Photo: Erik KellarCo-founder Daniel Dosoretz has made more than $100 million as 21 Century Oncology has grown.
Research and Innovation
Cancer Care: X-ray visionaries
A single outpatient clinic in Fort Myers grows into the country's biggest provider of radiation services — but not without bumps and bruises.
Born and raised in Argentina, Daniel Dosoretz earned his medical degree from the Universidad de Buenos Aires. In the early 1980s, he was completing his residency in radiation oncology at Massachusetts General Hospital and teaching at Harvard Medical School.
Dosoretz and two other residents, Michael Katin and Peter Blitzer, decided to continue working together after leaving the Harvard-affiliated hospital. They learned about an opportunity to set up shop in Fort Myers, a city that Dosoretz had never heard of. “Being from South America, I knew Miami, and that’s it,” he says.
Dosoretz had planned to return to Argentina to practice with his father, Bernardo, a radiation oncologist who passed away in 2013. But the demographics of southwest Florida impressed him as “very, very strong” — in particular, the growing population of retirees.
And so in 1981, Katin moved down and opened an outpatient clinic in Fort Myers with a $1-million linear accelator machine. Dosoretz joined him in 1982, followed by Blitzer in 1985.
Three decades later, the corporate descendant of that clinic, 21st Century Oncology, is the nation’s largest provider of radiation therapy, operating from more than 390 locations in 17 states and six Latin American countries. Last year, the company surpassed $1 billion in revenue. The company’s free-standing clinics in the U.S. treat about 3,120 cancer patients every day; most have been referred by their surgeon, specialist or primary care physician after a cancer diagnosis. Some come on their own.
In addition to maintaining a huge array of radiation technology systems from a variety of manufacturers, the company also operates a foundation that supports cancer research and offers certificate programs in radiationrelated specialities.
21st Century has grown primarily by acquiring existing radiation oncology practices, then taking advantage of economies of scale to offer cancer patients access to cutting-edge technology while achieving operational efficiencies that let it keep growing.
Its business strategy has been aggres- sive — and corporate. The company has moved back and forth between public and private ownership while managing mountains of debt. The process has made the founders wealthy: Dosoretz, now CEO, has grossed more than $100 million from the ownership changes. In 2013, he earned $8 million in salary, bonus, stock and other compensation and retains a 7% ownership stake in the company. Katin still practices with 21st Century and owns 2.5% of the company. Blitzer is retired and is no longer an owner.
21st Century faces challenges as it tries to keep growing. In addition to managing the debt required to grow, the company faces regulatory scrutiny. Its aggressive navigation through the laws on physician self-referral and federal Medicare billing regulations has made it the subject of two federal probes in five years.
21st Century also faces pressure on its revenue, arising from the broad effort to control health care costs. The company, which relies on Medicare payments for about 40% of its revenue, is directly affected by the federal government’s efforts to hold downthe costs of that program.
Meanwhile, private sector payors — insurance companies — also are working to restrain costs, both by pushing their customers to become healthier and by negotiating aggressively with providers.
“The conventional wisdom is that larger practices will be able to better withstand these downward pressures” on revenue, says Tip Kim, a health care consultant with LEK in San Francisco. But he also sounds a cautionary note for corporate-style practices like 21st Century. “The economies of scale only get you so far. Beyond a certain point,” he adds, “you begin to have diminishing returns” — when corporate bureaucracy collides with entrepreneurial innovation, for example.
In its early years, 21st Century gobbled up practices as if they were sugar pills. By the mid-1990s, Dosoretz and his partners were buying clinics on both Florida coasts, financing the purchases by taking on personal debt. By the end of that decade, they had expanded to Las Vegas and upstate New York.
With revenue of nearly $40 million at the time, they decided to take the company public and keep growing using investors’ money. Failing to attract interest from a Wall Street focused on dot-coms, they put the IPO on hold until 2004, when the stock started trading on Nasdaq at $13 a share.
With public ownership, however, came scrutiny of the company’s operational tactics. Forbes published an article titled “Beams and Schemes,” suggesting that the company used kickbacks to secure physician referrals. Of the $47.1 million raised in the IPO, the magazine noted that $40 million was used to pay Dosoretz and “a handful of other owners a cash dividend. The rest went to pay off loans.”
In a lengthy response, the com- pany criticized the article as repeating “false” allegations made in a lawsuit filed by a disgruntled former employee, while airing other “irrelevant” issues to try to force a settlement.
The controversy didn’t discourage investors. In early 2008, Vestar Capital Partners, a New York private equity firm, purchased the company in a $1.1-billion leveraged buyout that took the company private again. Vestar managing director James Elrod praised the company’s “very talented and experienced management team and extraordinary group of physicians.” Dosoretz remained CEO and received $127 million from Vestar, putting $45 million back into the business.
Fueled by Vestar’s borrowed money, 21st Century accelerated its acquisitions. In 2011, it expanded overseas with an $82.7-million purchase of a majority stake in Medical Developers, a Latin American oncology treatment provider. The deal probably wouldn’t have happened if the company had still been public, Dosoretz says — the sellers were his father and a brother, Alejandro. “It’s grown great. But I mean, it was my family.”
Two years later, the company bought out bankrupt competitor OnCure Holdings for about $125 million, including $82.5 million in assumed debt. More recently, it paid $65 million for a 65% stake in South Florida Radiation Oncology, which has 15 treatment centers.
Dosoretz calls the OnCure purchase a no-brainer because of big cost savings opportunities. “They were undercapitalized, and they had no medical leadership. There were a lot of economies of scale.”
The transactions expanded growth but pushed the company’s debt to $1 billion. In early 2014, the company sought to go public again, then changed its mind last May, citing poor market conditions. “It was not a good time,” Dosoretz says. “It was like giving away equity.” In September, Canada’s largest pension fund manager, Canada Pension Plan Investment Board, bought a $325-million stake, becoming a “major equity partner.”
According to a February regulatory filing, the investment gave 21st Century enough money to “significantly” reduce its debt and support growth. Moody’s subsequently upgraded the company’s credit rating, and Dosoretz says 21st Century is again looking for acquisitions.
Both its size and reliance on Medicare revenue mean 21st Century must navigate a host of legal and regulatory complexities. Last year, the company disclosed it was under investigation by the U.S. Justice Department and the Office of Inspector General at the U.S. Department of Health and Human Services over its use of an expensive test for bladder cancer.
The investigation involves the Stark law, which is meant to limit self-referrals by physicians to other health service providers — labs, for example — in which the physicians have a financial interest.
Exceptions in the law allow physicians to do in-office lab tests for the patient’s convenience. But as many practices have grown larger and more complex, they’ve claimed the exceptions as well — in ways that critics say don’t match the law’s intent. A Wall Street Journal report in 2014 raised questions about whether some of the tests that 21st Century conducted in-house were medically advisable and whether the company was taking advantage of the Stark exceptions to drive revenue.
The company denies wrongdoing and says it’s cooperating with investigators. “I don’t know what the issue is, but whatever it is, we’ll fix it,” Dosoretz says. “As the lawyers say, it’s the cost of doing business.”
Meanwhile, in a second probe, federal investigators have begun looking into the company over its Medicare billing practices. At issue is a program called Gamma, which measures the radiation therapy that patients receive to ensure it conforms to the prescribed amount. On a quarterly conference call in November, Dosoretz said the program helps doctors adjust treatments to improve care, though some critics contend that it’s unnecessary. The U.S. Justice Department has requested documents concerning allegations that the company “knowingly billed for services that were not medically necessary and for services not rendered,” according to a regulatory filing.
Whether the company broke the law, the case points to the incentives created by the fee-for-service model — and also the need for doctors to distance themselves from real or perceived conflicts of interest, say Navigant health care analysts John Colleran and Paul Keckley.
They predict that with growth in health care spending expected to exceed 6% annually for the next decade, payers and regulators will demand to know how physician business interests are affecting costs. “The integrity of the profession is at risk unless it embraces full transparency in disclosing its business relationships forthrightly, however uncomfortable or revelatory,” say Colleran and Keckley.
Dosoretz, whose daughter, Amy Fox, practices with 21st Century, professes to see all the legal and financial issues as part of today’s medical landscape. Dosoretz likes to joke about how little he once knew about accounting and the business of medicine. He still sees patients twice a week, he says. “I deal with lawyers, accountants and bankers, but doctors — we have a better job.”
He notes proudly, however, that his son, Arie, a Yale-trained physician who’s joining the practice soon, also has an MBA from Wharton.
21st Century Oncology relies heavily on Medicare payments, which can reach up to $30,000 per case for radiation therapy. Sources of U. S. patient revenue, by payer, for the nine months ended Sept. 30, 2014:
Medicaid 2.3% S
Source: 21st Century Oncology
More Revenue, But Bigger Losses
Revenue $736.5 Million
Loss –$78.2 Million
Revenue $1.0 Billion
Loss –$343.2 Million
Source: 21st Century Oncology
Cancer in Florida
There were an estimated 114,040 new cancer cases in the state in 2014 and 43,050 cancer deaths.
The rate of cancer per 100,000 residents in Florida is lower than national averages for both men and women.
The incidence of most types of cancer in Florida, including prostate, bladder and uterine, decreased from 2007-11 for all ages, sexes and races. Among major types of cancers, the only types showing increases were thyroid, pancreas, skin and liver cancers.
Sources: American Cancer Society, National Cancer Institute
21st Century Oncology
Opens as a single clinic in Fort Myers
Buys its first clinic
Calls off an initial public offering of stock
Completes its IPO, netting the company $47.1 million
Goes private in a $1.1-billion leveraged buyout by Vestar Capital Partners
Expands to Latin America by buying radiation treatment centers owned by Dosoretz’s father and brother
Raises $350 million through a bond issue
Buys bankrupt competitor OnCure Holdings for $125 million; changes name to 21st Century Oncology from Radiation Therapy Services
Secures $325 million from the Canada Pension Plan Investment Board