The Financial Risks of Biologics
by Jane Ehrhardt
Made from a living organism or its products, biologics treat anything from cancer, rheumatoid arthritis, and asthma to wrinkles. They can also mean a large investment for a clinic to stock. Prolia, a biologic used to treat osteoporosis can run $2,000 per treatment. "It's expensive and a doctor has to lay out that cost at the front end," says Jeff Dance, MBA with Kassouf Healthcare Solutions. "That's a risk."
As an alternative, a physician can choose the brown bag approach, in which case the patient absorbs the cost by purchasing straight through a pharmacy, only using the clinic to administer the dose. "Or physicians can refer them to an infusion center and let them take the risk," Dance says. "In that case, there is no risk to the physician, but also no profit. That's the zero neutral approach, but the patient still gets the care they need."
If a clinic chooses to undertake the risk of providing an expensive biologic, then some accounting pitfalls need to be heeded. "Are they willing to take the risk and have that initial cash outlay?" Dance asks. If a clinic purchases Prolia doses for patients, for example, that can mean a quick loss of $2,000 if a patient doesn't show before the drug expires.
If the patient is scheduled too soon by the clinic between treatments, the reimbursement can be denied. "If the claim gets rejected, you eat that cost," Dance says. "Staff has to pay attention and know what they're doing or the practice is not getting paid."
The large expense on inventory can also make the profit/loss statement deceptive with the cash basis accounting used by most medical practices. If reimbursements get posted before the drug company invoices, physicians could perceive that entire reimbursement as profit.
"So they would get inflated compensation unless they consider the expense of the drug, which is why the business managers need to alert physicians to how much expense has been reimbursed on the biologics but not invoiced," Dance says. "Be careful of the timing of when you pay those invoices. Distributors give some nice terms of 60 to 90 days on biologics." As an incentive, they offer early-payment discounts, which means the clinic may pay the hefty invoice before receiving reimbursement, leading to a bleaker financial picture than actually exists.
Distributors also offer rebates if a practice orders over a certain amount during a quarter. "That rebate can affect your profits as well, because you're anticipating the rebate, but it may take 30 to 60 days as well," Dance says. "The doctor basically finances the cost of the rebate until it arrives. It's a carrot for the future. The practice is buying the drug at a loss to meet the volume threshold."
This means, for example, the clinic chooses to lose $200 per injection beyond the reimbursement through the quarter in expectation of the rebate in the next quarter that turns that into $100 profit per injection. "You're carrying a loss in hopes of a little profit, so be careful from a cash standpoint," Dance says, warning that anything may interfere with achieving that volume threshold, such as physician illness or a pandemic that shuts everything down.
Dance recalls managing a practice that had 15 days to go on the quarter and needing only 15 doses needed to reach the threshold. They decided on the $200,000 expense for that quarter in hopes of the $20,000 profit from the rebate in the next quarter. "The benefits outweighed the cost. The big question was whether or not we had enough room in the refrigerator to handle that volume," he says.
Refrigeration becomes crucial for the investment in biologics. Because they must be kept at a consistent temperature, the practice needs a reliable refrigeration source, a way to virtually monitor the refrigerator when the clinic is closed, and business policies to cover spoilage, which generally tack on a few hundred more onto to the premium. At one practice that carried biologics, the door was not shut tight on a Friday. By Monday, they had lost $20,000 in biologics.
Practices just starting to offer biologics should expect about a two-quarter lag before seeing profits, and possibly longer if the time falls during the first quarter when patients are the main source of revenue as they pay off their deductibles.
"It's a significant cash outlay on the front end for biologics until things get rolling," Dance says. "Even if you're going through the proper steps, it's a risk."