INTRODUCTION MEDICAL SCHOOL LANDSCAPE 5/13/2016. Introductions

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1 Association of Chiefs and Leaders of General Internal Medicine 2016 Leon Hess Management Training and Leadership Institute Medical School Revenues and Budgeting Principles A discussion outlining the revenue streams which support medical schools and how these revenue streams are changing. INTRODUCTION Prepared and Presented by Richard M. Nuttall Associate Dean of Finance and CFO, UAMS, College of Medicine Wednesday, May 11, 2016 Diplomat Resort and Spa, Hollywood, Florida 1 2 Introductions It will be important to understand where I have been and the structures that I have managed under. They have shaped the business models I favor. Medical School My Role / Private Relationship to Parent Practice Plan Legal Structure Rutgers New Jersey Medical School University of New Mexico Dean s Finance Office Dept of Peds Administrator Dept of Medicine Administrator Financial Integrated Financial Integrated Separate Not For Profit Corporation Owned by University MEDICAL SCHOOL LANDSCAPE University of Arizona Dept of Medicine Administrator Financial Integrated Separate Not For Profit Corporation University of Florida Dept of Medicine Administrator Financial Integrated Separate Not For Profit Corporation University of Arkansas for Medical Sciences College of Medicine Chief Financial Officer Financial Integrated Owned by University 3 4 1

2 National Medical School Growth Trends Over the last 45 years, the number of medical schools have grown 60%. In the last 10 years DO Schools have grown more than double the rate of MD Schools. Number of Medical Schools in the US by Dates Established (not by entering first class) Remaining slides focus on Allopathic Medical Schools DO 50% MD 11% Developing Medical Schools: Anticipated Inaugural Classes Applied MD DO National Medical School Growth Trends Medical student applications have continually outpaced the number of medical school available slots. The growth of medical schools will minimally impact the supply and demand model, allowing for high annual increases in tuition rates (18% increase from 2012 to 2016). residency applicants outstrip current available resident slots (FY ,270 residency applicants and 29,671 positions). However, growing residency programs will be dependent on the clinical enterprise, as Medicare has capped the number of federally funded residency slots. MD DO 5 6 Source: Wikipedia Website, List of Medical Schools in the United States by established dates and inaugural class Source: AAMC Website, FACTS: Enrollment by US Medical School and Sex National Medical School Growth Trends Faculty have grown with much regularity (2.5% annual growth rate) for the past 20 years. National Medical School Growth Trends Most specialties have seen a steady growth over the past 10 years. Basic Science faculty have seen a more flat compensation growth Average Total Full Time Medical School Faculty, from 1996 through % Growth (1996 to 2015) 76% Growth (1996 to 2015) Growth has come in only one flavor $270 $260 $250 $240 $230 $220 $210 $200 $190 Average Faculty Total Compensation Changes 2.2% CAGR 2.7% CAGR All Basic Sciences 3.3% CAGR All Clinical All Medicine Specialties General Internal Medicine $ $170 $ % CAGR 0 $ Average Clinical Average Basic Science $140 FY2013 FY2014 FY Source: AAMC Website, Faculty Roster, Reports Source: AAMC Website, Faculty Salary Survey 2

3 Med School Organizational Characteristics Characteristics that drive and control the revenue streams of medical schools. Med School Organizational Characteristics Characteristics that drive and control the revenue streams of medical schools. FY2014 MEDICAL SCHOOL COUNT FINANCIAL RELATIONSHIP TO PARENT UNIVERSITY PRACTICE PLAN LEGAL STRUCTURE PRACTICE PLAN STRUCTURE Multi Specialty Group Practice Model Private Financially Autonomous Owned by the University or School of Medicine Federated Practice Plan 141 Medical Schools recognized by the LCME Financially Integrated with University Freestanding Institution Other Separate Not For Profit Corporation Other No Practice Plan Departmental Practice Model 7% 60% 40% Using average revenue, private medical schools are larger, have a larger proportion of clinical revenue and higher tuition rates, than public schools. 8% 5% Defines control, risk, and autonomy. 83% 9 Multiple Professional Corporations 1 Ability to influence 42% academic investment choices, adjust faculty compensation, and grow margin 35% 8% 1% 35% 58% Multi Specialty Group Practice Model: cohesive unit; common governing board; common management systems; joint contracting; clinically integrated across specialties; operating expenses are shared; income may be pooled and reallocated across departments based on a formula Federated Practice Plan: common governance; shared management systems; may conduct joint contracting; chairs still maintain strong control over compensation and funds; some cross departmental integration may be occurring Departmental Practice Model: departments are essentially autonomous; funds and compensation are the prerogative of the chairs; contracting may be integrated 10 Source: AAMC Organizational Characteristics Database (OCD), July 2015 Source: AAMC Organizational Characteristics Database (OCD), July 2015 Med School Organizational Characteristics DEAN S RESPONSIBILITIES OTHER THAN THE MEDICAL SCHOOL No Other Responsibilities Faculty Practice Plan Faculty Practice Plan, Hospital or Health System 20% 32% 48% Dean s with no faculty practice plan oversight generally have limited ability to manage compensation, and significant changes in investment strategies The Dean s ability to make decisions regarding use of hospital s margin greatly increases the medical school s ability to invest in the academic missions (research, education and clinical quality) FINANCIAL LANDSCAPE Source: AAMC Organizational Characteristics Database (OCD), July

4 REVENUES SUPPORTING FULLY ACCREDITED U.S. MEDICAL SCHOOLS FY 2014 Practice Plans Hospital Purchased Services Federal Grants Other Grants Government Support Tuition and Fees Endowment Gifts All Other Sources 9% 6% 15% 2%2% 18% 40% This represents data for 130 fully accredited medical schools in FY2014 Total Revenue Sources $105,013,000, FY2014 Revenue Streams Practice Plans Hospital Purchased Services Federal Grants Other Grants Government Support Tuition and Fees Endowments Gifts All Other Sources Mean Total Revenue Medical Schools (Count 78) 36% 19% 15% 8% 11% 1% 2% 100% Private Medical Schools (Count 52) 4 16% 16% 10% 1% 3% 2% 100% $639 M $1,061 M vs Private 9% 3% 1% 1% 10% 0% 2% 0% 0% $422 M The average private medical school is 66% larger than the average public 14 $1,200 Medical Schools, both public and private have achieved steady growth of 2.6% over the last 10 years, even when adjusting for inflation (real growth). 10 Year Trend of Average Total Revenue, vs Private $1,061 When you put this growth together (increasing the number of medical schools and the average revenue growth of medical schools), it creates a dramatic growth trend. From 1977 to 2014 (37 years) total medical school revenue has grown 256 or an average of 9.3% every year for 37 years. $120,000 Revenue by Source for Medical Schools, FY1977 through FY2014 $1,000 $800 $600 $400 $694 $420 $876 Compound Annual Growth Rate = 2.6% $639 $527 Compound Annual Growth Rate = 2.6% Dollars in Millions $100,000 $80,000 $60,000 $40,000 $200 $20,000 $ FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Private Current Dollars Private Constant Dollars Current Dollars Constant Dollars 15 $ FY1977 FY1982 FY1987 FY1992 FY1997 FY2002 FY2007 FY2014 Other Income Tuition Government Support Other Federal Federal Research Medical Services & Fees 16 4

5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% The financial needs of medical schools have outstripped the historical funding mechanism. In FY 1977 clinical service revenue accounted for only 20% of the total revenue, increasing to 58% in FY Revenue by Source for Medical Schools, FY1977 through FY2014 0% FY1977 FY1982 FY1987 FY1992 FY1997 FY2002 FY2007 FY2014 Other Income Tuition & Fees Government Support Other Federal Federal Research Medical Services 17 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $ Clinical Practice Plan Trends Clinical practice plan growth tops the charts for both public and private. Remember total revenue growth is 2.6% overall, thus other revenue streams are growing at a reduced rate or not growing. Average 5 year 10 Year Trend of Average Practice Plan Revenue HEPI = 1.86% $272 $138 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Private Current Dollars Private Constant Dollars Current Dollars Constant Dollars $471 $389 Compound Annual Growth Rate = 4.1% $228 $188 Compound Annual Growth Rate = 3.5% 18 Clinical Practice Plan Trends As the fee for service models transition to value based reimbursement models, health plans will see more and more of their revenues at risk. Federal Grants and Contracts Trend Using a constant dollar perspective, the grant resources have reduced over the last 10 years. Again, leaving clinical revenue as the prime pump for fueling growth and new initiatives. 10 Year Trend of Average Federal Research Grants & Contracts $250 Capitation $200 Financial Risk Shared Risk Shared Savings Episode Payments Performance Based Contracts Fee for Service $150 $100 $50 $162 $87 $169 $140 Compound Annual Growth Rate = 1.7% $94 $78 Compound Annual Growth Rate = 1.2% Provider Integrations $ FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Private Current Dollars Private Constant Dollars Current Dollars Constant Dollars

6 Federal Grants and Contracts Trend The NIH budget has been relatively flat for decades, increasing competition for existing grants and forcing researchers to seek new funding streams $35,000 $30,000 $25,000 $20,000 NIH Budget History, FY 2001 through FY 2014 Federal Grants and Contracts Trend Given the loss of federal grant revenue, it is easy to understand the increased competitive nature of grant applications. Often long time funded research faculty must re invent themselves into full time clinicians. 60,000 50,000 40,000 NIH Competing Applications, Awards and Success Rates 100% 90% 80% 70% 60% 30,000 50% $15,000 20,000 40% 30% $10,000 $5,000 10, % 10% 0% $ Applications Awards Success Rate (%) Source: NIH Website, Databook Source: NIH Website, Databook Tuition and Fees Trend Despite this revenue stream contributing very little proportionally to a medical school s total resources, medical schools have continually make this conscious decision to raise rates at these levels. First Year Total Costs of Attendance Average 5 year HEPI = 1.86% $70,000 $60,000 $50,000 Compound Annual Growth Rate = 4.3% BUDGETING PRINCIPLES $40,000 $30,000 Compound Annual Growth Rate = 3.3% $20,000 $10,000 $ FY2012 FY2013 FY2014 FY2015 FY2016 Resident Mean Resident Median Non Resident Mean Non Resident Median Source: AAMC Website, Medical School Profile System

7 Budgeting Models If you have seen one Medical School s budget model, you have seen one Medical School s budget model. Eat what you kill; Manage to budget, Manage expenses incentives driven both revenues & and productivity from margin expenses; positive margins budgeted of faculty Bottom line Budget Based Productivity A typical Based Based school will be all over Allocated to those who Direct Revenue Distributions this mapgenerate it (e.g. pro Direct and metric driven allocations fees, contracts, F&A) Distributed by metric Some revenues Indirect Revenue Distributions (e.g. hospital funds, distributed by metric; tuition, foundation) others held centrally Incentive / Investment Funds Direct Expense Distributions Indirect Expense Distributions Funded by department All expenses funded and managed within department Centralized functions are allocated to dept, or taxed (e.g. dean s tax) Managed by Dept or pooled Centrally All expenses funded and managed within department Centralized functions are allocated to dept, or taxed (e.g. dean s tax) Pooled Centrally All expenses funded and managed within department Held centrally 25 Budgeting Principles If an institution does not embrace this principle and follow it, it is nearly impossible to maintain and grow trust long term Cannot spend what you don t have [the concept of spend now and ask for forgiveness weakens your position to make meaningful impact to the institution and vice versa] Revenue allocation is based on output, priority, and not historical spending [if resources are not allocated based on output, output is not meaningful and will not drive performance] Use it or lose it budgeting [Otherwise called, expense based budgeting ; discourages mindful spending habits; potentially punishes departments twice] 26 Budgeting Principles continued Budgeting Principles continued Departments/divisions/sections exceeding expectations must be rewarded [excellence must be recognized and incentivized] Limit year over year changes [departments need guardrails to ensure principles can be followed; fairness does not trump political influence] Profitable services will subsidize less profitable services [in order to manage within today s highly specialized environment, eatonly what you kill will drive discord] Revenues, expenses, and productivity measures must be transparent and as real time as possible [Creates trust, an accountable culture, gives leaders the tools to assess performance, engages system in process improvement; encourages and develops data driven decisions] 27 Revenues (resources) and taxes must be spread using consistent metrics [Helps to establish a predictable environment; enables leaders to more easily develop investment opportunities; major annual changes create mistrust] Overhead units, such as chair s offices, must be held accountable and transparent [This is a common source of mistrust, and can help to repair it] Whatever is done, it needs to be done consistently [major annual changes only bring uncertainty and will tire and overwhelm the institution] 28 7

8 Building the Case of Your New Program BUSINESS PLANS PITFALLS Dean, Department Every leader Chair, Division Chief has their own philosophies that you must learn and adapt to. Answer the questions they want you to answer, even your ideas are better then theirs. When building the case for a new faculty or any new initiative, there are many common pitfalls, when not addressed, create delays or reactive disapprovals. If these pitfalls are acknowledged within the business plan up front, it will provide a more full picture for those reviewing and approving, which should expedite an answer Building the Case of Your New Program In case you didn t catch the message earlier, the clinical mission is the funding stream for the majority of incremental education and research initiatives. Other funding streams occasionally available to chairs and chiefs to grow research and education initiatives include: Start up packages Foundation, endowment and gift spendable balances Special state appropriation Hospital subsidy support Department positive margin or positive budget variance Depending on your institutional/departmental budgeting principles these principles may or may not resonate for your individual situation. 31 Avoiding Business Plan Pitfalls These pitfall will focus on outlining clinical revenues as the funding mechanisms for new faculty or new initiatives 1. Must prove incremental revenue 16,000 wrvus In total generating 16K wrvus or an average of 4K wrvus each. Such a simple concept, but rarely acknowledged 20,000 wrvus 32 8

9 Avoiding Business Plan Pitfalls Avoiding Business Plan Pitfalls continued These pitfall will focus on outlining clinical revenues as the funding mechanisms for new faculty or new initiatives Must prove incremental revenue a) Clinic and procedural revenue is usually easier to justify by pointing to patient appointment wait times, new vs return patient ratios, year over year growth, positive budget clinic volumes, etc. b) Inpatient revenue is tougher; must show growth by annual trends, opening of additional medicine beds, new affiliate partner to increase transfers, etc. c) First year should always have a ramp up period; no faculty will be 100% productive the first year (e.g. learning systems, growing patient panels, and collection lags of 30 to 90 days) Actual duties must equal or exceed assignments across all missions: Clinical FTE of 0.80 FTE with only 5 ½ day clinical session is not fully assigned May depend on your institutions effort definitions 33 These pitfall will focus on outlining clinical revenues as the funding mechanisms for new faculty or new initiatives Don t use down stream revenue for the proforma; acknowledge down stream revenue through referral counts, especially trends over time; subspecialists and the hospital already count these revenues for their business plans If PA/ARNP/APRN do not bill independently, then their revenue is already including in physician billing revenue; Add in an overhead rate for the college, departmental, and clinic, if applicable (e.g. dean s taxes); this will give a more realistic projection of the departmental or divisional financial impact) 34 Avoiding Business Plan Pitfalls continued Avoiding Business Plan Pitfalls continued These pitfall will focus on outlining clinical revenues as the funding mechanisms for new faculty or new initiatives These pitfall will focus on outlining clinical revenues as the funding mechanisms for new faculty or new initiatives Productivity and compensation must be in alignment (e.g. if compensation at the 50%ile benchmarks, then productivity must be at or above the 50%ile benchmark) Don t use benchmarks to set base salary; most compensation benchmarks represent total compensation (base + supplement + incentive, including VA salary) Most compensation benchmarks, such as AAMC salary survey, include all faculty within a given rank; avoid use these benchmarks to set compensation standards for graduating providers 35 When using academic wrvu benchmarks, such as UHC or academic MGMA, don t discount provider clinical FTE for clinical teaching roles, such as inpatient attending or a fellows cliniccational activity with residents, fellows and medical students Don t add incremental teaching time to each new faculty without adjusting current faculty assignments; just hiring a new faculty does not in and of itself create more teaching need With all new initiatives and new hires, it is best practice to outline measurable outcomes; this helps to ensure expectations are in alignment 36 9

10 Percent Change in Revenue by Source in Current Dollars: All Medical Schools Thank You TOTAL REVENUES ALL OTHER SOURCES GIFTS & ENDOWMENTS FY % 3.2% FY % 9.2% FY % 1.6% TUITION AND FEES 5.7% 6.1% 6.3% Richard Nuttall GOVERNMENT OTHER GRANTS FEDERAL GRANTS 5.1% HOSPITAL 5.2% 2.0% 8.1% 4.0% 7.9% 2.9% % 1.2% 9.1% PRACTICE PLANS 7.6% 6.0% % 5.0% 0.0% 5.0% 10.0% 10.0% 0.0% 10.0% 10.0% 0.0% 10.0% 37 15% 58% 38 10