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Physician Compensation Report

US Oncology to Split Group Earnings 70%/30% With MDs to Spur Cost Cuts

US Oncology to Split Group Earnings 70%/30% With MDs to Spur Cost Cuts

US Oncology, the Houston based physician practice management company (PPMC) that works with 850 oncologists in 450 practice sites, is changing its deals with most of its physician groups to pay them each a percentage of the practice earnings rather than a percentage of the practice revenues.

The switch from revenue based to earnings-based compensation has many purposes, according to US Oncology executives: to instill the physicians with cost consciousness; to strengthen and clarify US Oncology’s incentive to invest in the various practices; to make each practice a separate cost center; and to deepen the physicians’ interest and participation in each practice’s management and marketing.

The move to pay physicians a split of earnings is roughly akin to the policy of many physician groups with multiple clinic sites, or multiple specialty departments, to base compensation in part on the profitability of each location or department.

The groups will receive about 70% of practice earnings, while US Oncology will receive about 30%, says Mano Mahadeva, vice president for finance.

The firm was formed in the July 1999 merger of American Oncology Resources in Houston and Physicians Reliance Network in Dallas. The former, the larger merger partner, was paying its practices a percentage of revenues, while the latter was paying its groups on a 70 30 split of earnings. Thus, the switch applies to groups that were tied to American Oncology Resources, plus most of the groups brought in since then.

According to Alvis Swinney, US Oncology’s vice president for marketing, under the former pay system the percentages for “medical” oncologists, the ones who supervise chemotherapy, have usually been about 23% of net revenues (collections), while radiation oncologists have received 23% of revenues for evaluation and management codes and 60% of revenues for radiation codes.

Swinney says about 55% of the practices have already switched to earnings based compensation. The firm’s goal is that 75% of its practices will have such compensation in place by the end of the third quarter: To make the change, the firm must renegotiate its management services agreement with each practice.

Creating Cost Centers

Mahadeva notes that under the new system, the physicians have “70% of the upside, and 70% of the downside.” That is, they effectively bear 70% of every cost, and 70% of every dollar of revenue over practice costs ends up in their pockets. Under the previous sys tem, every cost and investment was borne by US Oncology, and it had to pay the physicians in proportion to their collections. Every windfall went to the company, but every spike in costs was entirely its problem. The switch makes a sea change in incentives for both sides:

* Costs. While under the old system the physicians had no incentive to contain costs, Swinney says they now have the same, two sided, cost and revenue incentives as physicians who operate their own practices.

* Investment. US Oncology’s willingness to invest in the practices was threatened by the unpredictability of costs and its full risk position. Now the company’s investment incentives are aligned with the physicians.

* Risk containment. Under revenue based compensation, most of the practices were run essentially out of the company’s coffers. Now the practices are all separate cost and profit centers, containing the risk from a major problem in the practice or region where it occurs.

* Practice management. Each practice has a “joint policy board” consisting of either one or two US Oncology representatives, and the same number of physicians. Its actions must be unanimous. The physicians’ participation is much more important under earnings based compensation. Under the old system, a practice could have lost money hand over fist, and it would have made no difference, at least in the short run, to the physicians.

The new system works essentially by adding up all a practice’s revenues, subtracting all its costs, and then applying the 70%/30% split. Among gray areas in applying this formula, physicians’ malpractice and health insurance, and the practice’s share of physicians’ 401 (k) contributions, are paid as expenses, before applying the split. Continuing medical education, the physicians’ shares of 401(k) contributions, and the cost of salaried physicians, are all paid from the owning physicians’ 70% share of profits.

The physician groups then have their own internal distribution system to set their precise paycheck and benefit amounts. Most of the groups have production oriented systems, Mahadeva says, although some use benchmarks or the equal shares method to set pay. To measure production, some use RVUs, some collections and some profitability (collections minus costs). Many groups use hybrids of these methods. Pegging the groups’ compensation to profits is pushing the internal compensation systems toward profitability as well.

Firm Is Major Power in Recruiting

US Oncology recruited 72 physicians last year as a free service to member groups. “We’re the biggest player by far” in oncology recruiting, says Dwight Mussleman, director of physician recruitment.

About 80% of its recruits are not fresh out of oncology fellowship. Most recruits have been practicing for two to five year’s and are unhappy with their positions.

Pay levels vary by the individual’s specialty and experience, and the practice’s region, Mussleman says. A practice in the Pacific Northwest can expect to pay $140,000 $150,000 for someone out of fellowship. In the Midwest and Southeast, the cost would be $150,000-$175,000, he says. Placements in the past year were for as much as $275,000. The average placement was for $175,000 $185,000. Those are base salary numbers. Most recruits also receive a production bonus of $15,000-$20,000 the first year: Most are also on two year partnership tracks.

About 65 of the 72 physicians placed were radiation or medical oncologists. Several years ago, radiation oncologists were paid less than medical ones, but now pay levels are about the same, he says.

The firm declines to reveal the range of incomes of owner physicians in its affiliated practices. Mussleman says it takes an average of 18 months for owner physicians to return to their income levels before US Oncology’s buy in. Of course, the physician has received cash from the buy in upfront.

Changeover Is Essential

Mahadeva says US Oncology would not renew its affiliation with a practice that declines to change over to earnings based compensation. Varying compensation systems within the firm could create future conflicts, he notes.

So far, most physicians accept the new system, he says. They understand the needs to jointly control costs, expand revenues, and share the risk of new investments.

Initially, the physician groups are receiving any where from about 75% of practice earnings down to 65%. If under revenue based compensation, a group is currently receiving an amount that equals 80% of its practice earnings, then it will move gradually down to 70% to avoid a large hit on physician earnings, Mahadeva says. Similarly, a group now getting 60% of practice earnings will be put at 65% for now to avoid a windfall. Within a few years, he adds, the firm wants all the compensation arrangements right at 70%.

In general, Swinney says, the changeover is making fairly small initial changes in the amounts paid to groups.

Mahadeva says that US Oncology chose the 70%/ 30% split because 30% was the share it needed to achieve a reasonable return on its investments in the practices and on its central office costs for free services such as recruiting, supply purchasing and clinical trials.

Contact Mahadeva at (832) 601 8766 or mano.mahadeva@usoncology.com.

RELATED ARTICLE: Defying Gravity: The Successful PPMC

Little is left of the once thriving physician practice management company (PPMC) sector: The very mention of the letters “PPMC” suggests complex financial arrangements unrelated to effective practice management.

But at a limited number of single specialty PPMCs, the model is alive and well. The difference is that by focusing on the needs of one specialty, the firms have been able to add substantial value to the practices with which they work.

Nowhere is this more true than at Houston based US Oncology, which is affiliated with 850 physicians in 27 states. It is the only PPMC that has a major national market share in its specialty field; it boasts handling 15% of the newly diagnosed cancer cases in the United States. It is one of just a few PPMCs that still follow the “equity model,” both owning the practice assets and employing all the non physician staff, with all the management duties that entails. In oncology this includes the important and expensive function of buying chemotherapy drugs.

US Oncology is also one of just a handful of PPMCs that still make asset purchases of practices, as opposed to management or marketing agreements. It is probably the only one that still pays for goodwill and future earnings when it buys a practice.

Marketing Is Job 1

“We don’t just buy a stream of revenues and keep it,” says Mano Mahadeva, vice president for finance. The company’s aim is to diversify and expand the revenues of each practice it buys.

For instance, if a practice does only chemo therapy, the firm tries to add radiation oncology, and vice versa. It’s adding expensive “PET” tumor imaging centers in cities where it has a number of practices. It enables its oncologists to perform stem cell transplants and other recent procedures.

It has a central office research division, and relationships with the Food & Drug Administration and drug companies, so that physicians who want to participate in Phase 1 and 2 trials may do so. To the drug firms, it is able to offer a wide patient base with every form of cancer:

Other important services the company provides to its practices are quantity purchases of supplies, especially chemotherapy drugs, and recruitment of oncologists (see discussion, this page). These are free services from the company’s central office.

On the local level, Mahadeva says, US Oncology managers handle managed care price talks. The company is now directing all its new practice purchases in markets where it already has a presence, in part to expand local market shares and improve its clout with payers. Greater local size also allows spreading investment costs among more patients, greater subspecialization among physicians, convenience for patients, and economies of scale.

Other local services are billing, information technology and human resources.

US Oncology does not employ physicians. They have their own group structure which contracts with US Oncology for management and to use practice facilities, which the firm owns, Mahadeva explains. Billing is done in the name of the physician group.

In 2000, the firm bought nine or ten practices with 20 to 30 physicians. It also has further purchases in the pipeline. But most of its growth came through the physicians hired by existing practices, he says.

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