For more than a decade, physicians across the country have been struggling to offset the effect of reduced reimbursement rates by working longer hours, seeing more patients, and trimming the fat from their operations. And for a while, it worked. But as malpractice premiums continue to climb, staff salaries rise, and regulatory mandates chip away at the bottom line, many are finding that this makeshift approach is no longer enough.

Indeed, the Center for Studying Health System Change reports that physicians’ inflation-adjusted income fell 7 percent between 1995 and 2003. “While revenue at most doctors’ offices has stayed the same or dropped in some cases, overhead expenses have gone way up for everything from insurance to the cost of nursing and support staff,” says Craig Holm, senior vice president of Health Strategies and Solutions, a Philadelphia-based healthcare management consulting firm. “As a result, many physicians are looking for sources of supplemental income.”

Enter ancillary services.

Inspired by stories of lofty returns promulgated by aggressive marketers and the popular press, medical groups are delivering new patient services at a frenzied pace in a quest to revive their shrinking profits. Medical imaging, diagnostic testing, laboratory and pharmacy services, and physical therapy are among the more popular ancillary services practice groups are currently offering. Such add-ons are not confined to internal medicine practices. Surgeons are investing in ambulatory surgical centers that enable them to perform a larger volume of same-day procedures. “The financial return on some of these ancillaries is very high,” Holm affirms.

How high? Holm says the practices with which he works average 20 percent to 35 percent returns on imaging services, such as radiology, CT, and MRI scans. Surgery centers report up to a 40 percent return on their investments, he adds. Indeed, the Medical Group Management Association’s (MGMA’s) 2006 Cost Survey for Orthopedic Practices finds that on average, orthopedic surgery groups realized $45,492 per physician in net revenue (after operating costs) for the physical therapy services they now offer. After implementing diagnostic radiology services including MRI, those same groups earned $47,951 per physician.

One obvious reason for ancillary services’ profitability is that they allow physicians to charge both a professional fee for their expertise and a technical (or site) fee to compensate for the overhead required to offer such services. Physicians also report that their new services provide countless opportunities to improve patient care. By bringing formerly referred services in house, doctors say they can better monitor their patients’ progress, expedite outpatient procedures when necessary, and reduce delays in obtaining lab and imaging results.

Look before you leap

But MGMA senior consultant Nick Fabrizio cautions that ancillaries are not always the monetary cure-all they’re made out to be. “Physician groups only hear the success stories at conferences and through networking groups, and that’s very dangerous because all practices are different,” he says. “For every group I have seen [offer ancillary services] successfully, I’ve seen an equal number not be successful.”

Before investing in a new patient service, practices must take into account a laundry list of different factors. For starters, is your practice prepared to adequately handle the business side of the service you are considering adding? “If you’re not doing a good job at billing and collections with your normal practice services, you may want to reconsider ancillaries,” Fabrizio advises. “You’re adding a whole new product line that your staff is going to have to track.”

Fabrizio notes that groups must also assess the impact ancillaries may have on quality control. “If you can decrease the number of times your patients have to hop from office to office, that’s a good thing as long as you can provide the same quality of service that you would by referring them to an outside provider,” he says. “If patients feel you’re providing a lesser service, that becomes a disadvantage, and it’ll catch up with you.”

Feasibility studies are a necessary first step. Practices should look at their patient population, considering age and health risk factors, to determine which services would yield the greatest demand. By tracking their referrals over the past 12 months, physicians should easily be able to identify their patients’ principal needs. “This is one of the biggest problems I’ve seen in the field,” Fabrizio says. “Practices haven’t done [their homework]; they spend a lot of money on equipment and resources to add a new service, and a year later find out they’re not doing very well.”

But determining revenue targets for ancillaries is no easy task. Some insurance companies contract exclusively with national labs and won’t reimburse for in-practice services. Others require that patients meet a certain number of risk factors before they authorize a procedure. And of course, reimbursement rates are in a constant state of flux.

In 2007, Medicare and Medicaid reimbursement will drop for imaging services, says Gary Matthews, president of Physicians HealthCare Advisors in Atlanta. Insurance companies are likely to follow suit. “It’s very definitely worthwhile to contact the payers that represent the vast majority of your patients to find out how much they reimburse for ancillaries performed on site,” says Matthews, adding that groups should build 2 percent to 3 percent annual reimbursement declines into their forecasts for all ancillary services “just to remain conservative.”

And then there’s the competition you’ll most likely face. Physician groups should determine which services other healthcare providers in their area already offer. If they’re located near a hospital or a large group practice with an MRI, for example, they can safely assume that that market is spoken for. “It’s extraordinarily unwise to try to compete with a large facility,” said David Gans, MGMA’s vice president of practice management resources. Small to mid-size practices that lack the volume to support adding new services on their own should try to determine whether other local physicians would potentially utilize the services they are considering. Those physicians may be likely to start referring their patients for such services, which can help defray costs.

Crunching the numbers