This is an excerpt from the HealthLeaders Media book Oncology: Strategies for Superior Service Line Performance by ECG Management Consultants, Inc.
Having completed the initial physician alignment planning, hospital and physician leadership are ready to begin defining the details of the arrangement. While the parties may agree on an overall approach, the negotiation of transaction details can reveal challenges and disagreements that will need resolution.
Taking the time to systematically work through the various deal points is critical to long-term success; however, it is not unusual for hospitals to rush the transaction process to meet a perceived crisis or artificial deadline. It is in these situations that obstacles can emerge that may disrupt negotiations and ultimately stall or derail the transaction process.
Ultimately, the details of the alignment model must reflect the unique needs of the players and the particular market. Despite their range in design and complexity, transactions that are successfully completed typically utilize a fairly standard method to work through the various issues and deal points.
Evaluate Business Implications
Even in the most urgent circumstances, it is important to utilize a structured process that will facilitate informed and shared decision-making while avoiding impulsive decisions that can ultimately stall discussions. Determining the basic feasibility of the relationship from a business perspective should be completed very early in discussions.
The conclusions and recommendations resulting from determining the business needs of the parties will provide a common understanding of the imperatives for alignment and help steer negotiations, particularly as the key deal points for an arrangement become finalized.
Some consideration should be given to the following aspects of alignment:
- How does this arrangement assist the aligned organization's overall vision for the future of how oncology care is delivered in its market?
- Does this arrangement support the hospital's broader physician alignment strategy?
- Will the arrangement facilitate greater clinical coordination and improve efficiency?
- Are provider needs for competitive compensation and stability addressed?
- Will this arrangement support the community need for oncology services and subspecialty care?
- What should a true partnership involve?
- Are physicians willing and ready to help lead the oncology service line?
- What are "deal breakers" from each party's perspective?
Understand Key Drivers
The incremental costs associated with hospital/physician alignment often require that parties identify additional revenue streams, either through increased volume or better reimbursement.
Financial challenges are particularly significant in oncology-related services because many independent physicians rely on ancillary services for a substantial percentage of their income. In addition, many of these alignment arrangements require large up-front capital expenditures, whether it be to assume the drug inventory of a medical oncology business or to purchase a radiation oncology group's linear accelerators and other related equipment.
To generate new revenue, many hospitals are seeking to convert all or portions of physician practices to provider-based designation. Under provider-based status, physicians receive a reduced Medicare professional fee for selected services, while the employing hospital can bill for overhead expenses.
The hospital bills a facility fee to cover the practice costs, which typically exceeds the reduction in professional fees and can result in a reimbursement advantage, particularly for select oncology services. Even if the Medicare reimbursement differential is insubstantial, the conversion of oncology services to provider-based status can have a considerable commercial reimbursement advantage.
Another approach to enhancing margins is acquiring chemotherapy drugs through the 340B Drug Pricing Program. The 340B program enables participating organizations to purchase qualifying drugs at substantial discounts (an average of 20% to 40% off of retail pricing).
If the transaction includes medical oncologists that currently perform infusion therapy services outside the hospital, the parties should conduct a thorough assessment of 340B drug pricing eligibility to identify options that maximize the program's benefits. Organizations should at a minimum consider the following questions when evaluating 340B pricing:
- Does the hospital or an affiliated hospital within the system qualify for 340B?
- If the hospital participates in 340B, how large is the practice's chemotherapy program? How many medical oncologists are expected to participate?
- If the hospital participates in 340B, how can it increase its participation through partnerships with community oncologists? And how will the alignment model engage physicians in the program?
- How many qualifying patients (e.g., outpatients, patients with an established relationship with the provider) are expected to participate in the program? What is the expected economic gain?
Ensure Proper Due Diligence
The due diligence process is critical for every transaction and is typically conducted in an iterative fashion, wherein increasingly detailed information is requested from the group.
Questions about compensation typically are initiated early in the process. It is critical for the hospital to conduct a thorough assessment of the oncologists' current practice, understanding all revenue streams and expense drivers, before presenting a financial offer to the physicians. This process is important for any specialty acquisition; however, it is particularly important for oncology practices due to the complexities of the practices (e.g., large reliance on ancillary income).
Issues that are commonly identified as a result of the practice assessment include:
- Lack of alignment between compensation and productivity
- Declining compensation and/or productivity over time
- A high level of midlevel services (e.g., infusion management) and/or other services that do not support a work relative value unit (WRVU) compensation model
- High level of outside physician compensation
- Varying compensation plans between employed and shareholder physicians
- Antiquated or poorly maintained capital equipment
- Practices with a large debt load
- Abnormal supply costs relative to production levels
The initial financial review is a critical first step in transaction discussions, but the due diligence process should be ongoing. Due diligence efforts related to implementation planning will begin once a term sheet and/or letter of intent has been finalized. This could include a third-party evaluation of the group's practice (if applicable) and potentially a fair market value (FMV) review of the proposed compensation plan.
In addition, there will be a number of other considerations if integrating the group into the hospital (e.g., space planning requirements for provider-based billing compliance). Many of these considerations are outlined in the following sections.
To facilitate this process, though, it will be important to share the implementation timeline with the physicians so they understand the process as well as the rationale behind what may seem like excessive data requests.
Involving one or more of the physicians in the implementation will help ensure that the physician group continues to be educated about the key issues being evaluated.
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The full book is available here: Oncology: Strategies for Superior Service Line Performance.
Oncology: Strategies for Superior Service Line Performance by ECG Management Consultants, Inc. is published by HealthLeaders Media.