Next-Generation Funds Flow Model: Enhancing Academic Health System Alignment

by Manatt, Phelps & Phillips, LLP
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Editor’s Note: From August 2017 through April 2018, the Association of American Medical Colleges (AAMC) and Manatt Health hosted a Funds Flow Learning Collaborative (FFLC) with the goal of developing principles to guide the next generation of funds flow models that represent the funding and alignment methodologies to foster investment in growth and innovation for the clinical, research and education enterprises. The AAMC has published a report of the FFLC findings that are summarized below. For more information on the report, click here.

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The promise of academic medicine is to create new knowledge, train the next generation of practitioners and advance standards of patient care. The funding is the oil that lubricates this powerful innovation engine. In addition to securing clinical and administrative services, funds flow enables faculty recruitment and program development, supports investment in new areas of research, and facilitates the delivery of educational programs insufficiently supported by tuition or public funds. Implementing the optimal funds model for an academic health system (AHS), which entails balancing its aspirations with its capacity to invest, thus becomes one of the pivotal leadership challenges for today’s deans, CEOs and department chairs.

Over the past decades, a labyrinthine tangle of negotiated support agreements among the hospital, faculty practice plan (FPP), clinical affiliates, departments, medical school and parent university has evolved at most AHSs. These legacy funds flow arrangements served the basic needs of compensating the faculty for their work and subsidizing the growth of academic programs. Since the 1990s, the academic missions became increasingly dependent on the clinical margin of their affiliated hospitals and health systems. Because of their success in attracting patients and negotiated pricing, these hospitals and health systems were able to vastly increase their clinical income, supporting the expansion of research programs.

The economy of AHSs is profoundly threatened by the erosion of the implicit subsidies that have supported the research and educational expansion. Many AHSs are experiencing reimbursement erosion in their hospitals and FPPs. Simultaneously, while the overall National Institutes of Health (NIH) budget has increased over the past few years, after adjusting for inflation, the agency’s purchasing power still falls 11% below the funding level from 15 years earlier. Additionally, the annual process for appropriating federal funding is unpredictable. As such, continued growth in the research enterprise consistently requires more and more financial support from other revenue sources.

Scarce funding and complex funds flow formulas create internal tension between the clinical and academic missions. Recognizing the essential interdependence of these missions and the organizational peril that comes from discord, many deans, CEOs and department chairs are committed to an agenda of strategic and financial alignment.

“Our money, our collective success” is becoming a more common vision wherein shared risk and reward accompany strategic resource allocation decisions. For these leaders, a funds flow model that promotes alignment, substantiates clear decision making and resourcing for each of the missions, and optimizes the institutional capacity for financial performance becomes the sine qua non of the next-generation AHS.

Three Interlinked Components of Funds Flow

In this report, three interlinked components of funds flows were considered: enterprise commitments, strategic funds flow and faculty compensation.

  1. Enterprise commitments are focused on the sustainability of the AHS enterprise. These commitments should be based on an enterprise strategic plan that defines priorities and capacity for investment. Enterprise commitment models may include a base level of academic support plus a combination of incentives for growth and margin, as well as other strategic success measures.
  2. Strategic funds flow is an investment in growth and includes performance incentives, academic investment, and clinical program investment and support. These investments should create a “shared risk, shared reward” culture of collaboration across the AHS and underpin the resource mechanisms of strategic investments such as service lines. Investments from clinical enterprise funds can be considered R&D investments, with the goal of creating synergy between discovery and clinical priorities. In this manner, academic and clinical leadership come together to define priorities, assess financial capacity, and consider talent acquisition and program differentiation.
  3. Faculty compensation encompasses faculty professional compensation and services required by the clinical enterprise, namely, medical directorships, medical education and purchased clinical services. Faculty compensation models should be considered part of funds flow because they are integral to enhancing alignment. Purchased clinical services should have clear mechanisms to track the provision of the services and include performance metrics where appropriate.

Equally important to these dimensions are the care and attention that must be given to the structure for managing funds flow processes while respecting and cultivating the deep integration and balance of the missions. Therefore, funds flow governance must bring together clinical and academic leadership organized around an enterprisewide strategic and financial plan. The performance of the enterprise and entities must be transparent and guided by leaders who value the academic mission and appreciate the synergy potential of aligning clinical and academic priorities. In this manner, the promise of academic medicine may be realized in the years ahead, as it has in the decades past.

Recommendations

Based on the common challenges and themes that emerged from the FFLC’s work, the following recommendations can serve as guiding principles as AHSs transition to the next generation of funds flow models.

  1. Agree on an enterprisewide, multiyear strategic and financial plan, and align resources to maximize the capacity to invest. Imbalanced resource allocations—whether to the school of medicine (SOM), departments or health system—will inevitably skew the organization’s adaptive capacity and introduce significant elements of operating risk. Academic support agreements should be sufficiently flexible to enable the clinical system to adapt to and thrive in evolving and dynamic markets.
  2. Convert historical arrangements into a transparent funds flow agreement linked to the strategic and operating plans. Funds flow transparency is a fundamental condition of effective leadership, faculty engagement and fiduciary responsibility. Shared understanding of the fiscal economies of all enterprise constituent components is a precondition for rational decision making.
  3. Consider funds flow transfers as investments. Transfers of clinical income should be disciplined investment decisions with established rules and a process for periodic recalibration, rather than entitlements or “patches” to particular issues. Perpetuation of funding commitments that have outlived their strategic value or mission imperative weakens the institution’s capacity to reinvest.
  4. Commit to radical simplification of agreements. Constructive reform efforts are impeded by persistent, elaborate and byzantine arrangements that often extend to hundreds or even thousands of agreements. The new formulas employed should be commonly understood and impervious to manipulation.
  5. Convert “entity responsibility” to shared responsibility and shared incentives for enterprisewide performance. In some significant measure, the leaders of the professional schools, the FPP, and the hospitals or health system must share financial and operating responsibility for the success of the entire enterprise, which should be expressed through their respective and linked incentive compensation goals.
  6. Combine entity-specific productivity expectations with shared enterprisewide financial performance goals. Each component of the enterprise must be held accountable to the same discipline to operate at its optimal productivity level, within the context of evolving value-based reimbursement arrangements.
  7. Rebuild faculty compensation models through FPP standards and corresponding faculty tracks to align with strategic goals. Redefine base salary service expectations and incentive compensation ranges. Apply common AHS-controllable metrics, aligned with AHS strategic goals, as well as shared and personal goals for productivity, access and service expectations in FPP incentive payment formulas.

Concluding Perspective

For most AHSs, the ability to invest in productive research, create new knowledge and advance standards of care will define leadership success or failure. In the past, the primary source of new investment was the clinical margin. However, the changes being introduced into next-generation funds flow models are likely to significantly change the manner in which investment decisions in research programs are made. Collaborative decision making between health systems and SOMs, even in fully integrated AHSs, is likely to favor investments in clinical and translational research as their R&D investment and the recruitment of research faculty with strong interest in clinical applications.

Applying the principles and recommendations of the FFLC can potentiate alignment to further focus the AHS on delivering greater value and driving the innovation that has differentiated AHSs. This value will in turn ensure the vitality of the academic missions, including the ability to train the next generation of clinicians and scientists and to address the health needs of the diverse communities each AHS serves.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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