Adding new services in a medical practice. (Practice Management).

The final Stark II rules led physicians to realize that they have more ancillary-service opportunities than previously thought. Medical groups can now legally operate and refer their own patients to a variety of in-house ancillary medical services.

New technologies reduced the cost, complexity and even size of equipment needed to provide sophisticated diagnostic and therapeutic procedures right in your office. Exhibit floors at specialty society meetings teem with vendors describing all kinds of new and profitable opportunities.

But before deciding to add, step back and study the proposed new service thoroughly and objectively. By applying old-fashioned business planning techniques, you'll make better decisions and improve your chances for success.

Decide first why you want to offer the new service. It may simply be to increase profits, which may be a valid reason in itself. But think of other good reasons, too, such as:

* Improving convenience for patients

* Improving turnaround time for the ordered service

* Making you more attractive to health plans and referrers

* Helping lower health care costs by providing the service less expensively

* Preventing losing patients to another practice offering the service

Eight steps

If you believe it makes sense to pursue the idea, commit to following these eight logical steps:

1. Measure demand

2. Decide if it makes strategic sense

3. Research payers

4. Consider legal issues

5. Calculate costs

6. Create an operations plan

7. Prepare a written proforma

8. Plan your promotion

Source: Adapted from "Seven Steps to Developing a New Service," On Managing. The Health Care Group, Plymouth Meeting, Pa.

Step I. Measure demand

Find out whether enough patients want or need the proposed service to make it a worthwhile venture.

Total up the patients your group refers to others for the same service, including each out-referral and who it went to. You can use that information to analyze how your plan will impact competitors and allies within your medical community--an important consideration in step #2.

Two to four weeks' tracking of such referrals should provide enough data to fairly accurately project a year's worth. Keep in mind that since some patients want to make their own arrangements, your group can probably generate more total demand than the numbers indicate.

Next, estimate potential referrals into the practice for the new service. Count patients referred to you for diagnoses who can serve as a bellwether to the new service.

For example, in ophthalmology, cataract diagnoses occur at about the same rate as retinal problems. An eye group interested in adding retinal services could reasonably estimate the potential demand by counting its cataract referrals. But note: Your cataract referrers will have to redirect their retina patients from wherever they presently send them.

If you're considering a new test or procedure with no track record, estimate demand by counting patients in your database with diagnoses that may call for it. If you believe, say, half of all patients with a certain condition would benefit from the new service, you can estimate accordingly.

Before you finalize your demand estimate, take your market's population trends into consideration, too. A growing number of people in your area who fit the general characteristics of those likely to need your new service suggests a still stronger demand.

Contact your local chamber of commerce to find out general population projections. But if you work in a complex service area, you may have to hire a marketing expert to provide a detailed, carefully targeted report.

Step 2. Decide if it makes strategic sense

Having considered whether there's enough business for the new project, stop and decide if you really want to do it. Make sure the projected benefits clearly outweigh any likely negatives.

For instance, will offering the new service put your group in direct competition against others it works with? Specifically, might you alienate valuable referral sources, losing more than the practice can gain by offering it? Does the service present risks you find difficult to tolerate?

In the end, only you and your physician-members can decide if the new service line will work well for you and your patients. You'll have to decide if it fits well within all that you do and hope to do. This requires taking the time to wrestle with subjective issues while also stepping through the objective considerations in the succeeding steps.

If you are satisfied enough to proceed, the next three of those steps are often referred to as "due diligence." Properly performing them requires significant time and effort from you or your administrator. You may decide to engage outside professional consultants or use your accountants for calculating costs and, by all means, hire an attorney experienced in health care to ensure that your plans will comply with the law.

Step 3. Research payers

Unless you expect to offer your new service on a self-pay, cash basis, you'll need to know if insurance carriers will pay for it--and how much. If most of your practice falls in the discount-fee-for-service category, your top payers will greatly impact how much revenue the new service can generate.

Contact each major payer's provider services representative to find out if it will pay for the new service. Ask for a complete fee schedule for all the CPT codes for which you will submit claims. Ask about the following issues, too:

* Will it pay for referrals you make within the group or will it consider the new service as part of another CPT code?

* Will it impose limits on how many times you can provide the service per year?

* What specific diagnoses will it want to see in order to pay?

If you contact enough payers to represent at least 60 percent to 80 percent of your revenue, you'll have enough information to project potential revenue for your service.

First, apply your payer-mix ratio to the total number of procedures you estimated when measuring the demand. For example, if Medicare represents 30 percent of your entire practice, expect 30 percent of your demand will produce Medicare-level reimbursement,

Use the information to fine-tune your financial projections. Your new plan may not be as profitable as you expected at first.

Step 4. Consider the legal issues

Even though the Center for Medicare and Medicaid Services' (CMS) final rule makes Stark regulations clearer, engage experienced legal counsel to set up your program.

Dividing up the new service's profits among physician-owners gets complicated. And don't forget to look at state laws, too. Most states have enacted Stark-like legislation in recent years.

Research other federal and state regulations covering your proposed service, too. Does the new service come under department of health or environmental agencies' jurisdiction? Do regulations require inspections and certification?

Step 5. Calculate costs for the new service

As you would with any new business venture, thoroughly calculate all the costs associated with the new service. Far from exhaustive, the following seven categories can help get you started:

* Equipment (depreciation + interest for purchased capital equipment)

* Upfit/remodeling (if the new department requires special construction, wiring or shielding)

* Maintenance (service contract and/or estimated maintenance and repairs)

* Personnel (recruiting and compensating additional employee(s), special training, certification)

* Facility (new department's share of rent and other costs like utilities and housekeeping)

* Supplies (consumable supplies used to provide the service both initial inventory costs and ongoing costs per procedure)

* Promotion and advertising

A new service has other associated costs not easy to calculate. For example, developing and maintaining the new program will require hours of administrator, physician and other staff time, too.

Finally, don't neglect the opportunity costs. If your new service requires converting exam space, it may reduce your office-visit capacity, Compare regular office-visit revenue to the new service's potential revenue to see if reallocating the space makes sense.

Step 6. Create an operations plan

If the project still makes sense after going through the foregoing evaluative steps, then you can proceed toward finalizing your plans.

As you zero in on the details of running the new service, don't just rely on your meeting notes. Committing your ideas to paper in an orderly design provides several advantages for you and your planning committee:

* Clarity--it literally gets everyone on the same page

* Objectivity--it allows the committee to step back and take a critical look

* Thoroughness--it makes it easier to see when something's missing

* Communication--it helps explain to others--partners, board members or the banker--how the new service will work, and it becomes the groundwork for a training manual

In planning the operations, consider whether your new service will run during normal office hours or on a different schedule. Figure out how to operate it so it complements the rest of the practice. Minimize its "drag" on normal operations by anticipating--and planning for--its impact on:

* Staffing

* Patient flow

* Precertification and billing

* Special considerations (For example, does a physician need to be present during the procedure? How does that impact scheduling?)

Planning the activity may lead you to revisit your revenue and expense estimates and adjust those projections, too.

For example, as you delve into the details of patient flow and space requirements, you might discover that your first idea about where to locate the service or how you planned to staff it simply won't work as previously expected.

Don't shy away from spending more money up front to design a better facility for your new service--if doing so will provide smoother operations and increased patient capacity.

Step 7. Prepare a written proforma

Gather up the data you've collected and create a written financial proforma. Have your administrator or accountant put together spreadsheets that project the income and expenses for the new service line for at least 12 months.

Make sure your advisor understands that incoming cash may lag at first as payers get used to your practice providing the service. Insist on conservative estimates for projecting at what point the new service will break even and turn a profit.

If your new project requires borrowing money, your banker will want to see reasonable projections. Presenting a report in a familiar accountant-like format reassures a financial officer that you've planned carefully and that the investment is sound.

Step 8. Plan your promotion

Outline ideas for announcing your expanded services to patients and referrers. Depending on the type of service, you may want to consider direct mail, billboards, brochures, Web site, directories or even broadcast media.

Attracting coverage by newspapers and broadcast news can have a powerful effect. If you can show the press the uniqueness and benefits provided by the group's new service--especially if you can share a human-interest story with patients' testimony--you can get their attention. The more work you do for them (research, copywriting), the more likely they'll use your story.

Some new services--especially those involving impressive new equipment--lend themselves well to holding an open-house event. Consider whether you should invite the general public or just referral sources.

Regardless of how you promote it, always emphasize how your new service can benefit your target audience. Show them how you've made their lives better by introducing new technology, convenience or resources for their health care needs.

Leif Beck is publisher of Advisory Publications, which publishes six newsletters and books, tapes and special reports an medical practice management. Contact him by e-mail at [e-mail], and visit the company's website at www.advisorypublications.com.