Service Industry Evolution: The Offshoring of Radiology

The Offshoring of Radiology Abstract For the past twenty years, international trade in services has grown faster than merchandise trade. One factor that has contributed to the internationalization of services is offshoring. Advances in communications have enabled a wide range of services to be transferred between countries, while improvements in a number of industry specific technologies have increased the scope of work that can be digitized and thus transferred using these new communication tools. While healthcare is not a market often associated with international trade, a combination of regulatory and technological developments are quickly transforming elements of this traditionally national market. To more fully understand how markets such as healthcare are responding to these opportunities and challenges, this paper examines the case of radiology. It begins with a brief overview of what radiology is. Section two discusses why offshoring radiology might be attractive. Sections three examines some of the issues that healthcare entities have to address as they weigh the advantages and disadvantages of offshoring a service such as radiology. Section four discusses what lessons the offshoring of radiology holds for other knowledge intensive markets.

The difference between making shoes and radiology is the huge difference in the entry barriers. The entry barrier to starting a shoe factory in Bangladesh is a question of getting through red tape. But the U.S., for example, has high entry barriers for radiology. (Dr. Bhavin Jankharia, quoted in Lowers, 2003) In 2004, radiologists starting compensation averaged $350,979 (Volkin & Dargan, 2005) Since the 1950s, international trade has grown faster than world output, a development that has generated much discussion regarding how falling trade barriers and improvements in communication and transportation technology have facilitated increased foreign direct investment and merchandise trade. Yet, for the past twenty years, international trade in services has grown faster than merchandise trade. One factor that has contributed to the internationalization of services is offshoring. Advances in communications have enabled a wide range of services to be transferred between countries, while improvements in a number of industry specific technologies have increased the scope of work that can be digitized and thus transferred using these new communication tools. While healthcare is not a market often associated with international trade, a combination of regulatory and technological developments are quickly transforming elements of this traditionally national market.1 To more fully understand how markets such as healthcare are responding to these opportunities and challenges, this paper examines the case of radiology. It begins with a brief overview of what radiology is. Section two discusses why offshoring radiology might be attractive. Sections three examines some of the issues that healthcare entities have to address as they weigh the advantages and disadvantages of offshoring a service such as radiology.

See Belsky et al (2004) for further discussion of how the General Agreement on Trade in Services (GATS) affects international dimensions of healthcare.

Section four discusses what lessons the offshoring of radiology holds for the healthcare market. Section 1: What is Radiology? Radiology is the branch of medicine that uses imaging technologies to diagnose and treat an array of conditions. It traces its origins to Wilfred Roentgens discovery of x-rays in 1895. Over the next several decades, an array of scientists and physicians refined and improved the science and medical use of x-rays, and by the 1930s, physicians begin to specialize in using x-rays to diagnosis specific medical conditions. In 1956, physicians began applying another new technology-ultrasounds-to their clinical repertoire. A decade later, in 1967, another new technology was added to the radiology arsenal, the MRI. In the early 1970s, the CT was introduced, providing another important imaging modality for radiologists. Advances continue to be made in this field, and in 2004-2005, a series of studies using digital mammography have shown the potential of this new diagnostic aid over traditional mammography. As this brief historical overview illustrates, advances in technology have continually expanded the range of medical uses of radiology, stimulating a steadily increasing need for radiologists. Today, radiology is broadly divided into two sub-disciplines, diagnostic radiology and interventional radiology. Diagnostic radiologists use a wide and sophisticated array of technologies to diagnose a series of medical conditions; interventional radiologists use radiation and other processes to help treat the patients. One fundamental distinction between them is the degree to which their work requires interaction and contact with patients. Diagnostic radiologists use an array of machines to help other physicians better understand the nature and extent of specific illnesses and conditions: their work requires

them to interpret digital images that are transmitted to them by hospitals, clinics, and physicians. Typically, most diagnostic radiologists have strong relationships with primary care and specialty physicians who order these scans and images, but they do not usually interact directly with the patients, and their interactions with the physicians who order radiological scans are commonly by email or phone. In contrast, interventional radiologists interact directly with patients and the other primary care and/or specialty physicians: proximity is a necessity. As this paper is focusing on the dimensions of radiology that are amenable to offshoring, it will concentrate on diagnostic radiology. After medical school, diagnostic radiologists in the U.S. must complete a five year residency and pass a board certification.2 At this stage, some enter directly into practice, while others opt for a one-two year fellowship in a subspecialty such as abdominal CT. Clearly, the path to becoming a board certified radiologist in the US is long and demanding. Section 2: Why is offshoring radiology attractive? Before we can discuss why offshoring radiology may be appealing, it is necessary to define some key terms. Although many newscasts and articles have treated the terms outsourcing and offshoring as synonyms, they are in fact quite distinct.3 Domestic outsourcing occurs when firms decide to hire out work that had been performed internally. An example of healthcare outsourcing would be a hospital that decides to contract with an external lab company rather than keep lab personnel as hospital employees. Firms have always engaged in outsourcing, as the line between what to make
One of the key points to emphasize in international discussions of healthcare is that most countries set their own standards regarding licensing and credentialing: thus, while the radiology profession in the US may set a five residency requirement, other countries have different requirements. 3 For good discussion of the distinction between these terms, see Stack and Downing (2005), Schultze (2004), and Hira and Hira (2005).
2

and what to buy from the market continually changes. The recent controversy in the 2004 presidential election over American jobs being sent overseas was not about domestic outsourcing but about offshoring and offshore outsourcing. Offshoring occurs when an American firm sends some portion of its work to an overseas facility where the work continues to be performed by company employees. An example of healthcare offshoring would be when a U.S. hospital moves its radiology department to its own offices in India: these workers in India could be Indian citizens but would still be employees of the US firm. Offshore outsourcing refers to steps by American companies to contract with new firms in other countries for work that had been performed by its own employees in the US: an example of offshore outsourcing would be when a US hospital contracts with a separate company in India for its diagnostic radiology needs. Although there are legal issues in the US related to the domestic outsourcing of radiology, the real debates concern offshoring and offshore outsourcing of radiology. But, before we can discuss these concerns, we first need to explain why offshoring radiology may be appealing.4 Section I ended with a brief discussion of the difficulties of becoming a board licensed and certified radiologist. Yet, despite these challenges, the number of diagnostic radiologists in the US has risen dramatically over the past twenty five years.

For the remainder of the paper, we will use the term offshoring to encompass offshore outsourcing as well: when we need to differentiate between the two, we will use both terms.

Table 1- Number of Diagnostic Radiologists in the US5

# of Diagnostic Year 1975 1980 1985 1990 1995 2000 2003 Radiologists 3544 7048 12887 15412 19808 21104 23345

From 1980 to 1990, the number of diagnostic radiologists rose by 119 percent; though the rate of increase began to slow, the decade from 1990 to 2000 registered a 37 percent increases. For the twenty years from 1980 to 2000, the number of radiologists rose by nearly 200 percent. If we display this on a supply and demand diagram of the radiology market in the US, this would indicate a significant increase in supply, or a large shift to the right of the supply curve, and the equilibrium wage would be expected to fall from A to B, while the number of radiologists rose from Q1 to Q2.

These data come from the 2005 edition of Physician Characteristics and Distribution in the US; slightly different numbers appear in the Statistical Abstract of the US , but these data are only for active, nonfederal, patient care diagnostic radiologists.

Diagram 1
US RADIOLOGY MARKET
Salary

Sa A Sb

B D Q

Q1 Q2

However, at the same time the supply of radiologists was increasing, the demand for radiological procedures was also increasing (Meghea & Sunshine, 2005; Saket et al, 2005). The combination of an aging population along with new technologies which are continually expanding the range of diagnostic radiology have resulted in a steadily increasing demand for diagnostic interpretations. The mean number of procedures performed per FTE radiologist rose from 11,100 in 1991-1992 to 13,900 in 2002-2003. Over this period, the compound average annual percentage growth rate in procedures per FTE was 2.1 percent (Bhargavan and Sunshine, 2005a; Bhargavan and Sunshine, 2005b). This increase in the demand for radiological procedures is reflected in Diagram 2 by the increase in Demand from Da to Db and from point B to point C.

Diagram 2
US RADIOLOGY MARKET
Salary

Sa A C Sb

B Da Q

Db

Q1 Q2

While an increase in supply will put downward pressure on a markets price or wage (represented by the move from A to B), an increase in demand will put upward pressure on the wage: the net effect of what happens to the wage over time depends on the relative shifts of the supply and demand within a given market. According to a study by the American Medical Group Association (AMGA), diagnostic radiologists ranked as the fifth highest paid physician specialty group. The 2005 AMGA report states that the median diagnostic radiology salary in 2004 was $364,899, up 5.58% from 2003 (Radiological Society of North America, 2005) A separate report from Delta Medical Consulting estimated the average radiology salary in 2004 at $350,979, with an average sign-on bonus of $37,667 (Volkin & Dargan, 2005).6

Levy (2005) presents data on the professional fees radiologists receive per procedure: these fees are typically quite modest, ranging from $12.36 for a chest x-ray to $68.92 for a CT scan of the spine. But, Levy then concludes that From an insurers perspective, the cost of interpretation is a relatively small share of the scans total cost, particularly for the more expensive CT or MRI. Correspondingly, an insurer seeking to control aggregate imaging costs would likely focus on limiting the number of scans through benefits management before they would consider mechanisms for hiring cheaper radiologists. However, insurers and policy makers are not concerned specifically with the cost of individual components of the healthcare system but in their overall costs. If radiology actually decreases future costs of other treatments, then the demand for radiology can be expected to increase; thus,

One benefits analyst commented recently that the million dollar radiologist is not far away. Using Diagram 2, these wage data suggest that the demand pressures for radiologists have been steadily outstripping the increase in supply. In an era of escalating healthcare costs, rising salaries for one of the highest paid physician specialties makes offshoring of radiology to countries with lower wage structures an attractive proposition: one healthcare firm in Bangalore India pays its radiologists who work for US clients $30,000 $100,000, well above the average Indian salary for radiologists but still low enough for the firm to charge about half what radiology groups in the US charge. The CEO of other India based Teleradiology company notes that highly qualified Indian radiologists earn between $20,000-$30,000. As one American radiologist complained on a webboard, "Who needs to pay us $350,000/yr if they can get a cheap Indian radiologist for $25,000/yr (Pollack, 2003). Using a median US radiology salary of 350,000 400,000, it appears that most highly qualified Indian radiologists can be retained for salaries at somewhere between one-tenth to one-twelfth the prevailing US rate. The vast gap between what qualified radiologists earn in the US and emerging market countries such as India make offshoring of radiology financially attractive. The next step is to analyze a framework that highlights key factors involved in the offshoring decision. Section 3: A Decision Framework for Offshoring

cost constraints are more likely to be sought by reducing fees per read rather than reducing than the number of reads.

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This section illustrates how a decision framework for offshoring introduced by Stack and Downing (2005) can be applied to radiology (see Figure A in Appendix 1). The offshoring framework begins by determining what degree of physical proximity is required: does the work in question require a high or low level of direct contact for the workers in question? The discussion in Section 1 illustrates that diagnostic radiologists have a very low need for physical proximity. Advances in medical technology have enabled the digitalization of radiological procedures, while advances in communication technology have essentially rendered costless the transmitting of even large radiological files anywhere in the world with a broadband connection (Jarvis & Stanberry, 2005; Kalyanpur et al, 2004). These developments have made offshoring of radiology technologically possible and economically viable. Yet, as the framework shows, this is only part of the story: healthcare entities must also evaluate what regulatory and firm level concerns may impede their ability to offshore radiology. Regulation affects many service industries, but healthcare has some of the stiffest regulatory rules of any market. According to Kovner and Salsberg (2002), the US has relied heavily on licensure, accreditation, and certification of health professionals to assure that health care was high quality...Most health professions are licensed by states. Licensure requires graduation from an approved school, passage of an examination, and, in certain cases, a minimum period of practical experience. Not only must radiologists be licensed in the states in which they seek to practice, they have to meet specific certification and accreditation criteria specified by the American Board of Radiology (www.theabr.org).

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These licensure and certification requirements pose significant hurdles to the offshoring of radiology (White, 2002). While designed historically to establish baseline competencies for US physicians, in a rapidly changing world in which some healthcare services are capable of being delivered internationally, they act-intentionally or not-as a restraint on trade. Without these requirements, healthcare entities could be seeking to reduce some of their input costs in much the same way that manufacturers and some other service sector firms have used offshoring and offshore outsourcing to reduce labor costs. Yet, even with these stipulations, some business models are emerging which provide varying degrees of radiological services from lower cost countries.7 Two of the most interesting examples come from Teleradiology Solutions and Wipro. Teleradiology Solutions (http://www.telradsol.com) was founded by Dr. Arjun Kalyanpur, an Indian who received his medical degree from the All Indian Institute of Medical Sciences and then completed his diagnostic radiology residency at Yale New Haven Hospital. Teleradiology Solutions has a staff of American Board of Radiology certified radiologists who are currently licensed in Arizona, California, Colorado, Connecticut, Delaware, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania, Texas, Washington and Wisconsin. All of these radiologists have returned to India after practicing for varying amounts of time in the US. Since the cost of living in India is a fraction of that in the United States, the salary requirements are considerably

There are other models of radiology offshoring, but they focus more on providing twenty four hour service by licensed US radiologists stationed for example in developed countries that are in distinct time zones. One of the best known of these firms is Nighthawk Radiology Services (http://www.nighthawkrad.net): firms such as these are competing not through lower costs but by being able to offer teleradiological services by radiologists who are working normal daytime hours in the city in which they are based.

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lower than in the US. During interviews conduced in India during the summer of 2005, one of these radiologists explained that even at a much lower absolute salary, her standard of living in India was in many ways superior to what she left in the U.S. Teleradiology Solutions has further enhanced its competitive position by becoming the first Indian company to become fully accredited by the Joint Commission of Accreditation of Healthcare Organizations (JCAHO), the independent healthcare organization in the US which evaluates and accredits healthcare entities and program in the US (Syed, 2005). Yet, while this has so far proven to be a successful business model, it is clearly a small nichethere are only a small number of US board certified radiologists who are willing to relocate to lower cost countries such as India. Another interesting approach to this issue comes from Wipro, one of Indias best known high technology companies which also has a healthcare division based in Bangalore.8 Rather than restrict itself to the rather limited supply of Indian radiologists who are licensed and credentialed in the US, Wipro has chosen to hire in highly trained Indian radiologists, some of whom may have studied or worked abroad in the US or the UK. Yet, while this may increase the supply of radiologists from which to draw, it circumscribes the type of work these radiologists can presently perform for their US clients. If the Wipro radiologists are not licensed in a US state and credentialed by a US hospital, they are not allowed to perform full radiological reads; instead, they are currently developing a range of complementary services that can speed the work flow of radiologists in the US. A few examples include providing 3D anatomical models for MRIs and CT Angiographies, and providing collaborative radiological reads which can greatly increase the time flow.
8

This information is based on interviews conducted at Wipro in Bangalore in June, 2005.

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As a result of these initiatives, the American College of Radiology (ACR) set up a task force in 2004 to establish guidelines regarding the offshoring of radiology. Among the key recommendations of the task force were that offshore radiologists: 1) be licensed to practice medicine in the state where the imaging examination is originally obtained, and possess any medical or other licensure required within the jurisdiction of the interpretation site; 2) hold credentials as a providers and maintain appropriate privileges in the health facility or hospital in the United States where the examination was obtained; 3) have appropriate medical liability coverage for the state in which the examination was obtained; and 4) be responsible for the quality of the images being interpreted (Jarvis & Standberry, 2005). A question that these guidelines raise is the extent to which they are intended to vouchsafe minimal quality guidelines for radiological interpretation versus acting a restraint on international competition (Chin, 2004).9 It these types of regulatory concerns that are proving the most significant hurdle for companies such as Wipro which are well positioned to expand their radiological coverage for developed markets such as the United States and the United Kingdom. Returning to the framework, however, it is also clear that even if both the technological and regulatory hurdles can be cleared, offshoring of radiology to lower wage countries such as India will face two final types of constraints. One set is captured by what is referred to as Firm Level concerns: here, offshore and offshore-outsourcing radiological entities would have to be tremendously careful regarding such issues as
9

An interesting twist to these quality arguments concerns the internationalization of academic radiology research. In his 2004 Presidents Address to the Radiological Society of North America published in the October 2005 issue of Radiology, Dr. Brian Lentle notes that 62 percent of the articles submitted to and 43 percent of the articles published by Radiology are now international submissions. This is not to suggest that international radiology is necessary equivalent to the US standard, but it does reflect the increasing amounts of high caliber research being done outside of the US, surely a good sign for advocates of international Teleradiology.

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patient privacy and Health Insurance Portability and Accountability Act of 1996 (HIPAA) compliance. Privacy concerns have been raised regarding the offshoring of medical transcription, and these concerns must be allayed if the offshoring of higher level medical services such as radiological interpretations are to gather momentum (Maher, 2004). Once a firm has determined that there are no overriding technological, regulatory, or firm level issues preventing offshoring, Stack and Downing note that there is also a broad socio-political context which can also shape the degree to which a firm or a market can embrace offshoring. The last several years have witnessed several examples of federal and state contracts that had initially been awarded to international firms (which were the low bidders) being re-awarded to US firms. It has proven very difficult to offshore a range of public contracts in the US, and various dimensions of the US healthcare market are already lobbying to explain why these services in general are not amenable to offshoring. Section 4: Lessons to be learned from offshoring radiology Offshoring is a very new development, and most markets are still trying to figure out exactly what the implications are. Projections of and generalizations about offshoring having proved misleading if not wrong in many instances. A well publicized report by Forrester Research in 2002 predicted that 3.3 million service sector jobs would be offshored by 2015; within a year Forrester and other groups had greatly increased their estimates of how many jobs will likely be offshored in the next five to ten years: in fact, approximately every six months, revised estimates of the total number of jobs likely to be offshored appear, often generating much immediate media discussion. Harper (2003)

15

asserted that healthcare was one of the industries least threatened by offshoring, since "You can't go overseas to see a doctor or nurse or get physical care." While this was incorrect even in 2003, we are likely to see even greater efforts to offshore a growing range of healthcare services. While all industries struggle with rising costs, healthcare has struggled more than most: from 1999 2004, overall healthcare spending in the US has risen by at least 8.2 percent annually (Strunk, 2005). Policy experts have introduced a range of different prescriptions, but thus far none have systematically examined how offshoring health care services could dampen the inflationary pressures driving up overall healthcare costs. Yet, as this paper illustrates, simple technical ability is only the first step to a successful offshoring strategy: while necessary, regulatory and socio-political pressures continue to render it far from sufficient.

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References American Medical Association (2005). Physician Characteristics and Distribution in the US. Chicago, Il. Belsky, Leah, Reidar, L., Mattoo, A., Emanuel E., and Sreenivasan, G. (2004). "The General Agreement on Trade in Services: Implications for Health Policymakers," Health Affairs, 23(3): 137-145. Bhargarvan, Mythreyi & Sunshine, J. (2005a). Utilization of Radiology Services in the United States: Levels and Trends in Modalities, Regions, and Populations. Radiology, 234(3), 824-832. Bhargarvan, Mythreyi & Sunshine, J. (2005b). Workload of Radiologists in the United States in 2002-2003 and Trends Since 1991-1992. Radiology, 236(3), 920-921. Chin, T. (2004). Radiologists weigh in on outsourcing of imaging work. Retrieved June 14, from http://www.amednews.com Harper P. (2003). Wilt your job move to India? Retrieved from http: //moneycentraL.msn.com/content/invest/extra/ P62115.asp?Printer Hira, Ron & Hira, Anil. (2005). Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. American Management Association: New York. Jarvis, L & Stanberry, B. (2005). "Teleradiolgoy: threat or opportunity," Clinical Radiology 60: 840-845. Kalyanpur, Arjun, Pham, D., Brink, J., & Forman, H. (2004). Implementation of an International Teleradiology Staffing Model. Radiology, 232(2), 415-419. Kovner, Anthony & Jonas, S eds (2002). Health Care Delivery in the United States, 7th ed.Springer Publishing. Kovner, C. & Salsberg, E. (2002) "The Health Care Workforce" in Kovner and Jonas, Health Care Delivery in the United States, 7th ed. Springer Publishing. Lentle, Brian. (2005). Radiology: Beyond Boarders. Radiology, 237(1), 8-11. Levy, Frank & Goelman, A. (2005). Offshoring and Radiology, retrieved from http://web.mit.edu/flevy/www/Offshore%20Radiology%20IPC.pdf Lowers, Jane. (2003). Radiologists weigh global challenges: access to care, technology, and growing demand, retrieved from http://www.diagnosticimaging.com/roundtable2003/

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Maher, K. (2004, March 26). Now in Offshoring's Sights: High-Level Professionals. Wall Street Journal. Mann, C. (2003). Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth. (International Economics Policy Briefs No. PB03-11). McCarthy, J. C., Dash, A., Liddell, H., Ross, C. E, E Temkin, B. D. (2002). 3.3 million U.S. services jobs to go offshore. Forrester Research. Meghea, Cristain & Sunshine, J. (2005). Who's Overworked and Who's Underworked among Radiologists? An Update on the Radiologist Shortage. Radiology, 236(3), 932-938. Moran, N. (2003, July 2). Looking for savings on distant horizons. Financial Times. Pollack, A. (2003, November 13). Who's Reading Your X-Ray? New York Times. Radiological Society of North America. (2005). "Salaries Flat for Interventional Diagnostic Radiologists" from http://www.rsna.org/Publications/rsnanews/oct05/salaries.cfm Saket, D., Nwanze, C., Maynard, C., Sunshine, J., & Forman, H. (2005) Update on the Diagnostic Radiologist Employment Market: Findings through 2004. American Journal of Roentgenology, 185(December 2005), 1408-1415. Schoenberger, K. (2005, January 2). Opponents of practice cite risks, ethical issues. The Mercury News. Schultze, C. (2004). Offshoring, Import Competition, and the Jobless Recovery. (Brookings Institution Policy Brief No. 136). Stack, Martin and Ricard Downing. (2005). "Another look at offshoring: Which jobs are at and why." Business Horizons 48(6), 513-23. Bradley C. Strunk, Paul B. Ginsburg, and John P. Cookson (2005). Tracking Health Care Costs: Declining Growth Trend Pauses In 2004, Health Affairs Web Exclusive, June 21, 2005 Syed, Falaknaaz. (2005). "Teleradiology Solutions becomes 1st JCAHO accredited Indian body, Express Healthcare Management, July 16th-31st. Volkin, L & Dargan, R. (2005). Starting Salaries, Inducements Increase for Radiologists, from http://www.asrt.org/content/News/IndustryNewsBriefs/Workplace/StartingSa050 324.aspx White, P. (2002). Legal issues in teleradiologydistant thoughts! British Journal of Radiology, 75(2002), 201-206. 18

APPENDIX 1 FIGURE A10

Proximity
Does the job require physical proximity to the workplace?

yes

no

Socio-Political context within which the offshoring phenomenon is unfolding:
isolated incidents of constraint
forcing new regulatory initiatives
backlash

Regulatory
Is there a law or regulation preventing the job from being done abroad?

yes

LESS
Likely to be Offshored

no

Firm Level
Security, Intellectual property rights, Privacy, Risk

yes

no

MORE
Likely to be Offshored

10

Stack and Downing (2005)

19