly for X-ray, CR and DR equipment (Table 2.1). Carestream, AgfaGevaert, Fuji, Konica Minolta and Voyager (an Australian company) also offer PACS and teleradiology services. Niche suppliers include Oncovision (supported by InSight Oceania) for specialised gamma cameras and Hitachi Medical Systems for ultrasound.

Table 2.1: Major equipment suppliers in Australia of the main diagnostic imaging modalities

GE

Philips

Siemens

Toshiba

Shimadzu

Carestream

Agfa

Nuclear med

CT

X-ray, DR, CR

Ultrasound

MRI

Mammography

Fluoroscopy

PACS, telerad

GE has the largest share of the equipment market in Australia and is highly price-competitive with Philips and Siemens. GE has offered service packages of up to five years, which other suppliers are now matching. Philips dominates sectors of the nuclear imaging market, supplying (through InSight Oceania) about a third of SPECT/CTs and 70% of PET/CTs.

United States equipment manufacturers have been sourcing equipment components from outside suppliers since the 1980s (Tilly 1999) and this is now involving lower cost countries in the AsiaPacific region, including Malaysia, Singapore and Taiwan (Carren 2010). GE, Siemens and Shimadzu are partnering with Chinese companies in the Chinese domestic market and Chinese sources of supply have now become major suppliers of third-party components to Siemens, GE and Philips (Bose 2004). China and India are now paying greater attention to the FDA’s code of GMP.

Chinese imaging equipment is not currently listed on the ARTG, although Australian NGOs and aid agencies fund the supply of low-specification Chinese equipment (such as laptop ultrasound) to countries in the Pacific region. Looking to the future, it is possible that Chinese diagnostic imaging manufacturers could emerge as highly price-competitive sources of supply in Australia.

1.13.2 Consumables supply

Major suppliers of diagnostic imaging consumables include Johnson and Johnson, 3M, Philips, Tyco Healthcare / Covidien and the Regional Health Care Group (an Australian company). GMS operates the major private radiopharmacy and an associated fast courier business in Australia. It has three radiopharmacies that deliver Molybdenum-99 and other ionic tracers to hot laboratories for use in gamma / SPECT/CT studies as well as FDG (from its Sydney and Brisbane pharmacies) to hospitals with PET/CT equipment. Radiopharmacies are also operated by Tyco / Covidien and Lantheus.

ANSTO is another major supplier of radioisotopes through its two commercial divisions of ARI and PETNET Solutions.

ARI is responsible for sales of isotopes produced by ANSTO’s OPAL research reactor at Lucas Heights. About 90% of its sales consist of Molybdenum-99 for SPECT and SPECT/CT equipment. Its reactor also produces other radiotracers that include gallium-67, thallium-201 and oxygen-15.

Until October 2009 ARI was also responsible for the operation of the National Medical Cyclotron, based at the RPA Hospital in Camperdown, NSW, mainly producing FDG for PET/CT. This cyclotron has now been retired (ANSTO 2009) and ANSTO is concentrating its interest in producing FDG through its two recently-commissioned small cyclotrons operated by PETNET Solutions, located on the Lucas Heights campus. These are dedicated to making fluorine-18 for FDG synthesis.

There are eight other clinical cyclotrons in Australia. These include two small ones, privately operated in Melbourne by Cyclotek and another privately operated within the precincts of Macquarie University Private Hospital by Cyclopharm. The latter competes in the FDG market with PETNET. The other cyclotrons are based at the following hospitals:

• Peter MacCallum Cancer Centre in Victoria

• Austin Hospital in Heidelberg in Victoria

• The Royal Brisbane and Wesley Hospitals in Queensland

• Sir Charles Gairdner Hospital in WA

Hospital-based cyclotrons dispense FDG for their own PET/CT equipment and also compete with non-hospital producers such as GMS for supply to hospitals that do not possess their own cyclotrons. All radiopharmaceuticals produced in non-hospital settings must be GMP-compliant and are subject to regulation by the TGA. Hospitals dispensing FDG are exempt from compliance with GMP.

Consumables for diagnostic imaging services are incorporated into the MBS fee, rather than being funded through the PBS. The cost of some consumables can amount to several hundred dollars per study. For instance, in the case of FDG, the delivered price of a 350 MBq dose of activity is in the range from $350 - $370.

Separate PBS remuneration of pharmaceuticals has traditionally been limited to therapeutic substances (although there is no specific provision precluding non-therapeutic items from the PBS under Part VII of the National Health Act 1953). Anomalies can arise in that some private hospitals may charge inpatients extra for some radiopharmaceuticals and (depending on the level of cover) private health funds may pay a benefit for such charges.

1.14 Depreciation

The capital costs of delivering diagnostic imaging services are represented by the costs of consuming the services of imaging equipment and its associated infrastructure throughout its useful life. Various factors may affect useful life including:

• the extent and intensity to which imaging equipment is utilised, as measured by the volumes of services it delivers and its associated wear and tear

• the care with which equipment is serviced and maintained to address wear and tear

• technical changes or changes in the clinical or legal environment that may cause equipment to become out of date, superseded, uncompetitive or otherwise impaired

• the extent to which equipment may be refurbished or upgraded to remain current and competitive

Where a provider purchases equipment outright or under a financial lease (see below), a diminution in the useful life of imaging equipment associated with net consumption of economic benefits inherent in the above factors is charged as a depreciation cost to the profit and loss account of an imaging provider. This amount is then recognised both as an expense as well as a reduction in an asset’s value. Examples of the way wear and tear might be expected to take their toll on imaging equipment include the friction on moving parts such as coils in MRIs and the mechanicals in rotating gantries. Worn out tubes on CT scanners would not be regarded as capital consumption since these are periodically replaced as a part of normal servicing.

Depreciation may be charged in various ways including the ‘straight line’ method (in which the equipment is consumed evenly throughout its useful life) or the diminishing balance method (whereby more benefits are consumed in the earlier life of the equipment). In accordance with Accounting Standard AASB 116, the method imaging providers adopt must reflect equipment carrying values consistent with the pattern of economic benefits actually consumed.

Imaging providers generally calculate their depreciation using the straight-line method to allocate the net cost of each piece of equipment, net of residual value, over its estimated useful life generally in accordance with Tax Ruling 2009/4 (Sonic 2009; Primary 2009; Capital 2009).

Some examples of the effective life of imaging equipment in the Ruling that first became applicable on 1 July, 2002 are:

CR, DR, PACS, fluoroscopy

4 years

Ultrasound

5 years

MRI, mammography

7 years

Mobile X-ray, CT, nuclear imaging (excluding PET and PET/CT)

10 years

Bucky room

15 years

As discussed below, providers may use different effective lives based on their individual circumstances such as equipment upgrading, ceasing operations, obsolescence as indicated by a fall in market value of equipment below its actual depreciated value, etc.

As a matter of strategy, because of the rapid pace of technological change, diagnostic imaging practices are likely to make regular estimates of the remaining useful lives and residual values of their equipment, and annually reassess major items. Where the carrying values exceed estimated recoverable amounts from its sale or disposal, equipment is written down to its recoverable amount4.

If equipment is not expected to generate further economic benefit it may be sold or cascaded elsewhere. Public hospitals generally ‘cascade’ depreciated equipment such as CTs over 10 years of age to rural or remote points of service. Where alternative uses cannot be found, equipment is destroyed or sold for scrap. Sometimes the only method of removing old equipment is by breaking it up.

In public sector jurisdictions, depreciation of equipment generally adheres simply to recommended and maximum acceptable reinvestment timelines, such as in WA (Table 3.1)—although these may not

necessarily constitute formal timelines and WA reports that (because of insufficient capital allocations) there is a significant backlog of imaging equipment that is overdue for replacement.

Table 3.1: Recommended diagnostic imaging equipment replacement schedule in WA

Modality

Recommended

reinvestment timelines

Maximum acceptable reinvestment timelines

CT, MRI, mobile image intensifier, angiography

7 years

10 years

X-ray, mobile X-ray, fluoroscopy, mammography

10 years

15 years

Ultrasound

5 years

7 years

Nuclear imaging

10 years

12 years

PET/CT

8 years

10 years

Digital detectors

7 years

7 years

Source: Department of Health, Government of WA

In the NT useful life of medical equipment is 5 – 15 years; Victoria is currently working off a 5 – 10 year equipment planning horizon. In Queensland, in accordance with its general non-current assets accounting policy, equipment is depreciated over 7 – 10 years under a ‘like for like’ replacement program, using depreciation funding (Queensland 2008). Around these effective life estimates a Queensland hospital reported that ―equipment is assessed for early or delayed replacement, using the following factors:

• changes in equivalent technology

• end of service life issues

• condition of equipment

• changed clinical requirements

• urgency of replacement of other equipment‖

SA has policy of using ―a relatively aggressive ten-year life‖ for equipment with a cost exceeding

$400,000 that is funded under their ‘specific replacement program’. In most jurisdictions there are nevertheless many examples of equipment (other than CT) that have remained operational well beyond recommended timelines—often with less than satisfactory (mostly software) upgrades. Public sector imaging departments report that mechanical breakdown of moving parts in such equipment is very common and of difficulty in obtaining service and spares for equipment that in many cases exceeds 20 years in areas such as X-ray, angiography and gamma cameras.

Victoria is developing a strategic approach to support individual Health Service Medical Equipment Asset Management Plans. Their objective is the development of:

• standardised guidelines for the classification, categorisation and definition of medical equipment assets;

• standardised ‘effective lives’ for medical equipment;

• a range of standardised tools, guidelines and templates to facilitate health services to develop, implement and maintain their individual Asset Management Plans based on ―robust and objective prioritisatio‖n, understanding the whole-of-life cycle costs and operating costs associated with investment and business case principles and an appreciation of additional medical equipment asset purchases as part of promotion of a business planning culture5.

1.15 Relative importance of capital equipment costs

Although major listed imaging conglomerates publish information in their financial statements about their capital costs, it is insufficiently disaggregated to specifically relate them to their diagnostic imaging equipment. The Consultant was nevertheless supplied with data indicating that the share of depreciation, representing the capital consumption component of costs in a typical private imaging practice, is in the order of 10% (Chart 3.1). This, however, would include buildings, building fit out and infrastructure such as PAC RIS. Allowing for the latter, the net share of depreciation attributable solely to equipment could be about 6% of total practice costs (or about 8.5% if buildings were leased, allowing for a 2.5% rate of depreciation on buildings).

The cost breakdown in Chart 3.1 refers to where equipment title appears on a practice’s own balance sheet. These practices would purchase their equipment from cash reserves, via debt finance or through a financial lease (see section 4.3). For practices that finance their equipment by way of an operating lease, title to the equipment would be held by the lessor, causing the relative importance of depreciation to diminish. Capitol Health Limited— a relatively small imaging group, but Australia’s only publicly-listed, specialist diagnostic imaging company— is an example of an imaging business that acquires most of its equipment by way of operating lease, causing the equipment deprecation component of total costs to fall to 4.3% (in 2008/09) (Capitol 2009).

Applied Economics

Source: Diagnostic imaging trade sources, April 2010

The data in Chart 3.1 may be compared with data collected by Queensland Health for 2006/07, based on the experience of the imaging departments of eight referral and major metropolitan public hospitals and shown in Chart 3.2. Here, separate information is not available on depreciation; it is combined with the ―other’ cost category which amounted to 25% of total costs. This also included ―travel, utilities and catering‖. If deprecation represented roughly half this figure—say 12% (net of an allowance for buildings, infrastructure etc), equipment costs in Queensland Health hospitals could be roughly comparable with the experience of a typical private imaging practice not resorting to off balance sheet finance. Queensland Health always buys major equipment for cash.

Applied Economics

Source: Queensland Health (2009)

Notwithstanding its relatively high capital output ratio, Charts 3.1 and 3.2 also highlight the significance of labour costs in diagnostic imaging (typically accounting for more than 50% of costs). Diagnostic imaging is more labour intensive than pathology (with which it is often compared) because trained staff must operate equipment to deliver patient-specific services and this can be timeconsuming. High labour costs are in part too, an artefact reflecting the rent (or differential surplus) that imaging specialists can command in their remuneration—influenced by barriers that curtail access to accredited training opportunities and specialist careers in imaging.

1.16 Recognition of capital in remuneration

1.16.1 Defined useful life payment criteria

The Commonwealth has foreshadowed that it intends to formally recognise the existence of capital in the payment of benefit for imaging services. The 2009/10 Budget papers canvass the possibility, with effect from 1 July 2011, of linking the benefit payable for diagnostic imaging services (other than PACS RIS equipment) to the useful life of imaging equipment prescribed in the ATO’s tax Ruling on the effective life of depreciating assets (Commonwealth of Australia 2009a, p 19). In October 2009 the Department accordingly sought stakeholder views on how capital sensitivity rules should apply to diagnostic imaging equipment (DoHA 2009b).

Since 1997 the principle of capital sensitivity has been limited to the payment of benefit on CT services. With the exception of scanning equipment located in remote areas6, Medicare pays a benefit for CT services using equipment that is older than 10 years at half that on equipment less than 10 years old—the implication being that capital depreciates over time and that its amortisation should be limited to its defined useful life. Medicare claims for CT now relate almost exclusively either to services performed on equipment younger than ten years or to services on older, remotely-located equipment where it may have been cascaded.

The benefit rule for CT scanning was introduced in the term of the Commonwealth’s MOUs with imaging providers during which, in a quest for cost savings, a prejudice ensued against investment in equipment. Providers told the Consultant that at this time, some imaging equipment was up to 30 years old. Because of this, a concern developed to inhibit operators who were ‘sweating’ elderly equipment. The capital sensitivity rule for CT equipment over 10 years old was accordingly driven originally by quality considerations in the interest of encouraging practices to modernise their equipment—except for reasons of ―medical necessity‖, equipment in remote locations (DoHA 2010a, Associated Note DIL GroupI2).

The de facto recognition of the capital component of cost in the remuneration of CT imaging and its proposed extension to other imaging modalities may be interpreted as a departure from established criteria for medical benefit remuneration. Under Section 3 of the Health Insurance Act 1973, medical benefits for services listed on the Medicare Benefits Schedule are generally restricted to payments for

―professional services‖. In the case of diagnostic imaging, Section 3 defines a ―professional service‖ as ―a service by or on behalf of a medical practitioner‖ that is ordinarily subject to a Section 16B(1) request—a written request by another medical practitioner. This may be interpreted to mean that benefit for diagnostic imaging services is admissible simply for services by a medical practitioner associated with reading and reporting on images or performing diagnostic interventional work.

The narrow definition in the Act of a ―diagnostic imaging service‖ on which benefit is payable could be taken, in a very technical sense, as neglecting of the role of capital upon which medical practitioners rely to perform imaging services. Any capital remuneration could hence be interpreted as being released only by virtue of a Medicare benefit paid for the services of a medical practitioner.

The Commonwealth acknowledges that ―over time the relative share of capital and other costs has become quite opaque‖ (DoHA 2010b). Section 3 of the Health Insurance Act accepts, however, that ―diagnostic imaging equipment‖ will be used in ―rendering diagnostic imaging services‖—a recognition that professional labour needs to work with equipment to deliver imaging services listed on the Schedule.

The definition of items in the Schedule also makes it obvious that consumables will be used in the delivery of imaging services. For example, ―modifying‖ items have been introduced to provide additional recompense …―where the service is made more complex…due to the use of contrast medium‖7.

1.16.2 Capital and infrastructure in distributed imaging networks

Diagnostic imaging services utilise a hierarchy of capital infrastructure and equipment in delivering imaging services, as described in Part 2 above. Almost all imaging providers in Australia now consist of a central corporate or hospital infrastructure that hosts a PACS RIS, serving a distributed network of practices or points of patient service. These ‘hub and spoke-type’ arrangements involve relatively high fixed labour and capital costs that are likely, as service output expands, to embody two types of economies of scale that are quite distinct from one another.

Management savings from centralising administration and buying power for equipment and consumables as well as the supervision of what amount to be numerous relatively autonomous, small businesses that appear (in varying degree) to duplicate one another in complexity and scale in various other locations will differ from the effects of scale within these small businesses.

Perception of the macro economies of scope associated with a streamlined centralised infrastructure may have been the driver that encouraged ownership concentration and the corporatisation of private diagnostic imaging practices that originated in the 1990s in Australia (Jones 2007).

Quite separate from the fixed costs of concentrated support and supervision, each individual devolved practice or hospital imaging department operates with its own discrete fixed overheard of infrastructure, equipment and staff. At the micro level the extent to which each point of service can independently realise increasing returns to scale will be governed by their ability to make the most effective use of their own separate overhead. The greater the size of the investment in, and the greater the sophistication of local equipment and its local infrastructure or its associated fixed labour cost or both, the greater the sensitivity of individual points of imaging service to economies of scale (USGAO 1992). Fee for service remuneration of imaging specialists may encourage this process.

For instance, a CT requires a fixed labour input of 2 to 3 radiographers and 1.5 specialists and at full capacity may be expected to perform some 40 studies per day; the corresponding figures for MRI are 2 radiographers, 0.5 of a specialist and one administrative assistant for 25 studies per day. Average cost for each of these modalities will clearly tend to fall as the number of studies expands towards full capacity of the equipment8. The correct strategic geographical location of points of service and the appropriate allocation of equipment within them is therefore of critical importance to imaging services in realising the most effective utilisation and adequate return on their equipment.

Because local economies of scale are likely to be equipment-specific they will be sensitive mostly to the character of a practice as evidenced by the portfolio of its equipment and its casemix, rather than to any generalisation as to practice type (e.g. ‘large metropolitan practice’, ‘rural practice’, etc).

1.16.3 Network disposition

Other things being equal, larger private imaging providers with distributed networks, will seek to locate, acquire or merge practices within patient catchments to enable ―acceptable and sustainable‖ practices to make optimum use of their local equipment and infrastructure910. At an operational level this is likely to be at the lowest point of their respective average cost curves. Subject to this constraint and to avoid ‘cannibalising’ their own clientele, the resultant distribution and growth of practices will ideally seek to equalise patient search and travel costs between practices (Cliff 1975). In the absence of competition, high travel costs to alternative points of service will deflect patients into strategically located proximate points of service and contribute thereby to the most efficient use of capital across an imaging group’s network of practices.

In reality (where there are no entry barriers) this pure model of spatial patterning in imaging practice location is inevitably emulated by competing networks; it is also to some extent replicated by hospital services run by public health jurisdictions. The ease with which competitors can enter a local market will vitiate the potential for a local monopoly. Where there is competition, practices will tend to compete with each other either by differentiating themselves by offering unique services (such as a Medicare-licensed MRI), by reduced waiting times or by competing on price with bulk billing (for which Medicare provides incentives).

Competitive behaviour in the market for diagnostic imaging services has been heightened as imaging specialists relinquishing their appointments at I-Med, commenced their own independent practices or networks to the point where, in the words of one stakeholder, fragmentation of local markets has become ―quite illogical‖. The excessive clustering of radiology practices in the western Sydney suburb of Westmead is a case in point. Since 2005 the number diagnostic imaging practices in this locality has risen from three to seven—an expansion of contiguous capacity claimed to be well beyond reasonable local needs or demographic criteria. Moreover, the standing and reputation of neophyte individual practices obliges each to equip with a full complement of high-end of imaging modalities with up to date peripherals.

1.16.4 Paying for imaging with economies of scale

In competitive local settings (and especially where there is excessive market fragmentation), practice networks risk losing the benefits of scale; indeed if local needs were satisfied where a practice operated their equipment at point where their average cost were falling, there could be a potential for a considerable expansion of services in excess of clinical criteria. Because of the presence of increasing returns, in the interests of spreading their capital costs, imaging providers are likely to want to make full use of their capital equipment. Opportunities for this are likely to be augmented where imaging services are bulk billed, with the corollary that a majority of patients is likely to incur zero or (allowing for time and travel costs) relatively small out-of-pocket costs11.

In a zero, or close-to-zero price environment, especially where some types of imaging service demand could be considered as elective (or more price elastic)12, the mere existence of unused capacity in a particular piece of imaging equipment could create a vortex for its utilisation12. To minimise the risk of excess resource costs associated with such moral hazard and possible overinvestment in equipment, there are thus incentives for Government to control the amount of equipment that is capable of attracting a Medicare benefit. This has proved the justification for the licensing of MRI or allocating

‘hidden’ MBS item numbers to a restricted number of PET/CT machines.

Where regulation of capital equipment is not feasible—for example in the case of technology already widely diffused such as ultrasound and CT, remuneration of imaging services should provide no financial inducement for providers to expand the volume of imaging services in excess of clinical need. Full cost remuneration may risk causing marginal revenue to exceed their marginal cost and hence create incentives to overuse capital as well as allowing for its perpetual deprecation13.

It may be argued that the risk of supplier-induced imaging services is to some extent mitigated because they are in any case subject to request from a medical practitioner. On the other hand, service utilisation may nevertheless be susceptible to facilitation through detailing of GPs, rental of premises from GPs, etc14; and, where vertical integration has occurred involving strategic ownership of primary care networks, imaging services may be amenable to ‘in house’ requests—although GPs to whom the Consultant spoke, working in corporatised general practice, deny this occurs. Imaging specialists may too, self-refer patients if they identify a clinical need for more or different imaging studies than those requested15. Some imaging specialists may possess financial stakes in some larger diagnostic imaging companies by virtue of equity they acquired when their practices were amalgamated by conglomerates or by larger independent practices (Fitzgerald 2002).

On the other hand imaging specialists have told the Consultant that one of the major areas of self-referral in diagnostic imaging is caused by cardiologists self-referring their patients for stress echocardiography (ultrasound), cascading into CT studies, without the rebate being affected.

The Consultant possesses no empirical evidence of over servicing, but the conditions may be propitious and there is a claim that imaging specialists have come under ―strong pressure from corporate managers to use lucrative investigations when not necessarily medically appropriate‖ in the case of services such as multi-slice CT (Galloway 2008, p 90).

In his 2008/09 Report to the Professions, the Director of Professional Service Review (2010) expressed disquiet at the number of CT scans ordered for low back pain without clinical justification. He noted that Australian GPs request CT scans for their patients at a higher rate than those in comparable countries. Stakeholders have told the consultant that CT is sometimes used when a planar X-ray might have sufficed; or when MRI might have been the preferred modality (e.g. for back problems), simply because CT is so much quicker, more readily available than MRI as a Medicare benefit and it does not require a specialist request.

1.16.5 Full cost remuneration with a defined useful life of capital

As discussed above, the Commonwealth proposes mitigating overpayment for capital by modifying current full cost arrangements to incorporate rules for capital sensitivity. We will refer to the

Commonwealth’s proposed rules for capital sensitivity as ‘defined useful life’ remuneration of capital equipment—to distinguish them from the discretionary arrangements that by default currently apply16.

Some smaller independent imaging providers told the Consultant that they endorse a defined useful life philosophy, provided it were to give proper and fair recognition to capital. They consider it will promote investment in updated equipment and new technologies. They expressed the view that in some cases, in the interest of quality, equipment write-offs should be accelerated—to seven years in the case of CT. However, they also argued that accelerated write offs should be linked to differential and more generous rebates for new, high specification equipment.

The current Schedule, for example, fails to distinguish between standard 16-slice CT equipment and new, much faster and more versatile multi-detector equipment. This uses only 10% of the radiation of older technology scanners (Shaukat 2010) but it requires more sophisticated workstations for post processing of the order of 2000 images per study, compared with no more than 500 on standard equipment (see Box 3.1 below). In the case of ultrasound, the Schedule does not recognise and give credit for higher specification equipment such as tissue strain applications, etc.

ADIA, on the other hand, is discomfited with the defined useful life model as an alternative to the current default full cost approach. The determination of useful equipment life cannot be reduced to formulaic and abstract principles and it would be unrealistic to allow a measure that originated as a quality criterion to have the unintended consequence of translating into an economic one. In any case, age of equipment cannot in itself be a test of quality; even recently-acquired equipment, if inappropriately maintained, can never perform according to its specifications (MTAA 2010). CT may have appeared an easy candidate for prototyping the defined useful life rule for limiting remuneration for depreciation, but (in spite of Tax Rulings) it will be more difficult to apply to other equipment. One stakeholder argued that many types of equipment are either highly durable or capable of being effectively upgraded. Many equipment upgrades are undertaken under service contract. For instance, it was claimed that:

• Ultrasound could never be a serious candidate for inclusion in defined useful life modelling since some 30% of the cost of ultrasound equipment (about $40,000) relates to its transducers. These require continual replacement; and there is no evidence that ‘old’ ultrasound is harmful to patients.

• X-ray is robust technology that can have a long and useful life of at least 20 years. It attracts low fees and is hardly worth serious consideration. The main concern with X-ray has to do less with a defined useful life than with the new technological plateau of DR—and here the strategy is one of timing and avoiding the risk of moving into DR too early and over paying.

• MRI has three main elements: the magnet, other hardware (e.g. coil, patient table and computer) and software. There is no point in discarding a perfectly good magnet before its time. A magnet can last for 15 years and it can then be replaced or upgraded; coils can also be replaced or upgraded as well as the computer and its software. For instance, one of Australia’s the first MRIs (a 1.5T unit) which commenced operating at the Royal North Shore Hospital, NSW in July 1986 (Crowe 1990), to-day remains operational after frequent upgrades. The cost of a typical MRI upgrade is currently of the order of $900,000. In assessing useful life for an MRI, it would therefore be essential to take into consideration past upgrades and to then re-set the deprecation clock—otherwise equipment will be under-remunerated. The momentum of continuing technical change, such as the likely availability of customised in situ neurological MRI/PET inserts, lends further weight to the importance of satisfactory provision for upgrading. MRI/PET technology will be very competitive due to the reduced radiation of an MRI/PET scan compared to PET/CT (Judenhofer 2008).

• Although the sodium iodide scintillator crystals in gamma cameras are hydrophilic and can eventually degrade performance, if properly maintained, gamma cameras can have long, useful lives much in excess of 10 years. They are highly amenable to software upgrading and some manufacturers such as Siemens offer SPECT that can be upgraded to SPECT/CT.

Whilst the 10-year defined useful life for CT at the moment may seem reasonable (in a properly maintained machine), much depends on future technological breakthroughs and the type of CT initially purchased. For example, if a 16-slice CT and a 128-slice CT were simultaneously purchased, the 128-slice would have a longer useful life. Since in the case of the latter, a Commonwealth-deemed equipment life may be less likely to provide for 100% depreciation, capital could be underremunerated. This could clearly make a significant difference to the impact of any defined useful life policy and on investment in appropriate equipment.

To be of any value in calibrating the payment for capital, the defined useful life model needs to forecast uncertain trends in future technology. Correct calls on the timing of technological change can be fraught. As one imaging provider remarked to the Consultant:

―…quite apart from the folly of trying to forecast future trends in technology, there would be no logic to introducing a separate payment or modifying existing payments to reflect a charging mechanism that recognises capital depletion. It would any case fail to address the depreciation of buildings and other infrastructure.

―Although the Schedule Fee was originally conceived as payment for professional services, it has now changed to accommodate many types of cost that enter into service delivery. It would therefore be inappropriate to attempt to identify and differently treat just one of them—especially since, after allowing for buildings and infrastructure, equipment depreciation is such a minor element of total cost‖.

ADIA accordingly believes that the MBS should embody current default full cost principles of remunerating diagnostic imaging services for the full operating life of equipment. Many of ADIA’s views are consistent with legitimate concerns about useful life term funding. A rigid extension of the current arrangements for CT could be wasteful of equipment that was perfectly serviceable and (if not fully depreciated) under-remunerate it; and even if capital cost were properly measured, it may often be of such minor consequence (Charts 3.1 and 3.2) that with or without the effects of local scale in networks, it could reasonably be ignored and may not always induce unnecessary use of equipment. Defined useful life could also cause less conscientious maintenance of otherwise perfectly serviceable equipment as it approached a point of (known and obligatory) statutory write off.

Moreover, the exemption of CT equipment older than 10 years that is cascaded to remote locations (susceptible to rapid deterioration on the immediate cusp of its metropolitan write off) makes a mockery of the argument for the application quality criteria in diagnostic imaging.

1.16.6 Marginal cost remuneration

A third approach to the treatment of capital would be to avoid controversy about useful life and to minimise any risk of unnecessary equipment use by excluding altogether from the MBS fee, the costs of equipment specific to the service at hand. Even if it were to remove the risk of over paying for depreciation, a defined useful life approach would not necessarily discourage the risk (to the extent that it is a problem) of capital equipment overuse.

Box 3.1: Arithmetic of marginal cost in determining an MBS fee a for diagnostic imaging service

The incremental cost of operating each piece of equipment for purposes of determining an MBS diagnostic imaging fee might consist of:

• a pro rata contribution to the cost structure of the entire service or practice—consisting of costs common to the delivery of all MBS items, such as buildings, front desk staff, power, etc.

• a charge for the incremental cost of using PACS RIS, typically (according to industry sources)

$2.00 - $2.50 per study for RIS and $3.00 to $5.00 for PACS, plus further third party ‘click’ fees

• the costs of any consumables used in delivering each service in question— radioisotopes, other tracers, catheters, etc. These are typically in the range of $350 - $370 for PET/CT studies for units located in proximity to cyclotrons (see text above).

• the specific labour costs of radiographer, sonographer, medical physicist services and the like with provision to accommodate post processing costs of fast, data-intensive imaging scans

• the specific fees of imaging specialists, determined by their opportunity costs, at the time of writing some $2,000 per day for locums—i.e. their earnings forgone during the time taken to read and report any image or to perform interventional work or both; so called ‘work value’ compensation (inherent in constructing relative value scales) would be unlikely to contribute to economic efficiency; the application of uniform opportunity costs to all types of equipment and technology (other things being equal) will create no financial incentive for the supply any one type of imaging modality over another

• an afterhours loading

Where equipment is used for imaging services that are case-specific—as in the use of a specific machine to produce studies to diagnose or stage a particular condition (such as a PET/CT for cancer), as distinct from its use on every imaging patient—it could be argued that the ‘correct’ price signal in the design of the MBS fee for that item of service would be equivalent to no more than its marginal cost—or the incremental cost of producing it (Richardson 1987). This would be equivalent to the cost of labour, consumables, etc, specific to the service with a pro rata contribution to infrastructure and overhead costs that were common to the delivery of all MBS items (see Box 3.1) but excluding equipment-specific depreciation and interest charges.

Under marginal cost remuneration, large items of equipment that were subject to decreasing costs and were case-specific would have to be independently remunerated, complementary to the MBS fee (because marginal cost could be less than average total cost)17. For both publicly- and privately-operated equipment this could take the form either of:

● a series of separate payments to imaging providers by the Commonwealth equivalent to a notional calculation of the extent to which each service causes a particular piece of equipment to depreciate—i.e. the notional service life of the equipment before delivery of an imaging service less its service life afterwards. This could be based on principles analogous to Health Program Grants used in remunerating radiation oncology equipment (DoHA 2008), and could reimburse equipment whether leased or purchased outright; or

● an outright government grant for the acquisition of the equipment or its upgrade—in which case the equipment would have to be regarded as a semi-public utility—rather than a practice asset. Doctors using the equipment could then pay a facility fee to the Commonwealth or to the health service for use of the equipment—analogous to when specialists exercising their right of private practice use hospital equipment. Box 3.2 provides recent examples of grant funding.

Box 3.2: Examples specific purpose capital equipment grants announced in the 2009/10 Budget

● $1.1 million for a PET/CT at Calvary Mater Newcastle Hospital (further to a $0.4m payment in 2008/09)

● $6.5 million over the period 2009/10 – 2012/13 to support a PET/CT at Westmead Hospital, Sydney

● $1.0 for a CT scanner at Kempsey District Hospital, NSW

● $4.0 million for the purchase of an MRI and associated structural work at Cairns Base

● Hospital

● $3.9 million for a PET/CT at Royal Hobart Hospital

Source: Commonwealth of Australia (2009b)

Quite apart from the likelihood that most imaging providers working off business rules, would be unaware of their marginal costs, use of this method of remuneration needs to be qualified because of imperfections in the mechanisms for separately paying for case-specific capital.

Health Program Grants for oncology equipment are regarded as excessively time consuming and cumbersome to administer. According to one jurisdiction, they are likely to be less amenable to the discretionary environment of imaging than to the more predictable and controlled settings of oncology. They would also disregard the difficulties (discussed above in relation to the full cost model) in relying on the notional service life of equipment as a reasonable basis for calculating deprecation.

The shortcoming in the provision of capital funding by way of specific purpose budgetary payments or other separate public funding is that it may be susceptible to being politicised. Services with the loudest voices or in marginal electorates may often find themselves better endowed than others.

Private practices would be reluctant to accept public funding for equipment with stringent conditions attached.

It could be worthwhile piloting a systematic public funding policy to support marginal cost remuneration limited to a single area such as nuclear medicine imaging. This is not generally an attractive area to private practice. Because of its infrastructure costs and significant staffing overhead that includes radiographers, nuclear medicine technologists as well as nuclear medicine and radiology specialists, nuclear medicine imaging tends to be concentrated in hospital settings especially in the public sector. New marginal cost fee arrangements would be relatively easy to implement for new complex technologies—such as for the public hospital sites which have been recent beneficiaries of specific purpose grants for PET/CTs—which is in any case an area of the Schedule that remains experimental.

Box 3.3: Alternative possible remuneration for nuclear imaging studies

One stakeholder proposed an alternative method for remunerating nuclear imaging studies based on isotopes, calibrated by required MBq of activity—including margins to cover capital, labour and other costs—as markers for the type of test undertaken and the equipment used. Hence an MBS item number for gallium, for instance, would immediately flag a SPECT study; and by virtue of the amount of the activity specified, denote whether it was for views of localised, whole body, or separate body regions. An item number for FDG would analogously denote a whole body PET/CT scan, brain scan, etc. This approach would have the merit of an explicit focus for ensuring that the margin for isotopes represented a supply price adequate for a reasonable return on the manufacturing cycles of Australia’s 10 cyclotrons and ANSTO’s reactor, as well as for the associated dispensing and supply chain costs.
To ensure that isotope activity were restricted to levels necessary only to support the study that had been requested, each nuclear imaging MBS item number (identified by isotope) would need to specify a unique level of activity—a principle similar to specification of anaesthetic units for surgery. Higher levels of activity would need to be specified to accommodate the remoteness from cyclotrons of PET/CTs in Canberra, Hobart and Adelaide.

1.17 Current MBS fee settings

From a public policy perspective, the art in remunerating diagnostic imaging services should be to promote efficient investment in quantity and type of equipment that is consistent with a ‘fair’ return to the owners of equipment. This should facilitate consumer health gain associated with access to appropriate equipment, but without encouraging its oversupply, over utilisation or excessive depreciation. Knowledge of the constituent elements of service cost will hence be important to the pricing of services.

Table 3.2 provides information comparing the average cost of providing diagnostic imaging services in major public hospitals in Queensland during 2006/07 with the average benefit paid on them by Medicare. In so far as possible, benefits paid were calculated using the same MBS item numbers that were used to construct estimates of cost by Queensland Health. The methodology used in costing is the same as that for the Queensland data given in Chart 3.2. Although the average benefit data are specific to Queensland, they are very comparable with national average benefit data provided above in Chart A4 (Appendix 1).

If the Queensland hospital data are indicative of the experience of Australia as a whole, including private imaging services, it is possible that at the level of benefit paid, the majority of diagnostic imaging modalities may not be covering full cost, with practically no provision for the amortisation of capital equipment (although Queensland authorities seem to think that ―fees are set at an appropriate level‖).

Of the ten imaging modalities for which average cost data are available, it exceeded average benefit paid in six cases. The exceptions were ultrasound, CT, nuclear imaging and MRI. The number of services for nuclear imaging and MRI are not large and the conditions under which these modalities are available are limited by restrictive conditions or strict licensing. They are often on the periphery of a typical networked imaging practice.

Table 3.2: Comparison of average Medicare benefit paid with the average cost of providing diagnostic imaging services in 8 referral and major metropolitan public hospitals in Queensland, 2006/07, $s

Imaging modality

Ave benefit

Ave cost

+ -

Notes on the calculation of average cost from Queensland Health data

Ultrasound1

102

83

19

65 items used of which highest and most frequently identified were used; average benefit based on all Ultrasound

CT3

276

112

164

47 items of which highest and most frequently identified were used; excludes non-diagnostic items

X-ray1

45

83

-38

51 items of which highest and most frequent identified were used

Mammography2

74

111

-37

6 items used

Angiography3

347

450

-103

25/35 highest cost items were used

Fluoroscopy3

92

278

-186

25/29 highest cost items were used

Interventional3

96

191

-95

17 items used; excludes 30 non-diagnostic items

Nuclear medicine3

506

239

267

25/67 highest volume items

MRI3

348

264

84

74 items of which 25 of the highest and most frequent were used

Densitometry2

77

183

-106

2 items used

TOTAL

105

117

-12

 

Source: Queensland Health (2009); Medicare (2010b)

Notes on the calculation of average benefit from Medicare data

1Average 2006/07 benefit for Queensland based on all diagnostic imaging MBS items, with indicated number of items used for calculation of average cost taken as representative of average cost

2Average 2006/07 benefit for Queensland calculated on actual MBS items used for calculating average cost

3Average 2006/07 benefit for Queensland based on the identified highest cost / highest volume diagnostic MBS items used for calculating average cost

The conspicuous exception is CT, which is a widely used and dispersed modality that appears to be operating on a margin of some 60%. This is consistent with reports to the Consultant that CT is generally considered to be the ‘heart’ of the business model and the ‘asset base’ of most private imaging practices in Australia. A large proportion of the debt structure of private imaging services is understood to be devoted to CT and evidence indicates that operating margins in CT may be a key determinant of whether providers are likely to acquire 64-slice CT (Lapado 2009). Some services are thought to invest in high-end CT equipment as a mark of their quality and standing.

One State jurisdiction, in acknowledging that their imaging department were ‘simply not in a financial position to ignore MBS funding’, nevertheless allowed that:

―… there is a significant distortion in the level of Medicare fees, with the result that CT scanning is significantly more lucrative for private imaging providers than are other modalities. This has likely resulted in excessively zealous promotion of CT scanning within the Australian medical community and distorted patterns of imaging activity in Australia relative to ‘free market’ demand seen overseas‖.

Other stakeholders noted that patients may be receiving CT when no more than a planar X-ray would have been adequate. This is consistent with falling utilisation of planar X-rays images (Appendix 1).

MBS fee settings appear to be influenced to some extent by historic cost principles. An appropriate structure of fees in conjunction with investment in the ‘right’ equipment will clearly be conducive to optimal patterns of investment in equipment and service access. In a publicly-funded environment, the structure of remuneration hence needs to recognise incentives for imaging services to acquire and upgrade equipment which is consistent with service priorities and established needs.

Purchasing authorities or agencies setting fees for Medicare benefit would also need a sound understanding of the price of the equipment that would need to be funded or amortised and what precisely represents ‘value for money’ in the equipment market. This issue is further explored in Part 5.

1.18 Criteria for investment in equipment

There are differences between strategy for the acquisition of capital equipment in private imaging companies and State and Territory jurisdictions. In the case of the former the purchase of equipment is especially dominated by a combination of:

• strategic considerations, focusing on maintaining on an overall mix of contemporary equipment conducive to maximising the flow of imaging requests from referring practitioners as well the recruitment and retention of key professional personnel; and

• financial considerations that require returns from investing in additional equipment to surpass an appropriate risk-adjusted financial hurdle.

In relation to the strategic considerations, one private provider told the consultant that:

―…a successful provider in diagnostic imaging must maintain an appropriate portfolio of capital equipment and will inevitably have to continually upgrade or replace it. The minimum standard of equipment required to provide a contemporary standard of care is never defined but market forces play a role. Providers try to synchronise their purchases with technology breakthroughs that render old technology obsolete. Examples would be the new plateau reached when multi-slice CT became available and later when 64-slice CT evolved. The threshold level for coronary CT angiograms is 64-slice; any less fails to deliver adequate quality. In other modalities there is less clarity in the criteria for crossing the technology threshold. The threshold is nevertheless dynamic—and the art is in the timing of precisely when to make an investment in new technology‖.

In both public and private sectors, although distinctions may sometimes apply between replacing equipment and an acquisition or upgrade to new layers of technology, it is thus often hard to differentiate these situations. For example when X-ray equipment is no longer serviceable, it may be upgraded with a transition to CR or replaced by a significant improvement in technology with DR integrated directly into a PACS RIS.

In relation to financial considerations, it is argued that because the demand for health services is often considered relatively inelastic, the health sector is to some extent insulated from the general business environment. Strategic perceptions in both public and private sectors will nevertheless generally remain coloured by a combination of the sentiment of the business cycle and structural conditions affecting industry margins (Table 3.2).

In the public sector, large investments in imaging equipment in most jurisdictions are subject to a satisfactory ‘business case’ which may incorporate evidence of clinical need and may also be subject to a ‘workforce plan’—in recognition that it is pointless investing in super fast equipment that is not covered by reading and reporting capacity. Indeed at some teaching hospitals in NSW, many imaging studies are never reported (Patty 2007).

The financial content of public sector business cases generally compares projected labour costs and capital expenditure with revenue flows from Medicare (and / or other fee income) as well as with assured flows of public funding over a defined business planning horizon. These are used to assess whether a net positive (undiscounted) value results. Whilst access to assured flows of public funding may infer some implicit acknowledgement of a State’s fiscal situation, public sector business cases appear to disregard the user costs of capital18. This may be consistent with a claim from ADIA that public sector equipment is simply ―paid for by taxpayers‖ (Cresswell 2010). It may also breach of the principle of competitive neutrality which seeks to eliminate any net competitive advantages that accrue to government agencies simply as a result of their public sector ownership19.

Although the capacity of equipment to attract Medicare fee income is clearly relevant to public sector business planning, all jurisdictions, apart from SA and Tasmania, claim that Medicare is not a major consideration. However, in addressing a query about the method of projecting Medicare fee income and any attendant risk that projected income might conceivably fall short and cause thereby a business case to ‘fail’, one public system health executive remarked to the Consultant that ―we make them pay‖. The integration of highly optimistic scenarios into business cases and any consequential accountability for securing their ultimate realisation (under anything less than clinically supportable circumstances) must inevitably invite comparison with the risk of moral hazard inherent in competitive private behaviour where economies of scale exist (discussed in section 3.3 above).

In the private sector, for-profit imaging providers, especially if they are publicly-listed companies, must unavoidably weigh the returns from invested capital against their weighted average cost of capital (WACC)20. This is the overall return that a taxpaying imaging business must earn on its existing infrastructure and its network or practice operations in order to maintain at least the existing value of its equity.

Assuming a 30:70 debt to equity ratio, ADIA argues that over the period 2005/05 – 2006 /07, the WACC in diagnostic imaging ranged between 8.1% - 9.5%, whereas (principally because of the effect of the MOU on fees22) the post-tax return on invested capital ranged between 6.4% - 8.4%. Since private imaging providers were at the time investing between 75% and 80% of their profits, ADIA claims that they were clearly not meeting a satisfactory hurdle rate, and that this was likely to inhibit the willingness of the imaging industry to invest in equipment in the future (ADIA 2008a). One imaging provider told the Consultant that its WACC is currently between 8.0% and 8.5% compared with a post-tax return on invested capital which has fallen to 4%.

Between 2006/07 and 2008/09 the return on equity for Capitol Health (Australia’s only publicly listed, specialist diagnostic imaging company) ranged between -144.42% and 1.54% (Capitol 2009).

Private sector investment imaging equipment may have been adversely affected by the global financial crisis of 2008/09. The abrupt reduction of interest rates of late 2008 has been largely offset in the funding environment at the time of writing by significant risk spreads in the capital market and a consequent increase in margins charged by lenders. There has nevertheless been little evidence of business failure in diagnostic imaging or of practices closing their doors or being forced out of business.

The Commonwealth sought to mitigate the effects of the 2008 collapse of credit markets by introducing an investment tax break as part of its broad economic stimulus package. ADIA told the

Consultant that the Commonwealth’s stimulus package (Box 4.1) had ―no impact on the demand for equipment‖. In the words of one imaging provider, ―… the package has had a minimal effect, although it is conceivable in some instances that it has accelerated investment in equipment that would have in any case occurred‖. For other imaging providers it is possible that financial conditions will have stretched the useful lives of equipment—a phenomenon that has been reported in the United States when after September / October 2008, many pending equipment orders were suspended21.

Box 4.1: The General Business Tax Break (Commonwealth stimulus package)

For diagnostic imaging businesses with turnover exceeding $2 million the stimulus package provides an additional tax deduction of 30% of the cost of investing (above $10,000) in equipment (excluding structural fit out) or its upgrading (excluding software) between 13 December 2008 and 30 June 2009, provided it is commissioned before 30 June 2010. For similar investment (including that after 30 June 2010) that is commissioned by 31 December 2010, the deduction is 10%.

This bonus deduction means that over time, imaging businesses may claim deductions of up to 130 per cent of the value of equipment. One stakeholder told the Consultant that some imaging businesses have been able to lever this tax break. Manufactures may be prepared to invoice and commission equipment within the deadlines for which the break applies, but to accept an extended delay of its payment. Tax credits may then be applied to lever leases or other financial accommodation.

Source: Commonwealth of Australia (2009b)

Equipment suppliers (with both public and private sector customers) conveyed an ambiguous picture of equipment demand that may controvert adverse macroeconomic events. A number of significant one-off public sector investments occurred, such as a major upgrade by BreastScreen during 2008 in most jurisdictions from film screen to CM; a significant, mostly public sector expansion occurred in the demand for nuclear imaging equipment; there was the gradual attrition of some elements of the large corporate model of diagnostic imaging, which contributed to private demand, as new independent practices became obliged to purchase equipment during 2008 and 2009—some whom exercised the opportunity of levering the tax break to their advantage (Box 4.1); and there was a significant appreciation of the Australian currency against the United Sates dollar and the Euro during 2009. The net effect appears to have been growth from some $490 million to $630 million over the years 2007 – 2009 in the constant dollar value of the overall market in Australia for imaging equipment—which is explored in detail in section 5.2 below.

1.19 Public sector investment guidelines

In the case of public sector imaging services, depending upon the amount of funding involved, the purchase of equipment may entail the development of a business case (as discussed above). However, the introduction of high-end and new technology is usually subject to special external approval on grounds of need or one-off funding authorisations and adequate workforce support.

In most jurisdictions there is no formal budget for the acquisition of diagnostic imaging equipment. In

NSW this is primarily the responsibility of Area Health Services and in Victoria, Health Regions. In

WA, capital allocations for Metropolitan services within the health budget are determined by the State Director of Diagnostic Imaging; in South Australia allocations are prioritised within an overall biomedical equipment program; in the NT hospitals simply identify priorities and seek to have them placed in the Government’s capital equipment purchase program, etc.

Most jurisdictions generally expense small items of equipment (e.g. a new workstation) from their provisions for repairs and maintenance. In addition to funding from their General Accounts, many large public hospitals have access to hospital trust funds. These may be highly liquid as result of facility fees paid by staff specialists with rights of private practice as well as benefiting from private donations. Hospital trust funds may still remain subject to business rules, but they offer more flexibility and it is reported that their availability and the relative abundance of their endowment can augment opportunities particularly for accessing new, specialised capital equipment. It is thus strategically easier for hospitals with the better endowed trust funds to support the acquisition of new equipment (as distinct from replacement equipment) than others. The collocation of a private hospital, for instance, may in inhibit the private practice work of staff specialists working in proximate public hospitals and adversely affect the capacity of their trust funds to accumulate.

In NSW, larger items of equipment involving amounts up to $0.5 million may be funded from the NSW Health Technology Program, from hospital trust funds or from other budgetary sources or a combination of these. Equipment costing in excess of $0.5 million requires a business case, signed off by the Area Health Service CEO and approval from Central Office. For equipment costing in excess of $1 million, a business case must be generally in accordance with guidelines developed by the NSW Treasury (NSW Treasury 2008). Although NSW Health reported that it is revising its own business case template for all equipment acquisitions, equipment of more than $1 million is subject to Treasury review. These larger acquisitions need to be justified by a financial appraisal that examines ―total lifecycle costs, benefits, risks and implementation requirements‖; it must heed the timing of the NSW Budget process and it must also embody a workforce impact strategy.

In SA there is a specific replacement program for medical equipment with a cost over $400,000 with an annual funding allocation of $5 million, indexed from 2006/07. This is ―strongly biased towards imaging and non-imaging diagnostic equipment‖. However, although detailed bids were sought for 2009/10, it is now under review because demand exceeds funding.

Queensland reported that two philosophies apply to funding capital equipment:

• for replacement equipment, the preferred approach is a corporately-managed Health Technology Equipment Replacement Program (HTER) that uses depreciation funding. It is a ‘like for like’, two-year rolling replacement program, with centrally procured and coordinated funding; or

• one-off capital purchases are progressed from a variety of sources, including District (hospital) funds and capital redevelopments

SA reported that its equipment budgets were not sensitive to macroeconomic variables; Queensland reported that they were; in the NT it was reported that budgets ―appeared to be sensitive‖ and in WA:

―…overall capital allocations are made annually by State Treasury and are significantly affected by the State’s overall fiscal position. Purchasing authorities are expected to manage fluctuations in the Australian exchange rate. If the exchange rate is very unfavourable, this may be reflected in a request to Treasury for greater capital funding allocations‖.

Few State jurisdictions appear to have equipment investment strategies specifically directed at remote localities. It is generally accepted that equipment will be basic and access to specialists limited, even in larger centres22. Investment in digital X-ray has now become priority to support. Access to other diagnostic modalities depends generally on older equipment being cascaded from metropolitan services. The NT has a policy of tendering imaging services in its larger centres (which are classified as remote), even at Royal Darwin Hospital, to collocated private imaging companies. Queensland encourages ―partnerships with private providers in rural sites such as Roma, to allow patients to access to high-end modalities (in this case CT) without the need to travel long distances‖.

1.20 Procurement of equipment

Imaging services may purchase equipment under a variety of terms and conditions including:

• outright purchase for cash

• a financial lease under which nominal title to the equipment passes to the proprietor of the lease (but would be charged to the lessor), with the debt progressively amortised over the term of the lease (but not exceeding the economic life of the equipment); similar to a loan agreement, with interest payments expensed

• an operating lease under which title to the equipment is held by the lessor and payments are made over the term, with the residual being paid out at the conclusion of the term or the lease rolled over into a further term

• a fully maintained operating lease under which maintenance costs and financial charges are integrated into a single financial contract—available until recently from the leasing subsidiaries of several major equipment suppliers (a major one was sold off in 2008)

Where title to the equipment is held by the imaging provider, it becomes an asset on the balance sheet of the proprietor (recognised at the present value of its lease payments) whose depreciation can be expensed over its useful life. The proprietor is then generally responsible for expenses such as those for maintenance, taxes, and insurance. In the case of operating leases, the equipment appears on the balance sheet of the lessor and cannot be capitalised or depreciated by the proprietor, but lease payments and interest are treated as operating expenses.

There is competition for the benefit of expensing deprecation between lessor and lessees. Because they value the benefit of deprecation on their own balance sheets, some leasing companies restrict their business to operating leases. However, their leasing packages are often more readily available to imaging businesses or less costly or both than financial leases.

The method by which equipment is acquired will also depend on the financial circumstances and creditworthiness of the purchaser of equipment. For instance, if corporations or public hospitals have access to banking accommodation or debt finance which is cheaper than the interest rate on a lease, they will generally purchase for cash. State and Territory health jurisdictions generally require all equipment to be purchased for cash; others such as Victoria allow a high level of autonomy to local health services who may accordingly exercise their discretion as to the most propitious method of acquisition, but they generally purchase for cash. Tasmania explicitly takes into account access to Federal funding alongside lease or buy considerations.

Although the situation in NSW since 2007 has been subject to strict guidelines laid down by the NSW Treasury inhibiting leasing, in special situations dispensation may be given to enter into new leases or roll over existing leases. This uncertainty has led many Area Health Services to adopt a ‘wait and see’ policy towards equipment replacement and is one of the explanations for the prevalence of elderly equipment in some public hospitals.

WA reports that they usually purchase equipment for cash and SA reports that it is ―considering the option of leasing equipment‖.

Private imaging businesses operate in more flexible environments than State and Territory jurisdictions and are generally disposed towards leasing arrangements, especially if they are breakaway partnerships or new entrants to the diagnostic imaging industry that lack accumulated reserves and for whom, because they have yet to establish their business credentials, loan finance could prove costly (Sexton 2008).

Well established listed conglomerates with sound credit ratings are more inclined to purchase their equipment for cash, since their internal cost of capital tends to be less than the interest rate on leases. Equipment ownership hence usually offers greater tax advantages through depreciation.

Most publicly-listed health companies that are directly concerned with the provision of health services have strong profit and loss and cash flow statements, but (because of relatively high debt gearing) relatively weak balance sheets. At the time of writing, Sonic and Primary fell into this category (Sonic 2009; Primary 2009). Both were in sound positions of financial health, principally attributable to their high cash flows (from most avenues of their operations, including diagnostic imaging) and their capacity thereby to source funds for investment on equipment from their retained profits or conservative dividend policies. Because of their manageable levels of financial risk, there are generally powerful incentives and tax reasons for these companies (and Sonic in particular) to purchase equipment for cash—even though they may sometimes have inherited leases from businesses taken over.

Private imaging businesses generally evaluate purchases of equipment with the aid of expressions of interest but do not purchase on tender. Some private providers may outsource their acquisitions to a third party. As discussed, in section 5.1 below, purchase of equipment is generally subject to extensive negotiation on price and is greatly influenced by group buying power.

For probity reasons, most State and Territory health jurisdictions purchase larger equipment and infrastructure by tender, panel tender or negotiated tender. Purchase of equipment is always subject to suitability of a site and the availability of infrastructure and support systems. New infrastructure fit out may be included in the tender to support equipment upgrades or replacement equipment for established imaging sites.

Different levels of delegated purchasing authority apply across the jurisdictions. For instance in WA, public hospitals are required to purchase authorised nominated equipment off a rolling tender from specified suppliers through its Health Corporation Network. These run for a period of 12 months, for equipment in the range of $50,000 to $0.5 million per line item (Government of WA 2009). As mentioned above, WA hospitals that hold sufficient funds may independently purchase low value items.

In NSW all imaging equipment and consumables are purchased through Health Support Services (successor to the Health Peak Purchasing Council) either on open or panel tender for a specified contract period23. Some purchase contracts may be restricted to equipment supply. However many purchase orders for NSW Health are now made on a turnkey basis, involving both equipment, site fit out and infrastructure supply. They consequently also involve multiple sub contractors. At the time of writing NSW was piloting a ‘managed equipment supply’ (MES) philosophy which would involve outsourcing total equipment, asset management and maintenance for a particular Area Health Service.

1.21 Equipment prices

Equipment purchasing authorities or agencies setting fees for Medicare benefit need a sound understanding of the price of the equipment they are funding and what precisely represents ‘value for money’. The timing of the acquisition of technologies can be very strategic in the sense that the capital cost of equipment typically falls steeply after a technology has been accepted or other suppliers enter the market and compete vigorously on price. The pace of technological change thus narrows the life cycle of equipment and thereafter accelerates supplier price competition.

Early funding of path breaking technologies can be prohibitively expensive. The experience with MRI well illustrates how costly it was to fund the early adopters of MRI in Australia. In 1986 Sydney’s Royal North Shore Hospital obtained one of Australia’s first MRIs (a 1.5T, as remarked above) on grant funding at a cost of $3.2 million (Crowe 1990). A superior but comparable 1.5T MRI would today be available at cost of about $1.25 million. In Europe an equivalent machine would cost about

€600,000 (approximately AUD 870,000) (Rink 2010); in the UK about £800,000 (approximately AUD 1.4 million) (WAG 2009).

Taking into account the better image quality of to-day’s technology and the significant increase in the general level of prices between when the Royal North Shore’s MRI was first purchased and prices of to-day, it is obvious that the real price decrease has been many times greater than a nominal price comparison might suggest (although evidently possibly less than in Europe).

Contemporary imaging modalities are now computer-based and substantially rely on software, image processing capability and digital transmission and storage systems—all of which have experienced significant price reductions since their first application to diagnostic imaging. This is parallel to the generally secular downward price trend in other computer applications and the IT industry. Even comparatively recent historical prices for imaging modalities are not therefore necessarily useful in comprehending contemporary prices—and as explained below, these may in themselves be subject to a degree of volatility and variation.

Table 5.1 gives indicative unit prices at 2009/10 values together with a price a range for different types of imaging equipment used in providing services described in Appendix 1. These types of equipment correspond with the broad classification of equipment for which data on unit sales could be sourced (Table 5.2). It differs from, but is not inconsistent with the classification used in the general description of equipment in Part 2. PAC RIS equipment was included as a class of equipment because it integrates closely with diagnostic equipment (even though they may be described as infrastructure) and they are also sold as units on which market data are collected.

Prices are exclusive of GST and do not include fit out and infrastructure costs. The data were obtained from the asset registers of State health jurisdictions, equipment suppliers, lease information and public tender data available on the Internet. Data from asset registers had limitations since much of the equipment was no longer current and historical prices were misleading.

Prices of like equipment can be subject to significant unexplained variation. This may be in part because even with a detailed specification of functionality, equipment from different manufacturers can never be homogeneously defined. Each manufacturer seeks to differentiate their equipment by way of one more characteristics which they may claim as unique—even though rival equipment may perform similar functions and broadly constitute a substitute.

Table 5.1: Indicative prices of new diagnostic imaging equipment in Australia; $s, 2009/101

Modality

Broad equipment
classification

Supplier 1

Supplier 2

Leasing sources2

NSW
& Q
Health

Other3

Indicative range4

Indicative unit price5



Nuclear imaging

Gamma camera/
SPECT

280K – 500K

300K – 400K

300K-
500K


400K

SPECT / CT

580K –
1.1M

800k –
1.1M

400K – 757K

400K –
1.1M


750K

PET/CT

1.9M –
3.3M

3.0M

3.5M

4.0M

3.0M –
3.5M


3.25M




CT

<$0.5m

360K – 500K

384K

360K – 500K


430K

$0.5m - $1m

550K – 900K

900K

1.1M

550K –
1.0M

775K

>$1m

950K - $2.4M

3.0M

2.0M

1.0M –
3.0M

2.0M




X-ray

Digital radiology

320K – 450K

320K – 450K

385K

Computed radiology

115K – 140K

36K – 126K

115K – 140K

128K

Bucky room6

115K – 140K

62K – 114K

115K – 140K

128K

Mobile X-ray

38K - $48K

50K

69K – 305K

38K – 53K

46K



Soft anatomical

Ultrasound7

45K – 330K

182K – 320K

160K-
300K

21K– 223K

45K – 330K

188K

MRI

900K –
3.2M

3.0M

1.5M -
3.0M

1.75M

Mammography

400K

85K-
496K

85K-
496K

291K




Procedural

Cardiac cath. Lab8.

1.5M

1.5M

1.5M

Fluoroscopy9

350K – 800K

350K – 800K

575K

Special procedures intervention room10

700K –
1.8M


700K –
1.8M


1.25M



PACS RIS

Minipack

400K

341K – 351K

341K – 400K

371K

Cardiology

400K

400K

400K

Full

1.5M –
2.0M

1.5M –
3.0M

1.75M

1 All equipment prices from quotes or reports are expressed in 2009/10 values, excluding GST (but see note 3) and excluding fit out

2 Equipment purchased by a leasing company during 2009

3 Includes data from current public tender information and data from the WA Health Corporate Network rolling annual contract for the period 23 March 2009 – 22 March 2010 (Government of WA 2009); some price data include GST

4 Excluding outliers, as discussed in text

5 Central estimate, based mostly on median of range, excluding outliers

6 X-ray generator, X-ray tube, X-ray floating table with bucky, wall-mounted bucky, controller

7 Ultrasound equipment is based on 4 levels of specification, as discussed in text

8 Mainly procedural, e.g. for angioplasty and vascular work, but some overlap with diagnostic

9 E.g. for barium enema

10 Hybrid, e.g. for angiography and other interventional work

Price variance may certainly reflect quality variance, and quality can often be diagnostically significant. One manufacture has a reputation for competing on price for a range of equipment that produces images of markedly inferior resolution to those of a competing range from a more expensive supplier, renowned for its quality. In the case of one machine, the intrinsic resolution is 4.6 mm, but the quality supplier embodies unique software that can deliver a 2.0 mm resolution. Hospital imaging departments with whom the Consultant spoke are willing to make the quality / price trade off in favour of quality, although hospital administrations may not view the quality / price trade off in the same light. Jurisdictional doctrine on purchasing is perceived as being characterised by those that invariably buy on price and others that will always entertain quality.

Stakeholders reported that exchange rate movements can cause volatility in Australian equipment prices, although their effects are not always readily discernible. It is understood that at the beginning of each financial year major suppliers hedge their projected sales (measured in their respective head office domestic currencies) against forward equipment deliveries denominated in Australian dollars. Exchange rate effects may not thus immediately become manifest, but apparent price volatility between competing suppliers may occur because manufacturers operate off different financial years24.

Even for identical model numbers, prices may vary at the same point in time for different customers. Quoted ledger prices are frequently subject to negotiation because of supplier competition; and price variation of identical equipment can generally be attributable phenomena such as bulk purchase arrangements, competitive tendering, manufacturer grants for research tied to specific equipment, demonstration or ‘luminary’ sites, the inclusion of extras such as training, extended warranties and the inclusion of some installation costs and future upgrades. Pricing may also vary for identified model numbers according to features such as image processing software and workstations. It was thus convenient and appropriate to specify price for each type of equipment with reference to an indicative range.

For some types of equipment shown in Table 5.1, the price range is quite large. This is because within a single description of equipment there may be many levels of specification. The price band for ultrasound, for instance, is from $45,000 to $330,000. Because of its versatility and the multitude of its applications in diagnostic radiology, four levels of specification are involved for ultrasound, ranging from ‘laptop’ to very high end equipment used for cardiology, guided surgery, etc.

In the case of CTs (following the taxonomy used by the source of data on unit sales), the level of specification is expressed with reference to three price bands. Lower end CTs (those less than $0.5 million) would typically relate to ‘plain vanilla’, 16-slice equipment (or lower); the middle band ($0.5 - $1 million) would include higher end 16-slice as well as some of the more basic configurations up to 64-slice; the upper band would cover some of 40- and 64-slice machines with neurological or oncology engines, right up to much faster multi-slice equipment. Top of the range, multi-slice / multidetector CTs cost from $2.0 - $3.0 million (Box 5.1), although considerable savings are available for

‘luminary’ sites for this type of equipment25.

The range of prices for line items of equipment is attributable to characteristics that include the strength of magnet and bore in the case of MRI; whether equipment is plain film, CM or DM in the case of mammography and use of an image intensifier or digital flat detector in the case of fluoroscopy, etc. Where equipment can be defined with a reasonable degree of precision, such as for different X-ray technologies, price variances are smaller.

Prices quoted for PACS RIS are typical off-the shelf products. Some Area or Regional Health

Services in public systems have purchased PACS in the region of $7 million and supporting RIS for $3 million. Although some private imaging conglomerates buy off-the-shelf PACS, to meet the requirements of their own business rules, they employ their own custom-built RIS and radiology desktop. These high end examples of PAC RIS are treated as outliers and not recognised for purposes of indicative unit prices.

The most costly examples of equipment are PET/CT ~$3.25 million (‘time of flight’ PET/CTs can cost up to $5.0 million), high end multi-detector CT ~$2.4 million and 3.0T MRI ~$3.0 million. For these categories of equipment especially, there are also likely to substantial installation costs, including shielding and extensive structural work to accommodate delivery. The additional infrastructure costs for a PET/CT are reported to be in the vicinity of $2.5 million, depending upon the suitability of the site.

Although the prices in Table 5.1 are net of GST, manufacturers’ invoices always include GST. As imaging businesses are GST-exempt, they claim it as an input credit in their BAS returns.

1.22 Size of the equipment market

Data on the size of the equipment market in Australia for the years 2007 – 2009 are assembled using two size variables. Table 5.2 contains data on unit sales and Table 5.3 contains data on the dollar value of sales, obtained by multiplying indicative 2009/10 values of price (given in Table 5.1) by unit sales.

Table 5.2: Unit sales of diagnostic imaging equipment in Australia, 2007 - 20091

Modality

Broad equipment classification26

2007

2008

2009

Nuclear imaging

Gamma camera / SPECT

15

12

6

SPECT / CT

37

45

55

PET/CT

4

4

10

Total SPECT/CT, PET/CT27

56

61

71

CT

<$0.5m

36

53

76

$0.5m - $1m

60

53

45

>$1m

28

25

25

X-ray

Digital radiology

36

61

70

Computed radiology

81

185

165

Bucky room

117

103

79

Mobile X-ray

96

65

89

Soft anatomical

Ultrasound

794

836

895

MRI

34

35

65

Mammography

48

88

38

Procedural

Cardiac cath. Lab.

18

22

27

Fluoroscopy

16

26

24

Special procedures intervention room

10

8

14

PACS RIS

Minipack

10

3

6

Cardiology

5

2

3

Full

5

10

4

Source: Diagnostic imaging trade sources
1
Covers sales of equipment only with new serial numbers.

The data on unit sales are obtained from a census of all equipment sold in Australia collected from vendor returns to a central agency. The aggregated information is then available for market research to firms contributing to it.

A money metric is useful to an understanding the market as it provides a common denominator for measuring total size as well as a means for assessing the relative importance of its constituent elements. Estimates of dollar sales in terms of a central estimate and a range for each modality (in Table 5.3) follow from respective dollar values of their indicative price and likely range (in Table 5.2). The relative value of the contribution of each imaging modality to total sales of equipment is given in Chart 5.1.

Table 5.3 shows between 2007 and 2009 that the market for imaging equipment in 2009/10 values grew steadily (as indicated by the central estimate) from $493.8 million to $630.8 million, representing a 28% growth in real terms. Ultrasound represented 27% of the total market in 2009 and was its largest single area. Other significant contributions to equipment sales in 2009 were MRI, 18% and CT and nuclear imaging, which in the aggregate of their respective specifications represented 19% and 12% of total sales.

Table 5.3: Estimated diagnostic imaging equipment market in Australia, 2007 – 2009, $ million, 2009 prices1

Modality

Broad equipment classification

2007

2008

2009

Range

Central estimate

Range

Central estimate

Range

Central estimate

Nuclear imaging

Gamma camera/ SPECT

4.4 – 7.5

6.0

3.6 – 6.0

4.8

1.8 – 3.0

2.4

SPECT / CT

14.8 – 40.7

27.8

18.0 – 49.5

33.8

22.0 – 60.5

41.3

PET/CT

12.0 – 14.0

13.0

12.0 – 14.0

13.0

30.0 – 35.0

32.5

CT

<$0.5m

13.0 – 18.0

15.5

19.1 – 26.5

22.8

27.4 – 38.0

32.7

$0.5m - $1m

33.0 – 60.0

46.5

29.2 – 53.0

41.1

24.8 – 45.0

34.9

>$1m

28.0 – 84.0

56.0

25.0 – 75.0

50.0

25.0 – 75.0

50.0

X-ray

Digital radiology

11.5 – 16.2

13.9

19.5 – 27.5

23.5

22.4 – 31.5

27.0

Computed radiology

9.3 – 11.3

10.4

21.3 – 25 .9

23.7

19.0 – 23.1

21.1

Bucky room

13.5 – 16.4

15.0

11.8 – 14.4

13.2

9.1 – 11.1

10.1

Mobile X-ray

3.6 – 5.1

4.4

2.5 – 3.4

3.0

3.4 – 4.7

4.0

Soft anatomical

Ultrasound

35.7 – 262.0

148.9

37.6 – 275.9

156.8

40.3 – 295.4

167.8

MRI

51.0 – 102.0

59.5

52.5 – 105.0

61.3

97.5 – 195.0

113.8

Mammography

4.1 – 23.8

14.0

7.5 – 43.6

25.6

3.2 – 18.8

11.1

Procedural

Cardiac cath. Lab.

27.0 – 27.0

27.0

33.0 – 33.0

33.0

40.5 – 40.5

40.5

Fluoroscopy

5.60 – 12.8

9.2

9.1 – 20.8

15.0

8.4 – 19.2

13.8

Spec proced interv rm

7.0 – 18.0

12.5

5.6 – 14.4

10.0

9.8 – 25.2

17.5

PACS RIS

Minipack

3.4 – 4.0

3.7

1.0 – 1.2

1.1

2.0 – 2.4

2.2

Cardiology

2.0 – 2.0

2.0

0.8 – 0.8

0.8

1.2 – 1.2

1.2

Full

7.5 – 15.0

8.8

15.0 – 30.0

17.5

6.0 – 12.0

7.0

TOTAL

286.5 – 739.8

493.8

324.1 – 819.9

549.7

393.7 – 936.6

630.8

Source: Tables 5.1 and 5.2

1See notes to Tables 5.1 and 5.2

Chart 9 shows whilst ultrasound remains the largest segment of the market for imaging equipment, its relative contribution since 2007 has steadily diminished. The main source of overall market growth between 2007 and 2009 was MRI, whose relative contribution to total sales grew by 50% (fuelled by a sudden increase in 2009); followed by nuclear imaging and procedural modalities whose respective contributions grew by 27% and 15%.

The importance of ultrasound in the market for imaging equipment is a reflection of its mainline role in service provision and next to CT, its key importance to the business operations of private practices.

Charts A1 and A2 (in Appendix 1) show that after diagnostic radiology (dominated by X-ray), ultrasound is the most frequently employed imaging modality; and Chart A3 shows that ultrasound attracts more Medicare benefits than any other imaging modality. Some possible general explanations may be that ultrasound is easy to install (unlike radiation-emitting equipment, ultrasound devices do not require shielding); ultrasound tends to be relatively small and the capital investment required is more modest than for CT and MRI—although high specification units now cost more than $300,000. However, stakeholders told the Consultant that ultrasound is frequently used inappropriately and that a major source of its growth is the restricted access to MRI.

Applied Economics

Source: Table 5.3

Annual unit sales of MRI were 34 and 35 in 2007 and 2008 respectively, but they jumped to 65 in 2009. At an estimated average unit cost of $1.75 million, the near doubling of unit sales during 2009 had a profound impact on the overall size of the equipment market—and was a major factor in its growth in 2009. As discussed elsewhere, the Commonwealth places restrictions on requests for MRI services and licenses the number of units that may attract Medicare benefit. From time to time it announces rounds of ‘invitations to apply’ (ITAs) for new MRI licences to be allocated to ‘areas of need’. The demand for new MRI equipment is consequently highly sensitive to changes in scope of Medicare licensing arrangements. Sales of MRI in 2009 reflect the culmination of progressive allocations of new licences by the Commonwealth since 2006, supplemented by elements of unlicensed equipment demand.

As noted above, data collected on CT equipment are distributed between three price ranges as a proxy for levels of specification. It is remarkable that increases in total sales of CT units between 2007 and 2009 from 124 to 146 were attributable solely to demand more than doubling for units costing less than $0.5 million (from 36 to 76); sales of high end multi-slice CT equipment remained constant (at about 25 units) and those for mid-range equipment fell sharply (from 60 to 45). As in the United States, vendors have failed to position high end CT systems as new practice mainstay scanners (Freiherr (2010)—possibly because of their relatively high cost but also because of their lack of special recognition in the Schedule.

The growth in ‘plain vanilla’, 16-slice equipment can be explained by the gradual decay of the large corporate imaging model (described in sub section 1.4.4), as imaging specialists departed I-Med and purchased low end scanners to start their own independent practices. These low end scanners attract the same benefit as higher specification models and in conjunction with the tax benefit available under the Commonwealth’s economic stimulus package, represent a cost effective point of entry into the market for new businesses. It is also a recognised manufacturer sales strategy to target first time buyers of equipment with mid to low range systems (Tilly 1999).

Box 5.1: The market for fourth generation multi-detector CT scanners

The market in Australia for high end, multi-slice / multi-detector CT equipment (that has evolved since 2007) is dominated by Toshiba’s Aquilion ONE 320-slice machine some 17 of which (at the time of writing) had been commissioned at a cost of up to $3.0 million each. Its competitors are the Philips iCT 256 of which there are five, each costing about $2.4 million; the Siemens dual-energy Somatom—three of which are currently operational and a further two are about to be commissioned, costing each about $2.3 million; and the GE CT750 HD, of which there is one that cost close to $3.0 million. All rely on slightly different multi-detector technologies, varying from 64 to 320 slices (Barnes 2008). Prices will vary according to configuration. Fourth generation multi-detector scanners offer the best results for cardiac CT angiography and pulmonary angiograms.

Between 2007 and 2009 the total market for nuclear imaging equipment grew from $46.8 million to $76.2 million, which was dominated by sales of SPECT/CT and PET/CT. The small share of the market occupied by standalone SPECT mostly comprised single head gamma cameras with distinct features28. Almost all SPECT studies now use SPECT/CT equipment, partly because of the additional MBS fee attracted by the accompanying CT attenuation study (even though not always a necessity) and SPECT/CT represents more than half the market for nuclear imaging equipment.

The value of sales of SPECT/CT and PET/CT between 2007 and 2009 grew by 49% and 150% respectively—and would have been considerably greater, but for their associated infrastructure and workforce costs and, in the case of PET/CT, the necessity of reasonable access to a cyclotron. SPECT/CT sales may in part have been affected by competition from CT coronary angiography as it avoids the cost of an isotope.

The dramatic increase in PET/CT units sold between 2008 and 2009 (from 4 to 10) is principally associated with the provision of Commonwealth special purpose grants and other government funding in response to political imperatives for equipping cancer services with path breaking technology. A further ten PET/CT machines are likely to be sold in 2010; and because of Australia’s relative underendowment with PET/CT, there is potential for much further growth29. The nuclear medicine market is currently reported to be ―saturated, with fierce competition between vendors‖.

Plain X-ray is a low cost, high volume business, still widely used in every imaging practice. However, it is of relatively little consequence to the size of the equipment market. Its hardware is extremely durable and often remains functional well beyond its intended useful life. Growth in demand for Xray equipment is dominated by updating to CR and the shift to DR, integrated directly into a PACS RIS. Sales of CR and DR grew between 2007 and 2009 respectively from $10.4 million to $21.1 million and from $13.9 million to $27.0 million, while the market for bucky rooms remained flat at

$4.0 million. A considerable part of plain X-ray work has now also fallen prey (possibly inappropriately) to other imaging modalities such as CT or other domains of investigative medicine— such as replacement with endoscopy for many barium studies.

Mammography equipment is used mainly in screening programs (although Medicare pays a benefit for diagnostic breast imaging). Sales in 2009 were valued at $11.1 million. The major funder of mammographic equipment is BreastScreen, which is a joint Commonwealth-State funded initiative. Specific purpose funding decisions have thus become the most important explanation of shifts in the demand for mammography units. A sharp rise in demand between 2007 and 2008 from 48 to 88 units can be interpreted in the light of a national decision (but implemented jurisdictionally) to upgrade to CM. Demand fell by more than 50% in 2009, but can be expected to rise soon as the Commonwealth releases funding during the course of its five-year, $120 million commitment to convert BreastScreen to DM.

Although the relative importance of procedural modalities increased their share of the total market, technical change has curtailed growth in their natural in demand—now confined mainly to the replacement market. Fluoroscopy to a degree is being superseded with MRI, especially in geriatric areas for brain scanning; and the demand for cath lab work is being curtailed by widespread acceptance of pharmacological intervention for lipid management.

Investment in PACS RIS is a lumpy infrastructure decision that is typically associated with network or Area or Regional Health Service one-off initiatives. The data on the market for these systems relate to sales of proprietary systems sold by major vendors that may be networked into wide area coverage. The total market was worth $7.0 million in 2009, but peaked at $30 million in 2008, principally because of the windup of the Victoria’s Healthsmart PACS portfolio30 as well as local jurisdictional demand associated with digitisation of BreastScreen in that year.

1.23 How capital equipment may improve productivity

The way diagnostic equipment may improve productivity can be addressed in various ways. The most constructive might be to consider whether it introduces better and less costly pathways for patient management and contributes thereby to direct savings in treatment costs and / or contributes to health gain31.

A formal cost effectiveness study is beyond the scope of the present study. In general terms it may be reasonable to suppose that a justification for employing any given type of diagnostic imaging equipment (in conjunction with its required labour and other inputs) would be its cost effectiveness relative to other methods of investigation (including other imaging technology) in:

• screening for, and preventing or mitigating disease; or

• diagnosing disease and (in some cases) its staging and tracking; or

• the diagnosis and management of trauma

—and the optimisation of any indicated intervention and the weighing of its attendant risks32.

With the exception of work commissioned by ADIA (Access Economics 2008) and work limited to health cost savings (Miles 2001), evidence on the cost effectiveness of diagnostic imaging in Australia is sparse. Results for cost effectiveness depend in substantial measure upon the sensitivity and specificity of the results of imaging studies on which an evaluation relies. The ADIA study uses data from the literature to examine the cost effectiveness of MRI, CT, mammography, densitometry and ultrasound studies for six different diseases, using various assumptions about diagnosis, treatment, the progression of each disease, etc.

All cases showed that on WHO criteria, each diagnostic imaging modality ranged from being moderately to highly cost effective. Evidence justifying MRI for knee problems and CT and ultrasound for appendicitis was overwhelming—both health and outcome costs for which were in each case lower with diagnostic imaging. No evidence was supplied on whether in reality requests for these studies are always appropriate—which is an area of stakeholder concern in the public sector (see below).

It is unclear, moreover, how the list of studies included in the ADIA evaluation was arrived at. No mention is made of evaluating uses of diagnostic imaging that may have failed to prove cost effective; and if this were the case, why they had been excluded. While the general importance of diagnostic imaging to patient welfare cannot be denied, it is difficult to sustain ADIA’s blanket claim, based on six case studies selected on unknown criteria, that their ―analysis demonstrates the substantial contribution that diagnostic imaging makes to health outcomes in Australia‖ (Access Economics 2008, p ii)—or indeed that Australia is necessarily obtaining ‘best value for money’ for the extent of its expenditure on diagnostic imaging (Appendix 1). One stakeholder told the Consultant that ―growth in the volume of imaging services in this country is unsustainable‖.

From time to time MSAC advises the Minister on the evidence of cost effectiveness of new and emerging applications of diagnostic imaging, but its remit does not generally extend to examining the value of existing MBS items. In general, remarkably little systematic evaluation has been undertaken of the application and use of the present diagnostic imaging content of the MBS.

Box 5.2: Examples of the value of diagnostic imaging

● Access to digital PACS RIS has improved productivity and permitted the interpretation, transmission and manipulation of complex images, including their sequencing or videoing. This allows the storage and transmission of complex records visualising metabolism, such as a functioning organ at diagnostically relevant times.

● Remote, fast after hours reporting on CT can be critical to early diagnosis of pathology and the treatment of many conditions without invasive costly surgery.

● Confirmation or exclusion by CT of scaphoid fracture suspected on X-ray film can avoid an unnecessary plaster cast and (after a 10-day interval) a second X-ray and attendance at a fracture clinic.

● Use of MRI to assess the benefit of vertebroplasty in relieving pain from osteoporotic vertebral compression fractures

● Use of MRI paediatric cardiac studies as a substitute for cardiac catheterisation and angiography

● Use of CT coronary angiography as a substitute for assessment by stress echocardiography and sometimes coronary angiography, otherwise involving an admission of up to 24 hours to a chest pain assessment ward (currently subject to a large randomised trial)

● Use of multi-detector CT to diagnose gout non-invasively—avoiding CT-guided joint aspiration and pathologic analysis

● Use of ultrasound in the review and repair of arterio-venous fistulas (used for haemodialysis) as a substitute for angiography and / or review in operating theatres with several days in hospital; with high end ultrasound planning and percutaneous catheter use, fistula repair becomes an outpatient service.

● PET/CT scanning enables better definition of cancer, and therefore has the potential to reduce the number of radical treatments.

Box 5.2 contains some specific examples of diagnostic imaging that some stakeholders thought were likely to be cost effective. They appear to cover ground different from the studies that ADIA evaluated. Not all stakeholders advanced opinions as to cost effectiveness. One thought diagnostic imaging was in most cases cost effective, but ―being one stage removed from the patient‖ they thought it was difficult to ―assess its contribution to changing patient outcome‖.

Another thought that it was not presently possible to answer questions about cost effectiveness. They remarked that

―. there are many studies that have demonstrated significant management change contingent on diagnostic imaging results. However, there are almost no comparative effectiveness or cost-effectiveness studies undertaken in imaging (and certainly no prospective studies in which gains are directly captured) … by funders, principally the Commonwealth, as the only funder of note in Australia.

― In the United States and Europe … the results of such studies are probably five or more years away.

― Of imaging procedures currently performed, it is estimated that 30-50 percent are either unnecessary (no imaging required) or inappropriate (imaging required, but wrong test(s) ordered). Whatever the future results of effectiveness studies, there is a clear and immediate need for decision support to guide referring clinicians in their test ordering; this could most easily be linked to computerised provider order entry (CPOE)‖.

1.24 Structure of diagnostic imaging industry

There is much less enthusiasm about the prospect of realising gains from centralised corporate ownership and management of private imaging services than was at first perceived in the early 2000s. Some imaging specialists are disengaging from concentrated ‘hub and spoke’ models of service provision and establishing their own smaller and independent distributed imaging networks and models of management. These new businesses can contribute to fragmenting local markets and over concentrating equipment in them. Excessive duplication of equipment and service capacity in clusters of practices competing for new custom with each other (and often with local public hospital imaging services) can contribute to inefficiency and heighten risks of equipment overuse. This environment provides an important context for reviewing the manner in which the capital costs are remunerated.

1.25 Payment for capital

After 1 July 2010, the Commonwealth plans to extend rules for capital sensitivity by linking the benefit payable for diagnostic imaging services to a defined useful life of capital equipment. Other methods of remunerating diagnostic imaging services include:

● the present arrangement that applies to all equipment except CT, whereby equipment is de facto remunerated at full cost for the duration of useful life, determined by the service provider; and

● marginal cost remuneration—which would exclude altogether from the Medicare fee any allowance for case-specific capital equipment, but have it rather separately paid for.

All payment systems involving capital sensitivity and appropriate methods of valuation have their failings. The case for changing the present default full cost, operator-determined useful life method of remunerating equipment is a risk that it will be over remunerated, exacerbating its overuse— especially where, in particular localities, equipment may be over concentrated.

.

On the other hand, the defined useful life approach could be criticised because it is a blunt instrument: that specifically targets over compensation for depreciation. Its ‘one size fits all’ philosophy cannot forecast uncertain trends in future technology, it fails to recognise equipment upgrades, if it does not 100% depreciate equipment it may under-remunerate it, it discriminates against a relatively small element of total costs, it may actually discourage the maintenance of older equipment and it will do little for the quality of remote health by way of the concession it (currently) offers for equipment to be cascaded. Moreover it fails to address financial incentives for overuse.

Marginal cost remuneration is an elegant theoretical construct that addresses both adverse financial incentives and over-depreciation problems, but it would need to rely on case-specific equipment being separately funded. This could lead to underinvestment in equipment. Health Program Grants are cumbersome and would be ill-suited to diagnostic imaging. In their ambition to forecast useful life, they also share the failing of the defined useful life approach.

Specific purpose grants for high cost capital items are already a feature of government policy for funding in the public sector, but it is doubtful if private imaging services would be enthusiastic about public funding for equipment with stringent conditions attached. On the other hand, a merit of marginal cost remuneration is that it permits a focus on incremental cost elements such as digital image storage and the use of isotopes and their logistics—critical to services remote from reactors and cyclotrons—that are not always recognised in full cost accounting.

Consideration should be given to trialling marginal cost remuneration for new modalities that are predominantly the domain of the public sector, such as PET/CT, which have been funded with specific purpose grants. In this event, to preserve competitive neutrality, directly competing PET/CT services already operating that had been established with commercial capital (such as at Macquarie Private Hospital in Sydney, at the Monash Medical Centre in Melbourne, at the Mater and Wesley in Brisbane and at Hobart Private), should receive compensatory capital funding, but obliged to meet the cost of facility fees to the funder. This may, however, discourage future private investment in PET/CT.

If the Commonwealth were to implement its proposed defined useful life method of remunerating capital, it would constitute formal recognition of the existence of capital in MBS remuneration— hitherto of equivocal status. As a corollary, in the interest of competitive neutrality, changes to the remuneration of imaging services that do not incur user costs of capital would be appropriate.

It is accordingly recommended that imaging services (either public or private) whose equipment is financed by way of external public capital funding, either from grant, donation or research money (of the type listed in Box 3.2)—even though it may be subject to notional amortisation—be ineligible to receive any full cost useful life margin in the Schedule Fee available to competing services obliged to fully fund the acquisition of their equipment. The capitalised value of any external operational funding should be treated in the same way as equipment funding.

To be competitively neutral, defined useful life remuneration could thus necessitate a two-tier remuneration system for identical pieces of equipment—depending upon the source of their finance (see Box 6.1). Grant-funded equipment would then effectively reduce to marginal cost remuneration. However full cost remuneration on grant-funded equipment in needy, remote services could remain if thought appropriate.

It also recommended that to avoid under-remuneration of capital, useful life assessments should re-set the depreciation clock when equipment has been upgraded in accordance with vendor specifications. Equipment upgrades may be often more efficient than buying a new machine.

Box 6.1: Example of the margin in remuneration in recognition of capital costs

The difference in the margin required to pay for the cost of capital consumption between publicly-funded and privately-funded PET/CT units may illustrate the possible order of magnitude of the margin in fees required to support competitive neutrality.

Medicare data for 2008/09 indicate that the estimated 18 PET/CT units that were operational during that year delivered 22,689 services billed to Medicare, representing 1,261 private services per machine (4.8 services per day) at an average benefit cost of $888. With the likelihood of machines operating at their full capacity of 9.1 patients per day (a weighted average of 12 for private machines and 8.3 for public machines), the private patient load would have constituted about 53% of the estimated total load of 42,900 services during 2008/09 (i.e. to both private and public patients).

The cost of a typical PET/CT machine is $3.25 million, excluding fit out (Table 5.1). With a defined useful life of 8-years (Table 3.1), the annual straight line depreciation charge at historical cost would be $406,250 per machine or $188 per service (distributed across both private and public patients), equivalent to 21% of the Medicare benefit cost of private patients. This does not infer that providers would necessarily be accounting for this amount (or that the actual fee would have been fully funding all other cost elements of the service), but it represents an indication of the margin (based on operating conditions and fee structures prevailing in 2008/09) that would need to be available to preserve the competitiveness of operators whose PET/CTs had been their capital could thus be entitled commercially funded to the full. Using 2008/09 values, $888 MBS payment, whereas services commercially-funded beneficiary to services paying for free capital would get the marginal cost fee of $700.

1.26 MRI

Aside from consideration of useful life remuneration, the other policy response to the risk of capital overuse has been to strictly control Medicare eligibility for new, costly imaging modalities. The main target has been MRI—a modality that is no longer experimental and which has now become an accepted means of clinical investigation.

MRI is the preferred diagnostic tool for managing spinal injury and disease and many neurological disorders. Although the number of Medicare-eligible MRI machines has increased (from 73 in 2004 to 124 in 2010), all stakeholders reported that insufficient access to Medicare-licensed MRI equipment remains. Australia has 5.6 Medicare-eligible MRI machines per million persons, the United States has 26 and OECD countries have 5 – 10 (OECD 2009).

Stakeholders reported that the shortage of MRI is contributing to distorting demand for diagnostic imaging services by spilling over into excessive CT and ultrasound services. Hospitals may be encouraged allocate their Medicare-eligible (generally newer) machines to patients with Medicare entitlements and other patients to other machines, rather than allocating the use of equipment on clinical need. Moreover, the current licensing system is anti-competitive. The overwhelming majority of MRI licences in private practices are in the hands of the conglomerates33.

It is possible that the steadfast policy on MRI is a legacy of denying any reward to persons who may have inappropriately sought to take advantage of the context of a 1988/89 Budget measure (ANAO 2000). This proposed to grant Medicare benefits in respect of MRI equipment ordered before May 1998. The upshot was that for probity reasons, about half Australia’s stock of MRI equipment (some 50 machines), much of it allegedly ordered on the eve of the Budget, failed to obtain a licence—and currently represents a considerable part of Australia’s unlicensed MRI capacity.

The profitability of CT to diagnostic imaging practices and its reputed overuse may in some respects be a function of present controls over MRI equipment and the inefficient and what are alleged to be ‘wasteful’ processes for requesting an MRI scan34. As a first step to neutralising this situation, it is recommended in the case of MRI equipment which is not currently Medicare-eligible with field strength exceeding 1T, that consideration is given to writing a Schedule Fee benefit simply for the cost of a specialist reading fee.

This would likely approximate the private charges which are currently raised on unlicensed equipment and need have no implications for the status of the equipment itself. The likely impact of paying MRI reading fees on the use of CT and ultrasound could be then carefully monitored, as well as its effect on ‘extra billing’, before the possibility of gradually expanding MRI remuneration in consideration of its other costs.

1.27 Industry returns

From published corporate accounts, it is unclear that the corporatised diagnostic imaging industry is reaping excessive returns on its investment in capital equipment—certainly not commensurate with the rent that individual imaging specialists may command in their own personal remuneration.

Between 2006/07 and 2008/09 the return on equity in Australia’s only publicly-listed, specialist diagnostic imaging company ranged between -144.42% and 1.54%. Partnership management models can now better effectively appropriate professional rents to owner operators. High labour costs may constitute a barrier to the future of large corporate networks that are now as well obliged to absorb significant new overheads associated with digitisation and PAC RIS upgrades.

Whilst there may have been productivity gains from PACS RIS associated with improved workflow and gains to patients, it is uncertain that these gains have been equitably distributed between consumers, capital and professional labour. The true costs of ongoing maintenance of hardware and software, and greater functionality to meet likely further increases in the complexity and size of image studies as the ratio volumetric scanning grows are downstream costs that will have to be factored into future earnings. The downstream cost of long term archives, broadband communications and networks will further add to costs.

Data on the costs of producing imaging services indicate that at the level of Medicare benefit currently paid, the majority of public and private diagnostic imaging modalities may not be covering full cost—with little provision for the amortisation of capital equipment. A significant exception to this is the return available to CT, which appears to be the mainstay for many diagnostic imaging practices.

1.28 The future

It is unclear that the pattern of investment in diagnostic imaging equipment has contributed to optimal care in Australia. In some imaging services investment in equipment has become an end in itself— often because ‘state of the art technology’ and equipment standards in themselves can be imaginatively exploited as intrinsic measures of quality. The provision of high end technology by grant funding is susceptible to glamorisation. Capital endowment can too, become a potent factor in recruiting professional staff and may become a bargaining chip (as admitted by some health jurisdictions) in securing accredited training positions in hospital settings.

Investment in equipment is a necessary but insufficient condition for a capacity to secure benefit from better and less costly pathways for patient management. The results of the ADIA (2008) study that rely on idealised assumptions about pathways of investigation and treatment (apart from breast screening) are beguilingly eloquent, but misleading. Diagnostic imaging equipment is an ‘information product’ that becomes valuable only when its requesters possess knowledge about its uses, capabilities and limitations.

As a stakeholder has suggested, an important priority in obtaining value from Australia’s imaging services would be to implement decision support to guide requesters in their ordering of imaging studies. Access to defined common order sets and their proper sequencing for symptoms and indications in accordance with clinical guidelines linked to CPOE may be a critical step in securing value for money from the stock of Australia’s imaging equipment. The migration from paper to digital has been the first step in this direction. Remuneration that offers efficient financial incentives to encourage appropriate equipment utilisation and disposition would clearly complement the adoption of rational criteria for ordering imaging investigations.

A combination of the transformation from film to digital-based imaging technologies and the possibility of a nationally-funded national archive in conjunction with investment in a high speed national fibre optic network, could offer significant potential for improved regional and rural imaging services. It could also attract more imaging specialists into areas that are currently struggling to maintain services.

1.29 Pattern of diagnostic imaging services attracting Medicare benefit

Using Medicare’s imaging classification (2010b), Chart A1 shows the frequency of diagnostic imaging services for the period 2006/07 – 2008/09, during which the total number of imaging services attracting benefit grew from 15.7 million to 17.3 million. This was equivalent to an annual rate of growth of roughly 5%. About half these services consisted of diagnostic radiology (8.6 million services in 2008/09); and diagnostic radiology and ultrasound jointly accounted for more than 80% of the total volume of diagnostic imaging services.

Applied Economics

The overall share of diagnostic radiology services, however, fell slightly (from 52% to 50%) due to significant growth in the volume of all the other imaging modalities, representing the newer technologies. Diagnostic radiology modalities such as static X-ray (especially in areas such as gastroenterology) have also been affected by competition from CT and endoscopic examinations that can be both diagnostic and therapeutic. The largest areas of growth in imaging were in nuclear imaging, which grew by more than 10% in 2008/09 (to 0.4 million services), followed by MRI (0.5 million services), ultrasound (5.8 million services), and CT (2.0 million services)—all of which grew in volume in 2008/09 by approximately 8%.

Chart A2 shows the distribution of diagnostic imaging services per person. Between 2006/07 – 2008/09 the total number of diagnostic imaging services used per 1000 resident Australians each year grew from 74.5 to 79.4, representing an annual growth of 3.2%. Per person use of diagnostic radiology actually fell between 2007/08 and 2008/09 (from 39.7 services per 1000 to 39.4), but this was offset by significant growth in the other areas (led my nuclear imaging, which grew from a much lower base of 1.7 to 1.9 services per 1000).

Since the overall per person rate of growth (3.2%) was less than the rate of growth of total service volume (5%), the relatively smaller increment in services used per person implies (other things being equal) that Australia’s total population grew relative to total diagnostic imaging service access or availability.

35 As for Charts A2 – A5

Applied Economics

Total benefit attracted by diagnostic imaging grew from $1.7 billion to $2.0 billion between 2006/07 – 2008/09 in current price terms. Chart A3 shows the distribution of benefit paid between the six categories of services. The three major areas of benefit cost, ranked by benefit attracted were ultrasound ($613 million in 2008/09), CT ($562 million) and diagnostic radiology ($433 million). Although benefit in current prices for each of the other diagnostic imaging modalities rose during this period, the rate of increase in the case of diagnostic radiology was substantially less than for others.

Applied Economics

In Chart A4, the average benefit cost of different categories of services is shown in current price terms (given by the ratio in each year of total the benefit paid for each type of service to the total volume of services on which benefit was paid). Between 2006/06 – 2008/09 this rose from $109 to $113—an increase of 3.6%. Whilst the average benefit cost of nuclear imaging, which was the most costly type of service, fell from $479 to $449, that for other service types remained roughly constant, with diagnostic radiology experiencing a marginal decrease to slightly below $50.

Between 2006/07 – 2008/09, the health component of the CPI rose by 10%, which was above the general rise in prices. The increase in the average benefit cost for all categories of diagnostic imaging (3.6%) was considerably below price increases that were occurring elsewhere in the health sector and was also less than the rise in the broader CPI (7.3%).

Applied Economics

The years 2006/07 – 2007/08 were the concluding years of the term of two MOUs between the Government, ADIA and the RANZCR which sought to cap overall Medicare payments for diagnostic imaging to 5% per year (with the exception of nuclear imaging, some ultrasound and some cardiac angiography). ADIA (2009) attributes the decline in real benefits available for diagnostic imaging to the application of the MOUs.

Chart A5 shows the distribution of the growth of diagnostic imaging benefit costs in constant 2006/07 prices (current benefit cost deflated in each year by the index for the health component of the CPI). The increase in total diagnostic imaging benefit payments in constant terms was from $1.7 to $1.8 billion. This represented an annual growth of about 1.8%, which was below the 6.8% annual growth of benefit payments in current prices. In constant price terms, there was a decrease in payments for diagnostic radiology (from $408 million to $393 million), there was no change in the total benefit paid for nuclear imaging ($168 million) and there were increases in payments for ultrasound, CT and MRI (which respectively attained $557, $511 and $145 million in 2008/09).

Applied Economics

The data in Charts A1 - A5 are generally consistent with diminishing prominence of the diagnostic radiology category and the concurrent emergence of the other newer imaging modalities, but whose increasing use in many instances has been subject to either one or all of cost containment measures such as restrictive criteria for service requests (e. g. only specialists may request MRIs) , tight specification of the conditions under which newer imaging MBS items may carry benefit entitlement and gradual implementation of new, high-end technologies through piecemeal licensing of locations at which machines may attract a Medicare benefit.

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Analogue X-ray

Two dimensional X-ray image captured on a film

Average cost

Total costs divided by the number of services

Bucky room

Room containing equipment used for X-ray studies

Capital sensitivity

Principle under which MBS fees for diagnostic imaging services could formally recognise a capital equipment component—for which the Department of Health and Ageing has foreshadowed rules for depreciation that are to apply from 1 July, 2010

Competitive neutrality

Conditions under which public imaging services enjoy no net competitive advantage (relative to private services) as a result of their Government ownership, including access to capital free of user costs

Computed mammography

Mammogram digitally captured on a detector and read out to a workstation / PACS via cassette

Computed radiology

X-ray image digitally captured on a detector and read out to a workstation / PACS via cassette

Computed tomography

Use of a computer to reconstruct a series of cross-sectional scans with the aid of multiple X-ray projected images

Contrast agent

Substance that is injected or taken orally to make certain tissues (such as blood vessels) more visible during diagnostic imaging

Cost effectiveness

Measure of relative efficiency in delivering an output or outcome, based on the least-cost combination of inputs

CT angiogram

Use of computed tomography to test for various types of heart disease

CT coronary angiography

Use of computed tomography to provide information about cardiac structure and function

Cyclotron

Equipment that accelerates charged particles used in the production of isotopes (such as FDG) in PET/CT studies

Default full cost remuneration

Remuneration based on full operating life of equipment as determined by an imaging service (implicitly incorporated into current MBS diagnostic imaging fees, other than for CT)

Defined useful life remuneration of capital equipment

Remuneration based on a statutorily-determined operating life of equipment

Defined useful life

Statutory operating life of equipment based on rules for capital sensitivity

Depreciation

Costs of consuming the services of a capital asset throughout its useful life

Diagnostic radiology

Radiological imaging modalities (including X-ray, CT and ultrasound) for studies that can assist in diagnosis

Digital mammography

Mammogram digitally captured and directly streamed into a workstation / PACS

Digital radiology

X-ray or ultrasound images digitally captured and directly streamed into a workstation / PACS

Digitiser technology

Means of converting an image into digital format

Economies of scale

Diminishing average and marginal costs due to increased use of the capacity of a piece of equipment

Elastic

A characteristic of a quantity variable that causes it to be relatively sensitive to changes in price or income

Financial lease

Lease under which nominal title to an asset vests in the proprietor of the lease

Fluorodeoxyglucose

Compound attached to the fluorine-18 isotope that is commonly used as a tracer in PET imaging studies

Fluoroscopy

X-ray that produces real-time video images

Full cost

All costs associated with producing an imaging service (see Average cost)

Full cost remuneration

Remuneration based on average cost

Gamma camera

Nuclear medicine imaging equipment that uses tracers emitting gamma radiation from within a subject after injection of a radioisotope that is taken up by a particular organ of interest

Half life

Time required for radioactive decay of 50% of the mass of an isotope

Image reconstruction

Computed, two or three-dimensional image from multiple original projections of an object (taken from many angles by rotating a source and / or a detector) based on an algorithm that back projects or iteratively reconstructs an image of the original object

Increasing returns

Reduction in average cost resulting from increased production

Inelastic

A characteristic of a quantity variable that causes it to be relatively insensitive to changes in price or income

Ionising radiation

Electromagnetic wave, such as an X-ray, capable of removing electrons from atoms in substances (including human tissue) through which it passes

Magnetic resonance angiography

Use of magnetic resonance imaging (MRI) to provide information about cardiac structure and function

Magnetic resonance imaging

Imaging modality that uses a magnetic field which interacts with hydrogen atoms to visualise detailed internal structure and function of soft tissues

Mammography

Study of the breast tissue using a single or multiple low energy X-ray projection(s)

Marginal cost

The cost of incremental inputs needed to produce an additional unit of service

Marginal cost remuneration

Remuneration at marginal cost

Marginal revenue

Incremental revenue attributable to producing an additional unit of service

Megabecquerel

A unit of radioactivity that represents a million nuclear decays per second within a sample

Molybdenum-99

Parent radioisotope to technetium-99m (used as a gamma tracer)

Moral hazard

A phenomenon whereby persons who are insured (or whose decisions are underwritten) may behave less prudently than if they were not insured (or otherwise indemnified)

Multi-slice / multi-detector

Technology that enables the simultaneous capture of multiple slices

Neutron

Subatomic particle found in atomic nuclei

Operating lease

Lease under which title to equipment is held by the lessor

Opportunity cost

Earnings forgone in alternative avenues of employment or deployment of resources

PACS / RIS

Information storage and retrieval system that provides local or wide area support for all administrative and clinical data of a diagnostic imaging service

PET/CT

Nuclear medicine imaging equipment that uses a positron emitter to visualise and measure organ function and metabolism, enhanced via co-registration with an anatomical CT image

Photomultiplier

An evacuated tube containing a light-sensitive entrance window and a series of electrodes (dynodes) for detecting, converting and amplifying light signals into electrical signals

Plain X-ray

Simple image of a subject taken with X-rays

Planar image

Image captured with a stationary source and detector and acquiring data from just one (projection) angle

Positron

Subatomic anti-particle released as part of the decay process of some radioisotopes and used in PET/CT studies

Post processing

Steps undertaken on multiple images after capture, but prior to their visualisation on a computer monitor, including three-dimensional reconstruction, modification to field of view, slice spacing, etc (see Image reconstruction)

Price elastic

See elastic

Radioisotope

Radioactive substance used with a tracer

Radioactive tracer

Substance used to take a radioisotope to a specific organ of interest for diagnostic and / or functional imaging

Radiopharmaceutical

Radioactive drug administered to a patient as a diagnostic tracer

Radiopharmacy

Facility that prepares and dispenses radioactive drugs

   

Rent

Remuneration exceeding that required to sustain deployment which a scarce resource (subject to finite supply) such as specialist imaging professional labour may command

Scintillation

Low energy photon production (typically visible light) after an interaction of a high energy X-ray / gamma ray in a scintillator crystal

Scintillator

Solid or liquid substance optically coupled with photomultiplier that converts X-ray radiation to light

Sensitivity

Measure of the proportion of correctly-identified true positive diagnoses

Slice

X-ray image of a single plane

Specific purpose grant

Payment made by Commonwealth or State or Territory governments to a health service or public hospital, tied to the purchase of equipment and related outlays—usually subject to conditions

Specificity

Measure of the proportion of correctly-identified true negative diagnoses

Single photon emission computed

Nuclear medicine imaging equipment that uses two gamma tomography cameras perpendicularly opposing each other on a gantry, capable of rapidly producing multiple tomographic images of the level of radiotracer uptake in an organ of interest

SPECT/CT

Nuclear medicine imaging equipment that fuses SPECT and a CT images, combining molecular and anatomical views

Teleradiology

Imaging reported from a location different from the point of service, facilitated by electronic transmission

Tesla

Unit of measurement for strength of a magnetic field

Tomographic image

Image gathered from slices projected from multiple directions, read to a reconstruction algorithm and processed on a workstation

Transducer

Probe used for ultrasound that converts electrical energy into sound waves

Ultrasound

Acoustic wave propagated in a subject and used for measuring the density and boundary between organs

Volumetric display

Graphical display that represents a three dimensional image

Volumetric scanning

See Tomographic image

X-ray

Electromagnetic wave producing ionisation in a substance (see ionising radiation)

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