The economics of an orthopaedic practice are rapidly changing, according to Michael J. McCaslin, CPA, and current revenue sources are likely to shift in importance going forward. Mr. McCaslin shared his thoughts on “Maintaining Practice Profitability in 2020” during the 2015 AAOS Now Forum on Orthopaedic Economics.

“Professional services revenues for private practices are likely to be flat to declining,” said Mr. McCaslin, “as the shift from fee-for-service to value-based payments continues. But working more hours is not the answer.”

Many private practices are offering extended hours or walk-in clinics to supplement income—a smart move, according to Mr. McCaslin. “These are great opportunities to steer new patients—the lifeblood of a practice—to the practice. They move patients from an expensive emergency department setting into a private physician practice setting and may be less costly—therefore more attractive—for patients. They can be staffed with nonphysician providers or nonoperating orthopaedists and can be run without adding additional staff or space.”

Other current sources of income for private practices include ancillary services revenues, ambulatory surgery centers (ASCs), payments for participating in emergency call rotations, net income from affiliated nonphysician providers, and government incentive payments, such as for meaningful use. In addition, private practices may generate revenues through arrangements with hospitals or health systems that range from medical directorships and service line comanagement agreements to joint ventures and full employment.

It’s under your control
In analyzing necessary steps for managing a patient’s condition—from the initial office visit to final discharge—Mr. McCaslin pointed to the degree of control that the physician has. “You are involved in or control more than 85 percent of care decisions,” he told attendees. “Is this not part of your value proposition for the future? This is how you take control of the future and future revenue sources—through a care management role.”

Pointing to ASCs, he noted that 70 percent of orthopaedic procedures can now be performed on an outpatient basis. “Whether those procedures are performed in free-standing outpatient ASCs is a function of physician scheduling,” he noted. “ASCs are a key asset for lowering the cost of care—and patients love the smaller, friendlier environment. But buy-in and buy-out problems do exist.”

Ancillary services such as imaging and physical therapy are also physician-driven. “Recent studies are showing that physician owners are not overutilizing these services,” he said, “and because hospital-based rates for imaging and therapy are 30 percent to 50 percent higher than physician-based rates, the argument can be made that ancillaries can reduce the costs of care.”

Physician-driven ancillaries, he noted, can reduce duplicate and unnecessary imaging studies, and “outcomes should be better than company-driven, corporate-driven, or hospital-driven therapy services.” However, when it comes to ancillary services such as durable medical equipment, pharmacy, and injectables, he warned that “the future could very well see vendor-to-payer direct contracting that would take the orthopaedist out of the picture.”

In summary, he said, “Ancillaries give private practices a recruitment advantage, because they offer new recruits additional sources of income. Ancillaries will be key for lowering costs and enabling private practices to take on risk-based contracting, because the costs of those services will be under the practice’s control.”

When help is needed
Maximizing practice volume demands finding lower cost alternatives for seeing as many patients as possible, asserted Rockford Orthopaedic Associates’ CEO Don Schreiner, MBA. Mr. Schreiner noted that as the focus of health care shifts from procedure volume-based medicine to patient-management, the addition of nonphysician providers to a practice could lead to managing more patient volume with fewer surgeries.

“Physician assistants (PAs), nurse practitioners, or other physician ‘extenders’ can manage clinic needs,” he said, “enabling specialists to spend more time in the operating room.” He went on to discuss several of the issues groups face when considering whether to add nonphysician providers to a practice.

“Hiring guidelines are key to addressing patient allocation issues when not all physicians work with a PA,” he said. “Economic issues include allocations for revenue, direct costs, variable overhead, and fixed expenses. Depending on the make-up of the group, corporate cost-sharing or subsidies may be needed.”

Physician extenders around the country are currently performing a variety of tasks (Table 1) and may take on additional roles in the future. “Extenders are the most cost-effective point of entry for patients,” said Mr. Schreiner, “and should have their own schedules and be responsible for their own patient satisfaction scores.”

Practices that employ PAs must address both governance and financial issues. For example, he suggested that PAs be in a departmental financial “pool” or cost center covering both revenues and expenses.

Under this model, the net income from the PAs can be shared, similar to an ancillary income source. In his experience, although the model worked well with trauma and hand, it did not work well with sports or joint practices.

“Physician ‘extenders’ are clearly the wave of the future,” he said, “enabling groups to provide more service and manage more patients at lower cost. “

Costs for PAs who staff an extended hours clinic should be excluded from the pool and recorded in the clinic cost center. “An urgent care or extended hours clinic is a practice benefit, and charges should be considered part of the general overhead,” he said.

Mr. Schreiner also noted that orthopaedic practices will need to pay attention to data management, possibly with a full-time data analytics staff. Practice management, clinical, outcomes, hospital, and episodic costs are among the data points that will need to be addressed.

Negotiating and contracting
“Negotiating,” said Mr. Schreiner, “is a process that attempts to satisfy or optimize the interests of all parties.” He advised focusing on the problem, not the people, and identifying common interests. “Don’t give ultimatums unless you truly will act on them,” he said. “Otherwise, you lose all credibility and bargaining positions.”

Understanding the other party’s value proposition is key to positioning a practice as the best choice to meet that proposition. “Identifying how you can meet their needs sets you apart and enables you to ask for what you need,” he said. However, he noted, “Payers and employers do not appear ready for risk-based or population management contracting. Orthopaedic practices will need to be patient and focus on gathering data and clinical information as they move toward these models.”

Mr. Schreiner identified the following ground rules as key points in any negotiation:

• Never negotiate lower rates than your largest commercial payer.
• Always include a 90-day termination clause “with or without cause.” This gives the practice the ability to force timely negotiations or to drop out if the payer changes the rules.
• Always insist on Medicare guidelines for payment.
• Specify Medicare at a fixed time (ie, the last quarter of 2014), rather than accepting current Medicare rates.

“Revenue sources are changing,” he concluded, “and the behaviors required to earn revenue will also need to change. Managing care will be as or more important than performing services. As a result, physicians will be well-positioned to lead the transformation of health care, because neither hospitals nor payers manage care.”

Information on the presenters’ potential conflicts of interest can be accessed electronically at www.aaos.org/disclosure

Frank B. Kelly, MD, cochaired the 2015 AAOS Now Forum. Mary Ann Porucznik is the managing editor of AAOS Now.

Additional Information:

• Private Practice in 2020: What’s the Future for Solos and Small Groups?
• Are Larger Groups the Future of Orthopaedics?
• Meet Your New Partner—Uncle Sam