Uncovering the bottom line of ancillary services

• Start thinking about ancillaries by looking at which procedures and tests your practice is referring out.

• Next, develop a marketing plan and consider time, staffing, training, equipment, and space needs.

• Inform existing patients and others of new offerings in the practice and via advertising and social media.

Faced with declining reimbursements, rising costs, and growing patient demand for "one-stop shopping" in medical services, some primary care providers (PCPs) have been expanding their ancillary service mix to build practice profitability.

If necessity is the mother of invention, then practice profitability has given birth to a slew of primary care services ranging from onabotulinumtoxinA injections to laser therapy.

Evaluating whether an ancillary service will buoy profits or sink them is one of the most important business-planning exercises you will face if considering expanding your practice offerings, especially if the service involves large outlays of cash for equipment, training, or investment in staff time.

The first step, experts say, is to look at which-and how many-procedures and tests your practice is referring out to specialists. Also, investigate the types of ancillary services growing in popularity in your area. Which services are covered by insurance, and which must patients pay for the services out-of-pocket? Set long- and short-term goals.

If you think a market for your new service exists outside of your current patient base, develop a marketing plan, and get buy-in from everyone in the practice involved in filling an unmet need in your community. Very importantly, examine the true costs of the ancillary service to the practice by considering time, staffing, training, equipment, and space.

A QUESTION OF SURVIVAL

For Lana Nguyen, MD, the decision to add ancillary services to her Petaluma, California, family practice was made for her. In fact, it was a matter of survival. In 2003, the doctor with whom she shared office space announced he was moving from Petaluma, located just north of San Francisco with a population of 55,178.

His decision left Nguyen with more space than she needed and higher rent than her practice could support. She had to increase income for the practice.

"I'm a woman family doc, and 80% of my patients are women," she says. "Many of them would mention at the end of an appointment, 'I'm going to see Dr. So-and-so for [onabotulinumtoxinA] or going to such-and-such a spa for a skin treatment.' I thought, "I'm a doctor. I could easily do those things."

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Keith Borgulm, CHBC, a medical practice consultant with Professional Management and Marketing in Santa Rosa, California, says, "When much of the country is underserved for primary care, most PCPs aren't looking for more work. What they are looking for is more profit. That's where all the focus on practice management and ancillary services should occur."

Given that increasing revenue is the reason doctors cite most frequently for considering an ancillary service, the first question to answer, Borglum says, is whether you're maximizing profits from what you're doing now. The Medical Economics editorial consultant advises looking at factors such as whether you're coding correctly, scheduling so as to accommodate the maximum number of patients per day, and whether you have the patient base to support bringing on a midlevel provider.

Data from surveys conducted by the American Academy of Family Physicians from 2004 to 2009 show that electrocardiography, skin procedures, ultrasound imaging, and echocardiography are growing in popularity among PCP ancillary offerings. In 2009, 94% of surveyed practices offered electrocardiography, 92% offered skin procedures, 18% offered ultrasound imaging, and 14% offered echocardiography (see the table "Ancillary procedures performed in office practice" for additional information).

Whether these and other services are right for your practice to offer depends on the type of practice, patient base, locale, and financial health of the business. Here are some considerations to help you in your evaluation.

ASSESSING THE MARKET POTENTIAL

If you're convinced you're getting the most revenue possible from your current practice, the next step is determining which ancillary service or services to add. The key question here, Borglum says, is, "What are you referring out that you can keep in-house profitably?

An exception to the rule of adding only services you're referring out involves practices in areas that are underserved for a particular service. Borglum cites the case of a family physician practicing in a town where the nearest dermatologist was 4 hours away. The family doctor took some training courses in dermatologic procedures, Borglum says, and now dermatology accounts for much of his practice's revenue.

SHOW ME THE MONEY

Closely related to the demand for ancillary services is the effect on your practice's revenue. Who's paying for the service, and how much can they afford?

Many, but not all, common ancillary procedures and tests are covered by Medicare and other third-party payers. The advantage of cash-only ancillaries is that they can provide a practice with an alternative-and sometimes lucrative-revenue stream.

"Often, more affluent patients will be willing to pay out of pocket for a weight loss program such as medically supervised fasting, within which you as the physician also can profit from the sale of prepackaged foods and weekly tests," Borglum says.

The drawback to cash-based services is that patients use them less when the economy sours-a trend Borglum has seen among his clients the past few years.

"Patients are avoiding seeing the doctor just to avoid the co-pay, so those people are not going to be signing up for a cash-based ancillary service," he says.

Reed Tinsley, CPA, CFP, CHBC, a Houston, Texas-based accountant and adviser to medical practices, suggests going even further in analyzing your practice's revenue sources by breaking them down by third-party payer.

"You say, 'What percent of my patient base is Medicare, Medicaid, Blue Cross, what have you. Then take your top seven or eight payers and come up with an allowable for that ancillary for each of those payers. You can easily get those data out of any practice management system," Tinsley says.

After seeing what third parties likely will pay for a given service, you can start estimating costs of the ancillary. Costs are likely to include the lease or purchase price and debt servicing of any equipment required, any necessary supplies, staff training, and the addition of a technician or other staff member, if required.

(For a step-by-step cost analysis for an ancillary service, see below)

Equipment Cost Analysis for Ancillary Service

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A related factor when considering ancillary services is your practice size. If it's a multiphysician practice, the costs associated with starting the new service can be amortized over all the providers, whereas physicians in solo practices must absorb all of the costs themselves. That's an especially important point, Borglum says, if the ancillary service or procedure requires buying or leasing equipment, which substantially increases the cost of offering it.

The desire among doctors to add ancillaries as a revenue supplement is what drives many practice mergers, Tinsley says, especially when the ancillary service requires a major capital expenditure, such as the addition of magnetic resonance imaging (MRI) equipment.

"No independent or small group practice could afford something like an MRI on their own, but by combining doctors into a group, now you have the working capital to do that," he says.

WELL, MONEY ISN'T EVERYTHING

Not everyone believes that profits are the main consideration in deciding whether to add ancillaries.

"The top services [in terms of growth] are really just extensions of what we really ought to be doing anyway," says Bruce Bagley, MD, FAAFP, medical director for quality improvement for the American Academy of Family Physicians. "It's more of the comprehensive care motivation, as opposed to, 'I'm going to add this to make more money.' "I think there is a delicate balance between providing the convenience, cost savings, and efficiency for the patient and the system versus putting in these services with the primary goal to enhance operational revenue," he adds. "In the absence of the immediate availability of some of these services, patients may not get needed services, or if referred out, the cost may end up being considerably more with little added value to the patient. With the services readily available in the office, there is a tendency to use them more often than might be indicated or necessary for real benefit to patients." (For more on the ethics of ancillary services, see "Ethical and legal considerations of ancillaries")

For most PCPs, however, the question of adding ancillary services comes down to some combination of patient health and the practice's bottom line. That was the case for Jeffrey Kagan, MD, a partner in a two-physician internal medicine practice in Newington, Connecticut, and a member of the Medical Economics editorial board.

Kagan and his business partner are in the process of restarting the pulmonary function testing service they had offered when they began their practice in the early 1990s. Not only does it serve an important clinical need, Kagan says, but it also can help persuade patients to quit smoking by providing a picture of what the habit is doing to their lungs.

As to why the practice is resuming the service now, Kagan says, "We realized we were leaving money on the table, because we're sending patients out for something that we could be doing right here."

Another service that has been both popular with the practice's patients and has been a revenue-booster has been ambluatory electrocardiography, Kagan says. "We use a service that charges us $75 each time we do it, and some of the insurance companies will reimburse for a couple hundred bucks or more, so that's been a nice profit center for us."

Other ancillaries the practice offers include nerve conduction tests for neuropathy, ear irrigation, and small-lesion skin removals. What these services all have in common, Kagan says, is that they don't require major capital expenditures.

"We get sales people trying to convince us to do a lease-purchase on some piece of equipment, saying if we do 'x' number of procedures per month, it will pay for itself. But I don't want the pressure of having to do 'x' number of procedures. I'm not going to make it convenient for the patient just so we can lose money."

THE ANATOMY OF A MARKETING PLAN

After deciding to add a service to your practice, the next step is to inform potential customers-either your own patients or residents of the surrounding community.

If you practice in an area that's underserved for that service, Borglum advises, look to traditional marketing avenues such as newspaper and Yellow Pages advertising and direct mail to market to the greater community, and also consider opportunities in social media and on Web sites.

Marketing to your own patients is easy, Borglum says. "Tell them while you've got them right there in the exam room. You say, 'You need an EKG,' or 'We need to test your cholesterol. You can have it done here, or I can refer you out.' The patient usually will say, 'Heck, just do it here.'"

The "just do it here" attitude highlights two other reasons for adding ancillary services: patient convenience and health. Grant Fowler, MD, is a member of the physicians advisory committee for the National Procedures Institute (NPI), which provides training in procedural skills for PCPs, and a professor of community and family medicine at the University of Texas Medical School at Houston. Typically, he says, about one-third of NPI course attendees want the new skill mainly for financial reasons.

"The rest think the additional reimbursement is nice, but they're really just trying to do a better job for their patients," he says. That's especially true of doctors in rural areas. "If they aren't doing it, the patient doesn't get it."

LOCATION, LOCATION, LOCATION

Geography played an important role in Nguyen's decision to add aesthetics to her primary care practice. Many of her patients seeking these procedures were getting them in neighboring Marin County or in San Francisco, more than an hour's drive.

The lack of nearby competition, along with her reputation in the community, where she had been practicing since 1992, persuaded Nguyen that she could successfully expand her practice. After getting the necessary training through the NPI, she leased two lasers at a total cost of $3,300 per month. (Because the fee for each procedure-hair removal, treatment of leg veins and spider veins, and skin rejuvenation-she was not able to figure an exact number of procedures needed to cover the lease amounts.) In addition, she began offering onabotulinumtoxinA and collagen injections and selling cosmetic skin-care products.

The fact that the business was cash-only was an additional attraction, she says.

"I liked having another revenue stream that wasn't dependent on whether each procedure was coded correctly, and I didn't have to worry if the insurance company was going to change my contractual rate," she says.

All went well for the first couple of years.

"The initial response was huge. Tons of my existing patients signed on, and I thought, 'I've got this made in the shade' " she recalls. She leased two more lasers, increasing her monthly lease costs to about $5,300, and hired a registered nurse to help with marketing and other administrative tasks on a part-time basis.

Then two things changed at about the same time: Competition started to emerge from other local doctors, and the economy slowed, reducing demand for aesthetic procedures.

"Things were getting kind of lean, and I started to wonder, 'Have I bitten off more than I could chew?' " Nguyen says.

She responded by marketing beyond her existing patient base through newspaper advertisements (print and online), advertisements in movie theaters, and direct mail, at an estimated cost of $600 to $800 per month. She also developed a separate Web site for her aesthetic services, and parted ways with the nurse.

The advertising helped shore up her patient base. She also found another provider, with whom she shares office space and staff, including an office manager, a front-desk person, and medical assistants to show patients to exam rooms. Today, aesthetic services account for about 30% of her practice's revenues, a level Nguyen says she is happy with.

"I don't think I have enough hours in the day to be a savvy plastic surgeon businesswoman," she says.

The most important lesson she has drawn from the experience, she says, is that a cash service requires a more marketing-focused attitude from herself and her staff than they had been accustomed to. "Not that we don't want to do that in traditional medicine, but you have to have a little more of that groomed façade and treat people in a slightly more deferential way," she says.

Her advice for physicians thinking of adding a new service? "Take it slow. If I had it to do over, I'd probably go slower on the laser leasing and start with procedures that didn't require a huge outlay to get into. That way, you give yourself the chance to see if it's really going to work."

Questions to ask about ancillary services

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