Should Your Medical Practice Add Ancillary Services?

November 26, 2014

Adding ancillary services may seem like a good idea. Before you commit, consider the fit with your practice and the total costs.

Ancillary services in medical practices can be effective ways to relieve some of the stress on net income that results from increasing costs and decreasing reimbursements - but they can also make the situation much worse. It all depends upon the answers to these five basic questions.

1. Are the prospective ancillary services consistent with your practice's brand?

Do the services complement the products and services the practice already offers? In business-school-speak, do they represent an adjacency? For instance, skin care products and cosmetics are a logical extension for many plastic surgeons and dermatologists. Not so much for a cardiologist, endocrinologist, or orthopedic surgeon.

Will they help the practice deliver a consistent message to patients? A good example of a bad idea is an aspiring Patient-Centered Medical Home that offered both nutritional counseling and liposuction. It may be possible to position those two offerings as complementary, but one is promoting a long-term change in life style, while the other seems to offer a quick fix.

If prospective ancillary services are congruent with the values and objectives of the practice, as communicated to patients, the idea is worth further consideration. If not, don't pursue it, no matter what the margins may be.

2. Is there a market for the ancillary services within the practice's patient base?

Practices attract and retain a set of patients with particular demographic and psychographic characteristics. Before committing to adding a particular product or service, ask your staff how they would expect patients to respond.

Your staff has a much better feel than the physicians or administrator about what patients would value and utilize. Patients are more candid with staff, and staff is more attuned to patients' likes, dislikes, and needs. It is the same in any business: the people who interact most directly with the customer read them best. Also, patients are generally much more positive in dealing with the doctor (an authority figure) than in dealing with staff (subordinates).

If the staff is positive, ask your patients what they think. I am not talking about formal market research. One question with, perhaps, a follow up question, asked of each patient that you see for a couple of days, will tell you all you need to know.

Don't waste any more time in considering the ancillary service unless there is a strong positive reaction from patients and staff. The response to the hypothetical will always be more positive than any response that requires spending money.

3. What is the total investment required?

A vendor will generally tell you about the hard dollars required for implementation and maintenance, although it is reasonable to assume that they will understate that amount when possible. Remember, these are not the total costs to actually offer the service.

Unless the practice has idle staff and equipment and space it never uses, you will have other costs.

Are additional staff or licenses required? What about additional or different supplies? Are advertising and promotional materials required? You won't pay the vendor for these, but you will pay someone.

What is the opportunity cost of the resources (staff time, space, equipment, etc.) required to offer the service? Opportunity costs are what you could make from these resources if you used them for another purpose.

4. What is the reasonably expected return on the investment?

There is generally no need to make a very complicated analysis. A back of the envelope calculation is fine, as long as all of the costs - hard dollar, opportunity, setup, and ongoing costs - are included. Since the best possible outcome seldom occurs, be generous on estimating expenses and conservative in estimating income.

5. Given everything else that is going on, are the expected benefits worth the practice's time and attention?

Unless you can recover all of the setup costs within a year and clear a significant amount of money each month after that, my advice is to pass on the opportunity.

Another product and service will add to your cognitive load, whether you are directly involved or not. Service failures, staff issues, and patient complaints are inevitable. Providing leadership that will mitigate and/or solve them takes energy.

Ancillary services present valuable opportunities for additional revenue and net income. They are not, however, guaranteed to deliver positive outcomes, and the devil is always in the details.