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New Organizational and Funds Flow Models for an Academic Cancer Center

Spahlinger, David A. MD; Pai, Chih-Wen PhD; Waldinger, Marcy B. MHSA; Billi, John E. MD; Wicha, Max S. MD

Special Theme Article

The clinical impetus to develop cancer centers has been the recognition that many cancer patients require a comprehensive treatment plan coordinated across multiple specialties. Developing an effective organizational and financial structure among the multiple entities that comprise an academic cancer center has, however, been a challenge. The authors describe an effort to realize a sustainable clinical operation at the University of Michigan Comprehensive Cancer Center (UMCCC) by developing an appropriate management structure and financial model. The modified organizational structure established a clear line of administrative authority and held faculty members accountable for their effort in the UMCCC. A unified budget aligned financial incentive among all stakeholders to increase efficiency, revenue, and margin. The authors report preliminary financial evidence of the success of the new managerial structure.

Dr. Spahlinger is clinical associate professor of internal medicine, executive medical director of faculty group practice, and senior associate dean for clinical affairs, University of Michigan Medical School, Ann Arbor, Michigan. Dr. Pai is senior research associate, Office of the Dean, University of Michigan Medical School. Ms. Waldinger is administrator, University of Michigan Comprehensive Cancer Center, Ann Arbor, Michigan. Dr. Billi is professor of internal medicine and medical education and associate dean for clinical affairs, University of Michigan Medical School, and associate vice president for medical affairs, University of Michigan, Ann Arbor. Dr. Wicha is professor of internal medicine, University of Michigan Medical School, and director, University of Michigan Comprehensive Cancer Center.

Correspondence and requests for reprints should be addressed to Dr. Spahlinger, University of Michigan Medical School, 4101 Medical Science Building I, Box 0624, 1301 Catherine, Ann Arbor, MI 48109; telephone: 734-936-3568; fax: 734-615-4397; e-mail: 〈〉.

The number of cancer centers at academic medical centers (AMCs) and community hospitals has increased dramatically over the past 25 years. Currently there are 61 cancer centers designated by the National Cancer Institute (NCI); most are associated with an AMC. The clinical impetus to develop cancer centers has been the recognition that many cancer patients require evaluation by and coordination of a team including multiple specialties to develop and execute a comprehensive plan.

There is evidence that the multidisciplinary approach has improved the care of cancer patients by reducing variations in treatment, facilitating clinical trials, and improving coordination of specialty care.1,2 However, creating an effective organizational structure and financial funds flow model among the multiple entities that comprise a cancer center has been a challenge for leaders at many AMCs. In this article we report the implementation of a management structure and a detailed financial funds flow model of shared incentives. Preliminary data of improved overall performance are presented.

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The University of Michigan Comprehensive Cancer Center (UMCCC) is a freestanding, outpatient facility. Departmental participants include dermatology, internal medicine, obstetrics–gynecology, pediatrics, and surgery. As reported elsewhere,3 there has been a general perception of inequitable distribution of revenues and expenses among the multiple participants in cancer centers. Within the UMCCC, all the departments sustained losses, while the University of Michigan Hospital reported positive margin for fiscal year 2000 (FY2000) (see Table 1).

In the initial model, the departments bore the costs of faculty, rent, malpractice, professional billing, and clinic support staff. The hospital was responsible for initial capital investment, technical staff support, depreciation, technical supplies, interest payments, and information technology costs. For services performed within the UMCCC, the departments received all the professional revenues, and the hospital received all the technical revenues. Multidisciplinary clinics were organized around disease entities. This allowed for efficient evaluation of patients by multiple specialists when necessary in order to develop a comprehensive treatment plan. However, this structure made cost allocation to the departments complex and inflexible. The initial financial funds flow was viewed as incongruent with the clinical care model preferred by the faculty and the institution. In addition, the initial model created a diffusion of responsibility that often delayed resource allocation within the clinics. Therefore, the medical director of the Faculty Group Practice and Cancer Center leadership initiated a project to create a new organizational structure and funds flow model that would support the multidisciplinary approach to cancer patient care.

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Initial Assessment

We conducted individual interviews with 47 key faculty, staff, administrators, and executive leadership. We also performed extensive financial analysis on revenues and expenses within the UMCCC's clinical operation. Our initial strategy was to analyze the operation of the UMCCC as a program, including both inpatient and outpatient services. In this effort, we encountered multiple difficulties in trying to incorporate inpatient and outpatient services into a single program. First, multiple organizational structures would have needed to be consolidated into a single comprehensive program. Second, revenues were attributed to multiple areas (laboratory, radiology, operation room, nursing units) involved in patient care, and patients often have multiple diagnoses in addition to cancer, making decisions about inclusion or exclusion within the program difficult. Finally, the inpatient nursing units are organized along subspecialty lines, which results in cancer patients being admitted to multiple nursing units. For these reasons, implementation of a new organizational structure and funds flow model was limited to the participants within the outpatient clinical operation of the UMCCC. The procedure rooms and outpatient pharmacy were included in the project. For political reasons, radiology and pathology services were excluded from the project.

Interviews with the key stakeholders identified two major issues that threatened the clinical operations of the UMCCC: a lack of a clear line of administrative authority over the clinical programs and ability to make changes, and an inequitable distribution of revenues and expenses to constituents. To address these issues, two main recommendations were proposed to manage the UMCCC's clinical operations as a program with its own budget and board oversight; and combine professional and facility revenues within the UMCCC, allocate revenues to the constituents based on activity within the UMCCC, and share margin improvement from the overall UMCCC operations with the constituents.

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Organizational Structure

We created a modified organizational structure for the UMCCC with its own management team and one unified budget (see Figure 1). This revised organizational structure creates a business partnership among all constituents. Specifically, a Cancer Center executive committee (functioning as the board of directors) is comprised of leaders from the hospital, medical school, and participating departments. It provides budgetary oversight for clinical operations and monitors the implementation of the new model. The executive committee reviews financial statement and operational data quarterly.

The UMCCC's director is responsible for all the missions of the UMCCC, including research, education, and patient care. Note that the UMCCC director reports to the dean of the medical school for the research enterprise, as required for NCI core grant funding. A new position was proposed for a medical director of UMCCC Clinical Operations who would be the primary decision-maker for clinical operations, reporting to the UMCCC director. In addition, physicians are accountable to the medical director for all UMCCC clinical activities and clinically related administration. The medical director in turn submits physicians’ performance evaluations to their respective department chairs, using agreed upon performance measures. Such evaluations contribute to the annual faculty evaluation in proportion to their time spent in the UMCCC. The peer pressure in the executive committee is an effective method to convince the chairs of the participating departments to use the performance review process to set expectations.

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Funds Flow Model

In the revised funds flow model, UMCCC revenues and expenses are pooled under one single budget and controlled by UMCCC management. Importantly, the new budget includes the cancer retail and infusion pharmacy revenues and expenses, a key component of a unified business model. The unified budget would help align the financial incentives and interests among stakeholders to sustain the feasibility of a multidisciplinary program.4 The revenues and expenses included in the new funds flow model are shown in Table 2. The UMCCC margin is calculated by subtracting all UMCCC clinical expense (direct and indirect, including relative value unit [RVU]-based payments to departments as the “expense” for physician services) from the net revenues (facility and professional revenues) generated in the UMCCC. UMCCC management is responsible for generating a margin in accordance with the budget approved by the UMCCC board. The medical school and its departments are responsible for paying physician salaries and benefits.

The medical school departments are reimbursed by the UMCCC based on work RVU for physician services in the UMCCC. The medical school can easily calculate the work RVUs for services generated within the Cancer Center, reducing administrative costs. RVUs are a simpler indicator of clinical effort than clinical sessions or time. Negotiations are limited to conversion factors (the dollar figure to be multiplied by work RVUs), not salary or effort. Furthermore, RVUs are a more accurate measure of productivity than sessions or time.

Several restrictions were placed on the implementation of the new funds flow model for the UMCCC. The most significant condition was that the new program should be budget-neutral for the hospital. Therefore, any correction of inequities in revenue splits needed to be funded out of improvement of the margin within the UMCCC. We devised a three-tier system of distribution in order to meet the restrictions placed on the project (see Figure 2).

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Tier I.

The primary goal of Tier I is to generate sufficient income to maintain the hospital as “margin neutral,” with a minimum level of payment to the medical school to shelter it from bearing the full risk of financial loss. Thus, the hospital is held to its agreed-upon, base-year margin. The medical school is guaranteed a negotiated, minimum payment of $35/RVU in Tier I. This amount is approximately 90% of the Medicare reimbursement rate in 2001. This RVU minimum requires an improvement in UMCCC financial performance by $2.1 million in order to guarantee the hospital its base-year margin.

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Tier II.

The primary goal of Tier II is for the medical school to reach the break-even point in order to fully cover faculty salaries devoted to the UMCCC outpatient clinical operations. The hospital margin remains frozen at its margin neutral point. All additional margins generated by the UMCCC will be allocated to the medical school until it reaches the break-even point calculated to be $46/RVU. When the break-even point is reached, Tier III will begin.

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Tier III.

The primary goal of this tier is to divide excess margin generated by the UMCCC among the hospital, the medical school, and the UMCCC. Excess margin is defined as the total UMCCC margin, less the base-year margin for the hospital and break-even payments made to the medical school, respectively. Tier III payment will be distributed according to the formula: 45% to hospital, 45% to the participating departments, and 10% retained by the UMCCC.

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After one year of negotiation, the implementation of the new models started at the beginning of FY2002. In the first two years of implementation, both net revenue and expenses increased, with the growth rate of net revenue outpacing that of expenses, resulting in a $4.5 million improvement in operating margin. As to payer mix, the UMCCC experienced a decline in commercial plans (24.3% to 19%), but an increase in Medicare (23.5% to 24.4%), Medicaid (5.1% to 5.9%), and Blue Cross Plans (35% to 39%). These changes in the payer mix resulted in a decline of the overall collection rate of the UMCCC. However, both expense reduction and revenue enhancement contributed to the overall financial improvement. Expense reduction included better management of staff and commodity expense, improving efficiency of the infusion area and billing practices, and improving infusion pharmacy performance. Revenue enhancements were achieved primarily through improved charge capture of infusion pharmacy and facility services. As a result, the hospital remained budget neutral, and the clinical departments received additional reimbursement over the base $35/RVU to reach $37.18/RVU in FY2002. In FY2003, the break-even point for the medical school was reached, and additional margin was split as outlined in Tier III. That is, the hospital and departments each received an additional $610,000, or an effective payment of $51.33/RVU to the departments. Table 3 shows the positive impact of the new model on each participant. For comparison purpose, the modeling used in Table 3 held all things consistent over years except the conversion factors for RVU payments. The modeling also assumed no change in productivity.

The departments benefited differentially due to several reasons. Physician revenues included in the revised financial model were limited to those generated within the Cancer Center. Therefore, surgical procedures performed in the hospital operation rooms were excluded. This was likely the cause of continued loss in surgery. Pediatrics loss was partially related to clinical productivity. Internal medicine benefited the most because of the amount of expense shifted to the Cancer Center. In addition, supervision of chemotherapy charges was payable in this model.

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The modified organizational structure establishes a clear line of administrative authority and holds faculty members accountable for their effort in the UMCCC. With three tiers of incentives, a revised, unified budget aligns financial incentive among all stakeholders to increase efficiency, revenue, and margin. The UMCCC faces many challenges ahead as reimbursement for both physicians’ services and chemotherapy infusion declines. This new model enables the medical school departments and the hospital to work together to sustain and improve the clinical operation of a multidisciplinary cancer center.

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© 2004 Association of American Medical Colleges