Virtually always available

CHICAGO - Amid the endless rows of booths hawking MRI machines and CT scanners at last month's Radiological Society of North America's annual conference, Virtual Radiologic Corporation's exhibit stood out.

The two-level display boasted a mini-staircase, carpeting, tables, chairs and several computer screens. Well-dressed doctors and executives pressed the flesh as Virtual employees demonstrated the company's technology at the scanning industry's biggest and most prestigious gathering.

Virtual had good reason to show off. It raised $68 million from its initial public offering (IPO) in November, and its stock price is up more than 35 percent, to around $23 a share. Inc. magazine recently named it one of the country's fastest-growing companies.

Virtual is the latest company to capitalize on the growing demand for certain medical procedures. In Virtual's case, the Minnetonka-based company contracts with radiologists across the United States to interpret and analyze imaging data from CT scans, MRIs and ultrasounds sent over encrypted broadband networks 24 hours a day.

With its size and technology, Virtual executives say the company and its chief competitor, Idaho-based Nighthawk Radiology Holdings Inc., are positioned as the industry leaders in the nearly $16 billion image analysis market.

But a year ago, Virtual seemed an unlikely titan, according to internal e-mails obtained by the Star Tribune. The company didn't have enough radiologists to analyze images from emergency cases, causing long delays in the amount of time it took Virtual to provide "reads" back to hospitals and clinics.

In late October, 2006, an angry chief executive Sean Casey fumed to a top executive that "the weekend was an operational disaster" and warned that "patients can die due to such irresponsibility."

"This is not a game," Casey wrote to then-chief operating officer Lorna Lusic. "This is a life-and-death situation for many of our patients. Furthermore, the reputation of the company is at stake."

In recent interviews, however, Virtual executives downplay the e-mails. Casey, who is a radiologist, said that weekend was "an extreme aberration." As proof, he cites the fact that Virtual retains 98 percent of its customers.

"Our reputation for quality is well earned," he said.

"We have been very impressed with them," said Dr. Robert Lefsrud, a radiologist with St. Croix Radiology Consultants, a Virtual customer.

But such problems underscore the high-stake risks for doctors and their patients of outsourcing some medical processes.

For teleradiology firms like Virtual, success -- and survival -- rests heavily on the ability to assign the right number and types of cases to the right radiologists, a delicate balancing act that can seem more art than science.

Teleradiology is booming because of a shortage of radiologists and a growing demand for MRIs, CT scans and ultrasounds, especially as baby boomers enter retirement. The number of imaging procedures is expected to grow at an annual rate of 15 percent. By 2020, the country will be short 15,000 radiologists, according to the American Journal of Roentgenology.

Increasingly powerful MRIs and CT machines are also boosting demand for radiologists, said Sean Wieland, an analyst with Piper Jaffray & Co. The emerging devices can produce such detailed and clear images that a radiologist can diagnose colon cancer by analyzing data from a "virtual" colonoscopy, he said.

Seeing the future

CEO Casey first conceived of Virtual in 1999 while working as a radiologist with the University of Minnesota. There was such a scarcity of radiologists that Casey found himself working 12-hour days just to keep up with cases. Much of that time he spent driving from hospital to hospital.

Using high-speed broadband connections and a proprietary software system, Virtual's technology enables short-staffed nighttime emergency rooms to outsource "image reads" to radiologists around the country who could work out of an office or even their homes.

"It's easier to recruit radiologists if you don't have to worry about geography," said Casey, who owns about 24 percent of Virtual's shares.

The company grew rapidly. Revenue more than quadrupled from $13 million in 2004 to $54 million last year.

The key to Virtual's business model is to balance the volume of cases with the number of radiologists on duty at any given time, Casey said.

"We have to be responsible and not take any more business than we can handle," which could present "dangers for patients and our reputations," he said.

In fall 2006, the company was struggling with its caseloads, especially during weekend nights. While there are no firm industry standards, experts say teleradiologists should return reads from emergency care within 15 to 30 minutes. In filings with the Securities and Exchange Commission (SEC), Virtual said it typically could provide these so-called "emergent'' reads within 20 minutes.

During the weekend of Oct. 21-22, 2006, 71 percent of emergent cases exceeded 30 minutes while 55 percent took longer than 45 minutes, according to an internal e-mail obtained by the Star Tribune. The average turnaround time for an emergent case was 50 minutes.

"This is much higher than what people would expect," said Joseph Tashjian, president of St. Paul Radiology. While all teleradiology firms experience some delays, Tashjian said: "There are some real safety issues. Every second you wait increases the risk for mortality. It could be devastating for patients.''

Swift response

Casey's response to that weekend's performance was swift and sweeping. In an e-mail sent to then-COO Lusic on Oct. 22, Casey noted a case in which a patient with a brain hemorrhage "sat around ... for 90 minutes. Patients can die due to such irresponsibility."

In December 2006, Virtual's performance was still shaky, according to company e-mails. On Dec. 16, 27 percent of emergent cases exceeded 30 minutes. On Dec. 28, 49 percent of emergent cases took longer than 30 minutes. Three days later, that number dropped to 18 percent.

Lusic and chief technology officer Brent Backhaus left Virtual at the end of 2006. The company also delayed its IPO.

"Clearly we took a pause," Casey said. "Planning an IPO wouldn't have been a wise thing. Investors would not have liked it."

Lusic did not return calls seeking comment. Backhaus declined to discuss the circumstances of his departure but did praise the company.

"It was an absolute blast to grow the company from its infancy to the point where Goldman Sachs is supporting the IPO," Backhaus said.

While the operational problems were not the specific reason why Virtual parted ways with two of its top executives, Casey said the company needed to find talent that could run an increasingly large and sophisticated operation.

"Some people grow with the job, some people need more time," he said. "If that kind of situation [in the fall of 2006] continued to be a persistent thing, we, including myself, could be questioned on our competence."

Casey said Virtual today also has some of the best turnaround times in the industry. He declined to be more specific because the company does not calculate average times over longer periods like a quarter or year. But Casey still stands behind the 20-minute turnaround time cited in the SEC filing.

"We strive to be [as] consistent as possible," he said. "We will do the best that we can do. Very few businesses can get it perfectly. But we are pleased with our progress dealing with fluctuations in demand."

Thomas Lee • 612-673-7744