Decosimo was engaged to be the business consultant for an oncology practice after the current advisor announced his retirement. We had stayed in contact with the two senior partners for many years and we were also recommended by the retirement advisor.
About the Oncology Practice
Based in a metropolitan area in East Tennessee, the practice was founded by the senior partner more than 30 years ago. The practice was the only oncology practice in a five county area. They were affiliated with a large full service suburban hospital and provided all the medical oncology services for the hospital and its physician staff.
The client engaged Decosimo to help in the stabilization of the practice. The initial engagement was to review the practice operations, provide financial reporting, provide tax advice and compliance and recommend any needed changes. Additionally, the oncology practice experienced two physician departures, including the founding and senior partner who planned to leave the practice to work in geriatrics at a large teaching hospital.
After reviewing the practices finances, we discovered the practice was unaware of the large accounts payable due for chemotherapy drugs. This payable represented drugs already administered to patients, which were for the most part billed and collected, with the revenue distributed to the partners, however payment had not been made for the drugs. The practice was not near the income norms we expected compared to Medical Group Management Association (MGMA), primarily due to low chemotherapy drug volumes and corresponding volume based rebates. To correct the payable issue new practice management was installed. To assist with the staff departure, an agreement with the departing partner was worked out in a fair and equitable way.
The financial due diligence process was developed to accumulate, analyze and report information in a timely manner. Much of the needed information was not being properly accumulated or reported to the partners. Our job was to first determine what the real numbers were and then install a proper and timely reporting process.
The results of our initial efforts produced a much different picture of the practice than what the partners had believed. The practice was in disarray and underperforming. Even though the annual purchase of chemo therapy drugs was in the millions of dollars, it was still below the threshold for obtaining large volume rebates. These rebates are generally a significant driver in the profitability of oncology practices.
Decosimo recommended the practice merge into a much larger environment and reap the benefits of economies of scale and much larger chemo drug rebates. This was recommended even though we knew a merger would end our relationship with the practice. Because the practice was affiliated with a large regional healthcare system that could maximize the drug purchasing power, we approached the system first as our preferred merger partner. The system was very interested and we began negotiations on behalf of the practice. After months of discussions and proposals a deal was struck that was acceptable to all parties. And, yes we did lose the practice. The physicians have been able to maintain their practice in a new and updated facility. The management has been streamlined and the physicians have greatly improved their compensation levels.
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