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Do Your Due Diligence Before Adding Ancillary Services

By: Reed Tinsley
Tel: (281) 379-5988
Email Mr. Tinsley


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Ancillary services are becoming an increasingly important source of medical practice revenues. Part of this change relates to patient care issues, however, the predominant reason is financial necessity. Doctors comprise the only major profession that has suffered consistent inflation adjusted per unit price decreases in the past decade. Medicare reimbursement has remained virtually unchanged. The costs of running a medical practice have increased at a rate exceeding the Consumer Price Index (CPI) or greater than 3% annually while reimbursement increases have not kept up.

For some physician specialties, this has been further aggravated by CMS reductions in relative value units (RVUs) that, in effect, has devalued services provided by those specialties. A few examples include ophthalmologists, diagnostic testing facilities, and radiologists.

To compensate for these decreases, doctors have increased the volume of services rendered and have become better trained in coding and documentation. This is effective, but there are finite limits to these strategies. The introduction of ancillary services is the latest strategic option medical practices are pursuing to keep up with operating expense increases and, hopefully, to increase their bottom line. Strategic is the key word. Simply adding ancillary services is not necessarily a silver bullet and, if not properly researched and planned, can be a costly, futile initiative. What follows is a suggested approach for determining what ancillaries are most appropriate for your practice, preparing a feasibility analysis, determining compliance issues, and marketing and monitoring.

  • Determining what ancillary service is most appropriate is the first step. You generally want to select an ancillary that is most compatible with your practice's medical specialty, the demographics of your patient base, and your practice philosophy. For example, audiology services are a natural for an otolaryngology practice, which treats patients with ear, nose, and throat problems. On the other hand, it may not be as appropriate for this same practice to offer laser hair, lesion, and spider vein removal services. This service is likely more compatible with dermatology and OBGYN practices.
  • A service that meets the needs and interests of your practice patients is more likely to be a success. Review your patient demographics, survey your patients and look to see how often you now refer your patients to an outside provider. Also, be sure your associate practitioners and, preferably, your support staff, buy into this new service, since patients will be asking questions and everyone needs to be knowledgeable and supportive.

  • Survey the market. You should check out who else in your market area is offering these same services. If several dermatology, OBGYN, and family practice groups in your proximity are already offering laser hair and skin treatments, it may not make sense to make the financial investment. This service, as with others, may not be all that profitable if your business comes only from your current patient base, especially if some of them are already getting treatments elsewhere.
  • Prepare a feasibility analysis. First, ask your CPA to assist you in doing a break-even cash flow analysis. This includes equipment leasing or debt service, payroll and benefits of non-physician providers and technicians, supplies, maintenance agreement costs, space and other occupancy costs, billing fees, advertising, marketing and such other incremental direct costs that you can identify. Next, if this is a covered service, contact all your major payers and find out what they actually reimburse and whether they will accept charges from your office for this service or whether they direct their plan participants to go elsewhere.
  • If this is a Medicare covered service, be sure you meet certification and training criteria. If this service is not covered by insurance you need to do some market research to determine that your pricing is competitive and that you set payment policies that will maximize your cash flow and minimize collection problems. Once you have done this, you will be able to run profit-and-loss illustrations under various volumes and cost assumptions. If you need financing for this program, the lending institution will want to see these. Beware of placing too much confidence in revenue and cost illustrations supplied by equipment vendors, because they tend to be overly optimistic.

  • Carefully assess your space needs. You'll likely need segregated space, special wiring, and other needs and possibly separate or additional waiting room space.
  • Assess your vendor and equipment. Obtain names of users and make a site visit. Inquire through the Internet information on other manufacturers of equipment and compare price, specifications and independent recommendations.
  • Check your professional liability insurance carrier to be sure your policy covers this service.
  • Evaluate purchase lease options. Ask your CPA to help you with this analysis. There are operational aspects to this as well as tax and financial. Don't accept representations of the vendor as to tax benefits, credits, etc. without checking with your CPA.
  • Carefully review maintenance and support agreements. It may be advisable to have your attorney review the contracts.
  • Consult with legal counsel on Stark and anti-kickback rules. There are various federal laws that prohibit referrals of Medicare and Medicaid patients for certain designated health services to any entity which may constitute a self-referral and prohibit other self-serving transactions. The most complicated of these is the Stark Law, which you can be unintentionally in violation of but nevertheless stand to suffer serious legal and monetary consequences. Be sure you get a green light from your legal counsel before proceeding.
  • Be sure your staff has adequate training and certifications for this service. Vendors usually conduct training programs and seminars. Be sure adequate time is allotted for this and inquire of additional costs that may be involved. Also, be sure you allow yourself enough lead time before scheduling patients.

  • Develop a marketing plan. Budget enough for start-up and an ongoing marketing and advertising program for elective services and those not referred within the practice. Direct mail to patients and referral sources and discreet advertising in your office, such as brochures and professional video presentations in the waiting room, are effective and relatively inexpensive. Explaining the service and program on your practice website is also very effective. You may want to contact a marketing consultant to assist in ad design and placement.

Reed Tinsley, CPA, is a Houston-based CPA, Certified Valuation Analyst, and healthcare consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry.

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