Book Excerpt: Elements of a Successful Oncology Transaction

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).