Cancer Capitalists

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US OncologyUS Oncology's doctors treat one in seven new cancer patients -- and enrage the rest of medicine.

Cancer treatment is one of the few bright spots on Dr. Dale Fell's income statement. His nonprofit Mission Hospital in Asheville, N.C. loses money on its emergency room, its pediatric division and its care for indigents. But not on radiation used to zap tumors at a cost of up to $50,000 per patient. Oncologists send 1,700 patients a year to Fell's hospital, one of two in western North Carolina with a radiation department.

Then last fall US Oncology, the giant cancer care services company, received approval from state regulators to buy a linear accelerator and launch its own radiation department three miles away from Mission. "This could cripple us," Fell says. He has sued state regulators, alleging us Oncology's radiation license violates state law.

Founded in 1999, US Oncology manages the business affairs of 1,000 cancer doctors, injecting practices with financial savvy and a competitiveness seldom seen in medicine. US Oncology's affiliated physicians treat 550,000 patients a year--one in seven new cancer sufferers. The company helps practices claim bigger chunks of the $80 billion cancer care market by recruiting new physicians, adding treatments and conducting clinical trials. It recently became the nation's single largest purchaser of chemotherapy drugs, spending a projected $2 billion this year. The clout allows US Oncology's doctors to demand drugs at a 24% discount on wholesale prices. US Oncology booked $239 million in operating income (defined as earnings before interest, taxes and depreciation) in 2005, on revenue of $2.5 billion.

The company has attracted a swarm of critics, often nonprofit or community hospitals, alleging that US Oncology destroys the fragile local economics of the U.S. health care system. The company has had to defend four whistleblower lawsuits alleging improper Medicare billing. (None went to trial.) Nonprofit hospitals in North Carolina have accused it of trying to push through anticompetitive legislation to help carve out a monopoly.

R. Dale Ross, US Oncology's 59-year-old chairman, rejects the claim that his firm has damaged the public by skimming the profitable patients from nonprofit hospitals. Rather, Ross says, the company improves the standard of care by putting sophisticated outpatient cancer centers in towns all across the country. "Not everyone shares our vision," he notes.

The idea of organizing masses of oncologists under one flag emerged in the early 1990s at a six-doctor cancer center in Denver. The physicians quit hospital gigs and hung their shingle after improvements in cancer drugs made it easier to treat patients in clinics. Simultaneously the rise of health maintenance organizations was making it more difficult to negotiate favorable reimbursements for cancer treatments. Looking to gain clout with the HMOs, the doctors, along with pharmacists, approached Welsh, Carson, Anderson & Stowe, a New York City venture capital firm, with an idea for a network of practices. Backed by the VC, the doctors incorporated in 1992, who incorporated under the name American Oncology Resources. Welsh Carson recruited Ross as chief executive.

North Carolina-born and easy-mannered, Ross spent six years in the Air Force before working up the sales ranks at American Hospital Supply. After witnessing the rise of in-home drug infusions, Ross founded Home Medical Support Services, an in-home drug services outfit that he took public and sold to Japanese investors in 1990 for $255 million.

Ross set up American Oncology's headquarters near his home in Texas and dispatched his six original doctors from Denver to recruit more. He quickly discovered that oncologists are an ornery breed with an inherent distrust of corporate life. "They just don't have a team mentality," says Ross.

Ross won them over with generous terms. The doctors got a mix of notes and stock in American Oncology, and the company got a fixed monthly fee, a cut of the practice's revenue and, if operating goals were met, an extra performance fee. By 1995 Ross had inked deals with 142 more doctors in cities from Portland to Pittsburgh.

That year Ross took American Oncology public, raising $95 million. Over the next three years Ross added 150 physicians to the network and expanded revenue at a 66% annual clip. He earned extra credibility with oncologists by hiring renowned Harvard-trained research oncologist Lloyd Everson as president to build a clinical trial program.

Ross also set out to help practices wring maximum profit from Medicare and insurers. He built a giant database, analyzing drug regimens for each type of cancer and their reimbursement rates. Upon request, US Oncology sends doctors a report highlighting the cost of using different drug cocktails.

In 1998 Ross merged American Oncology with Physician Reliance of Dallas, a practice manager, in a $650 million stock swap. Just before the deal, Physician Reliance had settled a nasty antitrust lawsuit filed by nonprofit Methodist Hospital, alleging the companies conspired with doctors to build a monopoly in the Dallas-Fort Worth area. The resulting behemoth, renamed US Oncology, had contracts with 700 physicians and annual revenue of $1.5 billion.

In 2001 Ross announced plans to sell $160 million in assets back to network doctors. US Oncology took a $200 million charge and posted its first loss. Ross renegotiated contracts; the new ones call for US Oncology to provide front-office management in return for a 30% split of profits. In addition, Ross launched a pharmaceutical-services division to sell data and consulting to big pharma and health insurers.

Just as Ross was completing the restructuring in 2003, Medicare announced that to save money it was changing the formula by which it reimbursed drug costs. Ross estimated the change would cut US Oncology's profits by 20%. Doctors kept the faith in Ross, but investors didn't. US Oncology's stock fell 25%. Seeing an opportunity, Welsh Carson took the company private in a $1.7 billion buyout in 2004.

Now Ross is pushing a slew of oncology-related services, such as imaging and radiation therapy. US Oncology will buy, say, a $500,000 positron emission tomography scanner, then turn it over to the doctors for a cut of profits from the machine. Prescriptions for PET scans, which cost $1,200 on average, are projected to grow 7% annually, according to sg2, a health care consultancy.

In Raleigh, N.C. Ross persuaded a ten-doctor oncology practice to leave leased space at the Rex Cancer Center at the University of North Carolina and end a 15-year affiliation with the nonprofit. US Oncology then lined up the financing to build a new 35,000-square-foot clinic across the street. Ross also told Rex that he wanted a larger cut of the money his doctors would generate by sending patients to Rex's radiation labs for treatment. When Rex refused the deal, Ross announced plans to obtain three new linear accelerator machines to beef up the new cancer center's radiation program. Ross lobbied legislators to exempt the center from state laws requiring doctors to prove unmet demands in order to buy radiation equipment. Competing cancer centers would still be subject to state approval.

Ross' legislative efforts failed but still created bad blood between US Oncology and the university. The US Oncology affiliate now refers almost no patients to Rex. "Their methods were totally backhanded," said one hospital employee.

Ross downplays the hostility, noting that US Oncology still has referral partnerships with six nonprofit hospitals. And, he says, cancer treatment is a growth business. Treatments are getting better and patients living longer. That is good for both patient and provider.

source - Forbes 

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