From THCB Sacramento bureau, Matt Quinn continues his comments on the injectable oncology market by discussing an article in Physician Compensation Report titled Oncology Income May Drop 40% by 2005. (The article is in italics, Matt’s comments are in normal text).

"Clinical oncologists in practices that infuse chemotherapy drugs say that changes made in their 2004 reimbursement schedule by the Medicare reform law will result in income losses ranging from 2%-3% up to 15%, depending on each practice’s payer mix and current prices for purchasing the drugs. For 2005, practice managers predict physician income losses of another 25% if Congress does not repeal the new law’s reimbursement cuts for next year."

This seems significant until you get to:

"Median physician compensation and benefit expense was $446,000 in 2002, the survey says."

So, my interpretation of this is that "the powers that be" are giving oncology practices 2004 to shift from a drug-based business to a service-based business (like 99% of other practices) at relative cost neutrality (using the bad assumption that per physician salary hasn’t grown since 2002, they are estimated to make between $379K and $437K in 2004). I don’t disagree that practices / physicians that cling to the drug-based reimbursement model in 2005 will stand to lose up to a quarter of their revenue (making them paupers who only make ~$285K to $328K per year). That’s the point. The government feels that oncologists are padding their salaries (at huge expense to the taxpayer) with excess drug utilization. Either take the carrot or get the stick. It will be interesting to see how utilization patterns change when (if) financial incentives change. This is hardly a situation that will leave cancer patients dying in the streets/driving hundreds of miles for lack of a community cancer center. Although it might leave a few oncologists short some of the income to which they have grown accustomed.

"Holcombe notes that ASPs do not reflect the markup that drug distributors charge to practices, or the drug inventory financing and handling costs that practices have."

This (which is the rationalization why the ASP for a drug must be greater than the cost of the drug), of course, contradicts the huge margins that oncologists make on administering drugs. There is a "cost of money" for maintaining the drugs necessary for running a practice, although healthy cash flows, favorable payment terms from distributors (60 to 90 days is standard), low interest rates, and mileage programs make this seem pretty darn negligible. There are shipping fees (very low, especially for planned purchases), and there is a cost associated with setting up and maintaining an oncology practice (must buy a chemo mixing hood, have ventilation, must have oncology specialist nurses), but these are not (obviously) anywhere near current (or projected) overall profit levels.

"The medical lobby opponents of the reimbursement changes are working to interest Congress in a change of direction."

They have scuttled this sort of legislation many times before. A membership that makes $450K per head has some influence, to say nothing of Big Pharma.

UPDATE: The NY Times reports that the situation is extra grim for some cancer patients in Marin County because the oncologists are laying off their massage therapists!