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    Timothy Smith, CPA, ABV

    Series: Examining Losses in Health System Physician Practices

    In this article, we’ll discuss how moving practice ancillaries into hospital outpatient departments is another contributor to health system practice losses.

    Many physician specialties routinely use ancillary or technical component services as part of patient care. Ancillary services may be used for diagnostic purposes or as part of treatments or therapies. Examples of such ancillary services include MRI exams and physical therapy in orthopedic practices. In cardiology, common ancillaries include echocardiograms, nuclear heart studies, and various ultrasound-based exams. Other examples are basic lab and x-ray services in primary care practices.

    Due to their size and mix of physician specialties or subspecialties, large single specialty and multispecialty practices are often able to own and operate many different types of ancillary services. Frequently, the size and mix of physicians provides the critical mass of patient referrals that are needed to support costly ancillaries, such as MRIs and CTs, or extensive lab and other forms of imaging services.

    Well-managed ancillary services can provide a source of additional compensation for a practice’s physicians. In these practices, physician compensation is not simply a function of the professional services that the physicians personally perform. Moreover, for certain physician specialties, compensation from ancillary profits can amount to really big dollars.

    For net profit distributions from ancillary services to be compliant with the Stark law, however, the services must meet the regulatory “in-office ancillary” exception. In addition, if the practice is a group, the Stark definition of a “group practice” must also be met.

    When hospital systems acquire or operate physician practices, however, they frequently move ancillary services out of physician practices into existing hospital facilities. They make these moves to maximize reimbursement. Health systems can bill for ancillaries at higher rates under a provider-based status in contrast to billing for the services in a nonfacility setting, such as a physician practice.

    A potential outcome of converting ancillaries to provider-based status is creating physician practice losses. These losses occur when physician compensation levels, whether established by market survey data or by historical practice net earnings, are maintained at historical levels after the conversion. The ancillary earnings that once made the practice break even or show a profit are no longer around to offset the related compensation for the practice’s physicians.

    One may ask how and to what extent survey data contain compensation that is underwritten by net profits from ancillaries. There are two conceptual-level reasons for why we can infer that survey compensation levels include some amount of net profits from ancillaries, at least for certain specialties.

    First, physician-owned practices, which make up a significant proportion of respondents in surveys such as MGMA, would typically include such profits. To the extent that reported physician compensation levels in health system practices are comparable to that of physician-owned practices, one can reasonably infer that ancillary net profits impact compensation levels in health system practices.

    Second, review of compensation-to-collections ratios frequently indicates that personally performed professional services do not fully explain physician compensation levels. These ratios are based on collections from professional component services that exclude ancillaries. For many specialties where in-office ancillaries are commonly used in patient care, one observes compensation-to-collection ratios well above 60% or more.

    Such ratios imply overhead ratios of less than 40% for a practice to break even. These overhead ratios are simply too low to make economic sense in many cases.

    In addition, we can contrast compensation-to-collections ratios to compensation ratios based on total medical revenue for a practice, including ancillary revenues. These metrics show lower compensation ratios by comparison. Such data indicate ancillary revenues and profits can help to account for reported physician compensation levels in survey data.

    Another way to think about the impact of ancillaries on compensation is to compare the compensation levels of non-invasive cardiologists and internal medicine physicians. Both types of doctors spend their time seeing patients in the office using office-based E&M procedures. But, why do non-invasive cardiologists make more money? Cardiology practices have historically included significant ancillaries in contrast to those of the typical internist!

    Certainly, more study is needed for us to understand the extent to which survey data include or imply ancillary profits as contributors to reported physician compensation levels. Yet, without such profits, the economics of certain physician specialties simply don’t add up.

    We can add conversion of ancillaries to HOPD status to our list of reasons why health system practices frequently operate in the red.

    In the next installment in this series, we’ll discuss how misuse and abuse of physician compensation survey data contributes to practice losses in health system practices.

    Click the following to read previous articles in the series:

    Physician practice losses: A tale of two owners

    Physician practice losses: Why physician-owned practices break even or make a profit

    Physician practice losses: Why losses are typical in health system practices

    Physician practice losses: Losses from revenue issues in health system practices

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