Not a week goes by when I do not receive a call from a physician practice wanting to increase revenue by adding a new modality. These "so-called" ancillary services can take various forms, including ultrasound equipment, nuclear cameras or more expensive diagnostic equipment such as CTs, MRIs, or PET scanners. Other ancillary services might include diagnostic catheterization labs, physical therapy, clinical laboratory services or outpatient prescription drugs. Unfortunately, many physician practices do not fully investigate the financial and operational issues associated with adding a new service and often find themselves paying for costly equipment that is underused or obligated to an expensive long-term contract with no termination options.

There is no doubt that appropriate ancillary services can help the bottom line of a physician practice, especially in this day of static or decreasing third-party reimbursement. Adding ancillary services to a physician practice can also increase patient convenience and allow the ordering physician to monitor the service more closely. However, before a physician practice adds an ancillary service it should carefully and truthfully consider the following issues.

1. What ancillary services are currently ordered by the physician group from "outside" providers and can we identify "new" ancillary services to order? Step one is to determine what ancillary services are currently ordered by the physicians in the group practice but provided outside of the group. For example, an orthopedic practice may order physical therapy for its patients, as well as orthotics and prosthetics. There may also be services that a group practice would order if more readily available within the office. Of course, any ordered service must be medically appropriate so it is important not to be overly optimistic about the use of a new piece of equipment or modality.

2. What are the costs of the ancillary equipment and other "hard" assets? Once the practice has identified a new ancillary service to explore, the next step is to determine the cost of implementation. A good starting point is to identify the hard costs, such as equipment, software, and fixtures. It is important to explore financing and lease options. If financing, talk not only to the vendor but also to local banks, which are often very competitive. It is also important to evaluate lease-to-own options or a fixed lease for a defined period of time after which the equipment is returned. A good accountant with experience working with physician practices is invaluable in identifying the applicable costs, as well as any tax implications of a purchase or lease.

3. What support will be needed for the ancillary service? Now that you have determined the costs of the equipment and other depreciable assets, it is time to factor in the other costs, such as space, personnel and management services. Can the new service be offered within the practice's existing office space, or will additional space be needed? Are there additional personnel or management costs associated with the new service? For example, the introduction of physical therapy services generally does not require a significant expenditure for equipment, but does require the employment or lease of physical therapists and physical therapy aides. Also, the running of a physical therapy practice is very different from a physician office practice. Accordingly, the practice will need to decide whether it can devote the resources necessary to develop and operate the new business, or whether it makes financial and operational sense to hire a third party manager.

4. Does the ancillary service require third-party approval? During the planning stages it is critical that the physician practice determine what types of licenses, if any, are required for the new service. For example, offering nuclear camera services in a physician's office requires a license from the Alabama Department of Public Health. Accreditation may also be required for certain services or to obtain increased reimbursement. For example, BlueCross and BlueShield of Alabama will reimburse a physician practice at a higher level for MRI, CT and PET scans if the physician practice has obtained accreditation by the American College of Radiology or other approved accreditation body. Obtaining licenses and accreditation is not only time consuming, but can involve significant costs.

5. Collect utilization and payor source data for the ancillary service. The fifth step involves the development of reimbursement estimates for the planned service. In developing such estimates, it is very helpful to use historical numbers reflecting actual physician referrals for the ancillary service. For example, a physician practice contemplating the purchase of an MRI should determine based on historical numbers how many MRIs were ordered by the physician group in the last year. These referrals should further be characterized by payor source. Once the physician practice determines the number of referrals and the associated reimbursement it can project revenue. Obviously, if historical numbers are not available any revenue projections become even more uncertain.

6. Compare the entire cost of providing the ancillary service in-house to the anticipated reimbursement. Once the total cost of providing the ancillary service is determined and the total anticipated revenue is projected, the two numbers can be compared. If the "break-even" point is barely surpassed with the projected revenue, it may be best to wait on the new ancillary service, especially if the service involves a significant capital expenditure or other financial commitment.

7. Identify any contractual impediments to providing the ancillary service. Once it is determined that the arrangement makes financial sense, there are other factors to be considered. If the ancillary service will be offered in leased space, it is important to review the lease agreement to determine if there are any restrictions on using the space to offer the ancillary service. If a physician group leases space from a hospital or on a hospital campus, it is fairly common for the lease terms to restrict the practice from offering certain types of ancillary services in the space which may compete with the hospital. It is also critical that the physician group verify with its malpractice insurer that its existing policy will cover the ancillary service or whether an additional policy or rider is needed and available.

8. Evaluate the proposal under the Stark Law. The federal prohibition against physician self-referrals for healthcare services, commonly known as the Stark Law, prohibits a physician from referring patients for certain "designated health services" to an entity with which the physician has a financial relationship if those services are paid in whole or in part by Medicare or Medicaid, unless a Stark Law exception applies. This restriction would apply to a physician owner or employee of a group practice who orders designated health services from the group. The list of designated health services include many ancillary services for which physicians frequently refer, including many imaging services (X-ray, MRI, CT, PET, nuclear camera imaging), clinical laboratory services, physical therapy, occupational therapy, and outpatient prescription drugs. There are various Stark Law exceptions that can be used to allow a physician to order most designated health services from his/her own group practice, including an exception called the "in-office ancillary services" exception. If the ancillary service qualifies as a designated health service and the service will be provided to Medicare or Medicaid beneficiaries, compliance with a Stark Law exception is required.

9. Evaluate the proposal under the Anti-Kickback Statute. The federal Anti-Kickback Statute, prohibits, among other things, the offer, payment, solicitation or acceptance of remuneration directly or indirectly in return for referring an individual to a provider of services for which payment may be made in whole or in part under a federal healthcare program, including the Medicare or Medicaid programs. Any arrangement in which anything of value changes hands between a referral source and a third party in connection with the provision of ancillary services paid for by a federal program potentially implicates the Antikickback Statute. Analysis under this law often arises when a physician practice contracts with a third party to provide management or personnel services associated with the offering of the ancillary service.

10. Evaluate the proposal under the Medicare Rules. The Medicare program has a host of regulations that potentially impact the offering of ancillary services. In particular, there are specific reassignment rules which regulate who can bill and collect for a particular service. These rules are implicated when a physician practice contracts with, for example, an outside radiologist to provide interpretations for the ancillary service and the physician practice bills and collects a global fee which includes both the technical component and the professional component provided by the radiologist.

While the offering of ancillary services can prove to be a financial and operational benefit to a physician practice, it is important to carefully explore and analyze the proposed arrangement under the steps outlined above.


May 2007