Many practices assume their ancillaries are profitable, yet often lack the systems needed to conduct a proper analysis.
Many practices assume their ancillaries are profitable, yet often lack the systems needed to conduct a proper analysis. Here are five tips for analyzing if ancillaries are yielding promised profits.
1. Set up ancillaries as cost centers on the Profit and Loss (P&L) Statement.
The first step in analyzing the profitability of an ancillary is developing a mechanism to track revenue and expenses. Creating cost centers on the P&L is the most comprehensive approach. Regardless of the accounting system you use, creating cost centers should be a relatively straight forward process. For example, in Quickbooks, the use of a “class” is synonymous with a cost center. Set up cost centers for each ancillary (i.e. lab, DME, MRI, CT, EMG, allergy, audiology, satellite office, etc.). The goal is to create a P&L for each ancillary to analyze profit.
Quickbooks has a P&L by Class report that shows cost centers side by side and sums to the practice total. This is a good tool to see how the cost center(s) fit into the “big picture.” An example of a P&L by class is as follows:
2. Allocate expenses to the costs centers.
The biggest challenge many practices face is properly allocating expenses to the cost centers. For example, medical supplies are received at the main office. Doctors and staff take needed medical supplies with them when they travel to a satellite office. The medical supply expenses are residing on the books at the main office and have not been allocated to the satellite office.
To analyze the profitability of ancillaries, an accurate accounting of expenses must occur. The easiest way to accomplish this is to set up different accounts or sub-accounts with the vendors so that invoices are clearly identified to the appropriate cost center. Otherwise, invoices will need to be segregated in the accounting system to the appropriate cost center. Often the person or team in accounts payable does not have the necessary information to make the allocation.
When it’s not feasible to separate orders based on cost center, a computerized inventory system is advised so that when supplies are received at one location and then used at another cost center, those supplies are accounted for properly.
Staff allocation is another expense to consider. When a staff member works in one location only, it’s easy to assign that staff member to their respective cost center. But what happens when a medical assistant works three days a week in the main office, one day a week in satellite two and works every other week in satellite three? Is there a mechanism in place to allocate his or her salary to the respective cost centers? Most time tracking systems allow staff to “clock in” to different departments, which is the most straightforward allocation method. Otherwise, it’s a manual allocation or an estimated allocation based on history. The most important takeaway is to develop some type of time allocation for staff to the different cost centers.
Another overlooked expense is rent. Allocating rent by square footage is most common. For example, if the lab’s square footage is 10 percent of the clinic’s total square footage, then 10 percent of the rent cost would be allocated to the lab.
It’s more difficult to determine the amount of management and administrative (M&A) expenses to allocate to the cost centers. M&A covers a wide array of expenses including management, billing, front desk, administrative, telephone, etc. Management provides services across cost centers and the practice’s marketing efforts typically apply to all of the ancillaries. Some practices allocate M&A based on revenue while others charge a flat percentage of revenue to cover M&A.
3. Properly attribute revenue to the ancillaries.
Revenue reports from the ancillaries reside in the practice management system (PMS) or billing system. How that data is reported will vary by PMS and often depends on the system’s set up. Most systems allow some type of grouping by CPT – each CPT code is mapped to a category (revenue category, department, CPT category, etc.). Examples of CPT categories that include the ancillaries are allergy, audiology, MRI, DME, and lab. Another useful report would be payments by location.
In a medical practice, the details of revenue transactions reside in the PMS, not the accounting system. Therefore, it’s recommended to allocate revenue by cost center in a journal entry at the end of the month using PMS reports rather than tediously allocating each deposit transaction in the accounting system.
4. Regularly review reports to analyze profitability.
Now that revenue and expenses are properly allocated on the P&L, the P&L by cost center can be generated and reviewed on at least a monthly basis. The report serves as a guide–revenue minus expense equals profit (or loss).
5. Consider non-financial benefits when analyzing the performance of an ancillary.
There are many instances where ancillaries yield a loss, rather than a profit. Does that mean the ancillary should be discontinued? Not without further analysis.
It’s not uncommon for a satellite office to yield a loss, but keep in mind the larger picture. The cost center itself may not be profitable, but it can lead to an increase overall revenue because the satellite office serves additional patients in a new geographical market. Note that it can be difficult to ascertain the impact on overall patient volume if all visits occur in one location.
Another ancillary to review is advanced imaging. Advanced imaging isn’t nearly as profitable as it once was. However, many practices continue to offer advanced imaging for the convenience of the patients and the physicians.
The bottom line? Consider both the financial and non-financial benefits when analyzing the performance of an ancillary.
Cheyenne Brinson, MBA, CPA is a consultant and speaker with KarenZupko & Associates, Inc. She delivers pragmatic business solutions that boost revenue, streamline workflow, and increase operational efficiency.