Strategy: Adding Ancillaries

For more than a decade, physicians across the country have been struggling to offset the effect of reduced reimbursement rates by working longer hours, seeing more patients, and trimming the fat from their operations. And for a while, it worked. But as malpractice premiums continue to climb, staff salaries rise, and regulatory mandates chip away at the bottom line, many are finding that this makeshift approach is no longer enough.

Indeed, the Center for Studying Health System Change reports that physicians’ inflation-adjusted income fell 7 percent between 1995 and 2003. “While revenue at most doctors’ offices has stayed the same or dropped in some cases, overhead expenses have gone way up for everything from insurance to the cost of nursing and support staff,” says Craig Holm, senior vice president of Health Strategies and Solutions, a Philadelphia-based healthcare management consulting firm. “As a result, many physicians are looking for sources of supplemental income.”

Enter ancillary services.

Inspired by stories of lofty returns promulgated by aggressive marketers and the popular press, medical groups are delivering new patient services at a frenzied pace in a quest to revive their shrinking profits. Medical imaging, diagnostic testing, laboratory and pharmacy services, and physical therapy are among the more popular ancillary services practice groups are currently offering. Such add-ons are not confined to internal medicine practices. Surgeons are investing in ambulatory surgical centers that enable them to perform a larger volume of same-day procedures. “The financial return on some of these ancillaries is very high,” Holm affirms.

How high? Holm says the practices with which he works average 20 percent to 35 percent returns on imaging services, such as radiology, CT, and MRI scans. Surgery centers report up to a 40 percent return on their investments, he adds. Indeed, the Medical Group Management Association’s (MGMA’s) 2006 Cost Survey for Orthopedic Practices finds that on average, orthopedic surgery groups realized $45,492 per physician in net revenue (after operating costs) for the physical therapy services they now offer. After implementing diagnostic radiology services including MRI, those same groups earned $47,951 per physician.

One obvious reason for ancillary services’ profitability is that they allow physicians to charge both a professional fee for their expertise and a technical (or site) fee to compensate for the overhead required to offer such services. Physicians also report that their new services provide countless opportunities to improve patient care. By bringing formerly referred services in house, doctors say they can better monitor their patients’ progress, expedite outpatient procedures when necessary, and reduce delays in obtaining lab and imaging results.

Look before you leap

But MGMA senior consultant Nick Fabrizio cautions that ancillaries are not always the monetary cure-all they’re made out to be. “Physician groups only hear the success stories at conferences and through networking groups, and that’s very dangerous because all practices are different,” he says. “For every group I have seen [offer ancillary services] successfully, I’ve seen an equal number not be successful.”

Before investing in a new patient service, practices must take into account a laundry list of different factors. For starters, is your practice prepared to adequately handle the business side of the service you are considering adding? “If you’re not doing a good job at billing and collections with your normal practice services, you may want to reconsider ancillaries,” Fabrizio advises. “You’re adding a whole new product line that your staff is going to have to track.”

Fabrizio notes that groups must also assess the impact ancillaries may have on quality control. “If you can decrease the number of times your patients have to hop from office to office, that’s a good thing as long as you can provide the same quality of service that you would by referring them to an outside provider,” he says. “If patients feel you’re providing a lesser service, that becomes a disadvantage, and it’ll catch up with you.”

Feasibility studies are a necessary first step. Practices should look at their patient population, considering age and health risk factors, to determine which services would yield the greatest demand. By tracking their referrals over the past 12 months, physicians should easily be able to identify their patients’ principal needs. “This is one of the biggest problems I’ve seen in the field,” Fabrizio says. “Practices haven’t done [their homework]; they spend a lot of money on equipment and resources to add a new service, and a year later find out they’re not doing very well.”

But determining revenue targets for ancillaries is no easy task. Some insurance companies contract exclusively with national labs and won’t reimburse for in-practice services. Others require that patients meet a certain number of risk factors before they authorize a procedure. And of course, reimbursement rates are in a constant state of flux.

In 2007, Medicare and Medicaid reimbursement will drop for imaging services, says Gary Matthews, president of Physicians HealthCare Advisors in Atlanta. Insurance companies are likely to follow suit. “It’s very definitely worthwhile to contact the payers that represent the vast majority of your patients to find out how much they reimburse for ancillaries performed on site,” says Matthews, adding that groups should build 2 percent to 3 percent annual reimbursement declines into their forecasts for all ancillary services “just to remain conservative.”

And then there’s the competition you’ll most likely face. Physician groups should determine which services other healthcare providers in their area already offer. If they’re located near a hospital or a large group practice with an MRI, for example, they can safely assume that that market is spoken for. “It’s extraordinarily unwise to try to compete with a large facility,” said David Gans, MGMA’s vice president of practice management resources. Small to mid-size practices that lack the volume to support adding new services on their own should try to determine whether other local physicians would potentially utilize the services they are considering. Those physicians may be likely to start referring their patients for such services, which can help defray costs.

Crunching the numbers

Indeed, adding new patient services can be pricey. While some ancillary services (such as physical therapy) cost little to implement, others require a major capital investment. Full-body MRI machines, for example, can cost anywhere from $800,000 to $3 million, while CT scanners can start at $200,000 and climb to more than $1 million.

And then there’s the price of training current staff to provide the new service, hiring new employees to meet demand, financing expenses for equipment loans, higher insurance fees, and the cost of lost business while the office is being retrofitted. For imaging services like MRIs, Gans says practices can spend hundreds of thousands of dollars in building modifications alone. “You can’t just put these machines in any building,” he explains. “You have very serious shielding and insulation issues there.”

Matt Nussbaum, executive director of Chester County Cardiology Associates (CCCA) in West Chester, Penn., says his practice has added numerous imaging services in recent years with varying degrees of success: “It does have the potential to increase income, but if the cost of purchasing the equipment is very high it can ultimately amount to a loss.”

So far, CCCA’s nuclear cardiology service has been the most lucrative, but even that has taken a hit due to rising technician salaries and increasingly stringent insurance precertification requirements. Data from the Bureau of Labor Statistics reveals that professional and technical workers saw their salaries rise nearly 7 percent between 1995 and 2003, after adjusting for inflation. “Nuclear cardiology used to be an extremely profitable service five years ago,” Nussbaum says. “But this year, it really wasn’t.”

Nussbaum’s specialty group of nine physicians has been contemplating adding CT angiography services for years, but insurance carriers in Pennsylvania don’t reimburse for those claims, so the $2 million to $3 million investment it would require is difficult to justify. “We do a lot of due diligence these days,” says Nussbaum. “A lot of our decisions used to be made on a gut feeling. We’d talk to the vendors, and we trusted their numbers. We don’t do that anymore.”

Is that legal?

The last major consideration for practices exploring adding ancillary services is the legal implications they may entail. Federal Stark regulations prohibit physicians from referring Medicare or Medicaid patients for designated health services to an entity with which the physician or a member of the physician’s immediate family has a financial relationship. “This is probably the biggest risk that physicians worry about when they’re considering pursuing supplemental income,” says Holm. “If set up properly, some of these services are legal; others are not.”

Under the convoluted Stark regs, the “in-office ancillary services exception” generally allows physicians to operate ancillary services within their medical practices provided they meet certain requirements, says Mark Lewis, a partner with Boult, Cummings, Conners & Berry, PLC, a law firm in Nashville, Tenn., that specializes in healthcare issues. “If two or more physicians are going to bring a service in house, the key thing to consider is how they’re going to share the revenue,” he explains, noting that physicians are not permitted to share what they bring in from added services in a manner that directly reflects precisely who referred the service. Physicians can, however, divide their total net gains from ancillary services evenly among the doctors in the group, and they are permitted to pay productivity bonuses to individual physicians based on patient encounters or professional work relative value units (RVUs).

However, surgeons who invest in ambulatory surgical centers (ASCs) are not bound by Stark rules, since these are not among the designated health services to which Stark applies, says Lewis. But such surgeons do need to steer clear of the anti-kickback statute, which prohibits healthcare providers from receiving or paying anything of value to influence service referrals covered by federal health programs. To further complicate things, an anti-kickback “safe harbor” does work to protect physicians who invest in ASCs. “Failure to fall within the safe harbor does not necessarily mean an investment is illegal,” says Lewis, “but physicians should attempt to structure their ASC investments to satisfy as closely as possible the safe harbor’s requirements.” Notably, the terms of individual investments should not be related to previous or expected referrals, and returns on investment should be directly proportional to a physician’s outlay.

Finally, groups that open laboratories within their practices must consider the Clinical Laboratory Improvement Amendments, which regulate quality control for all laboratory testing on humans for the purposes of diagnosis and treatment. All clinical laboratories must be properly certified by CMS, whether or not they seek federal health plan reimbursement.

Due to the complexity of the Stark regulations and anti-kickback legislation, Fabrizio recommends that practices consult an attorney to examine any potential legal ramifications before they even begin a feasibility study. “I always tell groups that’s some of the best money they can spend,” he emphasizes. “It’s not that expensive, and it avoids a lot of problems down the line.”

Financing it

Of course, few practices possess the financial means to purchase expensive medical equipment outright. Those looking to obtain costly imaging and diagnostic technologies have several options. For starters, many vendors, including GE Healthcare and Siemens Medical Solutions USA offer loans and leasing packages at competitive rates for a range of products in most specialties. GE Healthcare also supplies on-site support services, helping physicians select the equipment right for them, providing staff training, insulating exam rooms (when necessary), and conducting performance analyses. “Leasing is not a bad idea if it’s a technology that gets substantially updated every two or three years,” says Fabrizio.

A handful of lenders also specialize in healthcare equipment loans, including Bankers Healthcare Group in Weston, Fla., which can process loans in about a week and offers 100 percent financing. Many private banks require a down payment when financing medical equipment loans, sometimes up to 25 percent.

If you are ultimately unsure that you will attract enough patient volume to justify your purchase, or if capital is an issue, there’s also the option of renting medical equipment. Many companies, including Coast to Coast Medical Inc. and Freedom Medical, will rent surgical support services such as EKGs, stress systems, and C-arms on an as-needed basis. C-arms, for example, rent for between $3,000 and $15,000 per month at Coast to Coast Medical. Purchasing them new can cost from $120,000 to $200,000. “Physicians don’t always want to make a large upfront investment,” says Kevin Blaser, vice president of sales for Coast to Coast Medical. “In some cases, it’s a surgery center that wants to experiment with pain management services but wants to try the technology first. Or, they may be unsure whether the doctor who uses the equipment is planning to stay on board.”

Another big cost-saver is to buy used. Lake Champlain Cardiology Associates in Plattsburgh, N.Y., introduced a nuclear laboratory for stress testing in 2001, and it started offering echocardiography testing in 2002, both with previously owned equipment. Today, the two services alone account for nearly 30 percent of the practice’s total revenue. “We purchased a refurbished machine for half the price or less of a new one, and we’ve been extremely happy with it,” says Joel Wolkowicz, a cardiologist with the practice.

Though the success of the practice’s ancillary services has far exceeded expectations, Wolkowicz did offer a word of warning for physicians who are planning to follow suit: “Previously, we sent all our referrals to the local hospital, and we no longer have to do that, so that’s created a lot of friction between them and us. That’s been the only downside so far.”

If managed well, adding ancillaries can effectively help physician groups create new revenue streams. But they’re no magic bullet. Practices that fail to conduct a thorough analysis of patient demand, costs, and potential reimbursement for new services could easily get in over their heads. “Adding ancillary services can be a money pit,” says Gans. “If you add the wrong service or if it’s not managed well, you oftentimes have a very high fixed cost. If it were easy, everyone would do it.”

Shelly K. Schwartz is a freelance writer in Maplewood, N.J., who has covered personal finance, technology, and healthcare for 12 years. Her work has appeared on CNNMoney.com, Bankrate.com, and in Healthy Family magazine. She can be reached via editor@physicianspractice.com.

This article originally appeared in the March 2007 issue of Physicians Practice.