Funds Flow Model - Stanford University School of Medicine

Funds Flow Model
Stanford Hospital & Clinics
DFA Meeting
February 14, 2005

Funds Flow Model
Purpose of Briefing
We intend to reinvent the funds flow
to better align SHC and the SoM into
a more integrated and functional
organization

Funds Flow Model
Team Members
The Funds Flow Working Group formed in September,
2004, with the following membership:
Marcia J. Cohen David R. Kiehn
Michael A. Hindery Norman W. Rizk, M.D.
Robert Jackler, M.D. Gerald M. Shefren, M.D.
In January, 2005, the Group expanded to receive input from
additional Department Chairs:
Thomas M. Krummel, M.D. William J. Maloney, M.D.
Alfred T. Lane, M.D. Ronald Pearl, M.D.

Current Flow of Funds from
SHC to SoM Depts (FY2004)
Components
1. Professional Services Agreement (PSA) -
Collections from billing net of direct operating
expense and allocated “shared expenses” ($90M)
2. Other payments for services ($27M)
• Medical direction
• Essential services
• Program development
• Reimbursement for SoM clinical staff and services provided
to the SHC
3. Service Incentives & Practice Deficit Support ($3.5M)
4. “Grants” ($13M)

Professional Services Agreement (PSA)
Funds Flow
Academic Grants
Stanford Hospital & Clinics
Physician Professional Fees
Gross Charges
− Contractual Adjustments
= Net Collections & Other Rev
− Ambulatory Clinic Direct Expenses
− Shared Expense Allocations:
Finance & Admin
Space
Information Systems
Professional Malpractice
Billing Expense
+ Adjustments
= PSA Payment
Service Agreements
+ Medical Direction
+ Hospital Essential Services
+ Fellows
+ Purchased Services
+ Program Development
= Service Payments
+ Service Incentives
+ Deficit Support
Academic Grants
+ Overall Academic Grant
+ Ambulatory Academic Grant
= Academic Grants
Current Funds Flow
Stanford University Clinical Depts
PSA Payment
Service Payments
Academic Grant Distribution
= Total Clinical Revenue
− Deans Tax
− Expenses:
−Faculty/Physician Compensation
−Benefits
−Dept Clinical Management and Staff
−Dept Clinical Supplies and Equipment
Dept Clinical Profit or Loss
+ Service Incentives & Deficit Support
Amount Available for Department
Initiatives and Faculty/Physician Bonuses
Stanford University School of Medicine
Academic Grants
Deans Tax
− Deficit Support
−Service Incentives
Amount Available for School Initiatives

Professional Services Agreement (PSA)
Funds Flow
Academic Grants
Stanford Hospital & Clinics
Physician Professional Fees
Gross Charges
− Contractual Adjustments
= Net Collections & Other Rev
− Ambulatory Clinic Direct Exp
− Shared Expense Allocations:
Finance & Admin
Space
Information Systems
Professional Malpractice
Billing Expense
+ Adjustments
= PSA Payment
Service Agreements
+ Medical Direction
+ Hospital Essential Services
+ Fellows
+ Purchased Services
+ Program Development
= Service Payments
+ Service Incentives
+ Deficit Support
Academic Grants
+ Overall Academic Grant
+ Ambulatory Academic Grant
=Academic Grants
Current Funds Flow
$357.0m
$140.9m
($37.0m)
($19.6m)
$5.8m
$90.1m
$27.2m
($3.4m)
$12.5m
FY 2004 Operating Results
Stanford University Clinical Depts
PSA Payment
Service Payments
Academic Grant Distribution
= Total Clinical Revenue
− Deans Tax
− Expenses:
($112.8m)
−Faculty/Physician Compensation
−Benefits
−Dept Clinical Management and Staff
−Dept Clinical Supplies and Equipment
Dept Clinical Profit or Loss $9.0m
+ Service Incentives & Deficit Support
Amount Available for Department $16.3m
Initiatives and Faculty/Physician Bonuses
Stanford University School of Medicine
Academic Grants
Deans Tax
− Deficit Support
−Service Incentives
Amt Available for School Initiatives
$90.1m
$27.2m
$12.5m
$129.8m
($8.0m)
$12.5m
$8.0m
$3.9m
$3.9m

Funds Flow Model
Case for Change
Issues with Current Payments
• Unlike private practice, the Stanford PSA does not provide a
mechanism for ancillary revenues to supplement professional
revenue
• Professional revenue alone cannot support the high cost of
ambulatory expenses
–Current funds flow does not uniformly compensate for this
imbalance
–As a consequence, Departments are unable/unwilling financially to
grow unprofitable outpatient practices even if it would be profitable for
the overall clinical enterprise

Funds Flow Model
Case for Change
• Current funds flow does not incent growth of services overall
– Departments are rewarded for negotiating favorable “deals”, rather than
for productivity, innovation or quality
– Resulting “special deals” impair relationships and distract SUMC from
competing successfully within the market place
• For Departments, reliance on the negotiated end-of-year “grants” to
achieve financial viability means there is too much unpredictability,
and impairs planning
– For faculty it means compensation may not be based primarily on
productivity

Principles of New Funds Flow
Model
New funds flow should:
• Align incentives, be simple, formula-driven, stable,
predictable and transparent
• Be inclusive of medical direction, essential services,
program development, graduate medical education,
profit-sharing, and mission-based funding
• Support productivity and market-based compensation
for physicians
• Support financial sustainability for each organization

Evaluating the Outcome
• Outcome should meet the needs of the
physicians, departments, & institutions
– Physician recruitment & retention require competitive
MGMA compensation
– Departments require profitability for academic mission
– SHC needs sufficient profit to meet its bond
covenants & capital needs
– SoM needs sufficient funds for mission-based
activities

Why MGMA National Median
Private Practice?
• National
– We compete nationally for faculty (as well as locally)
– Need large number of responses to control year-to-year variability
– The only index with sufficient data, especially in sub specialties
• Median
– Reasonable starting point
• Private Practice
– Academic benchmarks are:
• confounded by other revenue streams (research, teaching)
• confounded by part time clinical FTE
• academic rank
• data is too sparse for consistent, reliable index
– Private practice is more sensitive to our own market conditions

Examples: Market RVU Rates for
Selected Subspecialties
Emergency
Medicine
Hematology
Oncology
Radiation
Oncology
General
Internal
Medicine
2004 MGMA Median
Compensation $211,708 $299,319 $369,424 $154,756
20004 MGMA wRVU
Median 4,670 3,895 8,373 3,858
2004 "Market Rate" per
wRVU $45.33 $76.85 $44.12 $40.11

Proposed funds flow methodology –
RVU payments
• SHC would operate the inpatient and outpatient
facilities, manage the revenue cycle, and pay
SoM for their professional services delivered
– Payment would be based on US private practice
compensation by specialty and clinical service, i.e.
the competitive payment for RVU’s as derived from
the MGMA’s database
– Total payment would need to include all expenses,
including benefits, departmental overhead, graduate
medical education, and Dean’s tax
– RVU payments would replace the previous PSA
methodology

Proposed Funds Flow
• Payments may be reduced for certain service payments,
such as:
– Medical direction, program development, essential services
• Profit-sharing methodology, based on operating margin
of the hospital, would encourage attention to overall
enterprise success
• A grant for education and training would acknowledge
these missions within the SOM

PSA
Service Payments
Education
Profit Sharing
Stanford Hospital & Clinics
Market Based RVU Payment
Benefits Factor
Deans Tax
GME Payment
Department Expense Factor
= Total Payment
Service Agreements
+ Medical Direction
+ Hospital Essential Services
+ Fellows
+ Purchased Services
+ Program Development
= Service Payments
Proposed Funds Flow RVU Benchmark Model
Teaching and Education Grant
Profit Sharing TBD
Stanford University Clinical Depts
Total Payment
Service Payments
= Total Clinical Revenue
− Deans Tax
− Expenses:
−Faculty/Physician Compensation
−Benefits
−Dept Clinical Management and Staff
−Dept Clinical Supplies and Equipment
Dept Clinical Profit or Loss
+ Deficit Support
+Profit Sharing TBD
Amount Available for Department
Initiatives and Faculty/Physician Bonuses
Stanford University School of Medicine
Teaching and Education Grant
Deans Tax
− Deficit Support
Amount Available for School Initiatives

Funds Flow Model
Benefits
• Bases payment on clinical productivity, rather than on
negotiated “deals”
• Provides for financial predictability and stability
• Aligns incentives of SHC and Faculty physicians
• Provides standardization in funds flow, which will facilitate
the creation of service lines, centers, and institutes
• Allows outpatient practices to achieve financial viability
• Provides funding for departmental practice administrative
overhead
• Allots resources for the education and research missions

Funds Flow Model
Additional Consequences and Caveats
• There is limited experience with methodology among AMC’s
• Financial liability for practice deficits will shift solely to SoM
• Revenue cycle management will be transferred solely to SHC
• New funds flow will require more financial and practice
operational management by SHC, and more focus on
productivity and practice development by the practices,
departments, & SoM
– SHC will have the financial liability for and control of practice
expenses
– SOM will need to change compensation plans to be
compatible with the new plan
• Budgeting, incentives and infrastructure will be different for both
institutions

Funds Flow Model
Transition
Principles
• The transition period should maximize the value of the new
system while minimizing the risks of the conversion
• The transition costs should be jointly shared by SHC and
SOM
• The transition period should incent growth for the entire
enterprise
• Benefits and losses to any party should be capped during
the transition on a diminishing basis
• The transition period will be 2-3 years, and changes in
methodology may occur during that period

Funds Flow Model
Timeline
• Refine the current RVU data - 3/31/05
– Use outside consultant help to determine accurate payable
RVU production and IDX system tracking
– Analyze each department accuracy for RVU methodology
– Make certain our methodology is aligned with the MGMA
database
– Establish methods to deal with departments and services not
appropriate for RVU methodology
• Communication plan with stakeholders - 4/30/05

Funds Flow Model
Timeline
• Reach agreement on methodology components - 3/31/05
– Benefits
– Department Overhead
– Handling of Deans Tax
– GME
– Education / Research
– Profit Sharing
– Incentives
• Establish impact to SHC, SoM, Departments - 4/15/05
• Methodology Finalized - 4/30/05
• Develop Transition Plan and FY 06 Budgets - 5/31/05

Conclusions
• The proposed model signals a change in direction towards paying
for faculty productivity as the primary metric
• The proposed model has specific funding for GME, teaching, &
education
• Consolidation of responsibility for multiple shared areas simplifies
funds flow & improves operations
– Outpatient direct and indirect expense and the entire revenue cycle will
be assigned to SHC
– Growth in productivity will be the primary clinical responsibility of
departments and faculty
• The new model refocuses our attention on maintaining and
enlarging our market share, as well as academic missions