Hospitals that are about to open outpatient cancer centers are like golfers basking in the sunshine on the first tee-full of hope, but set up for nothing but frustration.
It all looks good at the outset, what with $60 billion spent on cancer care in 2000, about $35 billion of it on outpatient care. But analysts predict that hospital-owned cancer centers will prove as frustrating as a day on the links when your game and the weather both head south.
Medicare changes are the wind gusts carrying in the dark clouds. One change-the outpatient prospective payment system-went into effect last summer and could be cutting payments as much as 40%. The other change looms on the horizon. It is a reform of the way Medicare pays for drugs in outpatient care, and it could hit cancer-care providers hardest of all.
Harvey Bichkoff, chief executive officer of California Cancer Care, which operates three cancer centers in the San Francisco area, sees trouble for hospitals. "Fundamentally, I think it's cheaper and more pleasant for patients to seek outpatient oncology services in a private clinic instead of a hospital," Bichkoff says. "The question is going to be, how soon are drug reimbursements going to be hit, and how hard? There is some discussion that outpatient hospital infusion centers are going to get hit pretty hard on chemotherapy reimbursements, driving some of them out of the business. But if the outpatient centers get hit, too, where are the patients going to go?"
Back on the first tee, cancer care looks like a winner for providers. Cancer is snaring more federal research dollars than ever. The National Cancer Institute's budget has more than doubled in the past decade to nearly $3.8 billion in fiscal 2001, with 89% of that budget supporting research. The Bush administration is requesting $5 billion for fiscal 2002.
And the patients are there: The American Cancer Society estimates that nearly 1.3 million new cancer cases will be diagnosed in 2001 and about 553,000 Americans will die of cancer-or 1 in 4 deaths, second only to heart disease.
In other words, for providers, there's money to be made in cancer, even as the NCI reports that the rates of cancer incidence and mortality fell from 1992 to 1998, reversing the two-decade trend of rising numbers of cancer patients and cancer deaths.
Increasingly, cancer-care money is being spent in outpatient settings. The number of outpatient cancer centers has increased more than 58% since 1997 to 950 in 2000, according to an annual survey by SMG Marketing Group of Chicago. The same survey found that more hospitals are recognizing the shift to outpatient centers, with 25% of them now hospital-controlled (See chart).
"Right after cardiology, cancer care is the second-biggest part of the healthcare dollar," says Stephen Wolfe, president and CEO of 148-bed Indiana (Pa.) Hospital, which is leasing land on its campus for a new cancer center to a joint venture led by Houston-based U.S. Oncology. "We need to be servicing our community in that area."
U.S. Oncology is the biggest for-profit player in outpatient cancer centers with 72 of them nationwide. Bruce Broussard, chief financial officer, sees plenty of growth opportunities in the $35 billion outpatient cancer-care market. The company plans to add 12 to 15 new centers per year for five to eight years to have enough capacity to handle radiation and chemotherapy referrals from its network of 864 affiliated physicians, Broussard says. U.S. Oncology also sees plenty of potential for positron emission tomography, a high-tech cancer diagnostic tool, he adds.
Another for-profit player in cancer care isn't faring as well; Response Oncology, Memphis, Tenn., declared bankruptcy in March (April 2, p. 10). Response Oncology runs 23 centers, down from a high of 54 at the start of 1999. Its fortunes have declined since research published at the 1999 annual meeting of the American Society of Clinical Oncology questioned the effectiveness of the company's specialty, high-dosage chemotherapy treatments.
U.S. Oncology's optimism may stem from pressures from opposite directions that are pushing more and more cancer care into ambulatory centers. On one side, physician group practices have stopped offering chemotherapy services, says Ted Matson, president of Ambulatory Care Advisory Group in Chicago. Complying with Medicare reporting requirements and workplace safety regulations on handling highly toxic cancer drugs is becoming too expensive, unless the costs are spread over the high volumes of patients that a center can handle, Matson says.
Meanwhile, hospitals have been pushing cancer care into outpatient centers for years, because of both clinical and reimbursement changes, says Lee Mortenson, executive director of the Association of Community Cancer Centers, Rockville, Md. Medicare's DRG system in 1983 sharply cut reimbursements for inpatient chemotherapy and radiation, giving hospitals an incentive to provide cancer care on an outpatient basis, Mortenson says. At the same time, more drugs that complement chemotherapy-drugs that fight the nausea and weight loss, for instance-were developed, making it easier for medical oncologists to provide the drugs in their offices.
"I think most hospitals see cancer as the big thrust of the next three decades, with all of the boomers turning into geezers," Mortenson says. "So they can't abandon cancer (care), but they can't always offer it in the same, hospital-based way."
Stemming the flow
Indiana Hospital's Wolfe certainly sees it that way. "Market share reports indicate that we have a good part of the market that does leave the community to get cancer care," he says, with patients driving 45 minutes to another western Pennsylvania town, Johnstown, or more than an hour to Pittsburgh.
Patients are draining away, despite the presence of a cancer center on Indiana Hospital's campus. That center's lease runs about five more years, Wolfe says. He declines to comment further about the center, citing a potential legal dispute with the tenant.
The $4.4 million, 9,000-square-foot center that U.S. Oncology is developing with Oncology Hematology Associates, a local physician group practice, is meant to stop that drain. Indiana Hospital is merely the landlord, so it won't share in any financial success the center may achieve, but Wolfe says having the center will keep patients in town when they need surgery. The hospital also may benefit from providing lab services to the center.
"There is a definite mission component for a not-for-profit community hospital, but there is also a financial rationale for being in that business line," Wolfe says of cancer care.
Competition also was a factor when 291-bed Enloe Medical Center, Chico, Calif., decided to build a 30,000-square-foot cancer center, says Janet Ellis, vice president of ambulatory care.
"We felt it was important to have the center to maintain our market share of cancer patients, recognizing that more and more radiation centers are popping up in the area," Ellis says. "That was certainly one of the reasons that we felt it was important to make sure that our program was the best that it could be."
Ellis says the center, scheduled to open in December in partnership with a physician group practice, also will improve patient care. The center, which will cost $9.2 million to build and equip, will centralize a wide range of services-from doctor's offices, chemotherapy and radiation to a boutique selling goods that cancer patients might need, such as swimwear for women who have had breast cancer surgery. The center also will provide the space needed for bigger, newer equipment for radiation, she adds.
Hospitals see each cancer patient as a potential treasure trove-one visit that confirms cancer can lead to surgery, 25 to 30 radiation visits, chemotherapy and other follow-up visits, or about $200,000 in revenue for a single patient, says Brian McCagh, executive director of the Washington Cancer Institute, part of 791-bed Washington (D.C.) Hospital Center. "If (hospitals) don't have the mechanism to capture and treat those patients, they're going to be heading off to another hospital," he says.
Shifting winds of reimbursement
Changes in Medicare-which is the payer for about half of all cancer patients-are the big question mark for outpatient cancer centers, says Matson, the ambulatory-care consultant. Everyone who deals with Medicare's outpatient prospective payment system is still gauging the effects, but the early line is that the system is cutting reimbursements 30% to 40%, Matson says. The outpatient PPS went into effect on Aug. 1, 2000.
A change that hits at the core of the revenue stream for outpatient cancer centers is expected by Jan. 1, 2002. In the Benefits and Improvements Protection Act of 2000, Congress ordered an examination of reimbursing for drugs in outpatient settings, with both HCFA and the General Accounting Office put on the case. The agencies are due to report by September on Medicare's average wholesale price method, which pays providers 95% of this measure of acquisition costs for outpatient drugs. The Clinton administration proposed to cut the reimbursement to 83% of the average wholesale price, but Congress rejected the proposal.
The law intends the change to be budget-neutral, however, with drug reimbursement cuts offset by richer reimbursements for the doctor's time and the nonphysician administrative costs of providing chemotherapy, according to a May paper on the law's effects by the American Society of Clinical Oncology.
Though changes in average wholesale price reimbursement would affect all Medicare providers, the impact would be more strongly felt by outpatient cancer centers, the Washington Cancer Institute's McCagh says.
"Where's the money to be made in cancer care? For many of the private practice oncologists, it's not uncommon where up to 50% of their annual take-home pay can be tied directly back to the markup on the drugs they prescribe in their cancer practice," says McCagh, a former president of the Association of Cancer Executives, Downers Grove, Ill. "How much longer will HCFA allow us to buy something for X (dollars) and try to sell it for 3 or 4 (times) X? Eventually, HCFA and managed-care organizations will crack down on this, and the question is just how much will they chip away at those margins."
The effects of the outpatient PPS and potential changes in drug reimbursements mean providers "have to be very realistic in terms of volume, service orientation and cost to provide care," Matson says. "The days are long gone when anybody could just go out and open a center and expect a lot of referrals and a profit center."
Divide and conquer together
Matson sees one strategy that will continue to be very strong: provider joint ventures. When providers agree to split the market, they stand a much better chance of getting the patient volumes needed to succeed, he says.
Two not-for-profit systems in Kansas City, Mo., are testing Matson's theory. Saint Luke's-Shawnee Mission Health System and Health Midwest have agreed on a 50-50 venture to open a "comprehensive cancer center," a designation awarded by the National Cancer Institute to 60 facilities nationwide. Cancer centers win the designation by showing a commitment to cancer research and offering a broad program of treatment in an academic setting. In return, such centers are supported by NCI research grants.
Perhaps more importantly, NCI centers have a great reputation with patients. "Our reading on it has been that it will be a greater market attraction to reinforce the community and medical confidence in the program," says Tom Cranshaw, senior vice president of strategic planning at Health Midwest, a 15-hospital system. The idea is to provide the level of care for which patients have been traveling 90 minutes by plane to receive from a renowned provider such as the University of Texas M.D. Anderson Cancer Center in Houston, Cranshaw says.
One issue with any joint venture is whether it will cause antitrust scrutiny from regulators. "We feel like, given what this organization will do for the community, and the community benefit that will accrue, we're not going to have antitrust problems," says Doug Lawson, vice president of Saint Luke's-Shawnee Mission, an eight-hospital system. "Nevertheless, we're giving the matter a lot of legal review."
In the absence of a joint venture in a freestanding facility, however, Matson sees tough times for hospitals in the outpatient cancer-care market. So does the Association of Community Cancer Centers' Mortenson, who expects to see most hospitals drop out of radiation and chemotherapy, markets where they currently serve 60% and 30% of patients, respectively.
"It's a sad thing," Mortenson laments, "but once again, Medicare reimbursement levels are changing the place where care is provided."