If an ancillary line is failing, find out why

Many groups expand into ancillary services thinking it's a can't-miss way of making extra money while offering needed services for their patients.

But for some practices, ancillary lines very quickly can miss. For them, the question is, can we find a way to turn this struggling business around? And if not, is it time to shut it down?

Health care consultants said the steps to correct a problem line starts with a simple question: Why is there a problem?

"If they aren't hitting their numbers, it's the first question they have to ask," said Linda Leake, president of ExecUchange, a business management consulting firm based in Raleigh, N.C.

Financial turnarounds are sometimes borne out of incorrect assumptions or projections made before establishing a service.

The root of the problem could be something as simple as an incorrect code, or it could be a staffing or pricing issue. Or the problems could be a result of the changing reimbursement or regulatory landscape. A practice that invested a couple of years ago in an MRI machine, for example, could not have foreseen the Medicare reimbursement cuts for imaging slated to start next year, nor the more rigorous protocols commercial insurers have put in place in an effort to rein in imaging costs.

Or it could be a combination of all of these situations.

The analysis of "why" should start with an investigation of the medical group's billing and coding practices, consultants said. If those seem to check out, other major sources of overhead become the next targets.

"The biggest costs are staffing, equipment, and supplies," said health care attorney Scott Becker, co-chair of the health care group in the Chicago office of McGuireWoods LLP.

"With staffing ratios, you're looking at how many employees you have versus how many you need. It can be a tough topic."

It's also likely to be a moving target, which makes the analysis even more difficult. Competition and the changing environment can alter revenue projections drastically, putting more of a focus on overhead costs, consultants said.

Unless they have an iron-clad business plan, smaller groups will be more susceptible to market changes because they are not insulated the way larger groups are. If reimbursement levels change, a larger group has a greater chance of weathering the storm based on volume, said Bill Katz, a consultant in Southborough, Mass.

That's not to say a smaller group can't succeed or can't turn around a failing business line, of course. Contingency plans can help in that regard, consultants said.

For example, when a practice is conducting an initial break-even analysis, it should include a variability analysis to determine how profitable an ancillary line would be if, say, revenue dropped by 20%, Becker said. That analysis might help a practice adjust if that scenario actually occurs.

In many ways, a turnaround starts with the same type of analysis that the group conducted -- or should have conducted -- before it actually made the investment, Leake said. The difference is that the group can use firm numbers instead of projections.

Eventually, a group must decide whether to implement a turnaround plan or get out of the business. "Don't throw more money at it and think it will get better," Leake said.

While consultants say it's not easy for physicians to give up on an idea they believe serves patients, sometimes the numbers don't give you many options.

Katz said he worked with a couple of cardiology groups that had invested in cardiac rehabilitation services. Because the reimbursement rates were "terrible," the groups needed to look at cutting costs to save the business line, he said.

One group with high fixed costs -- including additional leasing expenses -- had to discontinue the service, while a group with a lower-cost structure "could at least break even."

One way to address the mental anguish that goes into giving up on a service line is to set a deadline for improvement, Leake said. If that prescribed length of time goes by without any improvement, your decision may become easier to make.

"I usually suggest one quarter," Leake said.

"If you don't start to see things changing by then, let it go. How much more bleeding can happen before you get yourself out of a situation?"