A race to grow larger in the cancer treatment business has accelerated. It's an expensive pursuit.
A federal government decision to cut Medicare reimbursements on chemotherapy drugs was like a needle prick to the core of Florida Cancer Specialists.
Announced in early 2013, the 1.7% cut impacted oncology and cancer treatment practices nationwide. Medicare typically paid community oncologists the average price of the drug plus 6% to cover storing and administering the medication. Dropping the reimbursements to 4.3% presented a sizable problem for Fort Myers-based Florida Cancer Specialists. The for-profit firm is one of the largest independent medical oncology/hematology practices in the country. It has 2,000 employees, more than 180 doctors, 110 nurse practitioners and 80 locations across Florida.
“We are trying to survive as community oncologists,” says Florida Cancer Specialists CEO Brad Prechtl, who lives in east Manatee County, along with several other FCS senior executives. “We compete on access, service and outcomes. We want to treat patients with cancer in the communities where they live. We want to make it very patient-centric.”
Prechtl's response to the reimbursement crisis was to fine-tune a strategy that combines data-specific cost cuts and waste elimination with targeted growth in clients and new locations. The idea is to get bigger, fast. It's a cost-heavy tactic several other health care firms, in a variety of disciplines, have utilized in an effort to grow and even survive in the new industry landscape.
The strategy at Florida Cancer Specialists, so far, has worked: The firm now treats 50,000 patients a year who bring in more than $1 billion in fees. Total fees collected have increased at least 350% over the last three years, FCS executives say. Growth is from both new patients and acquiring practices. Locations spread from Tallahassee to West Palm Beach, with at least 20 on the Gulf Coast.
“We've exploded in terms of growth,” says Prechtl. “That growth has allowed us to have an economy of scale.”
Another large Fort Myers-based cancer treatment firm, 21st Century Oncology, has attacked the market with a similar get-big-fast approach. The firm, which postponed a planned public offering in May because of poor overall market conditions, has 185 treatment centers in 16 U.S. states and six Latin American countries. It had $796 million in revenues for the 12 months that ended March 31, according to public filings.
Florida Cancer Specialists and 21st Century Oncology, in general, work together with clients, not in competition. The focus at FCS is on medical oncology, which treats cancer through chemotherapy that kills cancer cells, while at 21st Century the concentration is in radiation oncology. That aspect of cancer treatment attacks the disease through radiation and high-voltage X-rays to destroy cancer cells.
There is some overlap. FCS, for instance, offers radiation oncology in Hernando, Hillsborough, Pasco and Pinellas counties and the West Palm Beach area.
One facet of the current health care market binds the two companies together, despite the different models: The cost of fast growth runs high in cancer treatment. Officials at 21st Century say the firm has spent more than $10 million over the last year to integrate acquisitions and improve internal operations.
A chunk of the money FCS collects likewise goes right out the door. It spends $800 million a year to acquire, administer and handle chemotherapy, executives say. The firm's second-biggest expense is payroll and benefits. With 10 employees for every doctor, that's also a considerable outlay. Says Prechtl: “We have a huge labor cost structure.”
Large expenses haven't prevented either cancer treatment business from profitability. Earnings before interest, taxes, depreciation and amortization (pro forma EBITDA) surpassed $30 million, or 12.6% of total revenues, at 21st Century in the first quarter. That's up from $21.7 million, or 12.5% of total revenues, in the 2013 first quarter, the firm says in a May 29 release.
Florida Cancer Specialists officials decline to discuss specific profitability figures. But they have no qualms about the strategy. Says Prechtl: “We'll never apologize for being profitable.”
There are several challenges connected to the grow-fast mission.
An aspect of the costs and profits at Florida Cancer Specialists, for one, was recently scrutinized, courtesy of a page one Wall Street Journal story. The article highlighted oncology practices nationwide that use Procrit, a cancer drug that was once a popular treatment for anemia, a side effect of chemotherapy. But the drug, according to the story and other medical reports, can also spread tumor growth. Its use is approved, but restricted.
Florida Cancer Specialists, says the Journal, is a national leader in billing Medicare for Procrit. The newspaper, in the June 20 story, an analysis of Medicare data, says 104 cancer doctors at FCS on average treated 11% of patients with Procrit at least once in 2012. That's nearly double the rate, 6.2%, of other oncologists who used Procrit or a similar drug called Aranesp in 2012.
The Journal analysis also reports Medicare paid U.S. oncologists $128 million in 2012 to administer Procrit, and about one-sixth of those payments, $20 million, went to FCS oncologists. More than half of the top Procrit doctors on the list, 11 out of 20, are FCS oncologists.
Dr. William Harwin, a Fort Myers oncologist who founded FCS in 1984, denies there was any effort to use extra amounts of Procrit to earn more from Medicare. And FCS Chief Marketing and Sales Officer Shelly Glenn says the firm's doctors use the drug “cautiously.”
In an interview with the Business Observer, Glenn adds that the firm's high volume of patients in various stages of cancer makes Procrit and similar drugs a treatment necessity. “The numbers are skewed,” says Glenn in response to the Wall Street Journal story. “The data is invalid.”
Not only is there high volume, says Glenn, but a large portion of FCS patients have multiple diseases or conditions, like blood disorders, in addition to cancer. That makes Procrit's use more applicable, according to medical journals. A patient with multiple conditions is more common among elderly, which makes up the bulk of FCS's client base.
Another challenge at Florida Cancer Specialists, beyond Procrit, is how to cut costs without compromising patients. An accountant with 20 years' experience in physician practice management, Prechtl approaches that topic surgically.
“We looked at every expense in the organization,” says Prechtl, who joined FCS in 2009. “You name it, we looked at it.”
One area Prechtl specifically reworked was staffing and payroll. He instituted a model that looked at patient wait times and other metrics to help determine pay levels. “We didn't have good details on expenses and costs,” Prechtl says. “We didn't have a scorecard report that compared one facility to another.”
Other areas Prechtl looked at for cost cuts include office supplies, equipment and office space leases. Prechtl and other FCS executives also renegotiated malpractice insurance fees, which brought the average cost-per-physician from $23,000 to $8,000 a year.
The cost management, past good business sense, put FCS in a position to attract more medical oncology practices to join the firm. Glenn says FCS rejects more practices than it acquires because it hears from so many that want to get into the network. That's partially from FCS's success. It also stems from regulations that make it nearly impossible for independent practices to remain viable.
Florida Cancer Specialists, says Glenn, considers a practice's outcomes, the experience level of its doctors and customer service grades, among other metrics, when it looks at an acquisition. “We are picky,” Glenn says. “We want to do what's best for the patient.”
Even a few oncology practices outside Florida have approached FCS about an acquisition or partnership. But the firm, executives say, will remain Florida-focused, at least for now. Prechtl says some regions he targets for growth in the next few years include the Panhandle, east coast and central part of Florida. Says Prechtl: “There's a lot of opportunity for growth in this state.”
Company. Florida Cancer Specialists Industry. Health care, oncology Key. Firm has grown rapidly through new patients and acquisitions.
At a Glance
Florida Cancer Specialists
Year Founded: 1984
Headquarters: Fort Myers
Founding doctor: Dr. William Harwin
CEO: Brad Prechtl
Patients: Firm treats 50,000 a year
Annual revenues: More than $1 billion
Employees: 2,000. Includes 180 physicians and 110 nurse practitioners.
Locations: Around 80, all in Florida.
Source: Florida Cancer Specialists