Smart shopping: Ideas don't always equal income

In the age of rising costs and declining reimbursement, a physician might look at almost any ancillary revenue opportunity related to his or her specialty. Perhaps a storage room might be fitted for a new ultrasound machine. Maybe a salesperson stopped by last week to drop off information about body-scanning equipment that is promised to draw cash-paying patients. The group down the hall could be looking for investors in a new specialty hospital.

The possibilities for revenue might seem endless, but financial experts caution that ideas don't automatically equal income. Each investment carries risk, and doctors can be so cash-strapped that one failed investment, especially a big-ticket item, can ruin a practice.

Caution, and expert assistance, are the keywords for physicians seeking input on sinking money into a new ancillary service line. A trusted accountant or business expert can evaluate the proposal objectively, and an experienced attorney can make sure your plan is in line with federal regulations such as Stark laws.

While the ground-floor investors are the ones who make the most money if the idea is a hit, they're also the ones who take the greatest risks. And because it's difficult to salvage any money from a failure, experts say it's imperative for doctors to get their ancillary investments right the first time.

"You can have the greatest equipment, but if other physicians or the public hasn't accepted it, it's not going to help you," said Curt Mayse, a principal in the St. Louis office of LarsonAllen Health Care Group. "You have to ask yourself, 'How does it fit with the practice?' Does it make sense with what they're doing? What does demand look like?"

Never a sure thing

Because a practice's financial situation often can range from challenging to dire, physicians could be working with a sense of urgency in their quest to raise revenue quickly.

Vendors also can help build the delusions of cash flow with rosy sales projections and optimistic reimbursement estimates. But financial advisers say there have been enough medical investments that have not panned out over the last few years to give a doctor pause when considering a new opportunity:

• Following up on the success of heart CT scans, a new wave of full-body scan companies flooded the market in 2000 and 2001, promoting their services directly to the public. Physicians were at the head of some of these companies, and although the initial demand was high, the technology did not gain the general acceptance investors were expecting. Many of the companies have since gone out of business.
• Dual energy x-ray absorptiometry, or DEXA, scanners had their 15 minutes of fame as physician groups invested in the technology based on optimistic vendor information, Mayse said. The bone density machines are still touted by practices that own them as an extra service for patients, but they have not produced the expected income stream.
• The verdict is still out on the financial viability of specialty hospitals, which generated tremendous interest over the last several years among physicians who saw the concept as a way to gain better clinical and financial control over their work. Not helping matters is an 18-month federal moratorium on the construction of specialty hospitals that is set to expire in June, although the Medicare Payment Advisory Commission formally recommended extending it to Jan. 1, 2007. Hospitals have lobbied for an extension under the complaint that specialty hospitals pluck the most lucrative procedures away from community hospitals. The American Medical Association has opposed any potential extension of the moratorium and supports competition between facilities as a way to provide quality patient care.

Moving target

The financial risks are high enough in business, but in medicine, you also have to worry about changes in government regulation, insurance reimbursement policies and technology derailing your business plan. It's enough to make the most aggressive entrepreneur gun-shy.

"I don't want to go out and do anything that hasn't already been done," said James L. Chappuis, MD, an orthopedic surgeon in Atlanta. "I learned that you shouldn't ever feel bad about a deal you missed; the time to feel bad is when you got into a bad deal. I don't ever want to be first, but I also want to be in the top third."

Dr. Chappuis, in solo practice since 1991, has invested in several ancillary services over the years, including physical therapy and an MRI machine, as a partner with three other physicians.

Before physicians start to look for alternative revenue sources, however, they need to make sure they have their practices in order, Dr. Chappuis said. Once you can feel comfortable that you are minimizing overhead and maximizing reimbursements, you can consider another investment. That is, after you put together a detailed business plan.

"You need to be able to estimate net profit, your break-even point, the time needed to reach that and your extra costs," Dr. Chappuis said. "Is the return great enough to take that risk?"

Considering an investment without a business plan is akin to trying to diagnose a patient's condition without taking his or her family history. Even for the small investments, it's a vital step that gives you a chance to look at the deal from all angles and make informed estimates of revenue and income.

Financial experts say letting someone else be the first to test an idea is a good way to gain significant benchmark data that can help you make an informed decision about your ancillary investment.

Benchmark data allow you to make realistic projections for your practice based on your own patient demand and costs, said David Strulowitz, a representative of Genworth Financial in Lincolnwood, Ill. It also helps you compare the equipment's performance with both your own projections and competitors' performance, he said.

The pro forma revenue projection is really just a math problem based on reimbursement and demand estimates, said Mike Fleischman, vice president of Gates, Moore & Co., a health care consulting firm in Atlanta.

"With technology, what tends to happen is you see it purchased by a larger entity, and you can see what happens there," Fleischman said. "The math is straightforward, as long as you can gather the data. Vendors are telling you you're going to make a lot, but that's what salespeople are going to do."

Success can be fleeting

The problem, however, is that even positive data already available can be fleeting, if not misleading. Thomas Giannulli, MD, a Seattle internist, learned that after he opened Health-Scan, a full-body CT scanning business, in 2001.

He saw national chains such as AmeriScan grow exponentially and Newport Beach, Calif.-based Health View Center for Preventive Medicine gain national media exposure. That convinced Dr. Giannulli, who had previous entrepreneurial experience, to open the Northwest's first center.

He raised more than $500,000 from investors to develop Health-Scan, which offered CT scans to patients. The company turned a profit in its first month and was successful in its first year, but as public opinion cooled on full-body scans, demand dwindled. The clinic closed after three years.

"To be honest, we couldn't anticipate" the change in public opinion, said Dr. Giannulli, who currently is president of CareTools, which creates and sells mobile charting devices to physicians.

"They painted everybody with the same brush. People were told by their physicians not to see us because they just didn't see us as credible."

Dr. Giannulli said he took a conservative approach to the business from the start, which helped to minimize losses. His entrepreneurial spirit has brought him back to the electronic medical record industry, which he sees as being at the cusp of a financial boom.

"I'm not sure this wave will be the wave, but it's definitely coming ashore," he said.

Getting a quick return

Doctors who aren't as willing to gamble and wait should be looking closely at how quickly they can recoup their investment, Strulowitz said.

"One of the big risks is liquidity," Strulowitz said. "It may actually be a good business idea, but you may be hard-pressed to turn it into cash."

This is especially important because of the risk of improving technology making the equipment you purchased obsolete. For example, the practice that purchased an ultrasound machine a few years ago is now competing with groups that offer three-dimensional, color ultrasound images.

With the demand for a standard ultrasound image probably declining, a practice that was able to recoup its initial investment now can think about upgrading. Or, if you're worried about the long-term viability of the equipment, you could always lease it, which gives you the flexibility of upgrading without losing a significant initial investment, Fleischman said.

Of course, some technology can be so far ahead of the curve that development, and not obsolescence, might be the issue. Financial experts warn of the investment that becomes a money pit, forcing you to sink more cash into it without realizing promising revenue gains. There's a distinct possibility of being too far ahead of the curve, to the point where patients just don't understand the concept.

"Physicians are trained to be on the leading edge, and they can see technology ahead of time," Mayse said. "But a lack of patient demand can get you in the worst way."