To Merge Or Not To Merge?

Oncology Business News, February 2014, Volume 3, Issue 1

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.

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

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.

“There’s been real downward pressure on oncology practice revenues, resulting in pressure on physicians’ incomes,” Conway said. “They see that buying and billing for drugs is no longer a good business to be in—it’s very risky, every month, for a practice to spend millions to purchase drugs. There’s a risk they won’t be reimbursed for the drugs or that they won’t be able to use the drugs if they are damaged or expire. More oncologists are saying ‘I don’t want to be managing a drug empire anymore,’ so to speak.”

Small Fish in Bigger Ponds

While marketplace considerations may make the merger question an obvious one, there are several other considerations. With an independent practice, there’s typically 1 (or in Whittaker’s case, a small group of) big fish working in a small pond. Once those big fish join with the larger school of fish swimming in the ocean, personalities can clash.

Sally Werner is the executive director of Cancer, Home Care, Hospice and Palliative Care Services in the Genesis Health System. Based in the Quad Cities of Iowa and Illinois, Genesis operates in Davenport and Bettendorf, Iowa, and Moline and Rock Island, Illinois within a 6-hospital system. Two years ago, Genesis reached out to 10 oncologists in 7 independent groups with an invitation to partner through co-management agreements as a way to improve cancer care for the community from a clinical quality standpoint, said Werner.

“The hospital has the benefit and the desire to have everyone moving in 1 direction in terms of clinical co-management, revenue sharing, and cost savings,” she said. The biggest challenge in combining practices came from a personality standpoint. “Getting people to lay down their egos to see what is best for the community and for patient care,” she said. “I think inherently they all want the best thing for the patient, and the community, and there was a little bit of not wanting to be the odd man out,” she said. “You had your early adopters, but the rest may feel, ‘If I don’t do this, how will I compete and raise the bar with my own practice?’”

Werner noted that while the co-management agreement has been in place for 2 years, Genesis Health System is currently in talks to develop a community cancer care program with Trinity, a neighboring Quad Cities health care system competitor, over the next 6 to 12 months. The collaboration, which includes only oncology and no other service lines, is a way for the two organizations to compete against larger, more familiar cancer facilities that are relatively close by.

Ted Okon

Things to Consider Before a Merger

“You have to go big if you want to make an impact,” said Werner, who said that solo practitioners have approached Genesis who were looking for simple employment, but that doesn’t help build the collaborative process that can help the organization succeed and compete against other name-brand cancer medical centers. “We’re 2½ hours away from Chicago, 5 hours away from the Mayo Clinic, and Iowa City is an hour down the road,” she explained. “If we’re really going to do this collaboration right, it doesn’t make sense for us not to go big.”If the local medical center approaches you about a potential merger, some of the best advice experts give is to ask a lot of questions and understand what the differences will be, in everything from cultural alliances and philosophies, to the differences between being a boss and an employee, and even the changes in IT including computer systems and electronic medical records systems.

Ted Okon is the executive director of the Community Oncology Alliance, a non-profit organization based in Washington, DC. His group has tracked more than 400 oncology mergers over the past 6 years. Computer issues can cause frustration, he said. “With the IT system, I know some people are struggling, and it slows down productivity,” he said. “There’s more data entry, it’s more laborious, and it gets really frustrating,” he said.

To ease the pain of transition, learn everything you can about how things will change.

“Have your eyes wide open on what you’re getting involved in,” he said. “Sometimes the grass looks greener on the other side of the fence. I see some physicians who merge into a hospital and aren’t happy because it’s a different environment working for yourself versus working for a big institution.” He notes that sometimes physician happiness depends on the type of arrangement the doctor had with the institution. “Generally, I find people are more happy with the professional service agreements, as opposed to being an employee. If people are happier being an employee, frankly, they don’t want to work as hard and they want to take less risk. It’s more of a lifestyle consideration.” Whittaker agreed, and said to ask many questions, particularly about finances.

“Be careful with your due diligence in evaluating potential merger partners,” he said. “How solid are their finances, as well as their clinical and research programs? What is their strategic plan and how does that mesh with yours? What is the structure and autonomy of your practice management after the merger? Who will be your boss? The health care environment and financing are changing, but don’t take all the risk. Get as many financial guarantees, and for as many years, as can be negotiated. Get it in writing.”

Be Prepared for Challenges

Even the smoothest transition will encounter bumps at one point or another. One of the biggest challenges patients are likely to see, says Conway, is that their out-of-pocket expenses are likely to rise—sometimes even for the same services provided by the same practitioners. “Medicare pays different rates for the same services, depending on whether you are seen in a hospital or by an independent practitioner,” said Conway. “It’s a slightly different business for that reason, and also because hospitals are much more complex environments than an independent practice, where the physicians have control over everything. In a hospital, drug pre-authorizations and drug purchasing fall under the pharmacy’s purview, so there’s a whole other group involved.”

Conway noted that hospitals often treat more complex medical cases than independent practices do, and that hospitals cover more care for the uninsured and underinsured.

“It’s a shame patients have to pay more, and it’s a shame insurers have to pay for higher cancer costs. On the other hand, hospitals provide a lot of charity care and are often subject to more stringent regulatory requirements.

Some of the expenses on the insurer’s side are out of their control, because Medicare sets its rates,” she said.

But when bills skyrocket, patients can throw a fit, Okon said.

And sometimes, some physicians or other oncology practice staff simply don’t make the transition well and decide to work elsewhere. While his patients are still receiving excellent care, Whittaker said he no longer manages his former employees or oversees how patient care is given.

“Happily, most of the management and the direction of staff from our new employer has been very good, but a few issues such as staffing ratios and a new staff pay scale have soured a few employees who decided to leave,” he said. “As employers, I don’t think we fully realized the impact it would have on our staff to have a new employer, even if their general job function didn’t change.”