To Merge Or Not To Merge?

Cheryl Alkon
Published: Friday, Feb 28, 2014
Jeff B. Swearingen, managing director of Edgemont Capital Partners, LP

Jeff B. Swearingen

For 18 years, Thomas Whittaker, MD, worked as an independent oncologist and as a physician partner in Central Indiana Cancer Centers, a private practice group of 17 doctors that provided medical and radiation oncology care to patients with cancer.

Affiliated with US Oncology, a nationwide network of community oncology physicians and practices, Whittaker’s group saw 3200 new patients each year and functioned smoothly. “I enjoyed managing a business with all of my partners,” said Whittaker, who is based in Indianapolis.

“We had a terrific group of physicians with a variety of strengths that played well against each other, and everyone took a different part of the business to manage. I liked managing an outlying office and the opportunity to create an outstanding office staff. We were an inviting, welcoming, and efficient site for our patients.”

But over a period of 3 to 4 years from 2006 to 2010, said Whittaker, things changed. “We saw our volume drop significantly in 2 of the hospital systems we were working in,” he said. As the health care systems employed and built up internal physician networks, independents like Whittaker’s group were squeezed out. The hospital systems and their employed physicians “very aggressively worked to monitor every referral made by their physicians, and exerted tremendous pressure and incentives to keep all referrals within their internal network.”

By 2011, as the saying goes, Whittaker’s group couldn’t beat ’em, so they had to join ’em. “We saw referrals dry up, patient volume dropped, and our revenue was significantly impacted,” he said. “We needed to join a local network to maintain our viability in the marketplace.”

Whittaker’s group joined forces with Indiana University Health, the state’s largest health care system, which incorporates more than 3700 physicians and is considered the state’s top ranked cancer program. “Financially, we understood that we couldn’t be independent and we needed a local partner,” he said.

Whittaker and his former partners aren’t alone. Instead, they are part of a growing trend of private oncology practices merging with their area hospitals or medical centers. According to “Opportunities and New Realities in Cancer Care: A White Paper on Oncologist/Hospital Integration in the ACA Era,” a 2013 report from the Rockville, Maryland–based Association of Community Cancer Centers (ACCC), “1 in 3 oncology programs was involved in a merger, acquisition, or affiliation in 2012.” About 4 in 10 survey respondents said they expected consolidation to continue in their programs and/or physician practices.

Lindsay Conway

Lindsay Conway

That trend is expected to continue this year, said Jeff B. Swearingen, managing director of Edgemont Capital Partners, LP, a New York specialty advisory firm that has worked with several physician groups in oncology and other medical specialties as they were merged, aligned with, or acquired by hospitals, managed care organizations, and other service providers.

“Based on the activity we are seeing at Edgemont, 2014 is going to be a very active year for physician group mergers and acquisitions, in oncology as well as numerous other specialties,” he said.

A History of Economic Pressures

Such mergers began increasing after 2005, when Medicare changed how it reimburses for drugs, placing economic pressures on practices, said Lindsay Conway, practice manager of the Oncology Roundtable, one of the membership programs of the Advisory Board Company, a research, technology, and consulting firm based in Washington, DC, that covers health care and higher education.

Up until that year, physicians could administer medications and make a profit margin of approximately 20 to 40 percent—“a lot of money on that approach,” said Conway. In 2005, Medicare reduced physician reimbursement for drugs to the average sales price plus a 6 percent mark up, and after Medicare made its changes, commercial health insurers followed suit over the years. Such changes, along with further cuts such as the 2013 sequester cuts, caused oncologists and other physicians “to just break even or even lose money on drugs,” she added.

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