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Oncology Practice Trends: Operating Margins Will Continue to Decline, Alternatives to Fee-for-Service Gain Traction

February 2012, Vol 2, No 1

Chicago, IL—Community oncology practices can expect a continuing decrease in operating margins, a slowing of the gains in business and clinical operating efficiencies, and rising labor costs. In addition, chemotherapy drug margins will shrink. As a result, current business models of oncology practices may be difficult to maintain, said Thomas R. Barr, MBA, General Manager at Oncology Metrics, speaking at the Cancer Center Business Summit in Chicago.

Mr Barr reported oncology practice trends based on a period of more than 6 years (from 2005 to 2010), reflecting data in surveys of approximately 1400 oncology practices across the country.

In providing a historical perspective of practice revenue and operating costs, Mr Barr described a stable period of operating margins between 1991 and 2003. During this time, several trends became apparent:

  • Infusions migrated out of the hospital and into the office
  • The number of specialty distributors of drugs increased
  • Antiemetics and growth factors began to define supportive care
  • Drug spending per hematologist/ oncologist steadily increased
  • Reimbursement from Medicare was governed by average wholesale price (AWP)
  • The total revenue and total operating costs steadily diverged, leading to “free cash” accumulation.

“The period also saw an increase in oncology aggregators (eg, OnCare, Texas Oncology, Physician Reliance Network) that wanted to aggregate oncologists into larger groups,” said Mr Barr.

Then came the Medicare Mod­ernization Act of 2004-2006, which changed the reimbursement meth­odology for chemotherapy drugs, replacing AWP with average sales price as an index for payment. “That launched a period of instability,” said Mr Barr. “We saw that our top line revenue continued to rise during the initial years of the Medicare Modernization Act, and we saw that our drug spending really spiked upward.”

The “squeeze” came in 2007, according to Mr Barr, when the curves for total medical revenues and total operating costs started to converge. “For the very first time, we saw the drug spend for medical oncologists go down, and they went down sharply,” he said. “This was a time when we had increased payer information requirements.”

The squeeze is driven by demographics, as Medicare has assumed the role as essential payer, Mr Barr suggests. The number of Medicare enrollees, which was 34 million in 2000, is expected to explode over the next 20 years, reaching 68 million by 2030. These demographic changes have resulted in a huge spending increase—from $408.3 billion in 2006 to an expected $862.5 billion in 2016.

Future Trends in Oncology Practice
Mr Barr listed several trends that are most likely to continue:

  1. The squeeze will persist for oncology practices. Total medical revenue will decline “because we’re not getting paid as well as we have in the past for the services that we provide,” he said. “Drug revenue will continue to increase but not as fast as the money spent to buy those drugs.” The result is a narrowing drug margin, which has already fallen from 22% in 2005 to 9% in 2010.
  2. The pace of efficiency improvement falters. Much of the im­provement in efficiency in the past was a result of inventory reduction. “We used to have a lot of drugs on the shelf, now we don’t have many drugs on the shelf,” said Mr Barr. An acceleration in collections also contributed to an improved efficiency, but the resulting increase in cash flow was probably a one-time event. Bad debt also decreased as unfunded care in the community practice setting declined, but this trend “can’t be taken a whole lot further.”
  3. Service delivery per hematologist/oncologist has peaked and that stability in the number of visits per hematologist/oncologist has al-ready occurred.
  4. Labor costs will increase faster than revenue as the number of full-time employees increases, which is not being driven by service demand. “Staff will be added to deal with things that don’t generate revenue,” he said.

As change occurs, community oncology practices will have to prepare for the future, according to Mr Barr. The margins on drugs and diagnostics will continue to fall, and diagnostics and ancillary services will take on greater importance.

“As we look to the future, we don’t see fee-for-service dying: it may be a small and lingering death that will take a while,” he said. “Private payer programs are out there, and they may have some traction in some markets, but Medicare will be the game changer, although the rescue could take years.”

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