Risks/Benefits of a Radiation Oncology Center for Urologists

In recent years, many urologists have merged to form large groups.  There are several advantages to large group formation including increased purchasing power, more efficient practice delivery and enhanced revenue from ancillary services.

 

The major ancillary services considered by large groups have been pathology, imaging and radiation oncology.  The purpose of this article is to discuss the potential risks and benefits of a radiation oncology center built as part of an existing group urology practice.  At the present time, there is significant profitability in radiation oncology.  Prostate cancer is one of the top revenue sources for radiation oncology centers.  There are also risks to be considered which include political risks, economic risks and public image risks.

Image guided radiation therapy (IGRT) and intensity modulated radiation therapy (IMRT) are the most technologically advanced forms of radiation therapy and are the technologies that should be considered when planning a radiation oncology center.  A building needs to be specially constructed for the delivery of radiation therapy.  4,000 – 4,500 square feet are required and because of the weight of the equipment the ground and foundation must be solid.  Construction of the building, including the vault for the accelerator, costs in the neighborhood of $1.5 million.  In addition, a linear accelerator needs to be purchased.  A Varian accelerator capable of IGRT costs approximately $1.6 million.  There is other equipment needed in this suite as well.  A CT scanner needs to be available and a Calypso scanner, which has the most advanced imaging technology, costs approximately $500,000.  Overall, the total cost of constructing and finishing a center is approximately $4 million.  Maintenance fees for the CT scanner are approximately $60,000 a year and maintenance fees for the linear accelerator are approximately $11,500 per month.  

A urology group considering a radiation oncology center should identify a construction company experienced in vault construction for structural advice.  The group should also decide which radiation oncologist(s) they want to work with and involve them in the planning process to ensure the space is adequate and the equipment purchased is optimal.  The radiation oncologist(s) can be hired on a salary basis or brought into the group as a partner.  There are advantages and disadvantages with either approach.  For a secure, fair and long lasting relationship, bringing the radiation oncologist in as a partner is probably advantageous in most circumstances.  Given the highly competitive nature of radiation oncology in most cities, a new center should not be built on the cheap.  Quality is important for marketing and for competitive advantage over other centers.  Remember, hospitals will not be your friend in this process and they’ll do anything they can to sink or delay your center.  The structure needs to be built well and the most advanced technology needs to be purchased to maintain a long term competitive advantage in your local market. 

The urology group could strongly consider hiring an administrator such as a COO to run the center as a separate part of the practice.  This person needs to have experience and expertise in both the operational issues in running the center and in the financial issues of maintaining profitability.  Given the size of the investment required a few missteps can carry a high price and unless a physician in the group has the expertise in radiation oncology and the financial savvy to organize a radiation oncology center, the investment in a COO will likely pay for itself several times over.  

A fully operational center can treat 40-50 patient visits per day with each patient taking around15 minutes.   One or two administrative assistants would be required for billing, pre-certification and scheduling issues.  Physicists will also be required for the center; these can be hired or sub-contracted.  This decision should be made in conjunction with the radiation oncologist who’s going to be running the center.  

The financial risks to a practice in the early stages of a center are significant.  A large amount of capital needs to be invested to get the center up and running.  Delays in construction can cost $600,000 to $800,000 per month in deferred or lost clinical collections.  This concern illustrates the need to have a COO, a radiation oncologist and an experienced construction company involved in the project before money is spent so that the ramp-up occurs smoothly and efficiently.  

Profit potential and break even volumes can be estimated but need to be calculated for an individual center when costs are known in detail.  65-70 patients per year represent a break even point for a typical center that has already been constructed.   For centers constructed in the future at perhaps higher cost, this break even point may be higher.  If reimbursement should decrease (see below) the break even point could increase.  For a typical center today, if 250 patients are treated per year, gross revenues will approximate $10 million and the overhead costs will be 25-30% giving net income of $7 – 7.5 million.  Again, these are rough estimates and should be only used as a guideline.  A urology group will need to run their own pro-formas when they have their specific costs itemized.  

The mechanics of running a center, once it is operational, are straight forward.  The most important need is patient volume.  For a fully operational center with one linear accelerator, 20-25 new patient referrals per month will be required.  The number of urologists required to generate this number of referrals is variable depending on the number of prostate cancer patients per urologist.  In general, the minimum number of urologists required to support a center is approximately 15.  A more comfortable number would be 20 to 30 urologists.  A group would need to look at their rate of radiation oncology treatments over the past year or two to determine if they have sufficient patient volume.  

In the event that there was not sufficient volume, there is the option to treat non-urology patients in the center.  This scenario would need to be planned in coordination with the radiation oncologist for equipment needs and with an assessment of the local market opportunities for non-urology patient referrals.  

There are significant risks to opening a radiation oncology center.  Some risks can be managed by a urology group but others are outside a group’s control.  Political risks generally are not manageable by physicians.  There is a significant effort under way in Washington, DC by pathologists, radiologists and radiation oncologists to prohibit other specialties from developing ancillary services such as radiation oncology as part of their office practice.  While these efforts are understandable given the financial threat to these specialties, there are significant advantages to patient care that would result from such in-office ancillary services. 

Possibly the major risk to investing in a radiation oncology center  is the possibility that centers not completely owned by hospitals or radiation oncologists would be prohibited from billing Medicare for radiation services.  In assessing the significance of this risk, the urology group would need to decide how many patients need to be treated at present reimbursement levels to recoup the required investment for a radiation oncology center.  I have heard estimates that 6 to 15 months of patients will recoup all invested dollars although again, this would have to be determined with a pro-forma analysis based on the itemized costs of constructing a new center. The center could also be sold to an outside entity but recouping all of the invested money would be uncertain. 

A second risk is a decrease in reimbursement for radiation services.  There has already been a decrease in CMS reimbursement for some imaging studies and it is likely that radiation oncology reimbursement will be lowered at some point in the future, the priority of CMS and health insurers to decrease health care costs.  Fortunately or unfortunately, depending on your view point, radiation oncology services are in the cross hairs of regulators given the high profits that result from these treatments.  In 2008, hospitals saw approximately a $5,000 per patient decrease in IMRT reimbursement.  It is likely that outpatient centers will also have a cut in reimbursement but the magnitude of such cuts is not known.  

A third risk to opening a center is the potential for negative back lash from hospitals and other radiation oncologists.  Hospitals tend to have large budgets and can embark on a negative public relations campaign against a physician group on a local basis.  While these campaigns may or may not be successful, they can create challenging times for the targeted physician group.  Hospitals tend to be well connected to local politicians and also may attempt to create legislative hurdles against the physician group.

In summary, there are significant financial benefits and risks that urologists should consider when analyzing the possibility of a radiation oncology center.  It is important that the group have enough prostate cancer patients to legitimately generate sufficient referral volumes to make a center profitable.  It is important that the urology group do a thorough financial analysis of the cost, break even points, patient volume required and administrative structure required to make a center run efficiently.  A COO and a radiation oncologist should be brought into the project at an early stage.  The urology group also needs to grapple with the self referral incentives and the potential for a conflict of interest in directing patients for radiation therapy preferentially over other prostate cancer treatment options.  If there are a sufficient number of prostate cancer patients in the practice, this concern may not be a significant issue.   The potential for conflict of interest is an issue that competitors may try to use to your disadvantage in the current competitive health care environment.