Selling 'High Risk' Part of an Oncology Practice Can Increase Financial Stability

February 1, 1996
Volume 23, Issue 5

MARINA DEL REY, Calif--Comparing the technical services portion of an oncology practice to a car that has been driven 25,000 miles, Dean H. Gesme, Jr., MD, managing partner of Iowa Cancer Care, P.L.C., said that he and his partners decided to spin off that part of their Cedar Rapids practice while it still had a high market value.

MARINA DEL REY, Calif--Comparing the technical services portionof an oncology practice to a car that has been driven 25,000 miles,Dean H. Gesme, Jr., MD, managing partner of Iowa Cancer Care,P.L.C., said that he and his partners decided to spin off thatpart of their Cedar Rapids practice while it still had a highmarket value.

Chemo Not a Source of Revenue

"When we analyzed laboratory and chemotherapy revenues, drugprices, and reimbursement issues--and made suppositions basedon historical fact and intent of government--we saw decliningrevenues and significantly increasing expenses. For example, usingour financial model, in 3.5 years, chemotherapy was no longera source of revenue but an expense to our practice," he saidat the annual conference of the Association of Community CancerCenters (ACCC).

The issues of financial stability and revenue control were keyto the decision process. Dr. Gesme found that the majority ofthe practice's cash flow was not based on time and services charges,elements directly under physician control. Instead, it was basedon laboratory and chemotherapy revenue--more under the controlof those who set reimbursement rates and, therefore, deemed relativelyrisky sources of revenue.

So they sold those "high risk" parts of the practiceto Physician Reliance Network, Inc. (PRN), a Texas-based practicemanagement group, leaving a separate and distinct physicians'organization that is responsible for all clinical matters. Now,the revenue stream for the technical services they provide asmedical oncologists goes to PRN.

In turn, for a fee, PRN furnishes the entire management operationsfor the newly formed group, Oncology Associates of Cedar Rapids.This includes all elements (eg, personnel, office space, equipment,and financial services) except physician services.

In Dr. Gesme's opinion, successful practice transactions dependon a physician's ability to develop a strategic vision of thefuture--a way of thinking he finds uncommon. "Many physiciansrarely think about the future; in fact, they rarely think abouttoday; they're still trying to get yesterday's records dictated."

But he stressed that such thinking is necessary to decide whetherto maintain the status quo (or, in his used car analogy, drivethat car into the ground) or to become proactive and make a changenow. "This was a fairly conservative move and offered usgreater financial stability," Dr. Gesme said.

While this kind of transaction is time-consuming, it can be accomplishedin a relatively short time-frame, with very concentrated efforts.Iowa Cancer Care had its first meeting with PRN in November, 1994.A letter of intent was signed February 1, 1995, and the agreementbecame effective April 1, 1995.

When evaluating purchase proposals, the group projected its revenuestream over the next 5 years and compared it with the offers received.But strategic objectives were weighted more heavily than financialconcerns.

As the only oncology group in Cedar Rapids, the group was notseeking a traditional competitive advantage. They viewed thisas a defensive strategy against future competition and as an opportunityto "align ourselves with someone who could bring somethingbigger and better to our practice," Dr. Gesme said.

For example, the group is adding a retail pharmacy to their operations,something they would never have considered a year ago, Dr. Gesmesaid. He noted that in an oncology practice, the drugs prescribedare not routine. Since local pharmacies may have limited stock,patients may get only a partial supply.

"We can offer a service to the patient--the convenience ofgetting the entire order filled at one time and the luxury ofbilling from a single focus and dealing with only one pharmacist,"Dr. Gesme said. In addition, an on-site pharmacist will be ableto prepare chemotherapy solutions, provide patient education,and communicate easily with the group's staff.

Genetic and cancer screening, x-ray services, stem-cell transplants,and drug company-contracted research are possible areas for additionalgrowth, he said. Affiliation with PRN will also allow for jointdevelopment of clinical guidelines.

Other Benefits

Both Dr. Gesme and Michael Mohn-sen, MHA, chief operating officerof Oncology Associates of Cedar Rapids, and now a PRN regionaldirector, agreed that the group has greatly benefited from manyeconomies of scale, due to PRN's large size. Plus, oncologistsor administrators can call any of PRN's corporate departmentsfor professional advice.

Dr. Gesme noted that PRN offered legal advice on the best wayfor the physicians to structure their corporation, and also informationon the IRS' leased employee regulations. Mr. Mohnsen said thatPRN provided a turn-key information system for the group, includinguser training, and will assist in developing marketing strategiesand promotional materials as the group adds new services.

Since all nonphysician staff members are now employed by PRN (seebox below), the group no longer needs its manual payroll system.PRN also handles all aspects of patient billing.

When negotiating a managed care contract, representatives fromOncology Associates of Cedar Rapids and PRN meet together withpayers--although only Iowa Cancer Care P.L.C., the physician armof the company, signs and is responsible for fulfilling the termsof the contract. However, as Mr. Mohnsen noted, PRN provides "costdata and knowledge of managed care that we don't have to takethe time to develop."

Also, PRN can act as the "bad cop" in negotiations withhospitals and other physicians, and probably obtain more favorablerates and terms in contracts.

Issues that develop over time and are not covered by the contractare decided by "shared governance." A board of four--twophysicians from Iowa Cancer Care and two representatives fromPRN, one a medical oncologist--modifies and amends the servicecontract as needed.

When the sale of any portion of a practice is contemplated, manyemotional issues will arise, since, as Dr. Gesme said, "mostphysicians want desperately to maintain autonomy." He andhis partners determined that what they really wanted was autonomyin the clinical care of their patients. Having another entitytake over the time-consuming operational issues was very attractive--aslong as patient care was not impacted negatively.

But he cautioned that physicians contemplating such a move mustascertain the buyer's motivation for acquiring the practice. "Dothey want high-quality clinicians, simply a revenue stream, ora salable asset for future merger and acquisition activity?"Dr. Gesme recommends face-to-face meetings with the company'sCEO and medical director, as well as representatives from otheraffiliated physician groups, to help determine the company's operatingphilosophies.

Dr. Gesme's group now has a long-term, contractual obligationto PRN. A restrictive covenant in their contract prohibits thegroup's physicians from practicing medicine "in a physicalradius around our location for many years," if they end theiraffiliation with PRN, he said. However, the group is very satisfiedwith the results of the transaction.

Finally, Dr. Gesme cited the need for ongoing "spin control"about a transaction, to help explain the contract to the localmedical community.

How the Sale Affected Employees

Michael Mohnsen, MHA, of Oncology Associates of Cedar Rapids,told the ACCC (see story above) that since much of a patient'sencounter with a practice is not with the physician, but withthe staff, it is critical to analyze how the sale of a practicewill affect all concerned.

It is important to do a "line-by-line comparison" ofemployee benefits before and after the sale transaction, he said.

Changes in health and dental insurance coverage, premiums, co-payments,deductibles, wages, raises, bonuses, vacation and sick time, andretirement plans must all be examined, Mr. Mohnsen emphasized.

Several of Oncology Associates of Cedar Rapids' 30 employees hadpre-existing medical conditions; by working with the purchasingcompany (PRN), "we were able to document with the new insurancecarrier that they would take on these situations without eliminatingcoverage," he said.

Using some of their proceeds from the sale, the physician partnersbought stock in PRN for each of the group's employees. This madethe conversion easier for the staff to accept, even though theylost deduc-tibles (which start over when changing insurance carriers)as well as some of their retirement benefits.