Cancer center operator and PPM US Oncology is progressing with a plan to convert all its practices to a "net earnings" business model rather than using the traditional percentage-of-revenue compensation plan. After signing renegotiated contracts with two major affiliates, the Houston-based firm now derives more than half its revenues from affiliated medical groups compensated based on profits.
Instead of figuring payments to doctors as a percentage of net revenue, US Oncology will share net income with its affiliated physicians. The Houston-based firm says the arrangement encourages the practices to operate as efficiently as possible and allows the company to reinvest profits into infrastructure improvements like expensive but lucrative positron emission tomography (PET) centers.
While this model is not necessarily a new concept, US Oncology may be the first PPM to try it with physician groups it does not own. It is not clear yet whether the trend will spread as more practice managers try to find the right formula to attract and retain medical groups.
"We don't have a priority payment to the physicians anymore," says Nicholas DiBello, M.D., president of Rocky Mountain Cancer Centers, a US Oncology operation in Denver. "This is what it would be like if you were in private practice. You don't take home a paycheck until you've met all your expenses."
Despite the possibility that doctors could see their income dry up, "I think that most of the physicians feel that it's a reasonable compensation plan, and they do realize that the health of the company is going to depend on the efficiency of the practice more than ever before," DiBello says. He would not discuss specifics of revenues or profits.
RMCC, which has 54 affiliated oncologists in Colorado and another six at a clinic in Santa Fe, N.M., is one of two US Oncology holdings that converted to the net income model in February. Physicians with the Kansas City (Mo.)
Oncology and Hematology Group also renegotiated their affiliation agreement. After several weeks under the new plan, DiBello says physicians on staff bring home about the same paycheck as before.
New design or not, US Oncology so far has been successful during its transition to the net earnings model. At a time when other PPMs are failing miserably, US Oncology reported a net income of $35.7 million during the first nine months of 2000.
"Switching from net revenue to net income is not a revolutionary idea," says Bill Painter, an attorney at Jackson, Miss.-based Baker Donelson Bearman and Caldwell.
Painter, who specializes in physician compensation, says many healthcare facilities and practice management companies adopted the revenue-based model simply because it makes for easier bookkeeping.
"The idea of reinvesting capital is actually the PhyCor model," says Mike Hutchens, Nashville, Tenn.-based senior vice president of Cejka Consulting in St. Louis. He is a former vice president for development at PhyCor, an ailing PPM that ran into trouble by purchasing medical practices nationwide and by failing to reinvest in its medical groups.
A key difference is that US Oncology owns the facilities and employs the support staff, but the physicians themselves are independent contractors instead of employees. Also, single-specialty PPMs, such as US Oncology, historically have been more successful than their multispecialty counterparts.
Alex Hunter, Atlanta-based partner in Cejka's healthcare consulting division, says: "I think it's a good marketing twist, but it's not a new idea. They're really trying to re-energize a sense of entrepreneurism back into their practices."
Hunter, who says he's bullish on the concept, adds: "In the past, I don't think it was the model that was flawed, but the way the model was communicated to and presented to the physicians was flawed. We as nonphysicians went in there and said, 'All we want you to
do is practice medicine,"' but it did not work out that way.
The US Oncology approach "inherently is in the best interests of our physician partners and US Oncology because it puts the focus on improving revenues and enhancing efficiency," says Alvis Swinney, the company's marketing chief. "By improving the bottom line, it makes reinvestment much more attractive. We're mutually incented to improve efficiency in operation and revenue growth."
However, Painter warns that net income is "tougher to compute from a financial accounting standpoint." For tax purposes, physician-owned practices must decide whether doctors' salaries should count as practice expenses or as management fees. When basing payments on the bottom line rather than on the top line, Painter says, "The issue is what goes in that expense column."
He explains: "You know what your collected revenue is. For net income, you have to define what expenses are included." Without careful control of the expense side of the balance sheet, he says, a practice could encounter cash-flow problems.
Joseph Deuschle, RMCC's executive director, says US Oncology has tried to rein in its spending by avoiding the expansion-via-acquisition strategy that killed MedPartners and Physicians Resource Group and has rendered PhyCor's stock worthless. With US Oncology, he says, "Growth is based on adding new physicians and growing market share."
The firm now is affiliated with more than 850 physicians at 72 practices in 26 states. According to Swinney, US Oncology handles 15% of the country's new cancer cases each year.
Deuschle says physicians are willing to take the chance that an unprofitable month could mean no paycheck for the promise of continued investment in their facilities. "Our practices use investment capital in ways that individual practices can't," he says.
Swinney says US Oncology has the resources to bring cutting-edge technology to practices that otherwise could not afford it. The company, which currently operates five PET scanners nationwide, plans to have 35 installations within three years.
"It sounds like they're trying to demonstrate value over time" by aligning incentives with profits, says Mark Francis, senior vice president for healthcare at the Chicago-based investment banking firm Houlihan Lokey Howard and Zukin.
Francis says changing physician incentives is one of three ways in which healthcare facilities companies are learning from the mistakes of PPMs. Others are the sale of practices back to the doctors and straight management arrangements without practice ownership.
"It shows that (US Oncology managers) still have positive relations with their physicians and that they're trying to do better," he says.
The common thread between these three approaches is that the PPM or facilities manager does not own the physician practice.
Hutchens, the healthcare consultant, believes investors might shy away from companies that operate only from contract to contract and have essentially no hard assets, while a firm that owns real estate and medical equipment, like US Oncology, has the assets to keep its value up.
"The non-equity model, the pure contract model, is probably the model for the future," he says. "But without an equity model, it's going to be tough to be (a) public (company)."