Lord or Vassal? Academic Anesthesiology Finances in 2000

Barker, Steven J. PhD, MD

Anesthesia & Analgesia:
doi: 10.1213/00000539-200108000-00012
CARDIOVASCULAR ANESTHESIA: Society of Cardiovascular Anesthesiologists: Research Report

This article examines recent trends in the management of academic physician practice groups, and in particular the allocation of revenues and expenses to anesthesiology departments. The history of academic group practice is traced, beginning with the “corporate model,” in which each department functioned in financial independence from the others. This evolved gradually into the “feudal system,” in which departments were ostensibly independent, but paid variable and often large “assessments” to the central group. The final stage in this evolution is the “big bag,” in which all clinical revenue is pooled by the central practice group, and then distributed by the group to departments or individuals according to some compensation plan formula. The advantages and disadvantages of each of these systems are discussed as they apply to anesthesiology departments. A productivity-based compensation plan formula under the big bag system is calculated for a typical anesthesiology department. This calculation shows that if the compensation formula is truly based on measured clinical productivity, anesthesiology departments may actually fare better under the big bag than under the feudal system. Finally, options for survival in the academic practice groups of the future are discussed.

Implications: The history, current status, and trends of finances in academic anesthesiology departments are reviewed. Knowledge of these issues will help departments develop funds allocation methods to ensure that they receive an appropriate share of their faculty practice group’s clinical income.

Author Information

Department of Anesthesiology, College of Medicine, University of Arizona, Tucson, Arizona

August 29, 2000.

Address correspondence and reprint requests to Steven J. Barker, MD, PhD, Professor and Head, Department of Anesthesiology, College of Medicine, University of Arizona, PO Box 245114, Tucson, AZ 85724-5114. Address e-mail to sjbarker@u.arizona.edu.

Article Outline

Under the intense and rapidly evolving pressures of managed care, the financial health of most academic anesthesiology departments has changed for the worse in the past several years. Whereas anesthesiology departments were almost universally profitable 10 yr ago, today many are not. That is, annual income is less than annual expenses. What has caused this change in our fortunes?

Academic anesthesiologists know very well that they are working harder than ever before. They have greater clinical commitments and less time available for academic pursuits, including research, teaching, and service. They feel that their academic mission is being compromised, and their lifestyle is becoming indistinguishable from that of the private practitioner. Yet their personal income is typically about two-thirds that of their private practice peers. This convergence of lifestyles and disparity of incomes is leading many to leave the halls of academics for private practice.

Of course the “bottom line” of this problem is quite simply the financial bottom line: managed care and government regulation have reduced our practice income while increasing overhead expenses by adding regulatory requirements. Most anesthesiology departments have by necessity become part of multispecialty physician practice groups. These practice groups must devise ways to allocate their increasing overhead expenses among departments and individuals.

The goal of this article is to trace the evolution of the relationship of academic anesthesiology departments to other clinical departments and the practice group. We will describe how this evolution has affected a typical department and postulate where these changes may be leading us. We will also examine a rationale for allocating group overhead expenses that should reward anesthesiology departments for their high clinical productivity. We will show by objective measures that anesthesiology departments are usually higher in clinical productivity than the average for the group practice.

If you are in one of those fortunate departments that have not yet seen any of these changes, I suggest that you read on anyway. Most, if not all, of these changes are headed your way, and if not, you can at least feel appropriate empathy for the rest of us.

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The Corporate Model: Past History

In the “good old days” of indemnity insurance, clinical departments could negotiate and manage separate professional fee contracts with payers. The departments could submit their separate bills and manage their own collections. Each department effectively functioned as a separate corporation, financially independent of the other departments. Of course the patient might receive a dozen separate professional fee bills for a single surgery.

In this “corporate model,” anesthesiology departments had their own private billing agents who were directly accountable for their performance. Billing agents knew that if they did not perform well, they could be replaced with minimum contractual notice, usually 90 days. Not only did these billers have strong incentives to perform well, they also were specialists in professional fee billing for anesthesiology. This is in contrast to the “centralized billing” function of a multispecialty practice group, wherein one group bills and collects professional fees for all specialties. As a result, billing expense was usually lower and collections performance better under the decentralized corporate model.

Another feature of the corporate model was the concept that “each ship floats on its own bottom.” That is, departments were accountable for their financial bottom lines. Along with that accountability went near-complete control over expenses. Departments had a strong incentive to manage expenses wisely: no one would bail them out if they fell into deficit. Departments also had the strongest possible incentive to maximize income, because all of that income was credited to the department and was hence available for salaries and other expenses. This philosophy of independence and self-reliance served us well until perhaps the late 1980s, when insurance companies, government, and universities began pressing us toward more centralization.

The following disadvantages of the corporate model have led to its disappearance in most academic practices: 1) Its decentralization results in payers receiving a dozen or more separate bills for the same hospitalization, 2) the physician providers have no unity and hence no bargaining power in negotiations with payers—this becomes a fatal flaw under managed care, and 3) there is no mechanism to collect “central expenses” from the departments. These may begin with the seemingly innocuous “Dean’s Tax,” but later lead to overt subsidies transferred between departments. Thus was born the “feudal system” of departmental quasi-independence with the addition of centralized taxes.

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The Feudal System: How Most of Us Live Today

It is a very small step from the fully independent corporate system to what I shall call the “feudal system.” The difference is simply the addition of central taxes or “assessments.” Individual departments maintain their own budgets and income/expense statements, and they still control their expenses, other than the assessments of course. This transition seems minor and logical: “I am still an independent department, but I should rightfully pay my fair share of the required centralized expenses.” These expenses include supporting the academic institution (e.g., Dean’s Tax), paying a central billing fee, and paying for the administrative staff required to operate the physician group practice. The camel’s nose is now well under the tent.

I do not imply that the transition to the feudal system was a terrible mistake or a nefarious plot. It was a natural evolution from the corporate system that allowed us to maintain our department identities while functioning in what was becoming a managed care world. By the early 1990s many academic physicians found it necessary to form multispecialty practice groups to compete for managed care contracts. Centralized billing gradually became a requirement rather than an option. However, another phenomenon began to give the feudal system a completely different objective. Downward physician payment pressure, combined with the decrease of other sources of department revenue (e.g., grants and state support), began to turn some clinical departments into chronic money losers. In most institutions, these were primary care departments such as Pediatrics and Family Medicine, but no department was exempt from the possibility of being driven into the red despite their best efforts. If this happened to only a few departments while the others remained profitable, then the logical corrective action was simply to subsidize the deficit departments from the central pool. Now we have a completely new function for the central assessments: transfer payments.

There are situations wherein cross-subsidization within a practice group is entirely appropriate. The group may decide that it needs a particular subspecialist, for instance a pediatric nephrologist, to compete for large contracts beneficial to the whole group. Yet the community may not have enough patients (I reject the callous, managed care term “lives”) to keep a pediatric nephrologist fully occupied and profitable. Therefore the group consciously decides to subsidize the subspecialist so that it can obtain the contract. Such decisions made by the group and for the greater good of the group are smart, competitive strategy. The problem is that this particular strategy establishes a slippery slope that is easily descended into a form of practice group socialism. Once the possibility of a financial “bail-out” from the central plan has been established, departments lose some of their incentive to maintain financial health. After all, if you lose money, the practice group will save you from bankruptcy. On the other hand, if you make money, the group may take it away from you to propup losing departments. That is, quoting from Karl Marx, “to each according to his needs, from each according to his ability.”

The feudal system can and has worked for years in numerous academic institutions. However, one vital flaw makes it unlikely to be a viable system for anesthesiology departments as financial pressures on the group increase. Table 1 shows average percentages of professional fee income going toward physician compensation and overhead for the various specialties (1). These data from the Medical Group Management Association (MGMA) include a large number of both academic and private group practices. The physician compensation column includes salary, malpractice premiums, benefits, and other direct physician expenses. All other expenses are in the category of overhead. Note that MD compensation for anesthesiology is 90% of the total professional fee income and overhead is 10%. In contrast, the average overhead for Family Medicine is 56%; for Pediatrics, it is 52%. Anesthesiology has by far the lowest overhead rate of all specialties, a fact that comes as no surprise to an anesthesiologist.

The problem with the feudal system now becomes clear. As centralized expenses grow under the irresistible pressures of managed care and government regulation, practice groups react by increasing the central assessments. These central taxes are generally applied at the same rates for all departments. Once the mechanism is in place, new initiatives or strategies tend to generate new taxes. (Does this sound like the federal government?) At our institution, we have experienced separate assessments for central plan billing, central plan administration, Dean’s tax, University tax, front office, development, and satellite clinics.

Increased taxes represent increased overhead, and as the taxes become the major component of overhead, they tend to drive every department’s overhead rate to the same value. But as anesthesiologists, how can we compete if our overhead rate is the same as that of Family Medicine? We cannot (Table 1). Consider the following example, which represents a real case. Central taxes in an anesthesiology department gradually increased over a 5-yr period to a total of 32% of practice income. The department’s internal overhead rate (for administrative staff, office expenses, etc.) was 18%. Thus the total overhead for the department reached 50%.

There is no question that a serious shortage of anesthesiologists exists today. The reasons for this shortage are complex, but are partially related to the recent drive to guide medical students into primary care disciplines. Because of the 4-yr length of the anesthesiology training curriculum, it will take several years to correct this shortage. Meanwhile, academic departments must pay competitive salaries to recruit and retain faculty. This quickly places us in a “no-win” situation. If the total overhead for an anesthesiology department is driven to 50% by central assessments, that department cannot pay competitive salaries to an adequate number of faculty without falling into deficit. It is precisely because of the typically low overhead rate for anesthesiology (Table 1) that the feudal system will harm us more than the other clinical departments. It may be difficult to convince practice plan administrators of this reality, because they tend to view all clinical departments as subsidiaries that should each break even when the total practice overhead is shared equally among them. This concept simply does not work. The academic anesthesiology department must compete for faculty with its sister departments in other institutions, not with the other clinical departments at home.

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The “Big Bag” System: More Socialism or Salvation?

The final step in the evolution of academic practice toward centralization is often called the “Big Bag System,” or BBS. Under the BBS, all clinical practice professional fee income is pooled in one central account, the “big bag.” Funds are distributed from this account to the departments or directly to individual physicians by the central plan administration. This is the worrisome part of the BBS: the central plan administration now has direct control of department and/or individual incomes. We physicians effectively become salaried by the central plan. This seems a bit like communism, and we are reminded of “rob from the rich to feed the poor,” in addition to Marx’s quotation given earlier. We anesthesiologists usually think of ourselves as being more clinically productive than many other specialties; hence, we are dismayed by the concept of pooled clinical income. Does this mean that our hard-earned dollars will be used to support “losing” departments and enterprises without even a guise of accountability? After all, in the extreme of the BBS we do not even keep track of where the money came from, we only concern ourselves with where it goes.

These are all valid concerns and potential pitfalls of the BBS. More socialism brings less individual (and departmental) accountability and responsibility. Furthermore, where is the accountability of the central plan itself for its own performance? However, because most of us are already deeply mired in the feudal system, we must at least examine the BBS to see if there is any way it could benefit us. As with most management systems, “the devil is in the details.” Anesthesiologists are discriminated against by the flat tax (same rate for all departments) of the feudal system; perhaps the BBS can offer a better alternative.

There is a compensation system under which the BBS can work to our benefit: a system based upon objective measures of clinical productivity. A purely subjective way in which I evaluate the relative workload of our anesthesiology faculty is what I call the “parking lot test.” That is, when I park my car at 6:15 am, I glance around the parking structure and notice that most of the other cars there belong to my fellow anesthesiologists. When I leave the hospital at about 7:00 pm, I again glance at the cars, and I see the same thing: anesthesiologists’ cars. There are, of course, many exceptions to this finding, but the point is made. Is there some rational way to quantify our large clinical workload in comparison with other specialties? The compensation plan described below is one method for doing this within a BBS central plan system.

First, we need an objective measure of our clinical productivity. Although no perfect measure exists, the Relative Value Unit (RVU) is at least a universally recognized yardstick, and it is how we are paid for most of our services. RVUs can also be used to compare workloads of different specialties if we can normalize them with national averages for each field. Table 2 shows RVU statistics published in 1999 by the MGMA. The table provides mean, median, and various percentiles of annual RVU production per physician in most specialties. The median productivity for anesthesiologists in the study was 8,748 RVU. Although these data do not represent a large number of providers, they at least provide a benchmark with which to compare our clinical output. Some of our clinical productivity (i.e., pain management and critical care) is not measured in RVU, a fact we will address below.

If we assume that the “median” column in Table 2 represents the workload of a full-time clinician, we can divide the total practice group professional fee income among the departments as follows. Suppose our department produces 250,000 RVU of anesthesiology services in the operating room for a year. To this figure we must add some measure of the RVU equivalent of our clinical services in the pain clinic and intensive care unit (ICU). The simplest way to estimate this is to divide the total charges for these services by the local department conversion factor or dollars per RVU charge. For example, if the pain clinic and ICU together generated $3,000,000 in annual charges and our RVU value is $60, then the RVU equivalent is $3,000,000/$60 = 50,000 RVU. So, our hypothetical department total productivity is 250,000 + 50,000 = 300,000 RVU.

To evaluate this RVU output in terms of a national standard, we divide it by the MGMA median value of 8,748 RVU/yr/FTE (FTE = “full-time equivalent,” the number of full-time MDs required to perform the work). The result, 300,000/8,748 = 34.3 FTE, is the number of full-time anesthesiologists required to produce this number of RVU if all are working at the median MGMA productivity level. This gives us an objective measure of our department’s clinical output, which can now be compared with other departments in different specialties. Note that the result of this calculation is the “clinical FTE” required, and does not include the additional FTE needed to accomplish our teaching, research and service missions.

For the last step, we must convert this MGMA-FTE value into a total clinical salary budget for our department. This part is more difficult, because it requires the incorporation of local market factors, which determine how much money is available for MD salaries in the practice group. What we are effectively trying to do now is “divide the pie” of the total practice income in a manner that represents each department’s actual clinical productivity. The monetary yardstick to begin this division is the median salary earned by MDs in each specialty. There are several sources of median salary data, but to be consistent with our RVU data, we will again use MGMA. The MGMA median income for anesthesiologists in 1998 was $238,000. Therefore, our “ideal clinical salary budget” for the example department is simply this salary value times the required number of FTE: Department ideal clinical salary budget = $238,000 × 34.3 = $8,163,400.

Unfortunately, this amount of money is not likely to be available within the total income pool of our academic practice group. We must therefore scale the ideal salary budget with a local market adjustment factor that reflects both the local payer mix and the costs of being in academic medicine. The latter include the increased overhead and other inefficiencies of academics versus private practice. This adjustment factor, which will be the same for all members of the practice group, is calculated as follows. We perform the ideal salary budget calculation shown above for every department of the practice group. We then total all of the results to obtain the “practice group total ideal salary budget.” Dividing this number into the total practice income available for MD salaries (i.e., total practice income less malpractice premiums and other overhead expenses), we obtain the local market adjustment factor (MAF): MAF = (Total income available for MD salary)/(group ideal salary budget). This method of calculation puts all physicians and departments within the group on the same standard. They are all compensated according to their own productivity and local market conditions.

Finally, we calculate our department’s actual MD salary budget as the “ideal salary budget” times the local market adjustment factor. Suppose that the MAF for our practice is 0.60. This is a realistic value in an advanced, managed care market in the West. Then our department salary budget should be:MATH Our hypothetical department should thus have $4.9 million available for physician compensation.

Of course this method of calculation is not perfect. The value of the local MAF will be influenced by the efficiency of the group billing and collection service as well as by the terms of the payer contracts. The method contains no direct incentives to improve either collection efficiency or contract terms. These functions must be measured and incentivized within the central practice plan in other ways. However, this algorithm does provide a way to validate (or disprove) something that academic anesthesiologists have long claimed: that our current share of the group practice income does not represent our clinical productivity.

The above calculation does not imply an endorsement of the BBS. It simply shows that almost anything can provide a more equitable income distribution than a highly taxed feudal system. The BBS may be either a curse or a blessing for anesthesiology, depending on how it is implemented. There is a real insecurity in having all practice income pooled and distributed by a central authority not under our direct control. Maintaining departmental access to all billing and collections data and central overhead expenses can alleviate this uncertainty. The central practice plan must always serve the physicians, not the other way around. That is, we do not work for the practice group; we are the group!

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Conclusions: Survival in the 21st Century

Academic anesthesiology departments in the year 2000 find themselves in a very different environment than in the recent past. Financial pressures generated by managed care and government have shifted our priorities and strategies for accomplishing the academic mission. Department chairs find more of their time occupied by financial management issues: contracting, compensation plans, billing and collection, overhead expenses, and assessments. As financial pressures increase, both the research and teaching missions tend to suffer.

As clinical income decreases, it is tempting to follow the path of least resistance and simply try to accomplish the clinical mission with a smaller faculty. With fewer mouths to feed, we might maintain competitive salary levels despite decreasing reimbursement. Maintaining reasonable salary levels is crucial for recruitment and retention in today’s situation of a national anesthesiologist shortage. However, this strategy is self-defeating and could eventually destroy academic anesthesiology. If the faculty shrinks while caseload stays the same (or number of faculty remains constant despite growing caseload), it is the nonclinical time that is sacrificed. In some departments, nonclinical time is today little more than a pleasant memory. When this occurs, the junior faculty must compare their lots with those of their colleagues in nearby private practice positions. If the lifestyle is indistinguishable from private practice (i.e., no nonclinical time), then the only difference between the two is income. Private practitioners make much more money than their junior faculty peers. Because private practice opportunities are abundant today, it is easy for the junior faculty to take the logical step of leaving academics. Without our junior faculty, we have no future as a profession.

So, the solution is not to reduce either the salaries or size of our faculty. What alternatives for financial viability are left? There are only two: increase income or reduce nonsalary expenses. As anesthesiologists we have limited power to increase our practice income, but here are a few important things we can and must do in that arena.

Do not allow your practice group to negotiate contracts that lose money for your department. Because most contracts are written in terms of a “conversion factor” or dollars paid per RVU, you must know what it costs your department to deliver one RVU of anesthesia care. This cost per RVU is a “magic number” that you should not advertise, or you may never again see a contract for a higher value. Do not accept contracts below your magic number unless your practice group is willing to make up the difference.

Make your operating room attractive to surgeons, so that they will bring their cases to you rather than the local community hospital. Remember, patients are your primary customers, but surgeons are your customers too. Despite managed care restrictions, they often have a choice regarding where to bring their patients.

Increase patient volume in the one place where you can control it: the pain clinic. Pain clinics often lose money today, and anesthesiology departments can no longer afford to heavily subsidize this service, even though it is vital to our mission. Find ways to make your pain clinic profitable. It can be done.

Increase other sources of department funding wherever possible. This is difficult today, because no one feels like playing Santa Claus. However, my experience suggests that academic anesthesia departments often do not receive appropriate support from their hospitals. Find out how much GME (Graduate Medical Education) money your hospital gets from HCFA (Medicare) and where that money goes. The GME allocation by state and by hospital is now available on the web at http://www.aafppolicy.org/data/gme.html. You must know your hospital’s six-digit identification number to find it in the table. The purpose of the HCFA money is to support the expenses of training residents, and your department is entitled to its fair share. If you are in a state-funded institution, does your department get an appropriate portion of the total state support in relation to other clinical departments? Extramural research grants can also help support salaries, but granting agencies generally expect to get what they pay for in terms of faculty time. Hence, these grants are often a financial “wash”—they neither help nor harm the bottom line.

To reduce expenses, we have already eliminated the largest department expense, faculty salaries. You may be able to eliminate a secretary or disconnect a telephone here and there, but these types of belt-tightening measures are unlikely to have a major effect. You should still do them where you can, because it looks good, and may help you accomplish the next measure. When asked why he robbed banks, Willie Sutton reportedly said “because that’s where the money is.” For an anesthesia department, “where the money is” usually means the assessments or taxes described above. Feudal system practice plans will be reluctant to decrease your department assessments because that implies they must either increase someone else’s or cut their own central expenses. Your arguments must be extremely convincing if you seriously expect to win tax relief. The most persuasive case for tax relief is probably the one stated earlier: anesthesia departments cannot survive with the same overhead rates as departments of Family Medicine or Pediatrics (Table 1). There is another argument that can work during today’s anesthesiologist shortage: if your department goes under, who will provide perioperative anesthesia care? Although situations may vary in some regions, in general there are no lines of private practitioners waiting outside the university hospital to take over your clinical service.

The financial picture for academic anesthesiology today contains both good and bad news. The bad news: managed care and government pressures have required academic physician practice groups to become more centralized with higher central expenses; hence, there is less money left to pay physicians. This has particularly impacted anesthesiology because of our traditionally low overhead rate, and the tendency of the feudal system to spread overhead equally among all. The BBS can either help us or harm us depending upon how it is implemented. In objective, productivity-based schemes, anesthesiology departments will usually come out ahead.

The good news today is that we are not only clinically very productive; we also represent a specialty whose physicians are in short supply. Hospitals cannot function without anesthesiologists. We must use this fact to our benefit while we can, but remember that only a few years ago we were considered a specialty with a surplus of physicians. This pendulum can easily swing the other way again, and we must be prepared. To prevent a return to the perceived anesthesiologist surplus of 1995, we may need to consider regulating the total number of residency positions in the country. I realize this is a controversial and divisive topic, but it may be a necessary step to ensure the ultimate survival of academic anesthesiology.

There is one thing we cannot do if we wish to survive as an academic specialty. We cannot remain passive, doing our daily jobs and assuming that everything will eventually play out for the best and that others will look out for our long-term interests. Physicians are notoriously reluctant to get involved in issues other than the actual practice of medicine; they simply do not have extra time for such matters. We must find the time to get involved and act with a unified purpose, or we may someday find that academic anesthesiology is ancient history.

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1. Medical Group Management Association: “Physician Cost Survey—1997 Report Based on 1996 Data.” Englewood, CO: Medical Group Management Association, 1997.
2. Medical Group Management Association: “Physician Compensation and Production Survey—1999 Report Based on 1998 Data.” Englewood, CO: Medical Group Management Association, August 1999.
© 2001 International Anesthesia Research Society