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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
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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
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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
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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%)
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“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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Examples: Market RVU Rates for Selected Subspecialties
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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.
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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
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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
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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
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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
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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.
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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)
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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
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Sources of Faculty Compensation
Wrvu payment Research funding Administrative funding Operating budget, teaching dollars Philanthropy
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MGMA
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AAMC
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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
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Stanford University/Stanford Hospital and Clinics Department of Neurosurgery Funds Flow Comparison (FY06) Endocr Physician
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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
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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 $ $ $ $ $ $
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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 ↓↓?
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Stanford University
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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.
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