Rethinking Deficit Funding in AMCs

It is an uncomfortable ritual that occurs in nearly every academic medical center (AMC): specialties unable to meet their department profitability targets find themselves hat in hand, requesting funding to cover budgetary shortfalls. The AMC, committed to providing comprehensive services, is then put in the position of having to find some way to oblige.

This is a tiresome exercise for all parties, and these negotiations often render the relationship between AMCs and faculty group practices (FGPs) as purely transactional, inhibiting a more integrated approach.

Though common, this dynamic is far from ideal. The reality is that some specialties simply generate more revenue than others. For many FGPs, faculty are paid on a revenue-less-expenses basis. While this philosophy may be well suited to private practices owned by shareholders, it leaves much to be desired in the academic setting, where the ultimate intent is to reinvest in all aspects of the tripartite mission. Those specialties without the benefit of strong revenue streams are typically rendered “wards” of the health system and rely on deficit funding arrangements to sustain adequate compensation levels.

To combat this inequity, some AMCs have been deploying a different tool – the professional services agreement (PSA). PSAs are contracts under which physicians typically function as independent contractors. They provide clinical services under a variable payment plan based on productivity (typically measured in WRVUs) – higher levels of clinical work result in a bigger funding pool for compensation. Incentives may be included to reward physicians for elements of comanagement, such as quality and operating efficiency.

At first glance, this sort of arrangement might not seem like an obvious fit for AMCs. PSAs have traditionally been used in the community-based setting to promote alignment while allowing private practices to retain their corporate identity and some degree of organizational autonomy. In contrast, FGPs typically are corporately integrated with their AMC partners or, at the very least, closely aligned through affiliation agreements.

But AMCs are increasingly using PSAs to move away from the historical model of deficit funding and to essentially “hardwire in” the support that certain lower-revenue specialties inevitably require.

These arrangements reset the perspective of department performance. Physicians are reimbursed for services based on a predetermined rate that is set at a robust enough level to ensure market-competitive compensation (independent of reimbursement rates). Including comanagement features can replace legacy hospital-funded administrative roles that often have limited accountability and fail to drive and reward performance improvement. As AMCs venture further into value-based payment arrangements, the weighting of WRVU-based funding can be thoughtfully de-emphasized to increase the financial value attached to quality and other performance metrics.

Concluding Thoughts

AMCs are committed to fostering the provision of all specialty services to meet the needs of the communities and patients they serve – not just those specialties that are profitable from a stand-alone business perspective.

Yet AMCs have realized that inequity is pervasive in their FGPs and that the status quo – deficit funding – does little to improve performance and incentivize faculty. PSAs offer an opportunity to invest in physician services in a manner that is performance-based and shares risk and reward between the hospital and FGP, better aligning interests and collectively benefitting the enterprise.

This entry was posted in Hospital-Physician Alignment, Integration, Physician Compensation and tagged , , , , , , by Evan Lynch-Throne. Bookmark the permalink.

About Evan Lynch-Throne

Based in ECG’s Boston office, Evan is a member of the firm’s Academic Healthcare practice. Working in the healthcare industry for 10 years, he focuses on assisting AMCs, children’s hospitals, and community health systems with strategy and business planning initiatives. His primary areas of expertise include physician/hospital integration and mergers and acquisitions. Evan has firsthand experience helping health systems prepare for healthcare reform and transitioning institutional leadership into thinking strategically about growth. He has recently assisted clients with negotiating and developing multispecialty Professional Service Agreements (PSAs), designing and implementing comprehensive physician compensation plans, and developing integrated physician organizations. Prior to joining ECG, Evan was the Director of Business Development for Steward Health Care System, where he played a leading role on many hospital, surgery center, and multispecialty physician practice acquisitions.

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