Health care and the law: winds of change buffet community oncology

September 14, 2016
By Michael L. Blau

This past year has been a remarkable one for the business of community oncology. It’s seen a raft of new initiatives and reforms that have profound implications for how oncology services will be provided and paid for in the future. Among other things, this year we have seen:

The Center for Medicare and Medicaid Innovation (CMMI) announced its Oncology Care Model to test episode-of-care payments for chemotherapy services for Medicare patients.

The surprise enactment of Section 603 of the Bipartisan Budget Act (BBA), leveling Medicare payments between physician offices and hospitals for new off-campus, provider-based sites.



The enactment of MACRA (the Medicare and CHIP Reauthorization Act), permitting hospitals for the first time to enter into gain-sharing arrangements with oncologists to reward them for reducing medically unnecessary hospital care, but also combining Medicare performance incentive programs.

A new proposed Part B prescription drug model from CMMI that would begin to pay for drugs at average sales price (ASP) plus 2.5 percent, plus a fixed fee of $16.80, which would disproportionately disadvantage those, like medical oncologists, who purchase drugs that are more expensive, on average, than other prescription drugs.

A 340B Drug Pricing Program omnibus guidance from the Health Resource and Services Administration (HRSA) that, if enacted as proposed, would significantly scale back the 340B program. Med-Pac recommendations to reduce Medicare drug payments to 340B eligible hospitals by 10 percent, and to redistribute those withheld payments to 340B hospitals with relatively higher rates of uncompensated care.

Impact of reforms
The combination of the BBA site neutrality provisions and the proposed changes in the 340B program is likely to chill or kill some projects that have been on hospital drawing boards — particularly oncologist-alignment transactions to convert physician office-based infusion centers to off-campus, provider-based sites of the hospital, as well as plans to establish new freestanding cancer centers off-campus.

Over the last decade, these have been some of the very few potential “win-win” oncologist alignment strategies left in health care. They have been a “win” for the hospital because the hospital could get paid higher Medicare hospital outpatient payment rates for community-based oncology services provided at these off-campus facilities, rather than be paid at lower Physician Fee Schedule rates.

In addition, if the hospital qualified to participate in the 340B program, and if the off-campus infusion facility was located within 35 miles of the hospital, the off-campus facility would have qualified for 340B drug discounts. This meant that the hospital could acquire infusion and supportive drugs for such an off-campus infusion center at a 22 to 34 percent discount — which translated directly into substantial additional contribution margin for the hospital.

It was also a “win” for participating oncology groups, since the groups could remain independent, and enter into a relatively lucrative Professional Services Agreement (PSA) with the hospital to staff and help manage the off-campus site. Aggregate payments to the oncology group under these PSA arrangements typically exceeded what the oncology group could earn from physician office rate reimbursement for providing such services on its own.

So what has changed? For one thing, the site-neutrality provision of BBA eliminates Medicare hospital outpatient payment rates for new off-campus, provider-based sites, beginning Dec. 31, 2017, with limited exceptions. On and after Jan. 1, 2017, new off-campus, provider-based sites that do not meet an exception will be paid by Medicare at physician office or ambulatory surgery center rates. This is intended to level the Medicare playing field between hospitals and medical groups when it comes to Medicare payment for “freestanding” (off-campus) ambulatory care or surgical services. The two most pertinent exceptions to this new site neutrality payment rule are for: “grandfathered” off-campus, provider-based facilities that were established as provider-based sites by hospitals on or before Nov. 2, 2015; and on-campus facilities — that is, facilities that are part of the main hospital building or that are located within 250 yards of the main hospital building. These facilities will continue to qualify to be paid by Medicare at hospital outpatient payment rates even after Jan. 1, 2017. As a result, a non-level Medicare playing field will persist for hospitals that converted physician practices to provider-based sites before Nov. 2, 2015, or that operate on-campus cancer centers. Oncologist owned cancer centers will remain at an economic or competitive disadvantage in these situations.

HRSA’s Omnibus Guidance, if enacted as proposed, would significantly impact the availability of 340B drug discounts for eligible hospitals. One of the key changes proposed is to the definition of “patient” for the purpose of determining whose prescriptions are eligible for the 340B discount. The most controversial aspect is the proposal to require the eligible hospital to bill for the oncology services “on behalf of” the employed or contracted provider who renders the services to an eligible patient. This would deny 340B program eligibility to any hospital that contracts with an oncology group for professional services and permits the group to bill separately for those professional component services — which is a relatively common and historically permitted arrangement for 340B program purposes.

If the Omnibus Guidance is enacted as proposed, all of the hospitals in certain states (like Texas, California and Illinois) would be ineligible for any 340B drug discounts. This is because these states strictly prohibit the corporate practice of medicine, and hospitals in those states are precluded, as a matter of law, from billing for professional component services as a hospital service under the hospital’s provider numbers. Thus, it would leave whole states out of the 340B program. Many public comments have been submitted in response to the proposed Guidance, and it can be expected that some revisions will be made by HRSA in the final Guidance to address industry concerns.

Until then, the combined effect of the site neutrality provisions of BBA and the uncertainty surrounding the proposed changes to the 340B program may hinder some planned oncologist-alignment transactions. One recent survey suggests that about 25 percent of off-campus, provider-based transactions that were in the pipeline at the time of enactment of BBA will not go forward. Most will still proceed because the Medicare payment differentials between hospital and physician rates are relatively modest compared to the differentials paid by commercial insurers. The bigger question, therefore, is whether and to what extent commercial insurers will follow suit by beginning to level site-of-service payments. The answer to this question will depend, in part, on the duration of existing commercial contracts with hospitals, and the relative bargaining power of the parties. Consequently, changes in commercial insurance site-of-service payment policy and rates should be closely monitored, as should HRSA’s response to comments on the proposed Omnibus Guidance for the 340B program.

About the author: Michael L. Blau is a partner and health transactional lawyer at Foley & Lardner LLP. He focuses on advising clients on health care corporate and regulatory matters. He is co-founder of the Cancer Center Business Summit, a research organization and think tank dedicated to advancing best business models and practices in community oncology care.