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Provision Of Ancillary Services By Physicians
by Neal T. Goldstein & Thomas B. Shapira
Ancillary services, such as imaging or X-ray services, physical therapy services and laboratory services are increasingly provided in facilities owned by physicians, resulting in competition for hospitals, which traditionally provided many of these services and rely on this revenue. Not surprisingly, this competition for patient dollars has caused significant tension in the relationship between hospitals and physicians. As more physicians provide ancillary services, in lieu of referring to hospital-owned facilities, it is important to understand the forces behind this trend.
Financial Benefits. It is no surprise that health care providers continue to seek ways to maximize every patient dollar. Physicians in particular have taken the brunt of the two most negative trends in the health care industry: declining reimbursement and increasing overhead costs. As profit margins have narrowed, managed care organizations (MCOs) have reduced the reimbursement paid to health care providers. As these MCOs grow and represent a larger numbers of enrollees, they command greater leverage in negotiating reimbursement for providers. Although this downward pressure on reimbursement levels has impacted both physicians and hospitals, hospitals and health systems are in a strong negotiating position because they offer a wide scope of health care services to the MCO's members. Hospitals also are in a better position to spread costs and unfavorable reimbursement over various services and make tradeoffs to maintain higher reimbursement levels for other services. Physicians, who typically practice either as solo practitioners or in small groups, have little ability to negotiate favorable reimbursement rates with an MCO. An individual physician has a relatively narrow scope of services to offer the MCO's enrollees and does not have the hospitals' ability to spread the risk between high and low reimbursement procedures.
Another significant source of health care revenues continues to be federal and state health care programs. Medicare and Medicaid have each reduced the reimbursement available to participating health care providers, but physician reimbursement has dropped more steeply than reimbursement to other Medicare providers. For example, as a result of a flawed formula for calculating physician overhead, the average change in Medicare's reimbursement for physician procedures was supposed to be -5.4% in 2003. Only as a result of significant last minute lobbying in Washington were physicians able to effect a small increase in the 2003 reimbursement level. Nevertheless, projections for 2004 again provide for a decrease in Medicare's physician reimbursement.
Not only have physicians seen increasingly lower reimbursement from all payor sources, overhead expenses related to maintaining a medical practice have steadily increased. Staff salaries, supplies, rent and utilities have all increased at rates at least equal to inflation. Professional liability insurance premiums have continued to skyrocket. Current projections from ISMIE, the largest malpractice carrier in the state of Illinois, show a 35% increase in premiums for professional liability coverage. In the absence of meaningful tort and insurance reform, this problematic trend will only continue. Finally, the cost of health insurance benefits for a physician's employees has substantially increased. Interestingly, MCOs have increased the cost for an employer to secure benefits for its employees, but at the same time the MCOs have reduced the reimbursement paid to physicians for health care services. Whether the additional premiums go to the MCO's shareholders, to hospitals, or to other health care providers, it is clear that the added money is not going back to the physicians. This results in a double "whammy" for a physician who is also an employer. A physician's only possible solution is to continually increase patient volume to keep revenue ahead of costs - at best, a short term answer. Unfortunately for physicians, the looming horizon appears bleak as costs continue to increase, perhaps ultimately forcing many physicians to leave the practice of medicine.
In such an environment, it is no wonder that physicians feel the need to seek other sources of revenue in connection with their medical practices. An obvious source of revenue stares them in the face when, in the course of their practice, a patient needs a referral for imaging or diagnostic services, physical therapy or laboratory services. If a physician can provide such ancillary services to his or her patients directly through the physician's own medical practice, such revenue can have a significant beneficial impact on the practice's bottom line.
Clinical Benefits. The provision of ancillary services not only presents an opportunity for increased revenue, but also generate clinical benefits for patients. It is easier for a physician to monitor a patient's continued progress under a physical therapy regimen when the therapy is provided in the physician's office. The physician is also able to verify that the correct therapy is being performed. The physician maintains greater control over the services and is personally familiar with the physical therapist or the imaging technician who renders the services, which puts the physician in a better position to assist in the care. The physician has better access to scheduling the patient and can triage patients to give priority to those who need to receive the ancillary services on an expedited basis. Providing the ancillary services in the physician's office reduces delays in conveying lab results or images that the physician needs for patient care. It also has the benefit of reducing the number of people who have access to a patient's health information, thereby providing a privacy benefit to the patient.
The combination of the financial benefit to the physician and the clinical benefit to the physician's patients are the driving forces behind the provision of ancillary services by physicians. This trend is likely to continue as long as health care providers are forced to chase an increasingly smaller pool of health care dollars. Although the competition to provide such ancillary services will continue to cause tension in the physician-hospital relationship, it is important that hospitals recognize the reasons that physicians seek to provide such services and understand that it is an essential element for the physician's continued practice of medicine and commitment to providing excellent patient care.
Neal T. Goldstein is a partner at Much Shelist and chairs MuchHealthLaw. He can be reached at 312.521.2457.
Thomas B. Shapira is partner at Much Shelist and is a member of MuchHealthLaw. He can be reached at 312.521.2499.
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