The following article is the fourth in a series providing analysis of current trends and anticipated developments in the healthcare industry.
January 2009
An aging population will result in continued growth in the demand for radiation therapy over the next 10 to 20 years. High growth areas include prostate, head and neck, and neuro-oncology.
Radiation Therapy
There are a number of technologies competing for cancer patients. Traditional external beam radiation therapy (EBRT) is giving way to intensity modulated radiation therapy (IMRT) and image guided radiation therapy (IGRT) each of which delivers greater radiation to the tumor with less damage to the surrounding tissue than traditional radiation therapy. Additionally, stereotactic radiosurgery (SRS) is becoming more clinically accepted as the preferred treatment modality for smaller soft tissue tumors, as well as cranial tumors. Although questions remain with respect to clinical efficacy, proton beam therapy continues to gain traction.
Technology has historically been, and continues to be, a driver in the radiation therapy space. The potential for disruptive technology could significantly change the competitive landscape. For example, if it gains clinical traction for prostate, head and neck, and brain cancer, the XOFT Brachytherapy System could dramatically impact the profitability of radiation therapy centers, since brachytherapy requires a capital investment of approximately $500,000 as opposed to (i) approximately $6 million for a radiation therapy center (excluding building), (ii) $6 million for a CyberKnife® (excluding building) or (iii) in excess of $100 million for a proton beam therapy center.
Currently, Medicare only reimburses hospitals for XOFT brachytherapy provided to oncology patients. If, however, physician groups are permitted to bill for XOFT brachytherapy, there could well be an explosion of brachytherapy in physician practices which could potentially dramatically reduce the patient volume for radiation therapy centers. Because of the low level of investment required for XOFT brachytherapy, there are few barriers to entry. In most states that have Certificate of Need laws, no Certificate of Need would be required for a physician group to begin providing XOFT brachytherapy to its patients.
There are a number of sponsor-based companies that are engaged in the radiation therapy space. Two formerly public radiation therapy companies have been recently acquired by private equity investors.
Over the last two years, a substantial percentage of the increased reimbursement received by radiation therapy centers has resulted from converting traditional radiation therapy patients to IMRT or IGRT therapy which is reimbursed at significantly higher rates than traditional radiation therapy.
Currently, approximately two-thirds of all cancer centers are hospital-based and one-third are free-standing. Surprisingly, Medicare reimburses IMRT and IGRT performed in an outpatient setting at approximately double the rate that the same services are reimbursed when provided in an inpatient setting. Recently published final rules for 2009 reimbursement narrow the gap between reimbursement for IMRT performed in an outpatient setting and IMRT performed in a hospital setting. Those rules increase reimbursement for IMRT performed in a hospital setting by 18 percent and decrease reimbursement for IMRT performed in a free-standing cancer center by 14 percent. The new rules increase the reimbursement for standard radiation therapy treatment by 7.7 percent for hospitals and by 15 percent for free-standing centers. Since non-Medicare payors typically pay according to a fee schedule based on a percentage of the Medicare payment rate, it is likely that the changes in Medicare reimbursement will be pulled through to commercial contracts.
The increase in access to SRS therapy, particularly CyberKnife systems, has led to increased utilization and corresponding attempts by payors to control utilization, as well as in reductions in reimbursment. It is likely that (i) reimbursement for CyberKnife treatment will continue to decline, (ii) that the differential between reimbursement for IMRT/IGRT and traditional radiation therapy will shrink as IMRT and IGRT becomes more available and (iii) that the site-of-service differential between free-standing radiation therapy centers and hospital-based centers will shrink.
Legal Landscape
The Stark law makes it unlawful for a physician to have financial relationship, including an ownership interest, in an entity providing designated health services and to refer governmental patients to that entity unless an exception applies. Radiation therapy and SRS are both designated health services. Consequently, it is unlawful to joint venture a provider of those services with physicians who refer governmental patients to the joint venture. Under the Stark law, however, radiation oncologists are deemed not to be referral sources. As a result, it is permissible to joint venture radiation therapy services and SRS (e.g., CyberKnife systems) with radiation oncologists. In the last few years, many joint ventures were created to own CyberKnife systems and radiation therapy centers and provide those services to a hospital in exchange for a per procedure fee "under arrangement." Such arrangements were, historically, permissible under the Stark law because the joint venture in which the referral source physicians held an ownership interest was not providing a designated health service. Rather, in such structures, the joint venture was selling a service to the hospital and only the hospital was the provider of the designated health service to patients. Recent changes to Stark regulations, effective Sept. 30, 2009, change the landscape, however. Joint ventures that provide services under arrangement to a hospital will be deemed to be providing designated health services. This means that physicians, other than radiation oncologists, who refer patients to the service will be prohibited from owning an interest in a joint venture that provides CyberKnife services to a hospital for a per procedure fee.
There has been a persistent rumor that CMS is going to permit ambulatory surgery centers to bill Medicare for CyberKnife services. (Currently only hospitals and physician practices can bill Medicare for CyberKnife services.) The Stark law includes an exception for ambulatory surgery centers. If the Government permits ambulatory surgery centers to bill CyberKnife procedures, ownership in a joint venture that operates a CyberKnife as an ambulatory surgery center by physicians who refer patients to the CyberKnife would not violate the Stark law. The Anti-Kickback statute would still need to be considered. To the extent, however, that each physician-owner of the joint venture performs CyberKnife procedures on the patients he refers to the joint venture, the Anti-Kickback risks will likely be within the risk tolerance of many providers.
Urologists are aggressively moving to capture the technical revenues associated with radiation therapy treatment for prostate cancer whether by block leases of radiation therapy units or brachytherapy. In Advisory Opinion No. 08-10, the OIG found that a block lease of a radiation therapy center to urologist groups constituted a "contractual joint venture" and was, therefore, a violation of the Anti-Kickback statute. Many healthcare regulatory counsel believe the OIG Advisory Opinion was poorly reasoned and that the result reached in that OIG Advisory Opinion would not be upheld if litigated. The risk, however, of such an arrangement being investigated will likely have a chilling effect on arrangements similar to the transaction described in the Advisory Opinion.
Medical Oncology
As a result of dramatic reduction in the reimbursement for infusion therapy drugs, many medical oncologists have seen their compensation fall by more than 50 percent. The reduction in medical oncology income has put pressure on existing practices. Many of those practices are seeking to affiliate with hospitals, add radiation oncologists and radiation therapy technical revenues and, where affiliated with practice management companies, unwind that relationship to pursue other options.
Opportunity
Positive demographics will lead to a substantial increase in radiation therapy and chemotherapy which will in turn result in Payor efforts to limit utilization and to reduce reimbursement.
Access to capital and remaining ahead of the technology curve will be crucial to the success of any business in the radiation therapy space, as will the ability to predict the intersection of the inevitable decline in reimbursement for more sophisticated radiation therapy (e.g., SRS, IMRT and IGRT) and the offsetting increase in utilization.
There are a number of free-standing radiation therapy centers owned by radiation oncologists. For sponsors and strategic buyers, there is an opportunity to roll-up free-standing radiation therapy centers and potentially combine those radiation therapy centers into a full-service oncology practice that includes both medical oncologists and radiation oncologists.
The existing treatment of oncology patients is fragmented and, generally, inefficient, thereby creating an opportunity to increase efficiency by vertically integrating the principal providers of cancer services and further promoting efficiency by adopting an integrated electronic medical record. Currently more than 20 electronic medical record companies focus on oncology. None at this point has, however, any traction and none is recognized as the standard for the industry. There is an opportunity for any sponsor who able to develop and/or integrate existing electronic medical records in the oncology space. Additionally, there may be opportunities for sponsors and/or hospitals to build networks of providers to provide care for oncology patients in exchange for accepting a capitated risk-based payment.
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