Introduction. Many medical groups continue to enjoy high levels of profitability despite stagnant or declining reimbursement under Medicare Part B and many commercial payer arrangements. The strategies to increased profitability are well established – work harder, cut costs, differentiate on quality or other grounds to obtain better reimbursement per unit of service and control a larger piece of the revenue pie.
Previous studies of better performing groups have shown that cost control measures, by themselves, rarely result in increased long-term profitability. Better performing medical groups pay attention to costs, but they place primary emphasis on enhancing productivity and gaining access to new revenue streams. Whether the strategy is called revenue diversification or something else, the core business strategy is straightforward -- expand beyond professional services to capture an additional portion of the health care reimbursement dollar. This article reviews some of the experiences, regulatory issues and lessons learned in medical group revenue diversification strategies.
Experiences and Options. The specific revenue diversification strategies that have been successfully used by groups are related both to the particular services that the group can furnish consistent with its core medical and surgical service mix, and to the particular business, reimbursement, and legal/regulatory environment in which the practice operates.
Today, some better performing primary care groups are enhancing their revenue base by providing MRI, CT, echo-cardiography, bone density and other imaging services that build on the services that are integral to their primary care practices. In doing so the groups have frequently demonstrated that they can provide services to health plan patients at lower costs than traditional institutional (i.e., hospital) service providers. They’ve also found that patients often prefer using the medical practice for such diagnostic services due to the practice’s relatively greater control over the intangible aspects of the product including access, convenience, staff attitude and in other ways.
Better performing specialty practices are also well-positioned to benefit from revenue diversification strategies that build upon the group’s core mix of clinical and surgical services. Findings related to better performers in cardiology, other single specialty practices as well as multispecialty groups demonstrate the increasing importance of revenue expansion activities to maintaining a medical group’s bottom line. For example, the recent increases in compensation and profitability levels for cardiology physicians and their practices are driven, in large part, by the diagnostic and other services that can be permissibly furnished through the cardiology practice itself. Today cardiology groups will often furnish a variety of diagnostic and other services that, historically, have been institutionally based including EKGs, stress tests, nuclear medicine and in some communities, in-office catherization services.
Similarly, physicians practicing in orthopaedic surgery, gastroenterology and other medical and surgical subspecialties are enhancing their revenue base through the development and operation of in-office imaging and diagnostic services and via ownership in ambulatory surgical centers ("ASCs"), as well as other external business ventures. Apart from their positive contribution to the medical group’s bottom line, the opportunity to invest in such ancillary service lines – either directly or through affiliated legal entities – is becoming an essential tool in the emerging recruitment and retention battles for physicians in these and other highly sought after specialties. The ability to participate as an investor/owner in an established ASC, for example, will frequently rank as an important factor that can tip the balance in favor of a particular medical group in a competitive recruitment context.
These underlying facts and pressures are no less important in a multispecialty group context, where a combination of ancillary service opportunities very naturally evolve from broad based clinic operations in many communities. Many multispecialty practices are revisiting the financial viability and utility of taking certain ancillary service activities "in-house" rather than maintaining long-standing referral relationships. And although the economics associated with some ventures are not always favorable, larger multispecialty groups are frequently concluding that in-office imaging, physical therapy, clinical laboratory and other services can more than pay for themselves even in a changing health care delivery and reimbursement environment. Much like the practice diversity that is inherent in a multispecialty group itself, many such groups are finding that a broader, more diverse revenue that includes a rich mix of professional services, procedures and ancillary ventures will the serves as a source of strength for the enterprise. And in the midst of increasing challenges related to recruitment, retention and concerns about compensation, many multispecialty groups are finding that the these new revenue streams provide much needed additional revenues to increase the compensation pie and in the process, can help alleviate some of challenges in the development of acceptable compensation arrangements in a multispecialty setting.
Legal and Regulatory Considerations. Better performing medical groups recognize and understand the interplay of the business of medicine, health plan contracting, and the legal and regulatory environment in which the practice operates. The federal physician self-referral prohibition, commonly known as the "Stark Law," is commonly viewed as the greatest potential barrier to revenue diversification opportunities. The law is strict in that it imposes an outright prohibition on physician referrals for certain "designated health services" ("DHS") that are payable by Medicare or Medicaid, to entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies. DHS that are subject to the Stark Law’s prohibitions include clinical laboratory services, physical therapy services, diagnostic radiology services, inpatient and outpatient hospital services and others.
The success of many better performing medical groups demonstrates that the Stark Law need not be an insurmountable barrier to revenue diversification strategies. Ancillary services that are subject to the Stark law can be provided to Medicare and Medicaid patients by complying with the Stark Law’s "in-office ancillary service" exception. The Phase I final rule implementing the Stark Law which became effective on January 4, 2002 provided much needed guidance regarding this important legal exception, including the law’s particular requirements related to permissible treatment of DHS revenues in the context of medical group practice compensation plans.
Moreover, the Phase I final rule also helped to clarify that certain investments and services are not subject to the Stark Law’s self-referral prohibitions. These include nuclear medicine procedures, ownership of investment interests in ASCs, certain diagnostic services and others. The Phase I final rule also expressly provided that medical groups and physicians can use "shared facilities" to furnish radiology, clinical laboratory and other DHS that are subject to the Stark Law’s proscriptions. Various additional opportunities for providers in rural areas and those interested in hospital ownership are also provided by the Stark Law itself.
By no means did the 2002 Stark Law final rule entirely tame the onerous provisions of this important law. Nonetheless, the Phase I final rule does communicate sufficient guidance regarding the services subject to the Stark Law’s prohibitions, the manner in which those services can be furnished, and the allocation of revenues from those services to facilitate the development of medical group revenue diversification strategies on a good faith basis within acceptable levels of compliance risk.
Joint Venture and Shared Facility Arrangements. Apart from Stark Law compliance, medical groups and their physicians must also consider numerous other legal and regulatory provisions that impact revenue diversification strategies. The federal "anti-kickback" law prohibits the payment of any remuneration -- essentially anything of value -- in exchange for referring or arranging for the referral of federal health care program patient service opportunities. The law is sufficiently broad that any number of transactions and relationships between health care providers and entities can have potential anti-kickback implications. Thus, the anti-kickback law can be implicated in diverse revenue expansion arrangements involving multiple providers. Such arrangements will commonly be developed through joint venture, contractual and service relationships involving two or more medical groups, hospitals or other health care providers. Frequently, a legally compliant business arrangement can be structured by assuring that the underlying transaction terms are consistent with fair market value and not linked to the volume or value of referrals, among other important points.
Central to any viable revenue diversification strategy is the availability of adequate capital and resources to fund the ancillary venture. Some groups will elect to go it alone, while others will consider partnering with local hospitals. From the hospital’s perspective this alternative may be preferable to losing an entire revenue stream. From the medical group’s perspective, a joint venture model can provide advantages and benefits such as expertise, operating experience, and capital -- therefore reducing demands on group infrastructure as well as physician cash flow. Many hospitals enjoy tax-exempt status pursuant to Internal Revenue Code § 501(c)(3) and as such, must be organized and operated exclusively for charitable purposes. These and other requirements will have implications for the structure of any joint venture arrangement involving a tax exempt hospital, including the governance, financing, management and other operational aspects of the project.
Orthopedists, cardiologists and other specialists are increasingly involved in the development and operation of joint venture "specialty hospitals" to provide specialty-specific services. The facilities furnish hospital services to the specialty hospital’s inpatients, and are reimbursed for those services under Medicare Part A. If such a facility is jointly owned by a community hospital exempt from taxation under Section 501(c)(3) of the Internal Revenue Code, such a joint venture model must likely include governance and control mechanisms to promote the hospital’s overriding charitable mission, while also reasonably protecting the economic and other interests of the specialty hospital’s physician investors. Even with these limitations on the venture’s governance and operation, however, medical groups can potentially benefit from substantial investment returns, not to mention the ability to deliver services in an efficient and high quality manner.
Services reimbursed as inpatient and outpatient hospital services under Medicare are defined as designated health services and are subject to the requirements of the Stark Law, yet physicians may, in defined circumstances, lawfully invest in the specialty hospital by relying on the Stark Law’s exception for hospital ownership. Such ownership interests in a surgical hospitals do not literally conform to an available safe-harbor under the related but distinct anti-kickback law. However, the ownership interests and underlying business terms can be structured to help promote anti-kickback law compliance.
Aside from the federal statues referenced above, other federal and state laws and regulations may affect a medical group’s revenue diversification strategy. These include federal reimbursement laws, state certificate of need requirements, and laws regarding hospital outpatient facility licensure, including requirements for ambulatory surgical centers, imaging centers and other facility categories. To be clear, many federal and state laws will continue to pose threshold compliance hurdles for the business activities of many better performing groups. This is particularly true if reimbursement by Medicare and other public payment systems is an essential element of a viable business model. In some circumstances, however, Medicare participation may alternatively be less essential to success, and the revenue opportunity will alternatively be marketed and offered exclusively to commercial and self-pay (i.e., non-governmental) patients.
In this context, because of the lingering compliance risk, some medical groups elect to carve-out Medicare, Medicaid and other federal health care business from their revenue diversification strategies. Arrangements that can help capture additional revenues in this manner include contractual arrangements between internal medicine and cardiology groups related to the operation of diagnostic testing services. For example, larger general internal medicine practices generate high levels of cardiology service referrals. While (for example) general internists can’t furnish all necessary services, some groups contract with cardiologists under independent contractor arrangements at fair market value to provide professional services in connection with the diagnostic services. In such circumstances, the cardiology practice retains the professional fees, but the host internal medicine group nevertheless may obtain the technical component as additional practice revenue.
These and similar arrangements involving two or more groups are subject to numerous regulatory considerations under applicable provisions of federal and state law. However, experience again suggests that with close attention to legal detail, successful business and operational models can often be crafted and implemented without undue compliance uncertainty.
Lessons Learned. Each medical and surgical specialty may have its own cluster of potential revenue opportunities that are both legally compliant and consistent with the medical group’s core clinical service activities. Whether acting independently or in conjunction with others through a joint venture arrangement, additional revenues may be accessible through strategies to provide quality, medically necessary services via methods that also enable the medical group to capture an additional portion of the health care dollar.
The revenue diversification strategies and models used by better performing medical groups are as varied as the range of medical and surgical specialties themselves. Anesthesiology practices may become involved in pain management; while oncology, urology and other practice specialties may consider alternative means to furnish one or more elements of cancer care. Primary care and internal medicine practices may become involved in bone density testing and new treatment modalities that will meet the needs of our aging population. Cardiology groups may contract with local hospitals to read imaging studies, and they may also provide in-office diagnostic services, operate in-office catherization laboratories or entire "heart hospitals." Each strategy has its own regulatory challenges, but by no means should such challenges be insurmountable under all circumstances. For example, contracting arrangements with a local tax-exempt hospital, in-office diagnostic services and others must be structured to comply with the Stark Law, anti-kickback law and other applicable legal proscriptions, including in many instances, the IRS rules governing hospitals as tax-exempt organizations. Despite these requirements, however, legal opportunities may nonetheless exist to develop such arrangements. Office-based labs and specialty hospitals present their own additional regulatory challenges, including Medicare certification, state licensure and other requirements.
Better performing orthopaedic, gastroenterology and other single and multispecialty groups are also capitalizing on their own unique set of revenue opportunities. Here too investments in ambulatory surgical centers, endoscopy suites and the like provide greater autonomy and control over the revenue stream, while frequently enabling the medical group to furnish services in a more patient friendly manner. The advent of regulatory safe-harbors under the anti-kickback law governing ownership of ASCs, clarification gained from the Stark Law final rule, and an evolving body of other regulatory guidance have, in recent years, made such business ventures far more feasible than they were in the past.
Experience demonstrates that just as with successful medical groups, successful business ventures and diversification strategies start with and build upon a number of business fundamentals. Common themes that are present in all successful ventures include:
- A willingness to think "outside the box" regarding potential revenue opportunities.
- Close attention to legal compliance and the performance of a regulatory assessment and "check up" before the project gets too far underway. In today’s complex environment business success and legal compliance often go hand-in-hand. Understanding the applicable regulatory environment and crafting proactive operational models to promote compliance are essential to business success.
- Consideration of means to pursue a revenue opportunity independently, or through the involvement of third parties in a joint venture or "shared facility" model.
- Attention to who will pay for the health services and how reimbursement will be obtained. A new service line will make no sense if third party payers may lawfully refuse to pay for services. Better performing groups do their homework by considering both best and worst case reimbursement scenarios to help assess the viability of a particular strategy.
- Lastly, consideration to the level of economic and other risk that will be acceptable to the medical group. Understanding the potential up (and down) side in economic terms given the uncertain nature of the health care industry is of critical importance. That said, many groups recognize the reality of the saying "nothing ventured, nothing gained." In light of the continuing downward pressure on professional fee reimbursement, these groups are willing to accept higher levels of economic and other uncertainty to make a preferred revenue diversification strategy a reality.
In conclusion, given the present environment of stagnant or declining reimbursement for professional services, better performing medical groups increasingly build their businesses on a combination of direct patient care/professional services and ancillary revenue streams. Although most medical groups will always need to view professional fees and procedures as the "bread and butter" revenue streams for their practices, better performers demonstrate the strategic vision to view their world in a different way. That frequently involves consideration of alternative business models and legal structures, as well as a tolerance for risk that differs from purely historical norms. Importantly, recent clarifications in the underlying health care regulatory environment have in fact opened up new opportunities for carefully crafted expansion of conventional revenue sources in a number of available circumstances.
Reprinted with permission from the Medical Group Management Association, 104 Inverness Terrace East, Englewood, Colorado 80112-5306; 303-799-1111. www.mgma.com Copyright 2003.