October 2001 Bulletin

Need more income? Try new service

Offset lower reimbursements, more competition for service

By Janice G. Cunningham and
Geoffrey T. Anders, JD

Orthopaedic practices continue to feel a financial pinch as reimbursement rates don’t keep pace with rising costs for labor, malpractice insurance and general operating expenses, while competition for the orthopaedic health care dollar has become much more aggressive.

Many orthopaedic surgeons are looking for new sources of revenue and something to set them apart from the competition. Often, this involves introducing a new service into clinical practice.

Traditionally, orthopaedic surgeons have responded by seeking additional training, and then hoping that patients who require the service will somehow appear. This passive "field of dreams" approach is no longer viable. Ideally, a new service should be introduced within the framework of a rational strategic plan. It is time to get back to the basics of business planning and marketing. This means that the orthopaedist should first evaluate the feasibility of introducing a new clinical service and establish a sound marketing plan.

To illustrate the "back to basics" approach, let us walk through the process using intra-articular viscosupplementation as an example of a new service that might be introduced into an orthopaedic practice. Here are some feasibility considerations.

Demographics

Start by asking some basic questions. Who will use this service? Do I already have patients in my practice who would be candidates? Are the demographics of my catchment area favorable?

Using the example of intra-articular viscosupplementation, the typical candidate is an individual with a specific diagnosis of osteoarthritis (OA) of the knee. The incidence of OA of the knee increases rapidly in men and women as they get older. In addition to older persons, potential candidates also may include laborers and athletes.

Start within your own practice. What percentage of your current patients have OA of the knee? Start tracking how many patients you refer out to other practices that offer viscosupplementation. They represent a source of potential candidates for the service readily available to you.

Next, determine the general demographics of the practice catchment area. Is the population generally older? Do you practice in a highly industrial area with many employees engaged in manual labor? Are there a lot of sports programs in the area?

Competition

Next consider the market conditions in your area. Are other practices already providing the service? If not, are they likely to do so? While information about your competitors’ future plans is not generally readily available, you can pick up a lot in casual conversation.

Ideally, you would like to be the first to offer a new service. Being first means that, at least initially, you control 100 percent of the market and you automatically inherit the mantle of authority. You become the primary educator, the innovator, the expert to whom patients will turn, the leader in the field. You may capitalize on these perceptions in your marketing efforts.

If you are the second or third to offer the new service, you may still benefit from the efforts of those who came first. Potential patients may already know of the new service through the marketing done by the first practice to offer the service. Perhaps there is more business than the first practice can handle. Being second or third allows you to pull from the overflow.

It may not be too late, even if a number of your competitors already offer the service. Some services catch on very quickly while others take longer to penetrate the market.

Statistically, it has been shown that upon the introduction of any new technology or service, it generally takes the same amount of time to capture the first 10 percent of the user market as it will take to go from 10 percent to 90 percent market penetration. This phenomenon is called the S curve. With a nonsurgical and relatively inexpensive treatment such as viscosupplementation, the 10 percent mark will likely be attained quickly, especially as patients are more informed about options for treatment. Thus, you need to act more quickly than for services that are more invasive or expensive.

Ease of introduction

The introduction of any new service may require changes as significant and costly as adding new specially equipped areas dedicated solely to the new service or procedure. Others require little or no change to the practice operations. Factors that influence ease of introduction include the level of financial investment required, the time involved in planning and implementation and the need for specially trained doctors and staff.

Determine what you already have and what you will need to offer the new service. Ideally, the more cost involved (both in terms of money and time), the more money the new service will have to generate to allow for a reasonable return on investment. Those new services requiring little initial investment represent little risk. Even if the new service does not do as well as anticipated, the practice loses little for trying.

Beyond pure financial consideration, factor in other potential changes. For example, will you need to endure construction in your office? Will the time required to prepare for the new service be too long? Is the new service expected to generate a significant increase in telephone calls? Can your telephone system handle the volume? Will you need to update your billing or scheduling system to accommodate the new service? Factor in the time and manpower costs. Sometimes the expected profit may not be enough to offset the "hassle" factors.

Cost-benefit analysis

It is difficult to determine whether the potential benefits of a new service outweigh the costs when dealing with such intangibles as "sweat equity" or hassle factors such as time and effort spent in developing the new service and the potential market share. Nevertheless, some factors that are common to all clinical practices may be applied to a cost-benefit analysis.

Start with the direct costs of introducing the new service. For example, is expensive equipment required? Will the new service require custom-built procedure space? The less the upfront investment, the less the financial risk to the practice.

Also consider the impact the new service may have on overhead. Certain costs of operating a practice, such as hospital staff fees, are traditionally considered fixed. Other costs, such as clinical supplies, are variable and rise in direct proportion to the volume of patients seen. The bulk of overhead costs, however, are neither fixed nor variable. They are "stepped." These costs increase not in direct proportion to volume increases, but rather in steps.

Staff costs are an example of stepped overhead. A given number of staff can handle incremental increases in patient volume until a critical threshold is reached. It then becomes necessary to add a new staff member. The practice is again able to absorb incremental increases in volume until the next critical threshold is reached.

In addition to costs, you must estimate the volume of patients and know the reimbursement to determine expected income from the new service. Since the majority of viscosupplementation patients are older, it is good that Medicare covers the service. Otherwise, it would not be feasible. Consider commercial carriers as well. For some services, such as viscosupplementation, younger patients may have OA due to sports or work-related injuries.

What other practice opportunities might arise from offering this new service and will these opportunities increase or decrease overall revenue in the long run? Will it set your practice apart from the rest? Do you need to offer the new service just to stay competitive? Will the new service lead to other more lucrative services down the road?

Even if the new service itself may not have a tremendous profit margin, the secondary benefits may make it a feasible new service.

If these key elements for successful introduction of a new service are present, the next logical step is to begin marketing or promoting the new service. Determine who will likely use the new service. This is most likely going to be your primary target audience. Next consider who might comprise your secondary targets. These are sources of referrals, other than the patients themselves. Chief among these for viscosupplementation are family practitioners, gerontologists, rheumatologists, physiatrists and other orthopaedic specialists.

In marketing terms, the new service must be "packaged" to appear convenient and attractive. Orthopaedists should focus on conveying a key message: "You need this service, and here is why." Whatever marketing message is chosen, it must be brief and to the point.

Note that the message is different for patients and referral sources. In the viscosupplementation example, the focus is on nonsurgical pain relief and increased mobility and function. For referral sources, convey the message that you are offering them an effective treatment option for their patients and will provide status reports.

The feasibility considerations to determine whether your practice has the combination of elements necessary for the successful introduction of a new service are:

©2001, The Health Care Group®

Janice G. Cunningham, JD and Geoffrey T. Anders, JD are consultants with The Health Care Group® and attorneys with Health Care Law Associates, P.C., based in Plymouth Meeting, PA.


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