AAOS Now

Published 3/1/2003
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Thomas J. Grogan, MD

It’s all about the ancillaries

The medical practice of orthopaedic surgery is fun, intellectually stimulating, and rewarding. However, developing a financially successful practice is challenging. In today’s climate of declining reimbursement, every surgeon needs to spend time developing a practice strategy to ensure financial success in the years to come.

Don’t count on reimbursements
The current favored technique of containing medical costs seems focused on reducing reimbursement rates. Indemnity insurers are giving way to managed care systems intent upon reducing contract reimbursements. The number of employer-sponsored third-party programs is dropping, while government programs such as Medicare and Medicaid—with limited budgets for physician compensation—are expanding. Uninsured and underinsured patients stress the financial fabric of every practice.

To compensate for declining reimbursements in the office and the operating room, many ortho­paedic surgeons are looking at ways to augment their take-home income with ancillary revenue. In many practices, ancillary income comprises more than half of a surgeon’s take-home, W2 salary.

Defining ancillary income
Ancillary income is money generated by the practice outside of the traditional physician–patient contact. For example, when an orthopaedic surgeon sees a patient with a fracture that needs to be fixed, the surgeon charges for his or her time using the appropriate Current Procedural Terminology (CPT®) codes and is reimbursed for that time. Ancillary income is generated by sources such as X-ray revenue, medical supplies, imaging services, use of a surgery center, or special reports.

In many practices, the ancillary income generated by X-ray revenues is a cornerstone of their financial success. In my office, the cost of producing a radiograph is 18 per­cent of the revenue generated. This means that for every $100 of revenue generated by radio­graph charges, $18 goes to pay for the machine, the technicians, rent on the space, the processor, and other associated costs. The rest ($82) goes to my bottom line.

Last year, I generated more than $300,000 in X-ray revenues. That added $246,000 to my bottom line—a huge factor in the financial success of my practice. (Read more about how I made the switch to digital X-rays in the February 2008 edition of AAOS Now)

Balancing income and expenses
Other ways that an orthopaedic surgeon can generate ancillary income include the following:

  • using practice extenders such as physician assistants or nurse practitioners
  • doing medical legal work
  • offering physical therapy services
  • selling orthopaedic appliances such as braces
  • performing in-office magnetic resonance imaging (MRI)
  • having an ownership interest in a surgery center or specialty hospital
  • providing consultant services to medical device manufacturers, insurers, and others

Although each of these sources of income may improve the bottom line, each also has a level of entrepreneurial risk. Using physician extenders may make financial sense, but only if the income they generate is sufficient to offset the costs to the practice (salaries, benefits, and space limitations).

The key is to understand the cost/benefit equation for each potential ancillary income generator. For example, before purchasing or leasing an in-office MRI unit, the surgeon needs to know both the monthly costs associated with having the unit and the expected reimbursements generated by its use. In some situations, the marginal increase in income may not offset the risk. In California, for example, one major insurer will not pay for in-office MRI unit with a magnet size of 0.3 Tesla or less. This could make the MRI unit a very expensive paperweight.

Choose carefully
Generating ancillary income is critical for the survival of many orthopaedic practices.

Before rushing to add multiple layers of ancillary income, however, orthopaedic surgeons must examine the marginal expenses and choose that ancillary source with the greatest predictable and consistent return on investment.

Thomas J. Grogan, MD, served as co-director of the 2009 Practice Management Symposium for Orthopaedic Surgeons and is a member of the Practice Management Committee.