Continual reductions in payments to medical oncology practices are driving physicians to seek the shelter of hospital employment. For the unprepared health system, this trend raises a variety of questions related to the strategic and economic value of such an affiliation. However, as described in this article, the acquisition of medical oncologists can offer significant strategic value to an organization. In addition, the economic realities of a hospital-based practice can mean stability and security for an otherwise struggling practice and service line.
Winds of Change: Financial Pressure
Medicare is the dominant source of payment for cancer services. Over the past several years, reductions in Medicare payments for both professional services and infusion drugs have taken a big bite out of medical oncologists’ revenue. Between 2008 and 2010, the median physician collections for professional charges declined 30 percent. This reflects reductions in reimbursement levels, as well as a number of practices shifting infusion services to the hospital setting.
In response to these trends, oncology practices have focused on improving the efficiency of clinic operations. Today, most practices have maximized operational efficiency. However, physician income remains under pressure. Over the past 3 years, median compensation levels for private medical oncology physicians have increased by approximately 3 percent, while hospital-employed medical oncologists’ compensation levels increased by more than 12 percent.
Note that although median compensation levels remain slightly lower for employed physicians, the gap is narrowing quickly.
Economic Benefits for Hospitals
While physician reimbursement is declining, hospitals have had more favorable reimbursement for infusion administration services. First, Medicare reimbursement is higher if services are provided in a hospital setting rather than the physician’s office. The following table illustrates the differential impact between physician office and hospital outpatient professional services (OPPS) payments for high-volume codes:
While Medicare drug payments are slightly lower in a hospital environment, third-party payer reimbursement for drugs is often higher for hospitals than for independent physician groups. In addition, hospitals are often able to reduce drug acquisition costs through their enhanced purchasing power. The 340B Drug Pricing Program offers additional opportunity for qualifying hospitals to increase the profitability of infusion services by lowering the acquisition cost of drugs. The program requires manufacturers to sell outpatient drugs to eligible healthcare entities at a significantly reduced price; discounts are typically 20 percent or more.
Most private physician practices cannot participate, but various types of hospitals and health centers are eligible for the program. Details regarding qualification criteria may be found on the Office of Pharmacy Affairs Web site at www.hrsa.gov/opa.
Oncologists are under financial pressure and recognize that enhanced revenue is possible for cancer services provided under the umbrella of the hospital. While this motivates physicians to affiliate with the hospital, there are equally compelling reasons for the hospital to pursue the formation of an integrated oncology service. These reasons include:
- A large and growing demand for oncology services.
- Opportunities to enhance the quality and value of services through a more integrated and less fragmented approach to care.
- Significant incentives for integrated oncology services through payment reform initiatives, including value-based and bundled payments.
- An increase in competition for new and existing providers.
Medical oncologists are a critical link in fully developing an oncology service line; oncologists help to drive program development efforts as well as serve as the key coordinators of diagnostic and therapeutic services. As a result, a group of aligned medical oncologists can have a significant impact on a hospital’s cancer program.
The oncologists’ emerging interest in affiliation, coupled with the hospitals’ strategic need to fashion an integrated cancer service, offers a major opportunity for hospitals to go beyond traditional service line structures and build an economically integrated network that will respond to the demands of the coming decade.
Detailed guidance for developing an employment model for medical oncologists and building a competitive, integrated cancer care service is available in the book Oncology: Strategies for Superior Service Line Performance3 written by ECG oncology service line and healthcare management experts and published by HealthLeaders Media in December 2011.
2008 to 2010 MGMA Physician Production and Compensation Surveys, Table 5.6 Physician Collections for Professional Charges (TC/NPP Excluded) by Hospital Ownership – Hematology/Oncology.
2008 to 2010 MGMA Physician Production and Compensation Surveys, Table 1.6 Physician Compensation (More Than 1 Year in Specialty) by Hospital Ownership – Hematology/Oncology.
Please see ECG Management Consultants’ Web site for more details or to order a copy of the book: www.ecgmc.com/.