New Payment Models May Impact the Valuation of Freestanding Radiation Therapy Centers

Medicare reimbursement changes may affect the valuations for freestanding radiation therapy centers, with likely changes in long-term cash flow projections and industry risk premiums. Valuation professionals should observe the inter-play between Medicare reimbursement reductions and operating company cost mitigations to properly appraise freestanding radiation therapy centers for acquisitions or joint ventures.

Beginning in July 2021, the Centers for Medicare & Medicaid Services (CMS) will implement a new radiation oncology mandatory payment model (RO Model) that provides prospective episodic bundled payments for 16 identified common cancer types. The payment model will apply to freestanding radiation therapy centers located within selected zip codes, which collectively represent about 30 percent of total cancer treatment episodes. 

Freestanding centers not subject to the RO Model will continue to bill under the Medicare Physician Fee Schedule (PFS), which reflects price cuts of 6.0% – 12.0% for 2021 according to the American Society for Therapeutic Radiology and Oncology.

In response to the dramatic structural change of payment methodology, freestanding radiation therapy operators are likely to re-align costs and business processes in various ways. These cost initiatives, coupled with an operator’s potential ability to increase market share from weaker competitors, could neutralize the impact of any anticipated reimbursement pressure. 

 

By the Numbers: About two-thirds of patients undergoing cancer treatment receive radiation therapy Freestanding centers treat about 40 percent of cancer patients who receive radiation therapy Medicare payments represent about one-third of freestanding radiation therapy center revenue

 

Background

A November 2017 Health and Human Services report to Congress laid the groundwork for the new payment methodology. CMS observed that freestanding (i.e. non-hospital based) radiation therapy providers steer patients towards higher-cost treatment plans (e.g. IMRT, SRS) and perform more fractions per patient than comparable sites of care. In providing fixed reimbursement for these 16 cancer types under the RO Model, CMS is experimenting with changing provider incentives as a way of reducing Medicare spending growth for radiation therapy. 

The RO Model includes significant discount factor cuts (3.75% and 4.75% for professional and technical components, respectively), in addition to withholds (3.0% in aggregate) for incorrect payments and quality measure performance. For practitioners, the RO Model encourages value-based decisions surrounding radiation therapy treatments including selected modality type (e.g. IMRT, SRS), dosage amount and fraction count. 

What to Watch

Freestanding radiation therapy centers that were not historically making value-based decisions when billing under the PFS (e.g. higher fraction counts, higher cost modalities, etc.) could face larger revenue impacts than the RO model discount factors suggest. While the current RO model only pertains to a sample of centers during a five-year demonstration period, it is very likely CMS intends to ultimately implement the RO Model nationwide, especially if savings are realized without impacts to patient outcomes.   

Contact us for information about: modeling the financial impact of the RO model on your business, valuations for acquisitions or joint ventures, fair market value review of management or professional service agreement fees, accounting assistance to document use of PPP funds, gift and estate planning needs, tax advice and planning, financial or IT due diligence needs. We are here to help.

Authored by Corey Palasota, CFA. 

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