The Profit Of Prestigious Cancer Care

The cash flow for Sloan-Kettering comes from more than just drug markups. It also comes from the high pricing enabled by a great brand and an enterprise that has learned how to expand the reach of its brand

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Like MD Anderson’s aggressive pricing for Sean Recchi’s stay, Sloan-Kettering’s markup on drugs like the Flebogamma given to Alan A. is one reason cancer care is so profitable. In 2011, the hospital and research institution of Sloan-Kettering had an operating profit of $406 million even after everything it spent on research and the education of a small army of young cancer doctors.

The cash flow comes from more than just drug markups. It also comes from the high pricing enabled by a great brand and an enterprise that has learned how to expand the reach of its brand.

One of Sloan-Kettering’s major revenue sources is the outpatient clinics it has been opening around New York City in recent years so that patients don’t have to travel to the busy Upper East Side of Manhattan for the kind of treatments Alan A. gets every six weeks. There is a cancer-screening and treatment outpost (run in partnership with Ralph Lauren’s foundation) in Harlem and a chemotherapy clinic in Brooklyn, and clinical-care facilities can also be found in five of the New York City metropolitan area’s wealthier suburbs, such as Sleepy Hollow in Westchester County, New York, and Basking Ridge, N.J. A sixth is being constructed in Harrison, another wealthy Westchester town.

Building on the deserved allure of the Sloan-Kettering brand, these outposts eat into the profits of area hospitals, which would otherwise be providing the same high-margin outpatient cancer care either on the basis of what their own doctors prescribed or according to instructions from Sloan-Kettering’s specialists. “Sloan-Kettering can open these clinics and treat people 9 to 5 at their [high] rates, and because they’ve got the brand name, they’ll be very successful because they don’t have to run a 24/7 operation,” complains the president of one hospital in a wealthy suburb north of New York City. “But if those patients need help at midnight on Saturday, they’ll end up in our emergency room.” That may be true, but Sloan-Kettering’s foray beyond the Upper East Side of Manhattan also represents a rare outbreak of competition in the current hospital marketplace.

Sloan-Kettering may be fishing for business in these wealthy suburbs, but it does have a financial-aid process that is both proactive and well publicized to patients seeking care. It provides discounts of varying amounts for those who are uninsured or underinsured and have incomes of less than 500% above the poverty line, which comes out to about $115,000 a year for a family of four. Counselors also help patients get other aid from the state or local government, from research programs or, as happened with Sean Recchi in Ohio, from drug companies.

That still leaves out many people, especially the uninsured or underinsured whose incomes are above $115,000 but well below what they would pay for treatment at Sloan-Kettering. And it undoubtedly leaves others struggling just to meet the co-pays required even with good insurance. Sloan-Kettering chief operating officer John Gunn says patients not formally in the financial-assistance program might still be offered discounts of some kind and that only “2% or 3% of our patients pay our full list prices”—chargemaster prices that he acknowledges are high “because we have better outcomes.”

Most of those asked to pay chargemaster rates, Gunn adds, are “wealthy foreigners, whom we screen and tell in advance what it’s likely to cost them.” Insurance companies negotiate discounts off of Sloan-Kettering’s chargemaster prices, but Gunn acknowledges that his hospital can drive a hard bargain because insurers want “to make sure we are in” their network.

That kind of brand strength produces not only lavish cash flow but also lavish incomes for the nondoctors who work to generate it. Six Sloan-Kettering administrators made salaries of over $1 million in 2010, the most recent year for which the hospital filed its nonprofit tax return. (The 2011 return is “on extension,” says Gunn, who was paid $1,531,991 in 2010.) Including those six, 14 made over $500,000.

Compared with their peers at equally venerable nonprofits, these executives are comfortably ensconced in a medical ecosystem that’s in a world of its own. For example, Sloan-Kettering listed two development-office executives, or fundraisers, as making $1,483,000 and $844,000. Another venerable New York nonprofit that mines the same field for donors—the Metropolitan Museum of Art—pays its top development officer $345,000. Harvard pays its chief fundraiser $392,000. Asked why salaries at Sloan-Kettering are so much higher than those at nonprofits like the Met and Harvard, Gunn replies, “All of us hospitals have the same compensation consultants, so I guess it’s a self-fulfilling prophecy.”

Whatever the origins of the compensation rates, the prospectus that Sloan-Kettering’s bankers and lawyers used to sell the bonds that helped finance those suburban clinics struck a tone that is at odds with the daily sight of men and women rushing through the halls of Sloan-Kettering doing God’s work. The halls may be sprinkled with cheerful posters aimed at patients, but the prospectus is sprinkled with phrases like market share, improved pricing and rate and volume increases. Then again, the same prospectus describes the core of the business this way: “higher five-year survival rates for cancer patients as compared to other institutions.”