Toshiba Buy-In Shows Imaging Field’s Growth
When the first commercial prototype of a magnetic resonance imaging system was installed by Diasonics at Huntington Memorial Research Institute in Pasadena in 1983, the pictures it produced of the brain were nothing to brag about.
“The initial pictures were very poor. You could hardly see the anatomy,” said Ronald Schilling, who was then president of Diasonics’ MRI Division.
But a couple months of fine-tuning cleared up the pictures and, Schilling said, gave reality to the “dream” of a tool that could help physicians peer inside the body to diagnose disease without subjecting their patients to potentially harmful X-rays.
Since then, MRI technology, which uses magnetic fields, radio waves and computers to create clear, three-dimensional pictures of soft body tissue, has developed into a burgeoning and highly competitive industry.
In just a few years, more than 1,300 MRI systems have been installed in hospitals and radiology centers nationwide, and now are commonly used to detect abnormalities in the brain and spinal cord, replacing riskier and more painful procedures.
Just how global and competitive the MRI business has become recently was underscored when Japanese-owned Toshiba America Medical Systems of Tustin announced that it would buy Diasonics’ MRI Division in a deal valued at about $187 million.
The acquisition reflects the consolidation under way among manufacturers of MRI systems. The acquisition of Diasonics will make Toshiba Corp. a formidable competitor in the U.S. market now dominated by General Electric Medical Systems and Siemens.
Gain of Equipment, Staff
Toshiba, which barely had begun to penetrate the U.S. market with its own systems, will gain Diasonics’ widely accepted technology and large installed equipment base as well as a nationwide sales and servicing staff.
But the going won’t be easy. For manufacturers, MRI is “a tough business to make money in,” said Donald J. Kokot, spokesman for GE Medical Systems in Milwaukee, Wis., which controls about 40% of the U.S. market.
Kokot said that GE has invested $350 million to research and develop the technology. Only recently, Kokot said, has the company’s MRI sales and service business grown large enough to enable it to support continuing research and still make an operating profit.
Schilling, who is vice president and general manager of Toshiba’s Tustin unit, said Diasonics has been among the most profitable MRI manufacturers. Lawrence Haimovich, a medical technical analyst with Furman Majer Dietz & Birney in San Francisco, estimates that Diasonics’ MRI Division this year will have net earnings of between $4 million and $5 million on $150 million in revenues.
But Diasonics officials feared that they could not maintain their market position because of a lack of sufficient capital for continuing research and development. Toshiba, as part of a $30-billion-a-year conglomerate, provides the deep pockets necessary to survive.
Industry analysts, however, say big profits for the manufacturers are mostly down the road in lucrative equipment maintenance contracts.
Another obstacle is that MRI systems, selling for $800,000 up to $2.5 million, are big-ticket items for hospitals and clinics at a time when Medicare and the private insurance industry are clamping down on the spiraling cost of medicine.
Entrepreneurs and physician investors have stepped in to fill the capital void by purchasing and installing many MRI machines, both at hospitals and at stand-alone sites.
More Liberal Reimbursement
Medicare encouraged the development of MRI as an outpatient service. Under federal regulations established in 1983, outpatient services receive more liberal reimbursement from Medicare than similar services provided to hospitalized patients.
But some critics contend that too many MRI centers have mushroomed in certain areas such as Los Angeles and Orange counties, which together are estimated to have about 80 systems. The critics complain that doctor ownership of many of these centers has encouraged overuse of the expensive technology, which depends for its financial survival on a high volume of patient referrals.
The creation of new centers through joint ventures by doctors appears to have slowed in the last year after U.S. Rep. Pete Stark (D-Oakland) proposed legislation to prevent physicians from investing in MRI centers to which they refer their own patients.
Nonetheless, most industry experts say the growth potential of the MRI industry continues to be substantial. Drew Consultants Inc., a medical imaging equipment consulting company, estimates that this year MRI sales will be $600 million in the United States and $900 million worldwide, and that sales will continue to expand 10% annually.
Suzanna Hoppszallern, manager of technology policy and planning for the American Hospital Assn., said that, just with proven applications, there is a need to double the number of MRI systems in hospitals and clinics nationwide.
Hoppszallern said MRI is “the gold standard” in brain and spinal cord diagnosis, where it has largely supplanted the CAT scan and myelography, a risky and painful procedure that involves injecting dye into the spinal canal and then having X-rays taken.
An MRI system consists of a large, tube-shaped magnet in which patients are placed lying down and then bombarded with radio frequency waves. The radio frequency waves that return from the patient’s body are translated by computer into anatomical images. Such procedures are not cheap, costing $800 on the average.
Hoppszallern also said the applications of MRI technology are likely to be expanded through research. Already, the use of MRI has been extended from the central nervous system to the shoulders and knees, where it can pinpoint torn cartilage and ligament.
Manufacturers say they are perfecting the use of MRI angiography to make clear images of the pumping heart and blood vessels. Further in the future, they predict, another MRI technology, called spectroscopy, will monitor the chemical composition and metabolism of body cells, which would help doctors determine the most effective forms of radiation or chemotherapy with which to fight cancer.
Meanwhile, manufacturers are making their equipment less expensive to entice new purchasers, which increasingly are smaller hospitals.
Schilling said the fastest-growing market segment consists of what are called “midfield systems,” which are less expensive and less versatile than top-of-the-line systems with stronger magnets. Even cheaper and less powerful systems are being marketed for use in trauma centers.
Donald Slater, an analyst with MD Buyline, a Dallas company that evaluates equipment purchases for hospitals, said that two years ago a midfield system typically sold for $1.8 million to $1.9 million; now competition in the industry has dropped its price to $1.5 million.
Various Approaches
Hospitals anxious to obtain access to MRI technology in some instances are entering joint ventures with doctors and with companies that specialize in funding, developing and operating MRI centers. Others are further hedging their financial risk by renting MRI units by the day or by the scan.
S. Lewis Mayer, the chief executive officer of American Health Services Corp., a Newport Beach company that operates diagnostic imaging centers in affiliation with hopitals and doctors, said, “In many cases today, hospitals can’t afford to purchase the equipment or don’t want to. They need someone to take the financial risk off their balance sheet.”
Mayer said his company frequently will provide up to $2.5 million of a $3-million investment needed to establish an MRI center at a hospital.
The leasing of mobile MRI units also is an increasingly popular option for smaller hospitals, according to the Hadley Hart Group, a medical consulting firm in Chicago. The company has charted a steep growth in mobile MRI units since 1986, showing 300 in service at the end of 1988.
Systems for Rent
Rick Zehner, chief executive officer at Alliance Imaging Inc. of La Palma, said the company has 39 MRI systems for rent, making it “the second largest owner of MRIs in the world.” The largest owner, he added, is another mobile imaging equipment company, Mobile Technology Inc. in Los Angeles.
In many instances, Zehner said, hospitals rent an MRI unit until they are convinced they have enough patient business to justify buying one.
Not everyone is favorably impressed by the proliferation of MRI technology. Dr. Tom Mayer, director of managed care for the medical audit services division of Mercer Meidinger Hansen, a consultant on employee medical benefits, said he believes “there is probably no question that there are too many” MRI centers.
Mayer said hospitals frequently obtain MRI units, not because of community need, but because they are determined to keep up with competitors. “Most hospitals in California, which is very competitive, feel that it is necessary to provide technologies like MRI in order to meet the expectations of their medical staff,” he said. “They want to keep their physicians admitting to their facility rather than down the block to a hospital that has an MRI unit.”
Mayer said he also is concerned that in many instances physicians are ordering MRI scans when much cheaper diagnostic alternatives, such as CAT scans or simple X-rays, would be sufficient.
The growing use of MRI systems is a concern to medical insurance companies, which have difficulty determining the effectiveness of the new technology in relation to older technologies so they can establish reimbursement policy.
“Without a reasonable and effective process for controlled expansion of technology, the fear is the conflict between technological advancement and health-care cost containment will be difficult to resolve,” said Joel Miller, director of the medical practice assessment unit of Health Insurance Assn. of America.
MRI centers throughout the country, meanwhile, are marketing their service to local referring physicians.
Nate Kaufman, president of the group at Medical Imaging Centers of America in San Diego that operates MRI centers, generally in joint ventures with hospitals or doctors, emphasized that owning an MRI center can be extremely risky. He said that a top-of-the-line machine may need to treat nine to 10 patients a day to break even. And, since an MRI scan generally takes 45 minutes to perform, making a profit means long operating hours, including scheduling patients at night and on weekends.
Some Centers Lose Money
Terry Gill, executive director of the Cooperative in Del Mar, a consultant to MRI centers, contends that about 20% of the centers nationwide are “just paying their bills” and 15% are losing money, some in large bundles. He said one center in Texas he would not identify tells him it is doing only two scans a day and losing $1 million a year.
But Cherrill Farnsworth, chief executive officer of TME Inc., a Dallas company that has developed 13 MRI centers, said that “without a doubt, the majority of clinics around the country are making money.” She said each MRI clinic costs about $4 million to establish. That can be paid off in five years, she added, after which “you will make a tremendous amount of money.”
THE MIRACLE OF MRI
Some current MRI applications
In the brain to discover tumors, strokes, multiple sclerosis and hydrocephalus (a cause of dimentia).
In the neck and lower back to discover herniated discs and in the spinal cord to discover tumors.
In joints such as the knee to discover torn cartilege and ligaments and in the shoulder to locate rotator cup tears.
Potential MRI applications
Magnetic resonance angiograms of blood vessels to diagnose aneurysms and other vascular abnormalities that could cause strokes or hemorrhage.
Scanning of the liver for malignant tumors.
Spectroscopy, a chemical analysis of tissues in organs such as the brain and heart for early detection of decreased blood supply caused by blocked vessels that could lead to strokes and heart attacks. This technique also could be used to individualize cancer treatment by allowing doctors to adjust radiation and chemotherapy depending on the chemical composition of the malignant tumor.
Source: Dr. William G. Bradley, director of MRI, Huntington Memorial Hospital, Pasadena 1988 U.S SALES OF MRI EQUIPMENT
Toshiba American Medical Systems of Tustin moved into the magnetic resonance imaging business in a big way with the acquisition of Diasonic’s MRI division in late August.
1988 % Total Sales Market Installed Revenue Share Units GE Medical Systems $215 41 550 Siemens 90 17 190 Diasonics 70 13 220 Picker 70 13 195 Philips 15 3 60 Fonar 40 8 105 Elscint 7 1 10 Others 20 4 25 Total $527 100 1,355
Source: Drew Consultants
