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Adding an ancillary service such as physical therapy, imaging or ultrasound services to your medical practice may seem like an easy opportunity to capture revenue you are giving away in referrals to providers outside of your organization. While an ancillary service can boost profitability and improve your patient care offerings, its addition should not be taken lightly, says Stephen Dobias, principal on the Health Care Team of Indianapolis-based Somerset CPAs.

Here are seven steps Dobias suggests you follow to determine whether the addition of an ancillary service is right for your medical practice and how to ensure the ancillary service gives you a strong return on your investment.

Note: This story features a sample proforma found at the end of the piece.

1. Determine your options. Take the time to determine what types of ancillary services you refer, and whether the volume and value of any of these ancillary services make them an appealing opportunity for your organization. Keep in mind that adding an ancillary service is, like any investment, a financial risk and you should not jump at an opportunity unless the volume of potential business will make it worthwhile.

2. Analyze your competition. As with any new business, it is imperative that you determine whether there is a need for the ancillary service you are looking to add and where your targeted patient population is currently going to receive the ancillary service you may soon offer. Find out where your potential competition is and whether there is room in your area for a similar service provider.

3. Develop financial projections. Once you have determined which particular ancillary service you want to pursue, you need to make sure the ancillary service will actually make your medical practice more profitable by developing several financial projections.

“It would probably be good to look at multiple scenarios—worst case, middle of the road and best case,” Dobias says.

When developing these financial projections, you have to be very careful that you’re not relying on data from an entity that has a vested interest in your getting into that business, such as an equipment provider.

“You need to develop your own set of projections, using your own data, and getting the advice from those that are versed in that particular industry so you know your numbers are solid if you were to get into that particular activity,” Dobias says.

While you may assume that you will capture 100% of the new services you will offer to your current patient list, consider the possibility that some of your patients will go elsewhere.

“You have to assume there’s going to be leakage for whatever reason,” Dobias says. “If you’re building a projection assuming 100 percent or 90 percent capture, you’re setting yourself up for failure.”

4. Research the payors. Once you complete your projections, you should then set your sights on potential payors to see if they will even allow you to bill for the particular activity you are hoping to add. Some payors are pretty stringent in allowing you to bill for certain activities, Dobias says.

“While you may have the capability of having that ancillary in your organization, you may find that the payor market is not going to reimburse you,” he says. “We see that particularly in the case of physical therapy. It’s in a lot of markets and the payors will often have entered into exclusive contracts with certain providers, and you just won’t get into that business no matter how hard you try.”

5. Understand legal restrictions. “Too many times we find that medical practices rush into (adding an ancillary service) without understanding the legal implications,” Dobias says. “We strongly encourage our clients to get their qualified health care attorney’s advice so they can explain the ‘dos and don’ts’ of the industry.”

Such legal issues may include Stark, fraud and abuse and certificate of need (CON) requirements.

When it comes to CON laws, some states will permit you to add an ancillary service if the cost of equipment falls below a certain dollar threshold, Dobias says. Other states may have single-specialty exceptions written into the law that would permit your practice to add an ancillary service but with some restrictions.

“It’s important to understand what your state statutes are,” he says. “You should involve both a health care consultant and your attorney versed in that state’s laws.”

If you determine that it is legal for you to add an ancillary service and you meet any CON requirements, you may still face a process to gain approval for your addition. Some states will require you to file a plan or feasibility study, Dobias says. Before you break ground for the new service, make sure you understand all of the rules and regulations you will need to follow to proceed with your project without any legal setbacks.

While you may face some legal restrictions, don’t let this prospect chase you away from the opportunity an ancillary service may present your medical practice.

“Many practitioners don’t understand the level of ancillary activity that comes out of their medical practice and how much they could capture for themselves and do so legally,” Dobias says.

6. Set aside necessary funding. The addition of an ancillary service will likely require significant capital to fund construction, equipment purchases and the necessary staffing. You can consider holding back cash that would otherwise be distributed as compensation and/or look to banks to loan you the capital.

7. Find the right personnel. The addition of an ancillary service will usually require the addition of staff dedicated to the service,” Dobias says.

“It can’t be done part-time in a lot of situations. Where practices make a mistake is they want to get into an ancillary and they pull Bob or Mary in from the medical practice and say the ancillary service is on their shoulders as well,” he says. “But then it really never gets off the ground or, if it does, it doesn’t have the attention or care it deserves, so it’s not as successful or fails to generate huge profits.”

If you have to look outside of your organization for help, you can consider a joint venture, at least initially, or you may have to hire the personnel necessary to run the service appropriately.

Note: You can download a sample proforma for adding a high-field MRI to a practice, provided by Jeff Boomershine, a senior manager in Somerset’s Health Care Team, here. It provides three hypothetical volume scenarios: low estimate, break-even and high estimate. The costs are grouped into fixed and variable to illustrate the “high fixed cost” nature of MRI. Physical therapy, on the other hand, carries high variable costs (the therapists), Boomershine says. Adding ancillaries with high fixed costs creates a more “volume sensitive” scenario, he says, where being inaccurate on volume estimates can quickly hurt a practice if actual volume is below break-even.

Contact information
Contact Steve Dobias at Somerset CPAs at:
3925 River Crossing Parkway
Third Floor, PO Box 40368
Indianapolis, Ind., 46240
E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Phone: (317) 472-2163
Web site: http://healthcare.somersetcpas.com