Ready to Bite Into a Bigger Piece of the Profit Pie

By Jennifer Schraag

Today’s healthcare market is ever-changing — that’s a given. But it’s the way it is currently evolving that is so intriguing. The old adage “bigger is better� is more relevant than ever in the industry, and just as ambulatory surgery centers (ASCs) were the way of the future just a decade ago, now it is medical malls, medical spas, wellness centers and wellness campuses. Even the addition of any number of ancillary services is defining tomorrow’s healthcare world. Is your center ready to become a part of something bigger?

According to an MSNBC report, there are more than 1,250 medical spas now functioning in the United States — and that number doubled from just the previous year. Wellness centers also are springing up around the county, as are any number of varying models of health campuses. And, it seems, that mixing every variation of a chosen specialty into one “melting pot� model is becoming all the rage as well. Take, for instance, a women’s wellness campus that features only specialists in varying aspects of women’s health. Add to that same model hair and nail salons, shopping areas, yoga classes, and a health food store and you are sure to have a hit — a very profitable one at that.

So, where does your ambulatory surgery center fit into all of this? The average ASC can delve into its own piece of the profit pie by either adding ancillary services and other innovative, creative new offerings or it can position itself to become a part of a larger, more diverse entity. Whichever path you choose, if you plan and execute the venture correctly, you can come out smelling like roses.

Max Reiboldt, CPA, managing partner and chief executive officer with Atlanta-based healthcare consulting company The Coker Group, says that adding ancillary services to a physician-owned business can position it for better financial success. “It provides a greater slice of the overall revenue pie,� he explains. “It provides opportunity to enjoy the technical side of the fee structure, the revenue structure, and it opens up a new avenue of opportunities for those that have heretofore perhaps only focused on the professional fee.

“Any time you can increase the total revenue that you generate, and do so primarily based upon your own existing practice inner workings,� it is going to be a win-win situation, he adds.

Cary Edgar, an attorney and founding partner of Scottsdale, Ariz.-based Ancillary Care Solutions, points out that ancillary services allow physicians to provide more comprehensive, higher quality, and more convenient care for their patients by providing physician owners with more control over staffing, location, equipment, specialty programs, and other aspects of ancillary care. “In addition, ancillaries allow physicians to increase their income without seeing more patients,� Edgar points out.

Feasibility analysis and financial projections are the first steps in exploring this type of growth within a healthcare venture. As Reiboldt points out, a feasibility study should be completed in just about any venture that is ancillary in nature. “Certainly, some of the larger ones require more sophisticated analysis,� he adds.

He recommends looking at the “predictable things� such as competition, existing supply vs. demand, the market demographic trends based on the area, growth trends, etc. As far as the financial projections, he suggests they be looked at in a conservative manner. The projection also must include a roadmap or blueprint as to how the business is going to succeed, he offers.

Edgar’s company helps physician groups develop, manage, and restructure ancillary services. Edgar’s personal expertise lies within the financial and regulatory matters encircling ancillary services. He offers some tips on the steps a physician group should take in evaluating whether to add a particular ancillary (e.g., physical therapy, imaging).

“(They) should start by preparing financial projections for at least the first three operating years that include anticipated revenue, expenses, cash flow, and start-up capital,� he suggests. “To project revenue, the group will need to estimate its referrals for that ancillary and the reimbursement rates.�

To project expenses, he says the group will need to use productivity benchmarks to determine staffing levels (for example, a physical therapist can be expected to treat 12 patients per day) and local compensation scales. “Cash flow is the difference between revenue and expenses, and start-up capital is basically the amount necessary to cover any negative cash flow during the initial months of operation,� he explains.

A feasibility analysis and accompanying financial projection is not only a necessity; it is a good way to face reality, according to Reiboldt.

“We do a lot of those, and for doctors especially, there is always the inevitable reality check. A doctor will wish, and hope, and expect that they can have a certain number of staff or a certain size building or what have you, and once they really see the numbers, and what it is going to require in revenue, and what the costs will be, and obviously the return or lack thereof, sometimes they will come back and say ‘You know, I think we can get by on a little bit less.’ So that’s the beauty of the feasibility study.�

Reiboldt continues, “From there, if it is any size venture at all you want to move it into a business plan. You can take a lot of the data that you used in the feasibility study and expand it into a full- fledged business plan, but that is indeed your roadmap.� Another point of research is whether or not you have the availability of the staffing needed to sustain the service. “It’s not rocket science, but you have to make sure you have a sufficient amount of revenue to sustain that (service) from within your existing group or you are confident that there will be utilization,� Reiboldt warns.

He adds that seeking a partner and attempting to solidify your referral base are both recipes for success. Ancillary services are a tremendous opportunity, but like any other business venture, they certainly involve risk. “That is why oftentimes you see these ventures done in more of a collaborative manner,� he says.

Edger points out that an ASC can benefit greatly from adding ancillary services due to location of the center. “ASC partnerships should definitely consider adding ancillary services at the ASC location because these locations tend to be convenient for patients and physicians and the physician partnership provides an opportunity not only to share the start-up costs, risks, and benefits of the ASC, but also physical therapy, imaging, and other ancillaries,� he remarks.

Adding ancillary services to an ASC also has its own unique set of challenges (see the legal and regulatory restrictions on page 36). A strategy must be lined out, and the focus needs to be on more than just the bottom line. The lack of proper planning; lack of strategy; lack of capital; and the lack of administrative expertise, all are big challenges and as a result, common mistakes, according to Reiboldt.

“Is this something that is going to bear fruit for the long term,� he asks. “Many doctors have for example, purchased, installed, and operate diagnostic equipment, such as CT/MRI. As it relates to Medicare, reimbursement has gone down significantly for 2007 for those services. It is a very significant point. It could be dramatic enough that there could be some of these CT/MRI centers that are not going to make it or will have to look for a partner.�

In addition, the challenges of adding and operating ancillary services are specific to the type of service. For physical and hand therapy services, start-up costs are relatively small, but ongoing staff costs are substantial and overstaffing can quickly shrink any profit margin, Edgar asserts. “For imaging, start-up costs are relatively high, staffing costs are relatively low, and reimbursement issues have become more challenging,� he adds.

“I think ancillaries are wonderful. I think it is important that doctors and hospitals try and work together in joint ventures as much as is feasible, but I also think that realistically, you are going to see more and more frustration in some circles about the return on investment from ancillaries. I’m starting to draw some of those conclusions and the reasons are reduction in reimbursement. They are not as lucrative as they once were (like the MRI/CT model). So that’s not very good news.�

However, he does offer that the more prominent and profitable services are those that would be considered elective such as cosmetic procedures or retail sales where there can be a mark up on price.

Edgar offers that any ancillary services that would improve the quality and convenience of patient care have potential to be successful. He notes such services as physical and hand therapy, imaging, and urgent care are among that list.

Reiboldt says he has run across a handful of physicians that say they have no interest in getting into such activities. His advice to them? “That’s fine, but just be willing to make less these days.�

Editor’s note: For more information on ancillary services, medical malls, and other innovative healthcare models, don’t miss the Fourth Annual today’s surgicenter Conference, Sept. 27-29, in Las Vegas. Visit http://www.surgicenterconference.com for more details.
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