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Unintended Consequences: How Government Policies Have Increased the Cost of Cancer Care; Part 1 Medicare Pay Change Triggered Care Migration

Butcher, Lola

doi: 10.1097/01.COT.0000454157.91313.1a


A decade ago, the vast majority of cancer care was provided in physician-owned practices that were financially strong, thanks largely to the profit margins on chemotherapy drugs.

In 2005, the Medicare program changed the way it paid physicians for drugs, making private oncology practice a less profitable—or, in some cases, a losing—proposition. And practices that looked like pillars of strength have been falling like dominoes ever since.

The result is mass migration of cancer care from physician-owned infusion centers to treatment centers owned by hospitals. More than 400 practices have been folded into hospitals since 2005, and close to 50 percent of oncology practices are now hospital-owned.

Whether that migration is good or bad depends on whom you are talking to, but what everyone can agree on is that it is dramatically increasing the nation's tab for cancer care.

To be sure, the change in the way Medicare pays oncologists is only one of several triggers for the migration of cancer care to hospitals. And Medicare—and the private payers who followed their lead—had a good reason for making the change: They thought the high profit margin they had been paying for cancer drugs was tempting physicians to overuse chemotherapy.

But the financial consequences of this change and other federal policies are hurting patients and payers. Ironically, the federal government—the biggest payer for cancer care—is hit the hardest.

Lance Lassiter, MD, a partner in Matthews Hematology Oncology Associates in Matthews, North Carolina, chalks it up to unintended consequences: “I think [the government] did not really realize what was going to happen as a result of some of these changes,” he said. “And when they do realize this is going to cost the health care system more money than they will save, it will be kind of irreversible at that point.”

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Why Cost Matters

More than 1.6 million Americans—0.5 percent of the population—will be diagnosed with cancer this year, and their treatment will consume about five percent of the country's health care spending.

Since cancer is primarily a disease of the elderly, as the population ages, the incidence of cancer increases. Considering no factor other than the aging of the population, the medical costs of cancer care in the U.S. are expected to rise by at least 27 percent between 2010 and 2020, according to statistics from the National Cancer Institute.



But factors other than the aging population are also at play. Cancer drugs account for eight of the 10 most expensive drugs paid for by Medicare, and the cost of drugs continues to rise. The average monthly cost for oncology drugs in 2013 was more than $10,000—with certain agents costing nearly $30,000 per month. New therapies allow cancer patients to live longer, increasing the number of patients under treatment—which is why NCI projects that cancer costs might actually increase by 40 percent by 2020.

That is bad news if you are the Medicare Trust Fund, which is currently expected to become insolvent in 2030—just 16 years from now. About half of cancer care in the U.S is paid for by Medicare.

Worse news: On top of its demographic destiny, Medicare's cancer care bill is increasing even more because of the shift from cancer clinics owned by physicians to those owned by hospitals.

There are many different ways of calculating how much the migration of cancer care costs Medicare (see “Why Cancer Care Costs More if Hospitals Own an Oncology Practice” on page 62). All of them suggest a rather small increase—one study, for example, finds that Medicare and its beneficiaries pays an extra $6,500 a year when a chemotherapy patient is treated in a hospital-owned facility.

However, considering that Medicare is the nation's largest payer for cancer care, it adds up. The Community Oncology Alliance advocacy group uses that $6,500 to extrapolate that every oncologist employed by a hospital costs Medicare and its beneficiaries an extra $745,000 a year.

The more significant financial issue: Medicare pay policy is fueling the movement of cancer care to hospital-owned facilities, which is dramatically more expensive for the private insurers that pay for about half of all cancer care.

Indeed, commercial insurers pay at least double the amount for chemotherapy agents when they are billed by hospital-owned facilities than by physician-owned practices, according to Magellan Health.

Patients—whether covered by Medicare or private insurance—bear the burden of higher costs as well. Looking at a list of 10 routinely prescribed chemotherapies, a privately insured patient pays an average of $134 per dose—and each drug in a combination therapy and each supportive care drug is an individual dose—if the therapy is received in a hospital-owned facility rather than a private oncologist's office, according to data from the IMS Institute for Healthcare Informatics.

Medicare patients, meanwhile, typically have 20 percent coinsurance for physician services and outpatient therapy, so when Medicare's payout increases, so does that of the patient.

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Case Study: How We Got Here

By the time Pacific Oncology, a 30-year-old practice in the Portland, Oregon area, went out of business in 2009, the migration to hospitals was in full thrall. The practice had grown to include 13 clinicians treating about 8,000 patients a year and, just two years earlier, had opened its seventh cancer center. Nonetheless, Bill Mooney, MD, Pacific Oncology's President and Chief Executive Officer, said it was an easy decision to sell out.

“With the economic pressures of decreasing drug reimbursements, we felt that we needed to be part of a bigger program,” Mooney said in an OT interview in 2009 (3/10/09 issue).

Like oncology practices everywhere, Pacific Oncology saw revenues fall when the Medicare Modernization Act went into effect in 2005, changing the formula Medicare used to pay physicians for the drugs they purchased and administered to patients. Instead of paying a markup on the average wholesale price of a drug, it started paying six percent above the average sales price—generally referred to as ASP+6.

All of a sudden, the profit on chemotherapy agents dropped dramatically—and running a financially viable oncology practice became much more difficult. Large practices that could negotiate good prices for drugs were generally able to make a profit at ASP+6, but small practices often were not.

Drug companies, worrying that their oncology customers were on the ropes, cut off their easy credit terms and started demanding upfront payment. Oncologists who expected the Centers for Medicare & Medicaid Services to understand the bind they were in found no one willing to accept their calls.

“Once it changed to ASP+6, the thought was that Medicare might increase the pay for [chemotherapy] administration codes and make up for some of the lost revenue on the drug side,” said Matthew Farber, Director of Provider Economics and Public Policy for the Association of Community Cancer Centers. “That never really came to fruition, and, in fact, a lot of those codes have been decreased over time.”

Private insurers quickly followed Medicare's lead in cutting pay for chemotherapy drugs, and many practices could not survive. On the other hand, many practices were able to adjust to the lower payments, and blaming the drug-payment change alone for the migration of cancer care to hospital-owned facilities oversimplifies the situation.

Another important factor: the Medicare sequester stemming from a Congressional impasse on how to reduce federal spending mandated by the Budget Control Act of 2011.

Medicare's ASP+6 payment for drugs means that the government pays a six percent margin to reimburse oncologists for buying, storing, and handling the drugs. That margin is applied to the average sales price; small practices typically pay higher prices than large practices that buy larger volumes. While the sequester was a two percent cut for most Medicare services, the formula was applied to ASP+6 in a way that punched oncology practices in the gut—and small practices got the worse of it.

“Cutting ASP+6 to ASP+4 was truly a 33 percent cut,” Lassiter said. “For smaller practices like mine, it was an even greater percentage, as we don't get as competitive prices on drugs as larger practices or health systems do. That has a tremendous impact on our possibility to remain independent.”

The aging of the physician workforce is another important factor. As the business acumen needed to run a medical practice—and the financial risks associated with it—have increased, younger physicians are attracted to the relative safety of hospital employment. Their older counterparts need someone to take over the practice, and a hospital can provide that exit plan.

External factors are also at play. Most primary care physicians and many surgeons are now employed by hospitals who wish to grow their own cancer care programs. That is why Brad Perrigo, Executive Director of Compass Oncology in Portland, does not rest easy.

Since Pacific Oncology folded into Oregon Health & Science University, cancer care in the market has consolidated to the point that Compass is the only practice not owned or strategically aligned with a health system. It is easily the largest provider—with 25 medical oncologists/hematologists and 14 related subspecialists—in the market, but size is not the insulator it once was. Huge oncology practices that once dominated the market in Pittsburgh, Kansas City, Indianapolis, and other cities have all moved to hospital ownership in recent years.

“What puts our model at risk is if the health systems continue employing primary care and the kind of subspecialists that feed oncology through referrals,” Perrigo said. “I think it's a real threat, a huge threat.”

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Where We Are

Frontier Cancer Center became a dot on the map in 2012. That's when the six-physician practice in Billings, Montana was acquired by its local hospital.

The Community Oncology Alliance (COA), an advocacy organization that tracks the changing cancer treatment landscape, placed a dot on its map to acknowledge the change.

“We had been in private practice for a long time and had done very well, but we had seen that the margins on drug purchases were going away,” said Patrick Cobb, MD, who led the practice. “The private insurers had ratcheted down payments for the services we provided to the point where it was going to be very difficult to keep our doors open if we continued.”

The dot on the map depicting St. Vincent Frontier Cancer Center, a department of St. Vincent Healthcare, is one of six in Montana—four represent physician-owned clinics that have been acquired by hospitals and two represent practices that report they are struggling financially.

Nationwide, COA reported in 2013 that in the previous six years 469 practices have been taken over by a hospital—either through an outright purchase or by a contractual agreement.

Meanwhile, nearly a third of the cancer centers responding to an Association of Community Cancer Centers survey in late 2012 and early 2013 reported being involved in a merger, acquisition, or affiliation in the previous year. And the American Society of Clinical Oncology's 2013 member survey found that 50 percent of respondents were sending some of their Medicare patients elsewhere—primarily to hospital outpatient departments—to receive chemotherapy because of the drug reimbursement cuts stemming from the sequester.

Whether a tipping point has arrived—more chemotherapy administered in hospital-owned clinics than physician-owned facilities—is not yet clear. Between 2005 and 2011, physician offices saw their share of chemotherapy administration for Medicare patients fall from 86 to 66 percent, according to information from the Moran Company, a Washington-based health care research and consulting firm.

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Where We Are headed

Andrew Chapman, DO, headed an eight-physician oncology practice in Philadelphia until 2009, when it joined Thomas Jefferson University to form the Division of Regional Cancer Care. The hospital subsequently acquired another practice; today, the division's 11 oncologists treat patients in four outpatient centers.

Competing with five academic medical centers, all of which were growing their cancer programs, was an untenable proposition in the long term, he said. And in the short-term, the cost of drugs was a constant worry.

“Our ability as a small business to purchase these ever-increasingly expensive medications—we saw that this problem would just to continue to escalate,” Chapman said.

Indeed, drug costs have soared since his practice made the move five years ago. Now that the annual cost for several common chemotherapies is up to $100,000 a year, he predicts the shift to hospital-owned cancer care will only speed up.

“I don't know where it's going to end, but I don't think it's reached an equilibrium,” he said.

The 2013 census conducted by the American Society of Clinical Oncology backs him up: 26 percent of independent practices said they were likely to affiliate with a community hospital in the next year.

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#1 in a Series

This is the first in a series of articles that show how federal policies intended to reduce cancer care costs have actually increased them. The series is part of Lola Butcher's year-long Reporting Fellowship on Health Care Performance sponsored by the Association of Health Care Journalists and supported by The Commonwealth Fund.

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  • Hospitals that are eligible for 340B pricing—deep discounts on drugs because they serve a high percentage of low-income patients—have a financial incentive to hire oncologists. The result: More cancer care in hospital outpatient departments, where costs for payers and patients are higher.
  • The Affordable Care Act introduces new payment systems designed to reward health care providers who provide high-quality care at low cost. The most popular—the accountable care organization—is fueling consolidation that means more cancer patients go to hospital outpatient departments for treatment, where many will get hit with higher out-of-pocket costs.
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iPad Extras!

VIDEO: Watch a video interview on the iPad edition of this issue with Brad Perrigo, Executive Director of Compass Oncology in Vancouver, Washington, the only oncology-only independent practice remaining in the Portland/Vancouver area.



If you are not yet receiving our iPad issues, download the free Oncology Times app from the App Store today! Visit, search in the App Store, or follow the link on



PODCAST: Listen on the iPad edition of this issue to Barry Brooks, MD, a partner in Texas Oncology, describe his frustration about the migration of cancer care from physician-owned clinics to hospital-owned facilities.



To receive our iPad issues, download the free Oncology Times app from the App Store today! Visit, search in the App Store, or follow the link



© 2014 by Lippincott Williams & Wilkins, Inc.
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