January 2013 Edition Vol.11, Issue 1

Anatomy of a Deal: University of Virginia Health System Acquires Hematology Oncology Patient Enterprise

Anatomy of a Deal: University of Virginia Health System Acquires Hematology Oncology Patient Enterprise

By Neil Canavan


In this era of healthcare reform, of rapidly shifting treatment, and business practice paradigms, sometimes the best plan in moving forward may be as simple, and as complex, as just going with the flow.  Such was the deal with the University of Virginia Health System (UVA) in its acquisition of Hematology Oncology Patient Enterprise (HOPE) of Charlottesville, Virginia. The deal may be best described by the adage, “if you build it they will come” since that is just what UVA did—create a new healthcare center intended for cancer care.

UVA found itself in a position where it needed to somehow bring in more revenue, and that meant acquiring new talent and learning new ways to utilize that talent, and that’s when Teri Guidi, MBA, FAAMA, of the Oncology Management Consulting Group, Pipersville, Pennsylvania was brought on board in order to ease the proposed acquisition of HOPE.

According to Guidi, “[UVA] was committed and definitely wanted to collocate some their physicians and treatment facilities,” but there were staffing issues from the get-go. “The school of medicine has a focus on research and education, obviously, so they were having trouble getting those lab rats interested in going to clinic to see patients.” 

Michael Borton, formerly of HOPE, and now an administrator for the UVA’s Community Oncology division, now known as UVA Hope Cancer Care, explained, how UVA wanted to remove the uncertainty that comes with owning a practice. “When you are an owner the last paycheck that is written is to yourself—we, at HOPE, wanted to see if there was a way to remove that risk from our portfolio.” 

HOPE also wanted to expand access to clinical trials for their patients, “so to be able to enroll more patients, and at earlier stages, was very attractive to us,” said Borton. As for the timing, HOPE was very stable, but not knowing how the Affordable Care Act would affect the practice, in addition to various other outside threats, “we thought that this was the best time to monetize our valuation,” he said. 

On the UVA side, the need for more physicians was primary; secondary to that was the desire to extend 340B discount pricing to a significant majority of HOPE’s patients which was very attractive to them as well as laying the groundwork for an NCI-CCC designation. With Duke University to the south and Johns Hopkins to the north, “the goal was to be the cancer center of choice within the state of Virginia,” said Borton.

Lastly, UVA wanted to secure their referral base. As a community-based physician group that did not have ties to the UVA medical center, “we felt very comfortable in designating our patients to whatever facility we thought best,” Borton said. But the proposed deal sought to secure referrals for both parties which would give HOPE a strong partner for referrals for tertiary care.

Challenges and Pitfalls

Going in to the deal, HOPE had three main concerns:

  • Referral physician reaction – Would those left outside the deal advise their patients to be treated elsewhere?

  • Patient response – According to Borton, “One of the things you find in an area with an academic center and a community-based practice is that people have already made choices about where they seek care.” If their prior experience was good, then there should be no problem. If it was bad, the patient may well associate that bad experience with the newly merged healthcare entity.

  • Hospital reception – HOPE provides services to four different hospitals, and really didn’t know how this merge would be viewed. “During initial conversations, we got the sense that they thought we were going to the dark side,” he said.

Moving Forward into the Acquisition

Most commonly, there are two ways of paying for a deal like this—a stock purchase, or an asset purchase. “The asset purchase is one that is traditionally used in this environment because of liability,” said Borton, “But with a stock transaction the liability gets transferred to the new owners (UVA). This approach was most favorable to our physicians because they no longer wanted the liability concerns.”

With an upfront payment for stock, an escrow account was established from the proceeds to cover unknown liabilities. One of the ways HOPE got UVA comfortable with the stock purchase was to put aside monies for a 3-year period of time so that if liabilities were to occur, such as after a RAC audit, those dollars could be covered.  

On the personnel side, overall, HOPE physicians were to be employed directly by the academic center with contracts designating them as faculty members and with the university agreeing to provide non-tenured faculty tracks to accommodate appointments. In its turn, HOPE agreed to support (with 1 FTE) the academic center while also staffing its four community practices.

With forces joined, the terms of compensation were recalculated. “We did a fair market valuation determination for the base year 2010,” explained Borton. “Then we gave it a haircut.” Meaning, the derived RVU* resulted in payments somewhat less than HOPE standards, but with the tradeoff of providing greater financial security for everyone involved in the merged entity. The idea was to spread the risk of a volatile payer mix—whether Medicare or private payer, the compensation to the physician would be the same.

This arrangement also came with an insurance marker. After 5 years, there will be a reevaluation of RVU’s value. If it’s found that the RVU has devalued over time, the adjusted (compensatory amount) would be subject to an annual reduction floor. So, if revenue goes down greater than the floor amount, the physicians will only see a portion of the decrease in their pay, subject to known limits.

“It’s not really a guarantee,” said Borton, “But as long as patients keep coming through the door we will know what our minimum compensation is over a ten-year period. That’s a fairly long period of time in this environment.” Any loss due to compensation versus revenue, as calculated by the RVU, will be made up for by UVA.

Finally, riding shotgun over all issues related to the transition is a newly created Operating Committee, peopled by equal portions of HOPE and UVA stakeholders.

How It’s Working

After 15 months since the signing, the acquisition is a mixed success. To begin with, HOPE is currently only operating at two-thirds its projected income target. Borton speculates that this is due to an unrealistic target (because of an overestimation of 340B pricing effect) and loss of patients.

HOPE lost 35% of patients in its second largest market. “That was the community’s response to, ‘I’ve been to UVA, I know what UVA is,’” said Borton, “and we were not able to convince them that the care they previously received at HOPE would continue.” On the other hand, HOPE has initially retained 92% of its primary market, though Borton cautions that the fall off in referral services has likely not yet fully been realized.

HOPE lost one employee during the eight-month transition, but that means that 71 of 72 employees were retained.

The switch in IT has brought its own set of problems. HOPE employed an oncology-specific EMR, but UVA has a system that doesn’t have the oncology-specific tailoring’s HOPE had with its previous EMR system. “It’s been one of the bigger challenges that we’ve faced,” Borton offered.  

Borton admits there is still some settling in to be achieved such as memorandum of understandings for who is going to pay for what.

The HOPE physicians are also still adjusting, according to Borton, “any time an entrepreneur sells a company, looking back he goes, ‘wow, I don’t have as much freedom to do what I used to, not as much influence on hiring and firing decisions.” And with that comes some frustration. “It’s easy (for the physicians) to understand the financials going in, but it’s harder for them to comprehend what the negative impacts on lifestyle might be,” said Borton.

Reactions from UVA

Larry Fitzgerald, CFO, UVA medical center, commented that there were learning experiences on both sides. “HOPE physicians were not accustomed to having residents and fellows, and they were not accustomed to teaching, or treating patients at a particular pace, etc.”

As for the loss of patients post-transition, “We had that volume drop in one of the four sites,” said Fitzgerald, but the decline had been anticipated, and included in the pro forma. “I knew that in at least one of these four sites this transaction was not going to be well received.” The reasons for this are somewhat too sensitive to discuss, but can generally be described as a lack of trust by a community center regarding UVA’s intentions.

One the upside, another center for which a drop off had been predicted actually saw an increase in volume.  Growing pains aside, UVA’s objectives for the merger have been largely realized

  • NCI designation for their cancer center is moving forward;

  • oncology/hematology physician capacity has been increased; and

  • UVA now has a presence in four different rural communities.

“The result has been incredibly consistent with projections,” said Fitzgerald. “No liabilities have crawled out of the woodwork, which is a fear we had,” and there’s been very little turnover due to staff dissatisfaction.

Turnover or lack thereof may also be playing a role in the success the UVA/HOPE roll out. Fitzgerald indicated that the continued presence of the HOPE administrator, Michael Borton, was instrumental in facilitating the ongoing transition. For now, take it to heart the road to a successful deal is never straight, and in regards to competition in the age of healthcare reform, it may not even be on the map.


*relative value unit (RVU):

A comparable service measure used by hospitals to permit comparison of the amounts of resources required to perform various services within a single department or between departments. It is determined by assigning weight to such factors as personnel time, level of skill, and sophistication of equipment required to render patient services. RVUs are a common method of physician bonus plans based partially on productivity.


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