Physicians should rethink their revenue streams

Ancillary services can boost practice revenue and be a major convenience for patients, but regulatory challenges and competition from hospitals and other players mean that physicians need to think more strategically than ever about their service menu.

Further reading: How to navigate direct pay successfully

Dallas internist Neal Sklaver, MD, FACP, has been providing ancillary services for 25 years and believes patients get better, faster care with in-house lab work and other on-site offerings like bone density scans and nutrition consulting.

Using in-house labs, he can have some results within an hour and others by the end of the day, allowing him to make decisions and get back to patients quickly, and at less cost to the patient. 

Increasingly, however, payers are steering physicians to large third-party facilities for traditional ancillaries such as lab work as the insurers chase economies of scale. Regulations limiting the types of providers who can offer certain services, along with increasing competition overall also threaten margins for these ancillary businesses. 

“The convenience more than warrants doing it, but we’re continuing to get squeezed,” Sklaver says.

The “squeeze” practices like Sklaver’s are feeling may be why independent physicians are putting fewer resources toward some of these services than others, notes David Gans, MSHA, FACMPE, senior fellow for industry affairs for the Medical Group Management Association (MGMA). 

For example, primary care single-specialty groups brought in $59,745 per full time-equivalent physician for lab procedures in 2015, roughly flat compared with 2011, according to MGMA’s 2015 DataDive for Cost and Revenue Report. During the same period, charges for radiology procedures more than doubled and revenue from non-procedural activities such as the sale of supplements, allergy antigens and onabotulinumtoxinA (Botox) rose substantially.  

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The growing number of regulations affecting lab standards and billing procedures have kept some physicians from continuing them, says Gans. At the same time, he says, the prospect of flat overall Medicare reimbursement rates in coming years–as well as its 20% cut to reimbursements in 2017 for analog X-rays–has some physicians diving more deeply into ancillaries that are either reimbursed at higher rates or for which patients pay out-of-pocket.

Other physicians are becoming more cautious about adding ancillary services as they await changes under Medicare’s new Quality Payment Program, says Nick Fabrizio, Ph.D., FACMPE, a principal consultant with MGMA’s Health Care Consulting.

“Physicians are having a hard enough time managing the new healthcare of today, getting their arms around quality requirements,” he says, leaving little time or money to hire the appropriate care coordinators who can maximize the value of an investment in care management procedures. 

Experts and those utilizing ancillaries offer the following considerations for physicians.

Ground rules

Consulting an experienced attorney is a must for avoiding legal problems associated with ancillaries, including possible Stark law violations, experts say.

Laws governing the level of professional who can perform the work vary widely by state, as do reimbursement rates That makes it crucial to calculate your own return on investment rather than relying on estimates from a product or service vendor, notes Keith Borglum, CHBC, CBB, a veteran healthcare business consultant and broker. (See accompanying worksheet.)

Even within states, he says, rules are often unclear regarding the required qualifications for administering various types of ancillary services, so getting a clear sign-off from practice attorneys is highly recommended.

Another cost of doing business is keeping up with pending changes to licensure rules, says Borglum. If a practice has been paying one type of professional $30 to $40 per hour to operate a laser, a change to the required qualifications for the position might double the cost of providing the service, he says.

Likewise, if an independent contractor is performing the service and splitting profits with a practice, that could run afoul of Stark-law and other legal requirements, he says.

Other challenges include inadequate reimbursements, which has long been a problem, notes Maria Ciletti, RN, a practice administrator for a one-physician, largely Medicare-based primary care practice in Niles, Ohio.

The year after starting up a lab unit, costs tripled for the practice under new Medicare rules. Later, the practice purchased a mobile radiology unit for bone density scans and ultrasound. Insurers denied claims because the practice didn’t have a licensed radiologist, and though the equipment provider promised a workaround, the practice wasn’t comfortable with the suggested solution.

“You have to be careful before investing a lot of money in these things,” says Ciletti. “My advice is to start small and go from there.”

Start at home

The best place to start when considering which ancillary services to provide is by bringing services in-house that patients already use regularly, Borglum says. 

“Look at the testing, services and therapies you are referring out to others,” he says. “Are you having enough quantity to justify bringing that in-house?” 

Echocardiography is a good example. Two providers with many seniors in their patient panel can easily add $50,000 to $100,000 in total revenue by bringing echo back into the practice, Borglum says.

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Next, physicians should consider services that their current patient base would view as natural add-on conveniences. Office-based dispensaries of prescriptions and over-the-counter remedies are also logical extensions, he says. 

But doctors need to be aware of the risks. Borglum recently got a call from a physician looking to start a pain management specialty, mostly to offer the use of topical cannabis in California, a business Borglum considers high-risk and unproven. Also, if practices are opening a dispensary, they should not offer opioids, because they are frequent targets for theft, he says.

In addition, they should stay alert for new opportunities, particularly chronic care management incentives, experts say. Another area to explore: noticing procedures your payers reimburse well, and developing a specialty in one of them. 

Next: Common mistakes to avoid

And they should try to be realistic when estimating demand, Fabrizio says. “When you listen to vendors, the sky is always the limit and the best-case scenario is always presented,” he says. 

Think critically about which patients would likely use the new service or product, whether payers are reimbursing at appropriate rates and whether all the partners in a practice are in agreement and enthusiastic about referring patients, he says.

Be willing to sell

Also, just offering a product or service doesn’t guarantee added patient volume.

“It often perplexes me that what sells well in one office won’t do well at [the practice] next door,” Borglum says. “It typically comes down to the salesmanship of the staff.”

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Physicians have to put time into building a service and training staff to communicate it to patients, says David Zetter, PHR, CHBC, principal of Zetter Healthcare, a consulting firm in Mechanicsburg, Pennsylvania. 

Zetter and Borglum both say they have taken on new clients, only to hear stories of failed ancillary businesses when practices ignored the need to market the new service. Sometimes they even see unused equipment gathering dust in conference rooms because a partner who spearheaded an idea for a service left the practice before getting it up and running and the other partners weren’t committed to the idea. Sometimes partners get excited about a new service but are too distracted by daily practice demands to give it the required attention.

Time and money costs associated with ancillaries vary dramatically, Zetter says, not only among different services but within them. Two practices opening radiology suites, for example, will have different cost and revenue structures depending on factors such as whether they lease or buy equipment, whether the equipment is new or refurbished and how they charge for a radiologist’s time to read images, not to mention local labor costs involved in building out the suite around the equipment and transportation costs for the X-ray machine. Consider all the options when estimating costs and revenues, he suggests.

“You may find it’s more economical to bill payers just for the technical component,” or it may make economic sense to absorb the entire procedure, pay fees to the radiologist, and seek reimbursement for both the equipment and physician time, he says. 

Run the numbers

Another common mistake, accepting a vendor’s revenue and return-on-investment projections, can be avoided by asking for details on the vendor’s underlying assumptions and then comparing the practice demographics used in those assumptions to the practice’s own patients, Zetter says. For leased or rented equipment, he also recommends asking vendors for actual invoices and how often they have increased prices in recent years.

Physicians should estimate what the patient demand will be for any given venture, then determine the current reimbursement rate for the service from each payer, he says. If Medicare accounts for 60% of the practice and two insurers account for the remaining 40% of patients, for example, the practice should calculate a weighted average reimbursement rate that mirrors this mix, Zetter says. 

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Practices finding it difficult to get a straight answer on reimbursement should insist payers provide the information, Zetter says. “Every payer’s fee schedule is proprietary, and even as a consultant, I have to sign non-disclosure agreements keeping me from using the data for other clients. But if you are under contract with them, they have to provide it,” he says.

Practices should also remember to factor in the costs of devoting physician and staff time to these efforts, experts say. The accompanying chart shows how to calculate physician and staff labor costs on a per-minute basis.

And physicians should consider the impact on the practice’s cash flow of any large ancillary equipment lease, Gans says. A vendor might present enticing returns that are based on the ability to depreciate the equipment, but the practice still has to make those monthly payments.

Next: How to get going

Consider total value

Sometimes an ancillary doesn’t provide much return at all, but helps patient care run smoothly or saves administrative time.

John Bender, MD, FAAFP, chief executive officer of a 25-provider, multi-location primary care practice in Fort Collins, Colorado says he still offers lab services, but also provides services with higher reimbursement rates or margins, such as mammography, aesthetics, dietician and other services.

Even though he might not be reimbursed fully for blood draws, he calculates that when labor savings are factored in, he’s better off doing the draws in-house. Moreover,  he says, the quick turnaround is better for patients.

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“If a person comes in and 15 minutes later I have lipid results, now it’s a more effective conversation to talk with him about getting serious” about improving his health, says Bender.

 “As a business owner, my biggest overhead is not supplies and equipment but staff,” Bender adds. “We found that if we just ran the cell count in-house, now it took us literally five minutes to get the blood and look at the result and we’re done.”

Get going

If the numbers look good, don’t waste too much time debating, Zetter says. 

“Chronic care management is a big thing right now, where you get a fee for each patient you are monitoring, but you have to be first in your market to get in there and do it,” he says, noting that specialists can offer these services and sign up patients for these programs.

“There’s so much more revenue there if you really want it, but it takes work and planning.” Generally, chronic care management programs will generate $40 per enrolled patient per month, experts say.

Whichever service physicians decide to add, don’t commit to overly burdensome supply costs, experts advise. Most equipment and services can be rented, where a technician comes with the required device on a schedule that conforms to the level of the practice’s demand, rather than leasing a product 24/7 for a given period. There will be finance charges in the lease, but depending on patient volume, leasing may make sense, particularly in the startup phase.

Testing the waters in this way will allow a practice to experiment with an array of services, Berg says.

Above all, stay flexible, experts say. “Pay attention, because it’s all subject to change,” Fabrizio says. “Whatever is gravy today might be out of favor next year. You might have a reimbursement commitment for a year or two, but nobody is bound to cover a service forever.”