American College of Physicians: Internal Medicine — Doctors for Adults ®


With ancillary services, you can do well by doing good

Adding new equipment can boost your practice's bottom line—as long as you do your homework

From the October 2000 ACP-ASIM Observer, copyright 2000 by the American College of Physicians-American Society of Internal Medicine.

By Bryan Walpert

Patricia L. Hale, ACP-ASIM Member, knew osteoporosis was often overlooked, undiagnosed and untreated, and she wanted to do something about it. The problem was that no one near her practice, Adirondack Medical Associates in Fort Edward, N.Y., offered the right test to detect it.

So Dr. Hale calculated expected volumes, forecast revenues and projected costs until she was able to convince her partners to buy a dual-energy X-ray absorptiometry (DEXA) bone density testing machine in May 1997. Though she didn't expect the machine to do much for the practice's bottom line, the DEXA machine today brings in roughly $3,000 a month in net profit for the multispeciality group of nine physicians.

Dr. Hale got into bone density testing to better serve her patients, not to boost revenue. But by tempering her desire to do right with careful research, she was able to make a success of adding an ancillary service. Consultants say she is not alone. "Many groups have bettered their bottom line because they invested in ancillary services," said Darrell Schryver, DPA, principal consultant with MGMA Health Care Consulting Group in Englewood, Colo.

The key to that success, experts caution, is careful planning. All too often, Mr. Schryver said, physicians realize a year after they've purchased equipment that they're not making any money. "They didn't do their homework," he said. "They didn't approach it as a business venture."

Before plunking down thousands for a new X-ray unit or tens of thousands for a DEXA machine, take the following steps:

  • Analyze your practice volume-
    If you're considering adding an ancillary service, start by choosing something that will draw sufficient patient volume. Your best source of information is your practice.

    "See how many times in the last year you referred someone outside for an ECG, what age group they were in, what insurance plan they had," said Tessie Quattlebaum, senior consultant with Physicians HealthCare Advisors in Atlanta.

    Track your referrals for at least three to six months, preferably a year. "A lot of medical practices have no idea how much business they give away in referrals," said Janice G. Cunningham, JD, attorney and consultant with The Health Care Group, a physician practice consulting group in Plymouth Meeting, Pa.

    Dr. Hale estimated volume based on her patient demographics. She created a list of medical problems, medications and risk factors that would indicate a need for a bone density test. She then fed those search terms into her electronic medical records system and produced a list of at-risk patients.

    Using national data on osteoporosis, Dr. Hale calculated how many of her at-risk patients would get the tests done and how many would need repeat tests. (Once she and her partners bought the machine, they started to get referrals from other practices, boosting those numbers.)

  • Determine realistic revenue and reimbursement-
    The real challenge of predicting revenue is knowing whether health plans will pay for your service, according to Lou Pavia, executive vice president of McManis Associates, a management consulting firm for health care and government in Washington. "Managed care companies sometimes have contracts with a few national labs and require you to send any tests to those labs," he said.

    Dr. Hale, for example, found that rules varied widely among payers. Some would reimburse only for patients who presented with one osteoporosis risk factor, while other payers would reimburse for only those patients with a specific combination of risk factors. Still others had no rules at all.

    When some payers had rules that were too restrictive, Dr. Hale gave them statistical information about osteoporosis that she had collected from national sources and her own practice. She was able to use that data to persuade three health plans to ease their reimbursement restrictions.

    Once you know which health plans are willing to reimburse for your ancillary services, the question becomes how much. Daniel M. Bernick, vice president, attorney and consultant with The Health Care Group, suggested contacting the three or four payers that account for most of your cash flow to ask how much they will pay.

    To project just how much revenue you would earn from a specific procedure, determine how much your main payers would have paid you for the service over the last three months to a year. If payers won't release data, come up with a conservative estimate by using Medicare rates.

    Finally, be realistic. "When you're projecting incremental net revenues, you've got to look at not what billings are, but at what actual collections are," Mr. Pavia said.

  • Calculate expenses-
    First, examine fixed costs. Contact manufacturers for specific price information, which will vary depending on size and sophistication of the machine as well as whether you buy new or used.

    A new DEXA machine, for example, costs an average of $35,000, according to Tim Shelton, president of Primary Care Diagnostics Inc., a distributor in Greeneville, Tenn. Equipment to do stress tests runs $13,000 to $25,000, holter monitors about $7,000 and spirometers about $2,500, Mr. Shelton said. An X-ray machine can range from $25,000 to $255,000, according to Medical Resources, a distributor in Columbus, Ohio.

    Much used or refurbished equipment is available. Some clinics are showing interest in equipment made available when hospitals' leases expire, said Hollye Rider, sales consultant with Primary Care Diagnostics. A used MRI machine, for example, costs about half a million dollars, while a used CT scanner goes for roughly $100,000. In June, she leased one of each to a rural practice in Tennessee that pays $9,500 for the MRI machine and $2,200 for the CT scanner.

    In addition to price, Mr. Bernick said, you need to ask the vendor about the useful life of the machine. "If you buy it for $50,000 and it has 10 years of useful life, then the annual economic depreciation would be $5,000," he said. "You want to generate revenue of at least $5,000 plus whatever other costs are allocable to this new service, plus a profit margin" of at least 10% and any interest charges for funds borrowed for the purchase.

  • Don't overlook variable costs-
    Some ancillary service operating costs—like reagents for a lab or film for an X-ray machine--are fairly obvious. But experts caution that many physicians neglect to account for staffing and space costs.

    You can train someone on staff to operate some machines, such as an ECG unit. In other cases, such as X-ray and some labs, you'll need to hire a trained technician. The rules vary by state. Because technician salaries also vary by region, talk to colleagues. Dr. Hale learned from a radiologist that a technician would cost $10 to $13 an hour.

    Planning to accommodate the equipment is another concern. Experts suggest calculating the required square footage and allocating a percentage of rent. For example, if 100 square feet are used for an ancillary station in a 1,000 square foot office, 10% of the office rent should be allocated to the ancillary service. To determine what percentage of your administrative costs to assign to the ancillary service, use relative value units. For billing expenses, use percentage of claims, said Ms. Cunningham of The Health Care Group.

    Adding the ancillary station may require more than reallocating existing office space. "People think, 'Here's a space. I'll just stick something in there,' " said Ms. Quattlebaum of Physicians HealthCare Advisors in Atlanta. "Maybe what's needed is to expand, or at least plan the expansion into the pro forma."

    Some costs are even less obvious. For example, you might need to retrofit a room with a lead lining for an X-ray machine, Ms. Cunningham said.

    Finally, consider ripple effects. You might regret converting a rarely-used exam room into an ancillary station if the ancillary service draws more patients than you can handle. Although there's no rule of thumb, assuming an increase of 5% to 10% may be a good idea.

  • Learn and follow regulations-
    Take into account federal laboratory and self-referral laws. When it comes to labs, for example, the Clinical Laboratory Improvement Amendments (CLIA) impose certain quality control and assurance procedures, personnel requirements, test management procedures, proficiency testing and inspections on certain laboratories. Your best bet, if you're a small practice, is to hire a consultant to help you set up a CLIA compliance manual and procedures. (For more information, see "How an office lab can help patients--and your bottom line," online at officelab.htm.)

    Federal self-referral laws like the Stark II regulations prohibit physicians from referring Medicare and Medicaid patients to certain health services in which they have a financial interest. Many states have similar laws that cover other payers, said Ms. Cunningham.

    Experts say that you can generally get around these prohibitions if you offer an ancillary service within your medical practice. In other words, don't set it up as a separate entity, Ms. Cunningham said. An incorporated practice can own a lab or an ancillary service as a wholly owned subsidiary, but the practice can't allow outside investors to take a stake, and individual doctors can't own it separately.

    You also need to be careful if you pay doctors based on productivity. Federal regulations don't allow practices to compensate physicians based on the technical component (as opposed to the professional component) of ancillary service reimbursement from Medicare and Medicaid. If you divide income based on collections, it can be a big problem, Ms. Cunningham said. For more details, your practice should consult a health care laywer.

    The easiest way to handle ancillary reimbursements from government carriers covered by Stark, Ms. Cunningham said, is to divide the technical component of test reimbursement evenly among all the doctors. "It makes sense conceptually," she explained. "They figure they're all equally invested in the equipment; they're all on the hook for the promissory note or the lease payment."

  • Know when to say "no."-
    Finally, you need to be willing to walk away if costs and risks outweigh benefits.

    "Ancillary services are not a simple gimmick to make a little money," warned Hobart Collins, principal with MGMA Health Care Consulting Group. "They may be an opportunity to make a little extra money, but they're typically not going to change anybody's lifestyle."

Bryan Walpert is a freelance writer in Denver.

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