Reflecting the growing financial pressure on oncology practices, including recent and pending changes in Medicare reimbursements for administered drugs, U.S. Oncology says it now receives the bulk of its revenues from group practices under contracts that require physicians and the company to share in rising group expenses.
The Houston-based company provides oncology-practice management services for 850 physicians at 450 sites in 30 states. Medicare accounts for 38% of revenue for affiliated physicians, the company said.
Today, U.S. Oncology announced 83% of its net revenue is derived from contracts with physicians in which the company pays and is reimbursed for all operating costs of a physician practice and then is paid a management fee based on a percentage of the remaining operating income of the practice. At the end of 2000, just 41% of U.S. Oncology contracts with physicians contained such a percentage guarantee of net operating revenues.
The other U.S. Oncology payment model -- still used by the company to a much lesser degree -- allows physician groups to retain a fixed portion of their revenues before any management fees are paid. Under this model, if practice expenses and the fixed portion of revenues exceed total revenues, U.S. Oncology would be on the hook for the loss, the company said.
With the conversions in payment models, U.S. Oncology Chairman and Chief Executive Officer R. Dale Ross said "we have seen a significant increase in practice involvement in local management, as well as enhanced opportunities to expand and diversify practice offerings."
Economists at the American Society of Clinical Oncology estimate increases in Medicare reimbursements for drug administration services in 2004 will increase 2.4 times over 2003 levels, but reimbursements for administered drugs will drop from 95% of average wholesale price to 85% of AWP for most drugs and 80% for some.
The company told investors late last year it expected 2004 increases in reimbursements for practice expenses under Medicare will be more or less evenly offset by cuts in drug reimbursements.
Medicare changes planned for 2005 will negatively impact U.S. Oncology's revenues and those of its groups, the company said. Using 2003 financial data for nine months through 2003 as a basis for a pro forma analysis of the impact of the impending changes, the company estimated 2005 reductions would produce a 2% drop in its net revenue and a 30% drop in net income.