Ancillary income: What's possible and what's legal?

April 1, 2007

In an age of declining reimbursements for traditional physician services-eyeball to eyeball with patients or standing at the operating table-many physicians are looking for replacement sources of income to keep their small businesses healthy.

Key Points

Recently, the Office of the Inspector General's Office of Audit Services scrutinized ancillary income earned from urologists' ownership of pathology labs. The Centers for Medicare & Medicaid Services also recently proposed rules that would have significantly affected operation of physician owned ancillary services under the "in-office ancillary services" exception. However, as of Nov. 1, 2006, CMS has temporarily suspended all of the proposed rules and regulations regarding ownership of pathology labs while they determine whether and to what extent further regulations are necessary.

Physicians are liable for 100% of clinical outcomes, direct 85% of health care spending, but are recipients of only 15% of the health care revenues. Ownership of ancillary services provides physicians with an opportunity to directly improve clinical outcomes by controlling the operation and quality of the service, provide efficient and effective care, and offer therapeutic options within the practice. Improved outcomes result in increased patient satisfaction, increased physician satisfaction, increased payer satisfaction, and decreased liability.

"Additional income from ancillary services provides capital for investment in new technology, continuing the virtuous cycle of physician ownership and control of the entire decision-making process for our patients," Dr. Hezmall explained.

Ownership of ancillary services is not a new concept for urologists. As of 2003, 58% of U.S. urologists owned shares in lithotripsy partnerships. Urologists have long depended on in-office imaging equipment to practice their craft. Recent declines in reimbursement, especially for LHRH drugs, have generated an interest in expanding sources of ancillary income.

Lithotripsy

The majority of U.S. urologists derive ancillary income from ownership in lithotripsy ventures. The most common business model involves a limited partnership and a relationship with a general partner who provides mobile equipment and arranges contracting, hiring and firing of personnel, purchasing disposables, and billing and accounting services. Lithotripsy services enjoy exemption from Stark self-referral laws, and most involve partnerships of physicians who are not otherwise related in business.

In large groups, one issue that arises is whether the ancillary service is owned personally by individuals or by the group of physicians in the practice.

"At UANT, we decided to bring this in-house and have the group own shares of the ancillary service," Dr. Hezmall said, citing the importance of providing rising partners with an opportunity for investment and eliminating potential conflicts of interest in a group that operates centers of excellence and depends on intragroup referrals.

Imaging

Gone are the days when the office-based intravenous pyelogram was adequate for the evaluation of patients with hematuria. Contemporary imaging of the upper tracts frequently involves CT scanning, and urologists are installing CT scanners in their offices. Fortunately, quality used equipment is readily available to physicians as hospitals and imaging centers upgrade their own facilities.

Dr. Hezmall reports that UANT currently owns two scanners, and projects that it takes about 53 scans per month to break even.