The Economics of Oncology: Doctor-Hospital Integrated Practice

January 1, 1996
James L. Wade Iii, MD
James L. Wade Iii, MD

Joseph S. Bailes, MD
Joseph S. Bailes, MD

Volume 10, Issue 1

The doctor-hospital integrated practice is one possible strategy oncologists may wish to employ in order to stay financially solvent in the current unstable health-care environment. Before entering into an arrangement with a

ABSTRACT: The doctor-hospital integrated practice isone possible strategy oncologists may wish to employ in orderto stay financially solvent in the current unstable health-careenvironment. Before entering into an arrangement with a particularhospital, the physician should compare the institution's financialhealth with that of similar hospitals. The practitioner also shouldreview the hospital's current managed-care contracts to ensurethat he or she will have access to new patients. Another crucialissue is whether the patients will belong to the physician orto the hospital, in particular whether patients cqan "follow"the physician is he or she leaves the hospital. Finally, the physicianneeds to consider whether the arrangement will provide the levelof intellectual satisfaction he or she desires. The next stepis to explore the various possible doctor-hospital relationships.These include a simple purchase of the practice by the hospital,renting space in a hospital-financed cancer center, or a hybridof these two arrangements. [ONCOLOGY 10(1):104-106, 1996]


The managed-care revolution has had unprecedented effects on thetraditional practice of medicine. The combined purchasing powerof large employers paved the way for all types of health insurancepurchasers to band together to cut premium costs. Over the last4 years, this march toward economy of health-care delivery hashad a dramatic impact on some health-care providers, especiallydoctors and hospitals.

Many medical specialists have seen their incomes drop by 33%.More importantly, many hospitals have seen their revenues disappear.Not only are hospitals being pressured to drop per diem rates,but hospital utilization is being hammered by case managementand primary-care capitation. In this unstable environment, whatstrategies should a medical oncologist consider in determininga future course for his or her practice? This paper looks at onesuch strategy-the doctor-hospital integrated practice.

Before selecting any future direction, the medical oncologist/hematologistshould assess his or her current situation and professional goals.Key issues to consider fall into four categories:

  • financial capital
  • access to patients
  • practice quality
  • intellectual satisfaction

Financial Capital

Finding financial capital needed for practice growth is one ofthe most difficult hurdles physicians face in the 1990s. Sincethe passage, in 1993, of the "Stark" anti-kickback laws,physicians are essentially prohibited from investing in localmedical systems other than their own practices. Banks that wereformerly generous now require extensive personal collateral thatcould put the individual practitioner at risk.

Separate and distinct from the federal anti-kickback statutesis another impediment to physicians gaining access to workingcapital--the federal antitrust regulations. These rules limithow closely, and under what structures, physician groups can poolresources.

Evaluating the Hospital's Financial Health

Working capital may still be available, however, from a hospital.Before a physician decides to "bond" with a local hospital,he or she should carefully evaluate the institution's financialhealth and, if applicable, its affiliations.

National standardized measures of a hospital's health are availablefrom large accounting firms, such as Peat Marwick. These standardizedmeasures can be used to compare the hospital in question to othersimilar institutions with respect to profitability, reserves,and working efficiency. The physician should not accept a hospitaladministrator's assurances that the money is there and available.Rather, the physician should obtain these reports for an objectiveanalysis of the hospital's strengths.

Forging an Agreement

Once the oncologist confirms that the prospective hospital partnerdoes indeed have capital, he or she needs to secure a contractualagreement that specifies what resources will be expended to fulfillthe needs of the oncology practice and how soon this will be done.Just because a hospital has investment capital available, thereis no assurance that it will invest that money in a cancer program.The hospital could change its direction and invest in other areasthat would help it survive in the new marketplace, such as mentalhealth, long-term care, and primary-care practices. The contractshould include specific commitments from the hospital and a timetabledescribing when they would be implemented.

Access to Patients

The second critical area that the physician should consider iswhere the patients will come from. If a physician enters intoa relationship with a hospital (the various types of which willbe discussed below), how will his or her present referral patternschange? The physician who becomes an employee of one hospitalin a community that fails to capture a large managed-care preferredprovider contract will not see those potential patients. If thephysician is not employed by the hospital, but has an office onthe hospital campus and the chemotherapy drugs are provided byand billed for directly by the hospital, he or she also may beexcluded from new referrals for the same reason; namely, the hospitalpartner may not be the preferred provider for any outpatient orinpatient services.

Reviewing the Hospital's Managed-Care Contracts

Before forming a relationship with any hospital, the physicianshould review the institution's current managed-care contracts,specifically looking for how many insured lives in its servicearea are covered and what is the duration of the contract. Iftime permits, the practitioner also can contact the corporatebenefit managers of those employer groups and query them on theirdegree of satisfaction with the hospital contract. This "investigation"may reveal that an employer group is planning to switch hospitalsat the next contract renewal time.

Practice Quality

The physician also needs to think about the type of practice heor she wants. Does the clinician want to work as hard as possible,or set up an 8-hour-day, 4-day-week schedule? Issues such as workload,type and amount of ancillary staff, and choice of associates willchange if the practice is blended with a hospital.

The most critical question is, to whom do the patients "belong"?If the patients belong to the physician, if their medical recordsare owned by the physician, and if they can follow the physicianif he or she leaves the hospital, the physician will have an incentiveto work hard and strive for a high level of patient satisfaction.If, on the other hand, the patients belong to the hospital orvertically integrated health-care system, the physician may stillprovide great care, but the reward for that effort is less director immediate.

Similarly, when patients belong to a "system," the repercussionsarising from low patient satisfaction may never reach the physicianresponsible. Also, decisions about adding doctors or other staffare made on the basis of what is good for the system as a whole.Likewise, if the patients belong to the hospital, how hard thephysician works will be directed by policy rather than by thephysician's determination of need, as is the case in a privatepractice.

Intellectual Satisfaction

A final issue to consider is whether the arrangement will offerthe intellectual satisfaction that the physician seeks. Many hospitalshave the resources to enable an oncologist to perform clinicalresearch with the help of an on-site data manager. Funding forsuch capability can come from NCI research grants (CCOP [CommunityClinical Oncology Program], CGOP [Clinical Group Outreach Program)and also from pharmaceutical research programs or hospital endowmentfunds. Such a research effort can help the physician provide state-of-the-artcare and keep him or her abreast of new treatment options.

What Hospitals Look for in a Physician

What should the hospital administrator look for in determiningwhether a physician is a good partner for that institution? Currently,there are between 6,000 and 7,000 active practicing oncologistsin the United States. Even though this is a small number thatwill not increase significantly over the next decade, it behoovesthe hospital administrator to be just as cautious as the physicianwhen selecting a partner. Certainly, the physician must be credentialedas an active member of a hospital staff, without any privilegerestrictions. The clinician should have completed an approvedfellowship training program and should be board certified in medicaloncology and/or hematology. He or she should have the trust andrespect of referring physicians.

The physician also should have leadership capability, as evidencedby participation in medical society, hospital staff, or tumorboard activities. Ideally, the prospective partner should demonstratea desire to provide high-quality, state-of-the-art care throughnational clinical trial programs. These characteristics will predictthat if all the incentives of the hospital and the physician canbe properly aligned, the joint cancer program will be successful.

Types of Doctor-Hospital Relationships

After the physician has accurately characterized his or her practiceaspirations, the next step is to examine
the menu of possible doctor-hospital relationships.

Simple Purchase of the Practice

The easiest to consider is a simple purchase of the practice bythe hospital, with the physician then becoming an employee ofthe institution. The physician's salary may be a fixed amountor proportional to clinical service billing volume. Charges forlaboratory services, chemotherapy drugs and supplies, and chemotherapyadministration would be billed by the hospital. The physicianwould be required to participate in the same retirement plan asother hospital employees. Malpractice insurance may or may notbe provided.

This plan affords security, predictability, and initial risk avoidance.Since the physician would no longer have any overhead expenses,even major fluctuations in patient volume would have only a modestfinancial impact. Certain ly, if the environment changed and thehospital decided to get out of the oncology business, it couldshut down the program and, within the bounds of the doctor's employmentcontract, terminate him or her at some point in time.

Usually, under this type of agreement, the patients are consideredto belong to the system, and the hospital may include a restrictivecovenant that prohibits the doctor from seeing those patientsfor a set period of time if he or she left the hospital. The legalityof this restriction is currently being tested in an Illinois court.

Renting a Hospital-Financed Cancer Center

A second option does not require the physician to relinquish hisor her private practice. The hospital invests the capital to builda cancer treatment center and hires the staff; the clinician rentsthe space from the hospital at a fare-market-value rate and reimbursesthe hospital for the cost of the staff, including benefits. Underthis type of arrangement, either the hospital provides the chemotherapydrugs and bills for them itself or the physician takes on theseresponsibilities within his or her practice.

Physicians deciding whether to enter into this type of relationshipneed to consider three rules. The first is the "incidentto" rule of Medicare, which requires that if a physicianis going to bill for chemotherapy, the patient must receive itin the physician's private office, administered by the physicianor a nurse employed by him or her and directly under his or hersupervision.

The second rule is the Ethics in Patient Referral Act, which prohibitsself-referral for Medicare-covered clinical laboratory services.This means that if the physician uses a hospital laboratory, heor she must maintain an "arms-length relationship" withthat laboratory. Alternatively, a laboratory within the cancercenter would need to be wholly owned and operated by the physicianand employees, not by leased employees.

The third rule refers to employee retirement benefits. The InternalRevenue Service has recently determined that leased employeesare entitled to the same level of retirement benefits as full-timeemployees of the doctor's professional corporation. This meansthat if the physician's laboratory technicians and chemotherapy-certifiednurses receive a 12% contribution to their pension and profit-sharingplan, the physician must ensure that the leased employees receivea financially equivalent retirement package. If the leased employeesonly receive a 4% contribution from the hospital to their 401Kplan, the physician is responsible for setting aside in each oftheir names an additional 8% of their hospital salary in the practice'spension and profit-sharing plan.

Despite all of the restrictions, this model allows the physicianto benefit from the capital infusion of the hospital and yet retainmaximum practice independence. The hospital benefits from havingan oncology service on campus, from rental and lease revenues,and from an increased use of therapeutic and diagnostic radiologyservices.

Hybrid Model

The third option is a hybrid of the first two, with some additionalfeatures. The hospital forms a separate corporation that employsall of the personnel, including the medical oncologist, nurses,pharmacist, administrator, and laboratory staff. All revenuesfrom patient-care activity would flow to this separate entity.The hospital receives rent for the facility and its equipment.The entire staff is given a salary plus an incentive componentbased on productivity and patient satisfaction. A budget is establishedthat allows for the growth of a financial reserve plus an incentivepool to be distributed to all the employees based on the profitabilityof the center. The amount of each employee's distribution is determinedby the productivity and satisfaction scores that employee earns,as compared with an established target.

Such a system would be able to accurately determine the actualcost of delivering care, thus making this type of doctor-hospitalrelationship competitive in the capitated health-care marketplace.The same structure could be broadened to include radiation therapy,therefore allowing for a capitated contract that would almostcompletely encompass the active treatment portion of oncologycare. This entity could then contract with the hospital for adaily bed rate, and with hospice and home health-care servicesfor a case rate. At that point, this hybrid entity would be ableto efficiently manage the entire oncology disease for that servicearea.


In summary, the linkage of the medical oncologist to a hospital'scancer program can be a successful venture for both parties. Ifthe hospital is willing to expend the capital and management expertiseand if the physician wants to create a high-quality program, bothwill be happy. If one party or the other is looking for an easyway out of the competitive marketplace, the venture will not besuccessful. The only certainty is that both the science and businessof health care will change, hopefully in ways that will lead tobetter patient care.


1. AMA Legal Advisor, 1995.

2. JAMA 268(1):80-84, 1992.

3. JAMA 268(1):85-91, 1992.