1. The Stanford Funds Flow Model
Gary K. Steinberg, MD, PhD
Director, Stanford Institute for Neuro-Innovation and Translational Neurosciences
Chairman, Department of Neurosurgery
Norm Rizk, MD
Senior Associate Dean for Clinical Affairs
Stanford University School of Medicine
Society for Neurological Surgeons Annual Meeting
Portland, OR May 23, 2011

2. Stanford’s Organizational Chart
Stanford University BOT
Stanford Hospital and Clinics (SHC) BOD
CEO of SHC
Stanford University President
Dean of the School of Medicine (SOM)
Lucile Packard Children’s Hospital
BOD
CEO of LPCH

3. Responsibilities of the Two Entities
SHC
SOM/Clinical Depts
Operates inpt and outpt facilities and provides new facilities as needed
Provides contracting and collection services for SHC and for faculty
Pays SOM for services rendered to the clinical enterprise
Operates medical school including all 3 missions
Appoints faculty and jointly develops clinical programs with SHC
Compensates faculty based on departmental compensation plans (Chairs)
There is no independent FPP at Stanford

4. How Clinical Revenue Flows
SHC
Clinical revenue
SOM
Funds Flow
Dept Clinical Revenue
Pass through
Faculty
Comp
Plan
SHC collects revenues and bears all practice expenses
Dept redistributes some clinical revenue to other missions
(Medicine: $10/$40M)
SHC: 5-6% operating margin (but $2 Billion new hospital)
(US hospital averages ~ 3%)

5. “Funds Flow”
Definition: Funds passed from our hospital (SHC) to the School of Medicine to compensate for services rendered to the hospital, including direct patient care services, medical direction and other clinical services.

6. Our Goal in Inventing the Funds Flow Model
Align SHC and the SoM into a more integrated and functional organization
Instituted “pay for performance”
Speak to this: We are presenting this to discuss the directional movement and evolving methodology of the proposed “flow of funds” from SHC to the SOM

7. Original Flow of Funds from SHC to SoM Depts (FY2004)
Components
Professional Services Agreement (PSA) - Collections from billing net of direct operating expense and allocated “shared (indirect) expenses” ($90M) Mediator to decide Indirects
Other payments for services ($27M)
Medical direction
Essential services (Psych ED, Trauma, Med Transplant, Path contract)
New program development (3yrs)
Reimbursement for SoM clinical staff and services provided to the SHC (Rad Onc physicists)
Service Incentives & Practice Deficit Support ($3.5M) (Ob-Gyn, Psych, ± Medicine)
“Grants” ($13M) (Dean decides: arbitrary)
Pass through = Fellow salaries

8. Original Funds Flow Model
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
Professional Services Agreement (PSA)
Stanford University Clinical Depts
PSA Payment
Service Payments
Academic Grant Distribution
= Total Clinical Revenue
Dean’s 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
Deficit Support
Service Incentives
Service Agreements
Medical Direction
Hospital Essential Services
Fellows
Purchased Services
Program Development
= Service Payments
Service Incentives
Deficit Support
Funds Flow
Amount Available for Department Initiatives and Faculty/Physician Bonuses
Amount Available for School Initiatives
Stanford University School of Medicine
Academic Grants
Academic Grants
Overall Academic Grant
Ambulatory Academic Grant
= Academic Grants

9. Original Funds Flow FY 2004 Operating Results
$357.0m
$140.9m
($19.6m)
($37.0m)
$5.8m
$90.1m
FY 2004 Operating Results
Stanford Hospital & Clinics
Stanford University Clinical Depts
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
PSA Payment
$90.1m
$27.2m
$12.5m
$129.8m
($8.0m)
($112.8m)
$9.0m
$16.3m
Service Payments
Academic Grant Distribution
= Total Clinical Revenue
Professional Services Agreement (PSA)
Dean’s 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
Service Agreements
Medical Direction
Hospital Essential Services
Fellows
Purchased Services
Program Development
= Service Payments
Service Incentives
Deficit Support
Amount Available for Department Initiatives and Faculty/Physician Bonuses
Funds Flow
Stanford University School of Medicine
($3.4m)
$27.2m
Academic Grants
$12.5m
$8.0m
$3.9m
Dean’s Tax
Deficit Support
Service Incentives
Academic Grants
Overall Academic Grant
Ambulatory Academic Grant
=Academic Grants
Academic Grants
Amt Available for School Initiatives
$12.5m

10. Funds Flow Model:Case for Change
Original PSA Agreement had several serious problems:
Unlike private practice, the Stanford PSA did not provide an adequate mechanism for ancillary revenues to supplement professional revenue
(Radiologic studies, ECHO, infusion tx, EEG/EMG, PFT)
(PAMF 43% revenue stream)
Professional revenue alone did not support the high cost of ambulatory expenses at Stanford
Departments were unable/unwilling financially to grow unprofitable outpatient practices even if they would be profitable for the overall clinical enterprise
(50% of SHC profit from outpt)
“The more you do, the more you lose” due to outpatient expenses charged the depts
(Neuroendocrinologist)
Need to define ancillary revenues: laboratory, EKG, Equipment

11. Funds Flow Model Case for Change
Prior funds flow did not incent growth of services overall
Departments were rewarded for negotiating favorable “deals”, rather than for productivity, innovation or quality
“Special deals” impaired relationships and distracted SUMC from competing successfully within the market place
For Departments, reliance on the negotiated end-of-year “grants” to achieve financial viability: too much unpredictability, and impaired planning
For faculty it meant compensation might not be based primarily on productivity

12. Other Misalignments
Shared contracting with hospital carried risk that the faculty’s interests might not be well represented in contract rates
Professional charges, particularly small “cognitive” charges, weren’t uniformly well collected
GME costs to departments were not adequately covered by Stanford Hospital

13. 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
This is a summary of the principles and goals
Reviewed and approved by Joint Planning Committee and Council of Chairs

14. Evaluating the Outcome
Outcome should meet the needs of the physicians, departments, & institutions
Physician recruitment & retention require competitive 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
The working group wrestled with what should the outcome look like if we were successful

15. Deciding on the “Right Amount” for Clinical services
Rather than basing payments on collections minus expenses (PSA), we decided to benchmark them to national standards for compensation for bundles of services
Evaluated the databases within AAMC, MGMA for the median amount paid within each specialty for work done, as captured in wrvu’s

16. Why MGMA National Median Private Practice?
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

17. Examples: Market RVU Rates for Selected Subspecialties

18. Funds flow methodology – RVU payments
SHC operates the inpatient and outpatient facilities, manages the revenue cycle, and pays SoM for their professional services delivered
Payment based on US private practice compensation by specialty and clinical service (RVU’s from MGMA database)
Total payment includes all expenses (benefits, departmental overhead, graduate medical education, and Dean’s tax)
RVU payments would replace the previous PSA methodology
This RVU methodology shifts responsibilities within the Medical Center Structure with positive and negative effects.
We have started the modeling using median MGMA PP Compensation and divided by the actual RVUs by Stanford Faculty by specialty to get to a RVU value for each department.

19. 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
(if SHC operating profit > 6%)
A grant for education and training would acknowledge these missions within the SOM

20. Proposed Funds Flow “RVU Benchmark Model”
Stanford Hospital & Clinics
PSA
Market Based RVU Payment
Benefits Factor
Dean’s Tax
GME Payment
Department Expense Factor
= Total Payment
Stanford University Clinical Depts
Total Payment
Service Payments
= Total Clinical Revenue
Dean’s Tax
Expenses:
Faculty/Physician Compensation
Benefits
Dept Clinical Management and Staff
Dept Clinical Supplies and Equipment
Dept Clinical Profit or Loss
Service Agreements
Medical Direction
Hospital Essential Services
Fellows
Purchased Services
Program Development
= Service Payments
Service Payments
Deficit Support
Amount Available for Department Initiatives and Faculty/Physician Bonuses
Amount Available for School Initiatives
Profit Sharing TBD
Medical Direction ---$5.5 Million ICU, OR, Heart Center, Life Flight=---also has Anesthesia, Trauma,
Essential Services --$10M------Physicists, Pathology Contract, ED support
Purchased Services
Stanford University School of Medicine
Teaching and Education Grant
Teaching and Education Grant
Education
Profit Sharing
Profit Sharing TBD

21. Funds Flow Model Benefits
Based payment on clinical productivity, rather than on negotiated “deals”
Provided standardization in funds flow, which will facilitate the creation of service lines, centers, and institutes
Allowed outpatient practices to achieve financial viability
Provided funding for departmental practice administrative overhead
Allotted resources for the education and research missions

22. Funds Flow Model Additional Consequences and Caveats
There was limited experience with methodology among AMC’s
Financial liability for practice deficits shifted solely to SoM
Revenue cycle management transferred solely to SHC
More financial and practice operational management by SHC;
more focus on productivity and practice development by the practices, departments, & SoM
SHC has the financial liability for and control of practice expenses
SOM needed to change compensation plans to be compatible with the new plan
Budgeting, incentives and infrastructure were different for both institutions
? Incent ↑ Medical (Medicaid) and uninsured pts; discourage working
to bring in commercial insurance pts

23. Funds Flow Model:Transition (2 yrs)
Principles
The transition period should maximize the value of the new system while minimizing the risks of the conversion
Medicine $5M loss (ECHO); Radiology $8M loss (imaging)
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
Using wrvu payments and MGMA benchmarks in essence provided an audit of whether the faculty was being adequately paid for their services.

24. Conclusions about the model
The model changed direction towards paying for faculty productivity as the primary metric
The 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 assigned to SHC
Growth in productivity and volume is the primary clinical responsibility of departments and faculty
The new model refocused our attention on maintaining and enlarging our market share, as well as academic missions
~40-50% of AMCs now use permutation of this funds flow model
Most large group practices use it (wRVU method)

25. Main Messages
For SHC: You must make your bottom line while paying faculty market rates for their services, operating the hospital and clinics, and doing effective contracting and collecting
For SOM: You will win by growing productivity and volume, not by negotiating
Left for the future: How to incent quality, faculty engagement in expense reduction, and compensation schemes across depts

26. Sources of Faculty Compensation
Wrvu payment
Research funding
Administrative funding
Operating budget, teaching dollars
Philanthropy

27. MGMA

28. AAMC

29. Stanford University/Stanford Hospital and Clinics
Department of Neurosurgery
Estimated Impact of New Funds Flow in 2006
NEW ADULT FUNDS FLOW (FY06)
ESTIMATED OLD FUNDS FLOW BASED ON FY05 EXPENSES
IMPACT MD
RVU $59.37/adjusted wrvu
Benefits Factor 24%
Dept Overhead Factor 20.5%
Total New Funds Flow
Collections
Less Estimated Total Costs
Impact A
404,855
97,165
82,995
585,015
966,228
703,414
(118,399) B
5,825
1,398
1,194
8,418
4,496
3,273
5,145 C
851,816
204,436
174,622
1,230,874
1,617,044
1,177,208
53,666 D
109,776
26,346
22,504
158,626
290,620
211,571
(52,945) E
392,948
94,308
80,554
567,810
719,636
523,895
43,915 F
180,092
43,222
36,919
260,233
335,812
244,471
15,762 G
7,880
1,891
1,615
11,387
14,105
10,269
1,118 H
48,664
11,679
9,976
70,319
114,644
83,461
(13,141) I
1,265,320
303,677
259,391
1,828,387
2,095,456
1,525,492
302,895 J
213,024
51,126
43,670
307,820
143,372
104,375
203,445 K
58,712
14,091
12,036
84,839
35,820
26,077
58,762 L
691,940
166,066
141,848
999,853
1,159,356
844,011
155,842 M
365,576
87,738
74,943
528,257
673,696
490,451
37,807 N
4,428
1,063
908
6,398
3,536
2,574
3,824 P
592,660
142,238
121,495
856,394
1,128,260
821,373
35,020
TOTAL DEPARTMENT
5,193,516
1,246,444
1,064,671
7,504,631
9,302,081
6,771,915
732,716
Total Costs: clinic staff & space, nursing, malpractice, billing, IT systems

30. Stanford University/Stanford Hospital and Clinics Department of Neurosurgery Funds Flow Comparison (FY06)
Endocr
Physician

31. Funds Flow Comparison of Year One Clinical Billings FY06
PRE FUNDS FLOW
POST FUNDS FLOW
HOSPITAL BOOKS wRVUs
113,349
Physician Professional Fees (charges)
$ ,432,443 NA
Collections
$ ,080,677
Other income (contracts with other hospitals)
$ ,264
$ ,264
Net Clinical Income
$ ,516,941
WRVU Income
$ ,277,550
Deans Tax (paid by Hospital in new funds flow)
$ ,976
Direct Hospital Expenses
$ (1,437,295)
Indirect Hospital Expenses (Billing, IT, MalP, Admin…)
$ (1,424,341)
Adjustments (DME/GME…)
$ ,612
$ ,280
Physican Service Payment (PSA)
$ ,799,917
$ 9,563,070 (pd up front)
Service Agreements (Med Direction, Program Support)
$ ,203,623
$ ,203,623
Total Clinical Income - Passed to School/Department
$ ,003,540
$ ,766,693
SCHOOL/DEPARTMENT BOOKS
Total Clinical Income - Passed from Hospital
MD and Staff Direct Clinical Expenses
$ (6,873,063)
$ (6,873,063)
Indirect Expenses (Dean's Taxes)
$ (687,976)
$ (687,976)
Department Profit
$ ,442,501
$ ,205,654

32. STANFORD NEUROSURGERY HISTORICAL FUNDS FLOW RATES
FY06
FY07
FY08
FY09
FY10
FY11
FY12
wRVU rate (Neurosurgery) $ $ $ $ $ $ $
Benefit Factor
24.0%
23.2%
21.8%
22.8%
18.8%
17.1%
TBD
Overhead Factor
20.5%
22.4%
23.0%
23.5%
20.8%
19.3%
Fully Loaded $/wRVU $ $ $ $ $ $

33. YEAR 6 (YTD FY11 ANNUALIZED)
NEUROSURGERY FUNDS FLOW COMPARISON FIRST YEAR TO CURRENT YEAR (YTD ANNUALIZED)
YEAR 1 (FY06)
YEAR 6 (YTD FY11 ANNUALIZED)
HOSPITAL BOOKS wRVUs
113,349
127,816
Other income (contracts with other hospitals)
$ ,264
$ ,889,926
WRVU Income
$ ,277,550
$ ,157,488
Deans Tax (paid by Hospital in new funds flow)
$ ,976
$ ,717,170
Adjustments (DME/GME…)
$ ,280
$ ,416
Physican Service Payment (PSA)
$ ,563,070
$ ,018,000
Service Agreements (Med Direction, Program Support)
$ ,203,623
$ ,810,924
Total Clinical Income - Passed to School/Department
$ ,766,693
$ ,828,924
SCHOOL/DEPARTMENT BOOKS
Total Clinical Income - Passed from Hospital
MD and Staff Direct Clinical Expenses
$ (6,873,063)
$ (11,708,724)
Indirect Expenses (Dean's Taxes)
$ (687,976)
$ (1,717,170)
Department Profit
$ ,205,654
$ ,403,030
What if SHC operating margin ↓↓?

34. Stanford University

35. 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.