Pinched by inadequate reimbursement rates, rising operating expenses, administrative hassles, declining patient loyalty and more demanding consumers, managers of physician practices are trying to figure out how to increase income.
A practice could attempt to boost revenue simply by seeing more patients. But more volume may only add to the misery, as it not only increases the workload, it cuts time physicians have for each patient, potentially raises the risk of errors and could trim profit margins even further if new patients have poor or no insurance coverage.
And, as Christopher Kalkhof, partner with managed care consulting firm MedAlliance, says, "There really is not much docs can do to get more money out of HMOs."
For most cash-strapped medical practices, the first step is to improve billing practices. But for those who have used this tactic already, or for whom this step has not been enough, a veritable gold mine in ancillary and retail services stands ready to be tapped.
Steve Messinger, partner with MedTactics, a healthcare consulting firm in Arlington, Va., recommends that multispecialty practices generate at least 30% of their revenues from ancillaries.
"As you add more primary care physicians, you need to bump that (ancillary revenue) up . . . to sustain the compensation requirements of higher-earning specialists," Messinger says.
Large medical groups, hospitals and other healthcare networks have done well with freestanding ambulatory surgery centers, but smaller practices can reap the benefits as well. "We've had a lot of success with primary care groups with as little as five physicians adding some good sources of revenue," such as radiology services, diagnostics, ultrasound and mammograms, says G. William Brown, executive vice president and COO of PriCare, a Brentwood, Tenn.-based PPM.
Realizing such benefits, however, may depend on local conditions. "For any practice, you have to understand the dynamics of the market you're in," Kalkhof says. He advises practice managers to ask: "Can I change that pattern?"
Change your ways
It's becoming essential to find a way to change set patterns, since reducing costs isn't necessarily the answer anymore.
"You can't just cut costs. The market is changing," says James Orlikoff, president of Orlikoff and Associates, a healthcare governance and delivery consultant in Chicago. Besides, he says, cost cutting has been around since the dawn of managed care a quarter-century ago, and there isn't a whole lot of cutting left to do anymore, especially on the provider side.
"One of the great problems physician groups are facing is that they are not reading the signs," Orlikoff says. For example, "IPAs are busier than they ever have been before. Revenues are up, but margins are down. It's the environment sending a red signal that the old model is not going to work."
The answers to these common problems most often relate to efficiency and revenue. "As the reimbursement declines, the first thing everybody says to doctors is to increase the efficiency of the practice," says Bruce Johnson, attorney and consultant to the Englewood, Colo.-based Medical Group Management Association.
Efficiency depends heavily on administrative functions. "Are you coding and documenting correctly?" asks Thomas Cook Jr., president of Nashville, Tenn.-based Stat Solutions. Stat formerly operated as PPM Raven Healthcare Management, then acquired the healthcare practice of an accounting firm last year. "We find that no matter how good the practice is, if they improve coding, they can raise their collection rates 5% to 30%, with the average of 25%."
James Reynolds, president of Reynolds & Co., a New York City-based financial consultancy for healthcare organizations, advises small groups and solo practitioners on such matters. He often tells his clients to join physician-hospital organizations just for the purpose of negotiating service and managed care contracts. "The quid pro quo would be increased revenues," he says.
Reynolds says small practices also could add diagnostic and therapeutic services or even get together with a local hospital or a developer like HealthSouth Corp. to build an outpatient surgery center.
With the right contract, individual physicians could rent space as needed--similar to a timeshare condominium--to bring in additional revenue without enormous capital expenditures.
It's well worth the investment, even for those who serve a high number of Medicare patients. Though HCFA has cut reimbursement rates for surgical procedures by up to 20% since 1997, the agency has boosted Medicare payments for some diagnostic tests by 10% to 18% in the same time frame, according to an analysis of HCFA data by Physician's News Digest.
Additional opportunities exist for specialists, Johnson says. For example, oncology practices may consider dispensing chemotherapy drugs rather than obtaining them through hospitals, and Johnson points to a gastroenterologist group that opened an endoscopy center.
Multispecialty practices already offer a wide range of medical services, but they could be losing out on referrals for patients just outside their service area. An effective remedy, Reynolds says, is the establishment of small satellite offices, each with two or three primary care physicians.
"A lot of multispecialty groups are looking to add primary care doctors in underserved areas to build referrals to the clinic," he says.
A large single-specialty PPM, AmeriPath of Riviera Beach, Fla., reported a 31% increase in revenue from dermatopathology services during the first quarter of 2001, in part because of the launch of its 60-physician Dermpath Diagnostics division last year. The division essentially is a marketing unit designed to highlight the availability of dermatopathology services at 21 AmeriPath labs.
Overall, AmeriPath has affiliations with 420 physicians at 49 practices nationwide.
The company also recently branched out into urology diagnostics with the establishment of the Center for Advanced Diagnostics in Orlando, Fla. "We expect a lot of urology practices will soon be joining us" as customers, says Chairman and CEO James New.
Still, services like these are aimed at a wholesale market, Orlikoff says, and the most lucrative opportunities are in retail activities. "The most important thing is to get out of the wholesale mentality," he says.
Though it may seem like a good idea, not many medical practices have opened full-scale pharmacies. "You have to be careful about how you do it," Cook says.
The AMA expressed concern more than a decade ago about conflicts of interest, cautioning that some doctors may overprescribe so a practice can bring in more pharmacy revenue. According to Kalkhof, drug distributors prefer to work with registered pharmacists and, increasingly, with pharmacy benefit management operations.
One company that does offer limited pharmacy services is Cleveland-based Whole Health Management, provider of on-site primary care medical clinics, preventive health programs and fitness centers for employees of self-insured companies and government agencies.
"It's probably not practical to have an extensive formulary to address chronic conditions, but certainly for acute conditions--whether it be infections, asthma exacerbations, sprains, strains--having on hand a limited formulary of medications may be a reasonable way for a provider to broaden their scope of service," says Bruce Sherman, M.D., Whole Health's medical director for clinical quality services.
Whole Health, which employs 25 physicians at sites in seven states, the District of Columbia and Guam, stocks its facilities with prepackaged prescription drugs from a vendor. Cook believes this is a reasonable way for some "doc-in-the-box," after-hours or all-night clinics to provide the convenience of on-site pharmacy services, as long as prescribers don't put themselves in a position to lose word-of-mouth referrals from drug stores.
A practice of any kind can augment its income by selling vitamins, nutritional supplements and what Orlikoff calls "complementary alternative medicine"--physical therapy, weight loss programs, chiropractic, massage services, herbal remedies and acupuncture. Orlikoff mentions one client, an eight-physician practice in Texas, that generated an additional $1.5 million in net profit through retail sales.
Adding such services has allowed 71-year-old gynecologist Bernard Pollock, M.D., of Wantagh, N.Y., to "manufacture some income." While Pollock says ancillary services like diagnostics, massage, psychotherapy, aerobics and meditation have not brought in huge amounts of money, the extra revenue allows him to practice just 20 hours a week and enjoy semi-retirement. "I do it more just to keep busy," he says.
Pollock opened the Women's Wellness Center of Wantagh in 1994 after his four-physician OB/GYN practice dissolved after more than 30 years and he stopped delivering babies. "At that time there were some rumblings about how important osteoporosis would become," Pollock says.
The situation prompted him to acquire bone densitometry equipment and gradually add nonmedical services. He rents out space at the Long Island clinic to fitness instructors, a nutritionist, clinical social workers and an image consultant, among others.
Reynolds says local conditions will dictate feasibility of ancillary services.
Alternative medicine, he says, "is one of those things that's awfully hard to get a handle on unless you look at your own market." The presence of established practitioners of alternative medicine can eat into potential profit margins from referral fees.
And, Reynolds says, "If (a nonphysician) can capture a consumer's loyalty, they may very well go to that person rather than to their regular primary care doctor."
"Providing relatively nontraditional services is something we always recommend that our doctors take a look at," says Stat Solutions' Cook. Adding nutritionals works well, as does pairing neurologists with physical therapists for patients with serious head injuries, he says.
But medical groups have to be careful that they have the volume to support these services, Cook cautions. One Stat Solutions practice added a center for treatment of headaches but rented three times the square footage it needed and was left scrambling to find other practitioners to sublet the space.
There's also the issue of cooperation. "The vast majority of physicians would not support having a chiropractor at their practice," Cook says.
They may take a similar attitude toward podiatrists, who also do not have M.D. or D.O. designations. He says he believes that medical practices would do better to add nurse practitioners and physician assistants.
But if the interpersonal relationships between practitioners are right, physicians can get along just fine with nonphysician doctors. "Everybody has a role to play on this earth," says K.J. Lee, M.D., an otolaryngologist with Medwin Group in New Haven, Conn., a practice with 11 ear-nose-throat surgeons, nine internists and four podiatrists.
"I send a lot of dizzy patients to chiropractors," says Lee, president-elect of the American Academy of Otolaryngology. "But if a chiropractor tries to treat a heart attack by manipulation, that is wrong."
Most health insurance does not cover Lasik vision correction, rhinoplasty or other elective procedures, so they are strictly cash businesses and thus alluring as potential moneymakers.
Conversely, Kalkhof notes, "The biggest segment of cash-paying customers is going to be uninsured," so physicians should resist the temptation of greed.
"A lot of doctors will price their cash-paying fees at 150% to 175% of Medicare (resource-based relative value scale rates). What if you lower that to 125%? You end up collecting 50% more by bringing in a higher volume of cash-paying patients."
Orlikoff believes it's important to differentiate between "penetration" pricing and "premium" pricing, because there are two types of cash patients. Penetration pricing is aimed at the public with the goal of increasing a business' market penetration, while the premium category targets affluent consumers willing to pay more for a higher level of service.
As John Hallick, CEO of Customer Potential Management, a healthcare management consulting firm in East Peoria, Ill., puts it, "We want to get the right patients to our constituents--our providers--and increase both the quantity and the quality."
A growing number of medical practices are targeting the high end of the market with what are popularly called "executive" exams. Intended for busy, high-income professionals, executive exams are comprehensive physicals that include a full range of diagnostic services sold as a package.
"What makes it special is how you bundle it and how you market it," says Orlikoff.
"It's an additional source of revenue and also a way to capture new patients," Reynolds says. If the exam turns up a condition, the referrals can stay in-house.
More importantly, Kalkhof says, "It's a way to get access" to large companies.
"If you can get a clinical intervention upstream . . . that has a lot of value for employers," and, especially with self-insured employers, a lot of value to a medical practice. "Nonmanaged care revenue is the goal."
"It takes more staff and more infrastructure each year to maintain the same level of revenue," Reynolds says. "The question is: Can the physician group become a hub for (patients') retail purchases and medical services?"
But Kalkhof advises to be mindful of offering too many ancillary products: "You don't want to be viewed as Kmart for healthcare."