U.S. Oncology, Houston, tried last week to persuade skeptical investors that its latest business strategy is sound.
The cancer-care company plans to make its roughly 50 physician group practices an enticing offer: They can buy back their practices at a big discount, with financing backed by their accounts receivable. Modern Healthcare first disclosed the move Oct. 1 (p. 6).
The company hopes to divest the group practices during the next 18 months. The move will cost U.S. Oncology $60 million in restructuring charges, a $420 million write-off of long-term assets and good will associated with the practices, and an annual net drop in operating earnings of $53 million, the company said. On the plus side, the company expects to receive $160 million from the sale of assets back to the practices and will cut its long-term debt by $140 million.
U.S. Oncology's move is the latest blow to the physician practice management model and, more generally, to nonphysician ownership of group practices. Nashville-based PhyCor, for instance, lost $575 million in 2000 and has shrunk to 11 owned practices from a high of about 60. Hospitals have been shedding physician practices as quickly as they snapped them up in the mid-1990s, buying only 3% of the physician practices acquired in 2000 (July 23, p. 40).
Despite the PPM model's troubled track record, U.S. Oncology's plan did not go over well with investors. U.S. Oncology stock tumbled to $5.74 per share as trading on the NASDAQ opened Oct. 1; the Sept. 28 close was $7.45 per share. It fell to $4.31 per share in midday trading Oct. 1, and traded at about $4.50 per share for the rest of the week. Analyst William Bonello of USB Piper Jaffray downgraded his rating on U.S. Oncology to "neutral" from "buy."
For the six months ended June 30, U.S. Oncology earned $20.6 million, or 21 cents per share, compared with $39.1 million, or 38 cents per share, in the year-ago period. Earnings shrank, even though revenue rose 18.3% to $746.5 million.
During a conference call, U.S. Oncology executives pitched the idea that divesting the physician practices will open growth opportunities in the $6 billion oncology pharmacy management market. Dale Ross, U.S. Oncology's chairman and chief executive officer, said the company can offer pharmacy services to a wider array of providers, without the capital burden of buying more practices. High capital needs have kept the company from grabbing more of the pharmacy management market and the overall $37 billion cancer-care market, Ross said.
The company still expects to open 12 to 15 new cancer centers a year for the foreseeable future. Ross said the new strategy should allow the company to add 60 to 80 oncologists to its network annually.
Several analysts questioned the wisdom of another overhaul of the company's business strategy. U.S. Oncology announced last year that it would push its physician group practices out of a model that paid the practices a percentage of net revenue and into a reimbursement model based on a percentage of net earnings. So far, practices that have converted to the net earnings model represent 43.4% of the company's net revenue.
Ross acknowledged that U.S. Oncology still has a lot of work to do to persuade its practices to switch, but he expects the favorable repurchase terms will offer a greater incentive to the net-revenue-model practices.
The more diversified a practice's revenue, the more likely that it will switch to the new plan, said Peter Bush, executive director of Northwest Cancer Specialists, an oncology group with 32 physicians in Portland, Ore., and neighboring Vancouver, Wash.
Practices that rely heavily on medical oncology and have shakier finances may be slow to change, Bush said. Medical oncology revenue is expected to decline if Medicare's average wholesale price reimbursement system, which covers drugs used in the course of a doctor visit, is changed.
Northwest Cancer Specialists, which has not made a decision about the company's plan, is diversified, with four radiation and three gynecology oncologists at the two cancer-care centers it operates with U.S. Oncology. The practice, which operates under the net-earnings model, has eight other offices.
Steve Messinger, a partner with MedTactics, Arlington, Va., a consulting firm that works with physician practices and other providers, said the company and the practices should benefit from the switch. Most practices that separate from PPMs see productivity boosts and declining costs, he said, because the physicians feel more in control and have more at stake.
"The real problem for U.S. Oncology is how are they going to transition the revenue-share model groups to independence," Messinger said.
