Squeezed? Think ancillary services

Squeezed? Think ancillary services

Gans, David N

As medical groups evaluate their financial status, they may observe that if patient volume holds constant, total revenue will decrease due to reduced reimbursement rates – at the same time expenses continue to rise. Feeling their profits squeezed, medical groups seek ways to increase practice income or reduce overhead expenses.

In years past, a practice feeling financially squeezed could simply raise its fees and bring in more money for the same work. This tactic hasn’t been an option for quite some time, because the federal government sets Medicare reimbursement rates and managed-care payers specify reimbursement in their contracts.

Yet a medical group still has alternatives. Physicians can work longer hours. The practice can reduce nonessential services. Staff can be “rightsized” (see the January 2003 MGMA Connexion “On the Edge” column). And the practice can initiate new services.

A medical group wanting to establish new revenue sources often will look to increase its laboratory or radiology services. In theory, the revenue received from government, managed-care and private-pay patients will be greater than the total cost of providing those ancillary services, thereby improving the medical group’s bottom line.

While specific circumstances may cause costs to exceed payment, the aggregate data suggest that ancillary services can provide a substantial payback to a medical group.

Ancillary revenue enriches multispecialty groups

The Medical Group Management Association’s Cost Survey: 2002 Report Based on 2001 Data lays out revenue and expense information for multispecialty groups and 18 single-specialty group types. This information allows us to analyze the effect of ancillary services on a medical group’s performance.

The graph at right depicts how increased levels of total ancillary-service gross charges per full-time-equivalent (FTE) physician affect the overall performance of the multispecialty groups that participated in the survey. For purposes of this analysis, total ancillary-service gross charges are computed by adding the laboratory and radiology gross charges reported by each participant.

The graph shows that multispecialty groups with no laboratory or radiology revenue have the least amount of total medical income per FTE physician. Those practices also have the lowest total operating cost per FTE physician, but the best measure of bottom-line performance – total revenue after operating cost per FTE physician – is, unfortunately, also low.

As the amount of total laboratory and radiology gross charges increases (the 10 categories in the graph represent an even distribution of respondents), all three performance measures also rise. The practices with the highest total revenue also have the highest production of ancillary services. Even though those groups also experience the greatest operating cost, they report the best bottom-line performance.

Single-specialty practices can also reap ancillary income

The survey data show that this same pattern of increased revenue after operating cost per FTE physician for practices with higher levels of ancillary services also occurs in single-specialty groups. The table (right) depicts how ancillary-service revenue affects the profitability of seven single-specialty group types. The amount of revenue after operating cost per FTE physician is shown:

* For practices with no reported laboratory or radiology revenue;

* For practices whose total ancillary services revenue was less than the median (midpoint) amount for the specialty; and

* For practices with total ancillary services revenue above the median.

In every specialty, survey respondents with a greater level of ancillary services also had more revenue after operating cost per FTE physician.

When sufficient respondents reported no ancillary-service revenue (which can occur when a hospital owns the practice and performs its laboratory and radiology services), revenue after operating cost per FTE physician was substantially lower than for practices reporting some ancillary revenue.

Are increased ancillary services a panacea for every medical group? Probably not. However, if your practice is feeling the squeeze of lower payments and higher operating costs, you might find the answer to some of your financial problems by providing additional services.

By David N. Gans, MSHA, CMPE

about the author

David N. Gans, MSHA, CMPE, MGMA director of practice management resources,


Copyright Medical Group Management Association Publications Feb 2003

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