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

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For these internists, in-house ancillary services can boost revenue-and physician morale

From the November ACP Observer, copyright 2003 by the American College of Physicians.

By Phyllis Maguire

When general internist Ted. L. Sussman, FACP, talks about his group's ancillary services, which include treadmill testing, soft tissue injections and bone densitometry, he is quick to admit that they help his bottom line. The practice where he works in rural Maine, after all, gets nearly one-quarter of its annual revenues from ancillary services.

But money was not the only factor that drew Houlton Internal Medicine—Dr. Sussman and two partners—to add the services to its practice. Like other internists, the group's physicians found that branching out into new procedures and services offers other benefits.

For one, said Dr. Sussman, Governor for ACP's Maine Chapter, patients want continuity of care, which running your own tests helps provide. "You understand the test and the patient better," he said.

But just as importantly, offering a wide range of tests and procedures makes the physicians feel good about the job they're doing. According to Dr. Sussman, he and his colleagues are not functioning as "gatekeepers" relegated to coordinating their patients' subspecialty visits.

"Any test or procedure that is indicated for screening or preventive medicine ought to be in the repertoire of the internist and not the subspecialist," Dr. Sussman said. Besides, he added, spending a morning at the hospital doing procedures "is incredibly fun. It's a nice break from a very busy office."

Not everyone, however, views physicians' growing interest in ancillary services as a good thing. Some hospitals worry about competition for some of those services, particularly when it comes to lucrative procedures like diagnostic imaging. In many markets, internists say they have to walk a fine line when deciding what services to offer.

Boosting the bottom line

In many cases, physicians working for large practices owned by hospitals or academic medical centers are simply reappropriating services they used to offer, but gave up when they sold their practices in the 1990s. Many now want those services—and the income they produce—back.

Physicians in independent practices, meanwhile, are also being bitten by the same entrepreneurial bug. In an era of decreasing reimbursements, smaller groups are looking for new revenue, which ancillaries can provide.

The physicians in Dr. Sussman's group, for instance, derive 11% of their annual revenues from office-based procedures. Another 12% of revenues come from the procedures they do in the hospital, which include echocardiograms, bone marrow aspiration, thoracentesis and nuclear cardiology exams.

Joseph W. Stubbs, FACP, a College Regent and former Governor for ACP's Georgia Chapter, reported even higher revenue percentages from his group's ancillaries. His 10-internist group in Albany, Ga., derives 30% of its revenues from ancillaries. Lab services are the most profitable, followed by echocardiograms, vascular studies, Dexascan screening and X-rays.

(Dr. Stubbs and his colleagues also offer spirometry, holter monitoring, flexible sigmoidoscopies and stress echoes, and they run their own warfarin clinic.)

Even solo practitioners are discovering that in-house ancillaries can be profitable. Keith W. Michl, FACP, for instance, a solo practitioner in Manchester, Vt., and a former Governor for ACP's Vermont Chapter, bought an Abaxis Piccolo system he saw demonstrated at Annual Session in San Diego earlier this year. The system provides comprehensive chemistry and metabolic panels.

Dr. Michl now asks patients to show up a half-hour before their scheduled appointment so they can undergo the testing. By the time patients enter the exam room, he has their lab results ready.

Performing about 350 tests a month, Dr. Michl said he expects the system to pay for itself in 18 months. Eventually, he said he hopes the new system will bring his office added revenue of between $20,000 and $30,000 a year.

Patient care and other perks

But the lab system's big advantage, Dr. Michl said, is the time it saves. His office no longer has to label specimens, for example, or provide billing information for the hospital lab.

Even more importantly, he no longer has to wait a day for lab results. He recalled discovering one recent patient, dizzy from high doses of diuretics, who had a potassium level of 2.7.

"I was able to prescribe potassium when the patient was still in the office," Dr. Michl said. "If I'd sent the test out, the covering physician would have received a call at 9 p.m. from the hospital lab. He wouldn't have been able to get the patient on potassium until the pharmacy opened the next morning."

Neal L. Sklaver, FACP, a general internist with Medical Specialists Associated in Dallas, said the in-house ancillaries his six-internist group offers (X-ray, lab, treadmill testing, spirometry and Dexascan testing) also boost patient compliance. Patients are more likely to get needed tests in the office than if they have to go out to a hospital or other facility, he said.

Because many physicians recognize these benefits, ancillary services can give practices a boost in another area: recruitment. When Dr. Sklaver's group was looking to hire another physician earlier this year, it found that ancillary revenue had real appeal.

"Physicians are much more interested in a practice that provides ancillary services than one that may be hospital-based and the ancillaries are provided solely by the hospital," Dr. Sklaver said.

Gentler regulatory environment

For years, most physicians could sum up the down side of ancillary services in two words: Stark regulations.

The Stark laws spell out the legal ways that physician groups can divide revenue from ancillary services. Physicians in groups that own and provide ancillary services, for example, cannot legally be compensated according to the value or volume of their referrals or generated business.

While the original Stark regulations were mind-bogglingly complex, analysts say the Stark II rules, which went into effect two years ago, have actually helped spur new growth in physician-owned ancillaries.

"Physicians are feeling much more comfortable with the law," said Patrick A. Hope, JD, ACP's Legislative Counsel. "Things are much clearer now than before, and what were gray areas are now black and white."

Under Stark II, for example, physicians in a group can divide ancillary revenue equally, the approach taken by Dr. Stubbs' group in Georgia. They pool the technical fee component of ancillary service payments and divide that pool equally among all their physicians. The professional fee component goes to the individual physician who does the procedure or provides the service.

Stark II also gives physicians another legal compensation strategy, the College's Mr. Hope pointed out: dividing ancillary revenue according to overall productivity, as measured by a physician's total relative value units. That makes it possible to give a group's full-time physicians a larger slice of the ancillary-revenue pie than physicians who work only part time.

Bruce A. Johnson, JD, a consultant with the Medical Group Management Association and a health care attorney with the Denver office of Faegre & Benson LLP, pointed to other improvements in the Stark regulations. The first phase of the final Stark II law, for example, allows for what is known as a shared facility arrangement. In this scenario, cardiology groups can partner with internal medicine practices or noninvasive cardiologists that have office space in the same building to share a nuclear camera.

Another shared arrangement is also appearing more frequently under the Stark II exemption. Orthopedic groups are installing their own MRIs or CTs in the buildings where they practice, and allowing smaller groups in the same building to use it on a per-day or per-session basis, giving those smaller groups some access to MRI or CT revenue.

Mr. Johnson warned, however, that the regulatory environment becomes much less friendly when physicians try to move out into a true joint venture model. "When physicians decide to buy a building, move the service outside of where they currently practice and get multiple participants," he said, "the regulatory environment gets dicey and complex."

Marketplace considerations

While a growing number of physicians see ancillary services and physician ownership as a boon, local hospitals don't always agree. One of the most controversial forms of physician entrepreneurship is specialty hospitals, which are currently under fire from charges of "cherry-picking" less acute patients and undermining less profitable community hospital services. Physicians involved in those facilities counter that they don't choose patients based on severity of illness—and that they take care of their fair share of Medicaid and uninsured patients.

In Sioux Falls, S.D., for example, Raymond H. Allen, ACP Member, is one of 20 cardiovascular physicians and surgeons who helped launch the Heart Hospital of South Dakota, a cardiac specialty hospital. The group's physicians decided to open their own facility after becoming frustrated with some local hospitals, Dr. Allen said. While nursing ratios "skyrocketed" in intensive care units and on telemetry floors, he added, "decisions about how to staff catheterization labs resulted in doing elective angioplasties at 10 p.m."

The Heart Hospital of South Dakota experienced the whole gamut of community hospital response: At least one local hospital was "vocally opposed" to its opening, Dr. Allen said, while another actually partnered with the physician group—as well as with the national for-profit cardiac facility company, the Charlotte, N.C.-based MedCath Corporation—to open the new facility.

In many communities, however, there is growing resistance to specialty centers from community hospitals. Because hospitals often have razor-thin profit margins, they want to stop profitable business lines from migrating to physician-owned facilities or office practices. (For more, see "Subspecialty centers face growing resistance" online.)

Even smaller groups that pose less of an economic threat to hospitals say they try to be sensitive to their local market when looking at ancillary services. Maine's Dr. Sussman, for instance, said that while his group's pacemaker clinics and services like pulmonary and cardiac rehab keep him busy, the group refuses to offer lab services other than waived testing.

"My group generates 30% of our hospital's total income, and we will do nothing that competes with it," he said. "A strong hospital is important to us. Small rural hospitals need all the help they can get."

Dr. Sussman's group similarly has not ventured into endoscopy, even though he and his colleagues feel they could perform those procedures with some training. The reason? "We'd put our general surgeons out of business," he said.

Some internists, on the other hand, say they've managed to strike a delicate balance with hospitals when introducing ancillary services.

In Rhode Island, for instance, Yul D. Ejnes, FACP, Governor for ACP's Rhode Island Chapter, is part of a group of more than 50 physicians, Coastal Medical Inc. While most are general internists, the group's two noninvasive cardiologists have brought stress testing and echocardiography in-house—competing for those services with local hospitals.

Rather than antagonize the local hospital, the group's in-house testing has actually generated more invasive cardiology care, helping the hospital-based cardiologists. "The hospitals have probably gained more than they've lost," Dr. Ejnes said.

In Wyoming, Harmon H. Davis II, FACP, Governor for ACP's Wyoming Chapter and Vice-Chair of the College's Ethics and Human Rights Committee, is one of two pulmonologists with Cheyenne's Internal Medicine Group PC, a practice that also includes two endocrinologists, a general internist and six cardiologists. While the group competes with the local hospital for echocardiography and stress echoes, it has been careful to add other services that the hospital doesn't offer. The goal is to complement, not compete with, the hospital's business.

"The hospital doesn't do Cardiolite imaging, which is one reason we got into it," Dr. Davis explained. "It also isn't set up to do pulmonary stress tests or methacholine challenge testing, so those were services we felt we needed to provide."

When Crossville Medicine Group, a multispecialty group practice in Crossville, Tenn., decided to bring vascular imaging and bone densitometry in-house, the local hospital was "fairly unhappy," explained Robert E. Nichols, ACP Member, one of the group's 16 physicians. While the relationship between the group and the hospital remains cordial, Dr. Nichols said the potential for conflict would definitely "go up a notch" if the group proceeds with the next ancillary service it is considering: MRI or CT scanning.

"We could probably get the certificate of need," said Dr. Nichols, who added that the group has put its plans for in-house MRI or CT imaging on hold for now. "But I'm sure the hospital would fight it, and right now it's not really a fight we want to get into."

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Bringing ancillaries in-house? Answer these questions first

While the lure of added revenue is enticing, physicians who have taken the plunge of bringing ancillaries in-house caution groups to spend as much time as possible in the planning and assessment stages. Here are questions they say to ask when deciding whether owning ancillaries is right for you:

  • What is your true service volume? Analysts say there are two factors physicians typically get wrong when considering new ancillary services. First, they underestimate the amount of physical space they'll need to house a new service or procedure. And two, they overestimate their current volume of outside referrals for that service.

    "Physicians are anxious to get a service started, so they overestimate their actual volume," said Jeffry A. Peters, MBA, a health care consultant and president of the Chicago-based Health Directions LLC. "You either need to have hard data or be very conservative."

    Another major mistake: Assuming that other medical groups will start referring services or procedures to you.

    "Always ask, 'Can this be supported by our group alone?' " said College Regent Joseph W. Stubbs, FACP, one of 10 internists with Albany Internal Medicine in Albany, Ga., which offers a host of ancillary services. "If the plan won't work within our group, it's not something we think is going to fly."

    The College's Practice Management Center offers several financial tools that allow groups to estimate service volume, revenue and expenses. See the free "Office Laboratory Check-Up" tool, or "Fine-tuning your practice's finances? Try these tools."

  • Can you get paid? "Don't make the mistake of thinking, 'If I build it, they will pay for it,' " said Bruce A. Johnson, JD, a consultant with the Medical Group Management Association and a health care attorney with the Denver office of Faegre & Benson LLP. (Mr. Johnson's new book, "Building Practice Revenue: A Guide to Developing New Services," can be purchased online.)

    He described how investors in Denver rushed to establish open MRI centers without first making sure they could join third-party payer panels. Now, he said, many of those facilities "don't have the utilization their owners expected."

    He suggested that groups start by looking at their current contracts. "Some contracts will say that certain screening or diagnostic services will be considered 'in network' when furnished through the group practice," Mr. Johnson said. That's the language you need to get paid.

    However, if your contract says that those services will be paid only through a designated provider the health plan already has a contract with, you'll probably need to renegotiate your contract. According to Mr. Johnson, bigger market share will almost certainly count in that renegotiation process.

  • Buy or lease? Most equipment manufacturers offer favorable leasing arrangements. Raise the buy-or-lease question with other practices that have already launched the service you're considering. (Georgia's Dr. Stubbs said that when his group is deciding whether or not to launch a new service, they always visit practices that have the service up and running.)

    Another equipment consideration: How soon will it need to be upgraded? That was a major factor when Medical Specialists Associated in Dallas decided not to launch in-house mammography.

    "The equipment and technology change so quickly that we felt we might not be able to maintain the imaging quality we want for our patients," said Neal L. Sklaver, FACP, one of the group's six internists. The group did decide to buy a Dexascan machine, in part because the equipment would not quickly become obsolete.

  • Are your physicians on board? Don't bulldoze through with plans to launch ancillary services if some of your physicians are skeptical. Ancillary services need to fit into your group's culture and business plan, said Denver's Mr. Johnson. Otherwise, the political fallout within the group can be severe when plans hit a snag.

    "It's always easy to come up with a profitable financial scenario," Mr. Johnson said. But if it's going to take 18 months for a new piece of equipment to turn a profit, while that service is sapping the practice's cash flow or incurring group debt, "a fair amount of amnesia and finger-pointing will likely set in" among physicians who originally agreed to the plan.

    Besides devising a best-case scenario, Mr. Johnson urged groups to also consider a worst-case scenario and an exit strategy or contingency plan.

  • Do services fit your business plan? Don't sign up for a series of ad hoc, scattershot services without first incorporating each into a coherent business plan for your group and market. Otherwise, you may find yourself launching services and procedures without having the right staff to manage or implement them.

    "Take the 'aim, then fire,' rather than the 'fire, then aim' approach," Mr. Johnson said. Groups should identify strategic services and options; assess the financial, legal and operational feasibility of each service; come up with an appropriate implementation task plan—and then "wrap the whole thing into the group's business plan."

  • Is it legal? Finally, be sure to run any business plan and proposed compensation arrangement by your attorney. Make sure those plans don't violate state statutes and federal self-referral and antikickback laws, said Patrick A. Hope, JD, the College's Legislative Counsel.

    "Some states such as Florida have their own Stark laws that take precedence over federal law," Mr. Hope said. "It's important that physicians be aware of those legal implications." States also have different certificate of need requirements as well as fee-splitting regulations.

    When considering various ownership strategies, Mr. Hope added, physicians also need to know that "the feds are onto the Stark law and they are starting to prosecute." Several years ago, he pointed out, federal authorities "might go after antikickback issues that had possible Stark violations, but the primary reason for audits was not Stark. Now it is."

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