Ancillary Service Lines

If you see dollar signs when you think about opening an ambulatory surgery center (ASC), magnetic resonance imager (MRI), cardiac catheterization lab, or endoscopy lab, you're not alone. Physicians stand to benefit greatly from such ventures - and so do patients. If you cherry-pick the best nurses, radiologists, and technicians, patients get better care, and physicians get more freedom and efficiency.

"Our in-office surgery center provides us a consistently good revenue stream, but that's not the only thing," says Brent Lanier, MD, managing general partner of 10-physician Central California Ear, Nose & Throat. "I can do 14 to 16 pediatric ENT cases by noon. At the Children's Hospital, I'm lucky if I get nine done by three o'clock."

But for all their benefits, ancillaries are a high stakes game, so go in with your eyes wide open. For example, "a one-room, in-office ASC can run $1 million to $1.5 million, and a two-room up to $2 million," says Jack Bert, MD, vice president and medical director of 19-physician Summit Orthopedics in St. Paul, Minn. "And some statistics show that 33 percent of ASCs fail within the first 18 months."

One multispecialty practice in the northeast opened a physical therapy (PT) unit without thinking things through. Poor quality therapists were hired and no one knew how to run the business. The unit hemorrhaged money, and even the physician-owners didn't refer to it. The moral of the story? Whatever ancillary you're considering, be sure to crunch the numbers before you take the plunge.

Analyze market and payers

"No matter what you plan to open, do a market and payer analysis first," advises Bert. "If there are already 10 MRIs in town, it probably doesn't make sense for you to open another one. And if plans have negotiated exclusive deals with hospitals or imaging centers, you'll be restricted to sending patients to those facilities, not yours."

"You've got to determine which cases or patients are portable," says David Nathanson, managing director of Phoenix Healthcare Consulting in Phoenix, Ariz. "That's the number of patients you currently take to surgery or refer for an MRI that you could send to your new facility."

Nathanson helped a Las Vegas cardiology group determine portability for an in-office cath lab. Based on his analysis, each physician was doing an average of 20 left-heart catheterizations per month, but only 25 percent of those had insurance plans that could be ported over to the new cath lab. Still, this percentage of portable cases allowed a tidy profit.

To determine portability for its ASC, Bert's group generated a CPT frequency report from the computer system to determine how many cases the group saw annually. Next, each case was reviewed to determine the patients' insurance plan. Based on which plans would allow patients to be treated in the ASC, Bert's group analyzed that it could send 38 percent of its patients to the new ASC, due to payer-hospital deals. "In the final analysis, that percentage still made the venture viable," he says. Lanier's group performed a similar analysis.

For MRI, PT, or other services for which you refer out or write a script (and therefore don't have CPT codes or surgery schedules to track activity), use a log to track the number of patients you schedule per month.

"Note each patient's insurance so at the end of the month you can calculate how many of those patients are portable," recommends Jack Spratt, a consultant with Orthopedic Health Services in Old Lyme, Conn. "You can also use the data to run feasibility scenarios."

For example, an orthopedic group in Virginia recorded that it had about 50 referrals per week. It wanted to open a physical therapy center and had 2,000 square feet to work with. "Given the space limitation, there was no way they could handle their own referrals" Spratt says.

Keep your eyes and ears open during the planning process, too. After hearing of a North Dakota group's plan to open an ASC, a hospital administrator took the president of Blue Cross to dinner and negotiated a shaved rate on inpatient fees - in exchange for being the exclusive provider of outpatient surgery services. The door was shut for the physicians who were planning the ASC, and whose payer mix was 75 percent Blues. But learning this before construction started saved them millions.

Project revenue

Once you've identified how many cases can actually be sent to your facility, it's time to determine how much revenue they will yield. "When you own an imaging center or ASC you are reimbursed the facility fee, which is different from the physician's professional fee," explains Mike Pulaski, CEO of Peachtree Orthopedic Clinic in Atlanta. Often, this fee is six times more than the physician's fee, based on the fact that it reimburses for overhead, contract labor, and other expenses incurred by the facility.

It's the facility fees you need to collect, and the amount differs by payer. "We had a 'mole' at the hospital who was willing to share the information," Lanier says.

But if you don't have a hospital cohort, "someone has to get on the phone with each payer and get the facility fee for the top 25 procedures you plan to do," says Bert. Once you've obtained the data, multiply it by the number of cases you've predicted the facility will see in a year. (See Estimating Facility Fee Revenue, page 88, for a step-by-step guide.)

"Never base your financial analysis on charges - only on actual reimbursement," Bert advises. He adds that part of revenue planning is to ensure physicians refer to the new facility - even if it's a five- to six-mile drive instead of a walk across the street to the hospital campus. "Otherwise your revenue projections will be off," he explains.

Pulaski suggests giving revenue a boost by being choosy about your contracts. "A Blue Cross Blue Shield facility fee for arthroscopy may be $690 in-network and $3,000 out-of-network, which would make it foolish to agree to be in-network," he says.

The revenue analysis should include the global impact on your practice. For example, you may end up agreeing to a contract that doesn't pay well for E&M services and surgeries, but more than makes up the shortfall with handsome facility fees.
Expenses and break-even points

Labor (including associated healthcare, training, and benefit costs), supplies, equipment, licensing, attorney and accountant fees, and construction costs are pretty standard accounting fare associated with business expansion. Nathanson suggests taking your time to accurately predict Medicare certification costs, legal fees, and other start-up costs. "They are often more than you think," he says. And plan to have at least three months of cash on hand so you can weather reimbursement lag time after start-up.

If it's an in-office venture, you'll also need to apply indirect costs (also known as corporate overhead) to the new business unit.

"You've got to allocate a percentage of administrative, marketing, billing, general accounting, administrator salary, and other enterprise expenses that can't be directly attributable to the new facility, but will nonetheless be used by it," says Nathanson.
To do this, add up the expenses that cannot be applied directly to the new business unit, and multiply them by the percentage of total revenues that the facility will bring. For instance, if you predict an MRI business unit will comprise 30 percent of total enterprise revenues, and total indirect expenses are $200,000, you would apply $60,000 of indirect costs to the MRI's financial projections.

When revenues and expenses are all said and done, run scenarios to determine how many procedures or scans you have to perform to break even.

"In orthopedics, the industry average is about two to three cases per day to break even in an ASC," Bert says. "For a shoulder/knee scanner you need to do one and a half scans per day and for a spine scanner four to five, to break even." Do your homework to see how your venture compares to specialty averages.

Get a little help

If the wrong person does these financial projections, you can end up with bad numbers that could put you in the red for 18 months or more.

"Be leery of attorneys and accountants holding business plans," Spratt cautions. "They may know finance but few know the right assumptions to put into an analysis like this."

Bert advises against consultants who run a demographic ZIP code analysis instead of doing a payer analysis. "I've never seen one that's accurate," he says.

Bert's chief financial officer ran ASC and MRI projections in-house, but most practices don't have this luxury. And even if they do, many still outsource it. "I did the analysis," Pulaski says, "but we ran the analysis past our consultants to be sure we had the correct numbers." In addition to checking the numbers, the consultant supervised the space planning and construction, hired the staff, provided the policy and procedure manuals, and ensured that the ASC received its state and Medicare licensure.

Central California Ear, Nose & Throat asked the space design company to run financial projections based on the last three years of average reimbursement data. "The analysis penciled out OK, but if we had it to do over again, we would have done a more rigorous business plan," says Lanier.

You can expect to pay $10,000 to $15,000 for a consultant to run the financial projections. "Unless you decide to go with a company that helps you set up and run the entire project," Pulaski says. There are companies especially for ASCs that set up the entire operation and help you obtain certification and licensure. But these companies also want a percentage of your revenue stream. A standard contract is 15 percent of revenues for the first three years - which could add up to hundreds of thousands of dollars.

Bert says practices don't necessarily need these companies "if you do your homework, hire the right people, and the physicians focus on feeding the venture." Lanier agrees, noting that, especially in states where managed-care contracting is tough, a national company doesn't know the market well enough. "We've been approached by national companies who want to buy our ASC, but the deal is decidedly in their favor."

The benefit of planning? Bert's ASC ran in the black in nine months, his MRI in three to four. Pulaski's ASC turned a profit in month four, and Lanier's has been running a steady profit for more than 10 years. "In 1990 we were renegades - everyone thought we were crazy for opening an ASC," says Lanier.

Today, colleagues still think Lanier's group is crazy - like a fox.

Cheryl Toth can be reached via editor@physicianspractice.com.

This article originally appeared in the March 2003 issue of Physicians Practice.