Calvin, James E. Jr MD
A “perfect storm” occurs when three storms converge, leaving no path for an entrapped vessel to find a safe harbor.1 Such a calamity is imposing itself on the usually tranquil world of academic medicine. The number of negative factors converging on clinical practices in academic settings (hereafter called “academic practices”) has never been greater, leading to what seems to be “perfect storm” conditions with seemingly few options. In this article, I present an actual case study of an academic cardiology section to describe carefully the external factors currently influencing academic practices in cardiovascular disease and present my view, based on the events and strategies discussed in the case history, of corrective measures that can be used to overcome these conditions and allow such practices not only to survive but to thrive.
The Storm Fronts
First front: Changing practice trends
Data published by the American Heart Association2 reveal that cardiovascular care is, indeed, transitioning from acute episodic care to the management of chronic illness. The incidence of heart attack and acute coronary syndrome and the volume of interventional procedures are decreasing, but admissions for chronic heart failure continue to escalate. Whereas heart attack care is episodic, organized around hospital admissions, and reasonably well reimbursed, heart failure care is chronic, requires a disease-management model to reduce rehospitalization, is expensive, and is not well reimbursed.3,4 Because academic health centers, in particular, have focused on complex heart care, they have been challenged to pay for heart failure specialists and programmatic costs. Profitability (i.e., when revenue exceeds costs) in heart failure services exists as downstream revenue in electrophysiology, coronary revascularization, and transplant, not as revenue from evaluation and management services.
In other service lines such as chronic coronary artery disease, better secondary prevention, better technology such as drug-eluting stents, and novel but effective drug therapies are now retarding growth in the volume of well-reimbursed procedures. This trend of reduced profitability from procedures limits the availability of funds needed to underwrite successful disease-management programs (such as programs to manage patients who have experienced heart failure) and programs to foster less prominent aspects of the academic mission of cardiology sections (e.g., cardiac prevention and patient and trainee education).
Second front: Decreased revenue
The federal Balanced Budget Act of 19975–8 has had a huge negative impact on reimbursement to physicians and hospitals. Academic health centers8 are particularly vulnerable because of a high proportion of government-insured patients. Phillips et al5 undertook an analysis of the impact of the Balanced Budget Act of 1997 on teaching hospitals and found that operating margins for teaching hospitals fell by 50% between 1996 and 1999, resulting in 35% of these hospitals having a negative operating margin in 1999. Specifically, graduate medical education margins (i.e., dollars paid to an academic health center by Medicare part A and indirect medical education) fell by 24%, education costs rose 12%, and Medicare and graduate medical education (GME) payments fell by 10%. Although Medicare margins were maintained, their contribution to supporting GME activities was substantially reduced. Private insurance reimbursement trends followed the government’s lead, and teaching hospitals in particular are experiencing significant reductions in their net margins. These reduced margins, in turn, have had a huge impact on hospital-based practices, resulting in less hospital support to the academic sections or divisions. Furthermore, competition from private practices continues to grow and to draw patients away from urban academic health centers.
Third front: Increased costs
Increasing regulatory pressures have represented additional expenses to both institutions and practices. These costs include Health Insurance Portability and Accountability Act compliance9, Joint Commission on Accreditation of Health Care Organizations quality measures,10 other quality-improvement initiatives, and the explosive growth in malpractice insurance11–14 and have created spiraling pressures on both private and academic practice expenses.
As shown in Figure 1, these three storm fronts entangle academic practices, leaving no apparent pathway to a safe harbor. In an attempt to cope with perfect storm conditions, academic practices are downsizing research and education missions. Physicians contribute more time to clinical service and less time to teaching, writing grants, and articles in order to compensate for negative financial pressures that put their salaries at risk.
Surviving the Perfect Storm: A Case History
A large academic health center with a large section of cardiology is the subject of this case history. When the storm fronts were beginning in 2003, there were 43 full-time faculty. The number of faculty reflected a silo mentality where the individual service lines (i.e., electrophysiology, interventional cardiology, heart failure, coronary care unit service, consultation service, the noninvasive laboratory, and pulmonary heart disease) had their own call schedules and infrastructure. This mix of programs and services grew as the section expanded over the 1990s with the goal of achieving academic and clinical care excellence in all areas. Sharing of administrative, nursing, and medical personnel within the section was minimal. The section built sophisticated programs in heart failure and pulmonary heart disease, interventional cardiology, and electrophysiology. It received regular subsidization over the 1990s, hitting a peak in fiscal year 2000 of $8 million to support the build-up of clinical programs and the academic mission. Originally, each program had its own cost center.
Unfortunately, revenue expectations for new programs were never set nor monitored. Patient volume increased, but not enough to avoid annual deficits or to repay the initial investment. Over the ensuing three years, hospital subsidization was reduced by the administration and then eliminated ($5.5 million in 2001, $3 million in 2002, $2 million in 2003, to zero in 2004) as the hospital tried to cope with its own reduced contribution and net margins (hospital net operating loss of $20 million in 2002, down from a profit of $18.5 million in 1996). Partially offsetting the loss of subsidization payment was a transfer from the hospital to the section of profits earned on the technical component of outpatient procedures such as stress testing (including nuclear imaging), echocardiography, cardiac rehabilitation, and electron beam computed tomography (CT) scanning. This ancillary profit on the technical component of outpatient procedures amounted to $1.2 million in 2002, rose to $1.8 million in 2003, and was $2.1 million in 2004. Hospital administrators eliminated all programmatic hospital cost centers and transferred expenses from hospital service lines such as heart failure, pulmonary heart disease, and cardiac rehabilitation (previously in hospital cost centers) into the academic practice plan in fiscal year 2004 (FY04) resulting in the practice losing $4.4 million (approximately $1.0 million in heart failure, $400,000 in pulmonary hypertension, $250,000 in cardiac rehabilitation, and remainder practice plan costs exceeding revenue) in FY04. It was projected to lose $5 million in FY05 but was expected to balance the budget by the end of FY05. These losses were absorbed by an escrow account that was the responsibility of the section to balance.
Eight general principles
The dean’s charge to both the director of cardiology and the chair of medicine was to stop the bleeding as quickly as possible and to balance the practice plan budget by the end of FY05. In addressing this charge, the director of cardiology followed eight general principles. These principles used many of the insights highlighted by Collins,15–18 including confronting the brutal facts19,20, understanding what the core businesses were (the so-called “hedgehog concept”),17 and sorting out who was on the team.18 Measuring performance created discipline within the group. Coupling future investment in new technology accelerators such as multislice CT (technology accelerators growth) to accomplishment of the other principles would, in the words of Collins, lead to a flywheel contributing “turn upon turn, to building momentum until a point of break-through, and beyond.”16
Principle 1: I-DARE.
All practices (private or academic) need an “I-DARE” approach: Incentives, Discipline, Accountability, Responsibility, Energy, Enthusiasm, and Entrepreneurial spirit. These elements place the responsibility of resolving problems within the practice, and by adopting this principle, physicians are empowered to make the changes necessary for the practice.
Principle 2: Confront the brutal facts.
The business situation and the financial reports of the section have to be assessed. The productivity of physicians and of all the service lines must be scrutinized, specifically, to look for sources of excessive cost within the practice and for potential new sources of revenue. The value of each individual program should include, if available, its downstream profitability or loss both within the section and throughout the institution (i.e., the academic health center). Duplication of infrastructure must be identified and reduced, thereby dismantling unnecessary silos that have grown as various programs were being built.
Principle 3: Getting the right team.
As programs and physician productivity are reviewed, the team is disclosed; discovering the team is perhaps the hardest but most valuable step in this process. As Collins has proposed in his book Good to Great,18 one needs to first determine who is on the bus before determining what the team’s mission and plan really are. To determine who is one the team and who is not, an assessment of each individual’s dedication to the principles of cooperation, collaboration, and accountability must be made, because this dedication is needed to successfully manage expenses and to provide uniform and high-quality care to all patients. Creating expectations for physician performance is critical.19 These expectations must be explicitly stated, and performance must be reviewed regularly.
Principle 4: Do your DBCs.
Do it, Document it, Bill it, and Collect it. This approach simplifies the attack on the revenue cycle. Fulfilling this principle requires leadership, managerial skills, and discipline to focus intensely on the revenue cycle. A systematic analysis of payer mix also is needed. To enhance the revenue cycle, time and attention must be spent teaching physicians and coders to code and manage accounts receivable within the practice.
Principle 5: Cost control.
A root-cause analysis and action plan to enhance the financial performance of a practice in deficit is outlined in List 1. In this analysis, the most important first step is to identify both controllable and uncontrollable costs. External factors such as compliance costs, overhead, rent, and malpractice and wage/benefits increases can be assessed and managed. Controllable costs include overhead, which relates to direct practice expenses, physicians’ compensation, and malpractice. Excessive expense relating to having too many physicians for the number of patients in the practice must be addressed either by physician reduction or salary adjustment. Having the right number of physicians adds other indirect benefits, such as avoiding excessive support staff and reducing malpractice cost and rent.
Principle 6: Define excellence through quality.
An academic medical practice must strive for excellence through improvement in quality.20–22 Data are now available linking adherence to evidence-based therapy to clinical outcome.23,24 A strong focus in quality is an imperative21,22,25 that can help reverse a failing practice. It is a stimulus for the development of teams, improving “espirit de corps,” improving reputation and satisfaction with referring physicians and patients, and affecting future compensation levels as the “pay-for-performance” approach gains ground.
Principle 7: Build relationships with referring physicians.
Instituting a relationship-management strategy for referring doctors is a critical tool in sustaining turnaround in performance. Referring physicians stress the three A’s of clinical practice: availability, affability, and ability, in that order, when selecting a consultant. Although dialogue with primary care physician practices is extremely valuable, it can be painful. However, cardiology practices need feedback on what they need to improve as well as what they are doing well and must avoid being defensive in this process. These efforts are further enhanced by promotional marketing and meetings with representative physician groups, either in a business or education context. Timely patient appointments, rapid report turnaround times, and timely communication are all essential.
Principle 8: Reinvestment.
During any turnaround, providing growth in clinical revenue and enhancing reinvestment in new technology will reenergize the mission. Emerging imaging technologies such as the multislice CT or cardiac magnetic resonance imaging challenge cardiology sections to transition away from older established technologies such as echo stress testing. Investment in these new technologies requires funds from the institution, philanthropy, and profits from the cardiology practice. Hence, this principle is the last one to be executed.
Back to our case study.
The action plan
I-DARE (principle 1).
Leadership characterized by willingness to change, the resolve to accomplish change, and the ability to motivate people to change are critical components in this transition. The leadership of the section, including the section’s administrator, had the resolve to confront the problems and had the will to succeed. Leadership took the view that an I-DARE approach should prevail in all deliberations. The administration was not blamed for the financial deficits; rather, the section leadership assumed responsibility, imposed discipline in spending, and increased accountability. Incentives were maintained and energy was focused on the problems at hand.
Confronting the brutal facts (principle 2).
One of the first tasks was to analyze the balance sheet for each service line, including preventive services, electrophysiology, interventional cardiology, heart failure, pulmonary heart disease, and satellite clinics’ office operations. Service lines that were in deficit were earmarked for special action. As an example, heart failure program deficits within the practice plan exceeded $1 million, and a full review of its operating expenses was conducted. Salaries of all faculty were benchmarked against salaries listed in the Association of Professors of Cardiology database. These analyses indicated that salaries were in the 50th to 75th percentile range of those in the Association of Professors of Cardiology database. However, cost analysis revealed that several programs that were in deficit were top heavy with nursing and administrative personnel. These observations necessitated a reengineering of each program and a review of the business plan of each service line (or the creation of one), including downsizing of staff. Both faculty and nonfaculty salary levels were judged reasonable. However, the numbers of each could not be supported by the current patient load.
Getting the right team (principle 3).
When it became clear that intense cost reduction was necessary to reduce the deficit, programs were forced to downsize. In some cases, leaders of programs in deficit chose to leave the institution on their own accord. This reduction in staff was inadequate to meet the need for balancing the budget. A mission-based compensation system was introduced (Table 1). This made it possible to conduct a systematic review of performance that encompassed all aspects of the mission. The mission-based compensation plan used by the section in this case study closely parallels the CARTS (Clinical, Administrative, Research, Teaching salaries, and Strategic funding) model proposed by Navigant consulting. In that plan, clinical earnings are tracked as points (one point per $1,000 of direct collections for clinical service). Administrative points are assigned on the basis of directorships or committee work (Table 1), are paid by the hospital, and are, again, based on the dollar value. Research points are awarded on the basis of grant salary support (one point per $1,000 of salary support) and publications (Table 1). Whereas grant salary support is directly allocated to the individual, unfunded research, especially with fellows, is funded by either GME or medical college dollars paid to the section by the institution, return of profit from technical fees on outpatient testing, or endowments. Teaching points are awarded on the basis of teaching time spent on clinical service and are also paid by GME dollars distributed to the section by the department of medicine. Strategic points (Table 1) were not formally allocated in the action plan, but shortfalls in any of the above areas were covered by the return of profit on the technical component of outpatient testing.
All physicians received a score on this plan. The salaries of productive physicians were maintained, but less productive physicians had salary reductions, and some left the practice as a result. Indeed, productive physicians were rewarded by small bonuses. A savings of $2,003,743 was achieved by right-sizing the number of faculty and using a systematic performance measure to guide compensation.
Do your DBCs (principle 4).
Billing procedures were reviewed and a more effective clinical management system was introduced with a goal of reducing accounts receivable to less than 45 days. A certified coder was hired to improve coding procedures, and physician coding training and feedback were introduced. The results of these efforts were to decrease day sales outstanding by the end of FY 05 from 69 days to 58 days. Furthermore, the lag time from the date of service to bill submission decreased from 33 to 16 days in the same time period.
Collection ratios (dollars received/dollars charged to either patient or payer) were found initially to be in the 28% range at the beginning of FY 04. The rate was maintained between 26% and 28%, despite the fact that there had been growth in government-insured patients (Medicare increased from 41% to 50%, whereas commercial insurance decreased from 30% to 22% of total charges). Close vigilance of the collection rates did result in changing billing vendors twice and in reorganization of the registration process (getting the right patient information), ensuring correct diagnostic and procedural coding the first time, and instituting a denial-management system.
Cost control (principle 5).
Only by sharing common resources could expenses be brought under control. The administration of each program had to be integrated into the overall practice, and individual program resources were severely curtailed. Nonsalary expenses were reduced from $3.9 million to $2.9 million within eight months. This included space reduction ($721,225 to $511,772), contract services ($683,298 to $597,999), and other expenses ($1,422,310 to $832,623). This latter category included telephones, supplies, dictation, and physician parking. The section paid 7% less for overhead ($451,000 to $420,000). Malpractice costs did not change because rate hikes offset the savings of having fewer physicians.
It was clear that individual silos were untenable; indeed, a cohesive, well- integrated team approach needed to be developed. Thus, staffing levels were brought into alignment with benchmarks, and nonfaculty staff reductions produced a $1.3 million saving.
Define excellence through quality (principle 6).
The section director made quality a top priority.21,22,25–27 Revising clinical pathways, changing to standardized order sets, and developing discharge checklists became the concern of two multidisciplinary teams focusing on acute coronary syndromes and heart failure. Nursing resources were identified to ensure both adequate data collection and implementation of the pathways.
Growth was stimulated by these quality-improvement efforts. Early adoption of clinical practice guidelines and systematically searching in electronic databases for patients who had new indications for procedures (such as implantable defibrillators and biventricular pacemakers) increased patient visits and procedure volumes. These efforts also created important leverage with referring physicians.
Building relationships with referring physicians (principle 7).
Increasing practice volume when resources are constrained and investment capital is unavailable or severely limited is challenging. However, demonstrable improvements in service reestablish loyalty from primary care. Scheduling profiles were reviewed, and because of long waiting lists for appointments, physicians were asked to see more patients. A goal was adopted by the section to reduce waiting lists to less than five days. Testing schedules were reviewed daily with the goal of reducing waiting time to less than 24 hours from an average wait of two to three weeks. This was achieved within four months. The strategic map used is outlined in Figure 2. Staff were required to undergo training in quality services and hotel services and to become more sensitive to the patient experience. Achieving our goal of better patient service included significant reengineering and reorganizing of internal operating procedures. Aggressive attempts to collaborate with the emergency department on protocols for chest pain and heart failure were made. New programs were introduced such as the Women’s Heart Center, which brought a broader connection to the community. Indeed, the Women’s Heart Center had the highest growth rate of new patients over FY05.
The end results of these efforts were satisfied customers, improved reputation, and relationships with referring physicians and increased volumes for overall patient encounters and noninvasive testing. These efforts resulted in an increase to $2.8 million from $2.1 million in outpatient technical profit.
Overall results of the action plan
The efforts reviewed have been extremely successful. Despite the loss of many physicians and downsizing of programs, clinical revenue fell only 2.2% in FY05 compared with FY04. Internal support (administrative salaries, endowments, GME contributions) was largely maintained, although research revenue did fall. Quarterly charges increased from $4.6 million in the first quarter of FY04 to $5.7 million by the second quarter of FY05. Total procedural volume increased from 17,704 episodes of care (procedure and visits) to 18,204, despite the reduction in faculty. This increase in productivity offset the unfavorable charge in payer mix. The performance target of cash received of $550,000 per month was finally exceeded in February 2004 after seven successive months beneath this threshold. By December 2004, cash receipts had increased 27.2% over the same period from the previous year. Profitability was gradually achieved by October 2004 and has been maintained up to the time of this writing. Indeed, the section made a profit of $1.1 million in FY05 before adjustments for overhead (see above) and internal taxes. Income per work relative value unit (RVU), which had been consistently less than direct cost per work RVU, finally exceeded the latter by September 2004, and this difference remains positive up to the present time, late 2006. These positive changes resulted from increased growth in service volume (an increase of 7.6%) and the reduction in the number of faculty to 14. Reduced lag time in charge entry and maintenance of accounts receivable to less than 60 days also contributed. Operating losses of $2.4 million in FY04 were converted to a profit of $1.1 million before taxes and overhead.
Because several researchers had left following loss of institutional support of their programs, it was not surprising that research revenue fell (from $1.8 million to $1.5 million). The number of the publications also fell from 77 in 2002 to 37 in 2004, highlighting the strong but inverse relationship between increased clinical service and research productivity. A sound growth strategy to rebuild research efforts is discussed below.
The results of quality-improvement efforts were outstanding, with adherence to evidence-based therapies after myocardial infarction exceeding 95% within six months. This resulted in the institution being named a best practice hospital in acute myocardial infarction by Care Science in 2005 and being rated number 5 in the nation in quality performance by the University Health Center Consortium. In July 2006, the section was rated 29th in the nation by U.S. News and World Report.
What’s Next for This Academic Cardiology Section?
The outcomes of our action plan indicate that financial competence is achievable in an academic section of cardiology. Clinical services must be made profitable for a section to invest in new technology and in programs including research and education. The same discipline that stopped the financial bleeding of the clinical services must also be applied to the financial analysis of any future investments or programs (principle 8). Break-even analysis and net present value analysis should be applied when any new clinical service or research technology is acquired or a new clinical program is initiated. Each new technology or program needs constant monitoring, analysis, and aggressive stewardship. The financial analysis also needs to include a program’s downstream effects.
The focus on quality in this case history produced the further advantage of promoting health services research within the section.26 This type of research includes not only better measures of adherence to drug therapy but health care delivery models that focus on finding better methods of teaching patient self-management, providing clinical decision support systems, and providing better information handing. Leading Fortune 500 companies20 routinely spend some percentage of their profits on research and development costs, with the goal of creating growth through new and better products.20 Why should health care institutions not follow suit? In the case study described above, profitability and excellence worked hand in hand to provide great financial resources for a promising future. Future research efforts will focus on translational and clinical trial research built on a strong financial base, excellent clinical service (now being provided by the section), and new technology.
Investing in new imaging technology (principle 8) was not a part of the initial plan, but the fiscal strength of the section enables growth in this area. Imaging will help to stimulate translational research in the section and the academic health center. In FY06, the section negotiated a leasing arrangement with the radiology group practice to develop 64-slice CT angiography within the institution, once again highlighting the importance of relationships in solving tough problems. Donors have now contributed $20 million for the state-of-the-art imaging and the new heart and vascular evaluation center. In part, these donations came from grateful patients. However, as fiscal competence and clinical quality improved, confidence among medical staff and within the community rose also.
Now that we have established a plan for acquiring necessary technology, assessments of faculty growth in new imaging technology are necessary. One of the expectations of new faculty will be to conform to the new discipline within the section. Explicit expectations will also be set for grant applications made by new faculty while bridge financing is provided by both the section and the institution. The physician compensation plan is structured to reward all aspects of the mission and recognizes and fairly rewards all faculty.
Clearly, the future depends on creating profitability both in the section and in the institution. As with private practice, the technical component, especially in outpatient procedures that can be done in the office, will become a lightning rod for debate between the section of cardiology, the department of medicine, and the academic health center.26 It is unlikely that the trend of decreased revenues and increased expenses outlined early in this article will diminish in the future, so that a cardiology section will require either a significant portion of outpatient technical revenue to create its own flywheel or an assurance of adequate institutional or philanthropic support to fulfill its mission. It is imperative that both the section and institution approach the future with clear minds and a win–win attitude, and a commitment to implement the win–win.
The author wishes to acknowledge Dr. Lynda H. Powell, Dr. Magnus Ohman, and Dr. Thomas Zoeller for their thoughtful suggestions on this article.
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