TrendSpotter: Will Ancillaries Save You … or Drag You Down?

Visit volume is down in many physician practices. While the severity of the drop differs by region and specialty, even doctors who haven’t yet seen it are worried about the future, as the recession gathers momentum. And if you’re starting to see fewer patients, what will happen to the ancillary services you’ve invested so much money in? If they’re the linchpin of your profitability, will a significant decline in ancillary income endanger the viability of your practice?

During this economic downturn, “ancillaries become more important because a little money is better than no money,” notes David Scroggins, the president of Clayton L. Scroggins Associates in Cincinnati. “If you can exceed the break-even point, you’re making some money, plus you’re maintaining the service.”

Michael Brown, principal of Health Care Economics in Indianapolis, says, “I don’t know where this economy is going. But as volume goes down, you’re probably going to get sicker patients, because they’re not going to come in as frequently. Therefore, testing ancillaries become that much more important.”

Consultants also emphasize that, in these tough times, it’s essential to re-evaluate your business operations. “If you have a service that’s underwater, either fix it or drop it,” says Keith Borglum, principal of Professional Management and Marketing in Santa Rosa, Calif.

Among Borglum’s suggestions: Do more recalls of patients who need care. “In the past, a lot of people have been so busy that they haven’t done recalls. It might be time to go back through your charts and find out what’s the appropriate follow-up for various patients.”

Though uninsured or high-deductibles patients may resist needed tests, Brown says the average physician should be able to refer about 5 percent of her patients for truly necessary ancillary services - perhaps a bit more or less, depending on specialty.

If groups expand the use of their facilities and equipment, Brown says, ancillary income doesn’t have to fall, even if the number of patient visits does.

But what if your ancillary revenue is already down? Cindy Dunn, a senior MGMA consultant, stresses that data is the key to making sound business decisions. “You have to monitor your ancillaries much more closely, and make sure you’re doing true service-line assessments. You look at all the expenses involved in each ancillary service - not just what’s coming in, but what is it costing you for rent, for employees, for their benefits, etc. If you weren’t doing a good job of this before, here’s your opportunity. You have to make a change, because you could end up losing enough on ancillaries that it puts your practice in a very difficult situation.”

Dunn maintains that a thorough business analysis will reveal whether it’s time to drop an ancillary or hold on for the long haul. “You don’t make any decisions that are not data-driven. If you have the data to support your decision, go forward. If you don’t, and you’re doing it based on your gut, or what you feel or believe, that’s not good business.”

Part of the analysis, she adds, is being aware of what’s happening in your community. What are the biggest employers in the area doing in terms of plant closings or health insurance? What’s your hospital doing? She cites one practice that was concerned because its hospital was “buying up physicians and bringing them on-site, making them employees.” As a result, this practice was having a hard time recruiting new physicians whose referrals could make its ancillaries profitable.

Scroggins agrees that practices have to take a closer look at their ancillaries. But he cautions doctors not to be alarmed if they see overall practice overhead rising as a percentage of revenue because of declining ancillary income. If, for example, your expense ratio rises from 52 percent to 54 percent, he notes, it’s OK because you’re still making extra income that you couldn’t have generated without the ancillary.

Even if an ancillary is just breaking even or is slightly unprofitable, Scroggins says, you should think twice before dropping it. First, you’ve already invested a fair amount of money and effort in the service. Second, you don’t want to lose good technicians who were hard to recruit and train. And third, when business comes back, it’s going to be a lot more expensive to build an ancillary from scratch than to ramp up the one you’ve held onto.

“We’re going to have a couple of bad years, and who knows what’s going to happen with health plan reimbursement, but it’s not to the point where we do away with our diversification,” Scroggins says.

Ultimately, however, there may come a time when an ancillary is losing so much money that it’s time to cut bait. In that case, Brown says, you probably won’t get much by selling your equipment to used-equipment companies. Instead, says Borglum, consider selling your gear online, using a site such as eBay. “The used-equipment dealers - the guys who specialize in echoes, autoclaves, or imaging - shop there all the time,” he says. Either they’ll bid up the price on your equipment or come to you directly and make an offer.

Internist Kenneth Kubitschek and his nine colleagues at Carolina Internal Medicine in Asheville, N.C., are nowhere near having to sell their ancillary equipment. In their neck of the woods, in fact, business is holding up pretty well. But Kubitschek sees the possibility of a decline in ancillary revenues. That would be bad for his group, he says, because it specializes in geriatric medicine, and Medicare reimbursements have not kept up with expenses.

But Kubitschek says the practice would get rid of its DEXA scanner, X-ray and EKG machines, and/or its ultrasound suite only as a last resort. Before the group closed the ultrasound service, for instance, it would probably try to reduce its labor costs. “Instead of operating the ultrasound three days a week, I’d keep it open only one. But if things got really bad, I’d bail out - you can’t keep losing money on it.”

Ken Terry is a New Jersey-based freelance writer and the author of the book “Rx for Health Care Reform.” He can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the February 2009 issue of Physicians Practice.