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Medium-Margin Businesses

June 2011, Vol 1, No 2

Oncology is evolving from a high-margin infusion business into diversified medium-margin businesses, according to Jeffrey Patton, MD, medical oncologist and CEO, Tennessee Oncology, Nashville. At the 2011 annual meeting of the American Society of Clinical Oncology, Patton discussed how to assess the potential for future revenue, before you commit to adding an ancillary service.

Begin by developing a pro forma statement. This statement projects future returns of a new venture. In appearance, a pro forma statement is similar to an income statement; but instead of detailing past revenue, the financial tool creates a way to decide if the new venture will be worthwhile.

Income = Revenue – Expenses

1. Estimate revenue. First, estimate your potential volume, for example, the number of tests taken and/or procedures performed. Second, multiply that volume by the estimated revenue per test. To calculate your per-test revenue, Patton suggested averaging your commercial rates with your Medicare rates. To keep the estimate as accurate as possible, he stressed the importance of factoring in any “cannibalizing” of a current revenue stream, such as if you install a magnetic resonance imaging machine, remember that its use will likely decrease the use of and revenue from a current computed tomography scanner.

Be conservative in your estimates, Patton warned. You do not want to create a financial cost center instead of a profit center. Talking to colleagues who are in that business line can help, according to Patton, who recommended asking about their costs, volumes, and pro forma projections.

2. Estimate cost. This estimate will need to include any lease payments, additional employee costs (ie, will an additional person need to be hired to operate the new technology), wholesale cost of goods needed to successfully operate a new technology (eg, contrast agents or lab serums), and, if new space is required, rent payments.

3. Estimate net income. It is important to project ahead for 2, 3, 4, and 5 years, although in his experience the estimates get murkier the further out you get, noted Patton.

4. Question your decision making, and plan ahead.

  • What is your current versus your future volume? For a new technology, adoption is likely and your volume is likely to increase over time, believes Patton. For a mature technology, however, he cautioned that volume may decrease because its use is more aggressively managed by payers.
  • What is your current versus future reimbursement? Reimbursement trends follow those of volume trends. A new technology takes time to “show up on the radar” of payers, which translates to a stable, and possibly increasing, revenue stream. An established line of business, however, will be under pressure from payers and your reimbursement will probably decrease over time, said Patton.
  • Will the new business be covered by your patients’ insurance? Patton recommended only integrating services that can be reimbursed.
  • Is the vender’s pro forma accurate for your situation? It is important to realize that the vendor is selling you a product; therefore, a vendor will show you a “very aggressive pro forma statement.”
  • Will the practice’s doctors/partners embrace/support the service? The human element should not be overlooked, stressed Patton. For a new technology, consider the likely adoption curve; and for an established line of service, remember that doctors have an established referral pattern that may need to change.

5. Implement. Once you decide to move forward with a new service, choose a staff member to “own” the project. This project manager will be the one working with you to develop a project plan. Be sure to develop hard, but reasonable timelines, emphasized Patton. As a team, you need to identify resources both inside and outside of the practice, as well as look at capital—both human and financial.

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