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Alternative Funding for Academic Medicine: Experience at a Canadian Health Sciences Center

Rosenbaum, Paul MA; Shortt, S E. D. MD, PhD; Walker, D M. C. MD

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In July of 1994, the health sciences centre in Kingston, Ontario, initiated a new approach to funding, the Alternative Funding Plan (AFP). The AFP ended fee-for-service billing by Queen University's medical faculty and provided an envelope of funds for the compensation of physicians for the full range of their clinical and academic activities. In this article, we describe the environment that led to the development of the AFP, the nature of the plan, and some of the changes in funding, governance, management, and accountability that have evolved since its inception.

Funding Academic Medicine at Our School Before the Plan

In Canada, funding for medical education typically comes from a variety of sources. Provincial ministries of education or the equivalent provide per-capita funding for undergraduate medical students. This is supplemented by student tuition, a portion of which is shared with the central university. The university provides operating budgets, including salaries, for basic sciences departments. The ministries of health fund residency positions. Finally, and importantly for this article, clinical faculty earnings support the operating budgets for clinical departments.

The School of Medicine at Queen's University, as is the case in medical schools across North America,1–4 became unduly dependent on the clinical earnings of its faculty to survive. In the absence of adequate government funding for the academic mission of the Faculty of Health Sciences, the university effectively taxed earnings of clinical teachers. While details differed by department, either through a flat rate or by “overage” on earnings above an individually negotiated ceiling, most clinical teachers contributed financially to the operation of the faculty.

By 1994, what had been a barely adequate financial base was being significantly eroded. Clinical earnings were growing at a rate slower than were expenses of practice, academic department expenses continued to increase, and funding from government for academic activities was being reduced in an attempt to control expenditure. Also, to further control heath costs, the province imposed caps5 on physicians’ professional earnings, a strategy which reduced the overage available to medical schools. Several clinical department trust accounts were in a deficit position and others were about to become so. Consequently, the pressure on faculty to produce clinical income was intense, a development viewed by many to be at the expense of academic activity and, occasionally, good patient care.

The principal goal for the academic health sciences center in initially pursuing an alternative to fee-for-service funding was financial survival. However, the specific form chosen to purse this goal—the AFP—had the further objectives of eliminating any marginally necessary care. By creating a better match between patient need and physician service, the plan was thought to not only enhance quality of care, but also free up time for faculty to engage in more research and teaching.6 From the perspective of the Ontario Ministry of Health and Long-term Care, locking in the cost of regional specialty care for the five-year duration of the agreement represented an appealing contrast to cost escalation in the fee-for-service sector.

Alternative Funding at Our School

The Queen's Alternative Funding Plan was established through a partnership of five organizations: Queen's University, its three principal teaching hospitals, and the Clinical Teachers Association of Queen's University. This group created a governing body, the Southeastern Ontario Academic Medical Organisation (SEAMO). The original five-year agreement was extended by three months to permit a conclusion to renewal negotiations. The first renewal agreement was for only 18 months to allow continued discussion on certain matters while providing needed financial adjustment. A second renewal of four years duration was initiated in 2001. Below, we describe key features of the initial agreement.


A distinction should be made between the terms “alternative payment” and “alternative funding” as used in the SEAMO context. In the former situation the focus is the physician, and the payment method for clinical work is other than fee-for-service. The unit of compensation is a health system input: the clinical work of the physician. In contrast, an alternative funding arrangement is a method for funding a basket of specified outputs, or deliverables. An organization might be funded to provide a set of deliverables that could include, for example, a targeted market share for a specified service for a designated population or specified educational outputs such as a certain number of graduating medical students per year. Such deliverables do not depend for payment on the amount of physician service required to produce them.

The distinction between alternative funding and alternative payment is a critical one, and one that was not initially well understood by the Ontario Ministry of Health and Long-term Care. Part of the reason for this may be that alternative payment is far simpler to administer: the Ministry knows that it is buying the clinical service of a specific number of physicians, rather than a deliverables arrived at through complex negotiations.

Conversely, alternative funding is far more attractive to an academic health sciences center than an alternative payment scheme. It allows the center to negotiate deliverables and to staff in whatever ways it sees desirable to meet these responsibilities. For example, the center can negotiate a greater emphasis on academic activities than would be possible in a fee-for-service environment and allocate resources accordingly.

The agreement between SEAMO and the Ministry envisioned funding to cover the full mission of the medical school. For the duration of the agreement, and for subsequent renewals, clinical teachers “parked” their billing numbers for all but a very limited and clearly defined list of exceptions. The contract provided funds for the compensation of clinical teachers, including almost all of their clinical activity. At the time, it was expected that SEAMO would also receive funding for the hospital-based activities (e.g., inpatient care, medical imaging, pathology) of all physicians, whatever their academic status. In practice, this was difficult to deliver. Although the overwhelming majority of specialty medical service was provided by geographic full-time (GFT) clinicians (i.e., those with a full-time university appointment) under the plan, there were a small number of non-GFT physicians providing services in hospital under the provincial health insurance plan.


Developing governance arrangements acceptable to the clinical teachers and to the institutions was critical to the conceptualization of SEAMO and to achieving stakeholder ratification of the AFP agreement. The five organizations within SEAMO established a governing committee to serve as the board of directors to oversee the routine operation of the AFP (see Figure 1). The 16 governors are appointed in a variety of ways: full-time members of clinical departments appoint some, and some are appointed by member organizations. However, a majority of the members are GFT physicians.

Figure 1.
Figure 1.:
Structure and context of the Southeastern Ontario Academic Medical Organisation (SEAMO). Internal accountability flows from departments to the Governing Committee, while external accountability extends from SEAMO to the Ontario Ministry of Health and Long-term Care. Individual clinicians are accountable to their departments. (Details may be found at 〈〉.) Note: CFO, chief financial officer; CIO, chief information officer; Com., committee.

The governing committee is not only a creation of the five organizations that signed the funding agreement, but it is subservient to them since above the governing committee is a signatories committee upon which each organization has one representative. The latter has two fundamental roles. First, the committee can be used for dispute resolution among these parties. For example, on matters of “fundamental principle,” any of the signatories can refer an issue. Each member organization has a single vote, and unanimity is required on all decisions. This is a very stringent test; however, it was believed that for the academic health sciences center to survive, the partnership had to be preserved without any one of the parties feeling aggrieved. Since its inception in 1994, the signatories have never met for the purpose of dispute resolution. The second role of the signatories is to determine amendment to SEAMO's “constitution” and to enter into or amend agreements with government.

It is important to note that SEAMO's constitutional document also requires that for executing or amending agreements with government, or for changes in the composition of the governing committee, the Clinical Teachers Association must seek approval from its membership. Beginning with the first iteration of the agreement, the clinical teachers have applied a very strict test of acceptability: the double two-thirds majority. Two thirds of member voting and two thirds of the departments with four or more voters must be in favor.


The dean of the Faculty of Health Sciences, who is also the director of the School of Medicine, is the chief executive officer of SEAMO. Indeed, while the University and the Health Sciences Centre have provided the personnel for management, for none of them is this role a full-time responsibility. The chief financial officer for the Faculty is also the chief financial officer for SEAMO. The director of the health sciences centre Secretariat is the director of policy and planning for SEAMO. The university provides financial services for SEAMO; for example, the audit of SEAMO is conducted as part of the annual University audit. Not until the third iteration of the agreement with the Ministry were funds designated specifically for SEAMO management.

Professional Autonomy

A key principle of the AFP is the reconciliation of the traditional professional autonomy of clinicians with the corporate character of SEAMO. In establishing alternative funding, the five signatories recognized their mutual interdependence in providing programs of clinical service, teaching, and research. Recognition of an interdependent enterprise did not mean, however, that organizational differences in responsibility and accountability did not continue. This conceptualization of a common enterprise conducted by independent bodies is especially important for clinical teachers, who function as faculty of the School of Medicine, as members of the attending staff of the teaching hospitals, and as service providers in the community. SEAMO recognized and protected the academic physicians’ entitlement to professional autonomy concerning patient care in accordance with the standards of the profession and the requirements of the profession's regulatory bodies. Academic physicians are independent professionals in the context of their clinical practice. This requirement prevents the SEAMO central governance from intruding on the physician–patient relationship.

SEAMO does not fund individual clinical teachers; rather, it allocates resources to departments that determine the role and compensation of individuals. Specifically, departments are responsible for developing role definitions for individual academic physicians, systems for appraising performance and for determining compensation, and appeal mechanisms. Departments are required to develop these through collegial and democratic processes, although the mechanisms developed for implementation need not necessarily be democratic. It was recognized that the culture of medicine supports the view that cognate groups are best able to understand the nature of the work of their members and should, consequently, be responsible for determining the general role of the physician and the appropriate compensation based on performance of that role.

Although based on the desire to protect the ability of academic physicians to make independent clinical judgments and to collectively determine the performance of their specialties and subspecialties, these constitutional arrangements also protected the tax status of SEAMO-funded physicians as independent professionals. This is not a trivial matter. To view academic physicians as employees rather than as independent professionals, and thereby disallow expenses of practice or other benefits associated with a self-employed income, would have a devastating effect on the academic health sciences centers’ ability to recruit and retain academic physicians.

Supporting Factors

Several aspects of medical organization at the Queen's School of Medicine and within the Kingston hospitals were supportive of a move toward alternative funding. First, local hospitals required that members of the attending medical staff have university appointments, almost always in the GFT category. By funding Queen's academic physicians through the AFP, government was therefore able to capture almost all specialty hospital service in the area. This reduced, but did not eliminate, government concern about AFP participants offloading significant levels of service to non-AFP physicians. Government also believed that capturing all physician services within the hospitals would control hospital expenditure. For the Health Sciences Centre, it avoided a “two classes of citizens” problem that might have occurred had there been a significant number of “downtown,” or nonuniversity, specialists providing in-hospital services. This arrangement also facilitated the effective representation of the clinical teachers’ interests. Designing a body to represent the interests of GFTs is far less complex than creating a single organization to represent the divergent interests of GFTs, major part-time clinical teachers, and those with little or no connection to the medical school.

Second, for many years the hospitals and the university had agreed on a “joint chiefs” policy in which the head of the university clinical department is also the chief of the clinical service at all of the hospitals. For example, the head of the Department of Medicine at Queen's University was also chief of medicine at Kingston General Hospital, Hotel Dieu Hospital, and St. Mary's of the Lake Hospital. This arrangement avoided dispersed and potentially fractious medical leadership in the community; indeed, department heads have become central to the management structure of SEAMO.

Third, there was a university- and hospital-based medical culture into which alternative funding found a comfortable fit. Academic physicians had a hospital base that tended to support a group practice culture, as opposed to a solo practitioner culture. Most specialists conducted all of their clinical activity within the hospitals. There was little or no office-based practice. In addition, almost all specialists were already working within the University's practice plan. The shift to SEAMO, in effect, posed a less dramatic organizational change than would have been necessary in a center in which each clinician practiced entirely independently.


Government versus the Southeastern Ontario Academic Medical Organisation

Faced with double-digit increases in aggregate payments to physicians during the 1980s, it is hardly surprising that at the inception of the AFP some Ministry officials may have viewed SEAMO clinicians as income-maximizers who were likely to reduce their workload once fixed payment was guaranteed. Government negotiators had inconsistent reactions to this belief. On the one hand, they expressed the belief that 30% of the clinical activity of clinicians was physician generated and unnecessary. They argued that alternative funding would reduce clinical work and would provide significant savings in hospital expenditure. On the other hand, they expressed concern that with the fee-for-service incentive gone, academic physicians would reduce their clinical workloads, leaving patients without access to necessary care. Growing concerns provincewide about lengthening waits for various services suggested such a development would not be acceptable.

The result was a protracted debate about reporting activity requirements. Habituated to measuring physician productivity on the basis of billing submitted to the Ontario Health Insurance Plan, the Ministry wanted the center to engage in “shadow billing,” that is, to continue to submit documentation similar to those previously used to request fee-for-service payment from the provincial health insurance plan. From the center's perspective this exercise would involve excess labour costs, was likely to yield inaccurate data, and would perpetuate a piece-work conception of physician activity that the AFP was designed to replace. The debate over this and related issues revealed an ongoing element of suspicion in the initial relationship between SEAMO officials and the Ministry.

Autonomy versus the Collectivity

Before the AFP, the school of medicine was a loose confederation of independent providers. Individuals wishing to enhance income were, subject to discussion with department heads, able to increase incomes, while departments were able to freely recruit new faculty dependent only on establishing the availability of adequate clinical work to support additional billing. Because of government-imposed fee-for-service caps with accompanying claw-backs (i.e., requirements for repayment of billings above the allowable limits), it is unlikely that the AFP reduced the average earnings of physicians, but it did restrict opportunities of some individuals to augment personal income. Moreover, it had a profound effect on the process by which new positions were approved since funds had to be found centrally by SEAMO administration. Further, under the third iteration of the agreement, each department was obliged to create for itself a role description against which its performance would be measured and resources allocated. This process presupposed departments would evolve role descriptions for individual faculty members. The cumulative effect of such organizational changes at the center was to underline the extent of the shift that occurred away from individual autonomy toward collective goals and activities. The degree to which individual faculty members welcomed this transition in organizational culture was variable.

Informational Needs

One of the singular changes that accompanied the initiation of the AFP was the gradual recognition of the greatly enhanced information needs required to govern and operate SEAMO. Accountability reporting requirements, for example, demanded that self-reported information previously sporadically available in hardcopy from Faculty annual reports, now be centralized in electronic form, made more precise, and validated from independent hospital and university sources. This involved creating an electronic reporting capacity for Faculty and linking to, among others, the hospital patient information system and the records of the university's Office of Research Services. Moreover, collecting data was recognized as only the first step; it then required that SEAMO develop an analytic capacity as well. Such centralized information was never deemed necessary when the center operated on a fee-for-service basis.

An Evolving Plan

In the period since 1994, the AFP has undergone a number of significant changes. In this section, we briefly describe key developments.

Scope of the Plan

At the inception of alternative funding it was the intention of SEAMO and the Ministry to capture within the plan all physician activity within the hospitals, inpatient and outpatient, by all physicians regardless of university affiliation. For non-GFTs, it was expected that some would agree to “park” their billing numbers for in-hospital work and to receive payment from SEAMO. Others were expected to continue to bill the provincial health insurance plan, but the Ministry would recover these amounts from the SEAMO cash flow. Technical problems made this difficult to accomplish.

In order to “roll-in” non-GFTs, SEAMO and the Ministry would have to agree on the value of this clinical activity. It was expected that billing history would provide this value. In practice, however, this proved difficult or impossible in many specialties. Despite best efforts, SEAMO and the Ministry were unable to distinguish billing for office-based ambulatory care from hospital-based activity by non-GFT physicians. Furthermore, it was necessary that the Ministry continue to distinguish office-based from hospital-based work so that they could be assured that specialists were not being paid both by SEAMO and by the provincial health insurance plan for the same activity.

For only a handful of services was it possible to differentiate clearly between office-based and hospital-based practice. A financial value of in-hospital work was calculated, and the Ministry adjusted SEAMO's funding. These departments became known as “fully converted departments.” Within fully converted departments, all hospital-based work by all physicians is funded by SEAMO. Fully converted departments include Anaesthesiology, Emergency Medicine, Urology, Obstetrics and Gynecology (except obstetrics services provided by family physicians), Rehabilitation and Physical Medicine, and Critical Care.

After many months of joint work, SEAMO and the Ministry agreed to calculate the value of this work prospectively over a six-month period. Just before the conclusion of the six-month period, an agreement between the Ministry and the Ontario Medical Association closed the door to further conversion of funds from the province's fee-for-service pool to alternative funding or payment plans. Without the ability to convert these funds, the Ministry would not pursue further roll-in of non-GFTs. Although it was the wish of SEAMO in principle to fully convert all departments, the failure to do so did provide to SEAMO a greater measure of flexibility in engaging additional clinicians in these departments that it would otherwise have had. The issue of flexibility, or the lack of flexibility, was one that has dogged SEAMO from the beginning.


The 1994 funding agreement made no provision for financial adjustment to deal with a changing environment. During negotiations this seemed acceptable to SEAMO, since the province and the Ontario Medical Association had agreed to caps on individual earnings and on the total amount in the fee-for-service pool, eventuating in claw-backs from individual physicians. In addition, the clinical education budget was shrinking. In this environment, a fixed amount for five years appeared to be desirable. The problem was that patient demand continued to increase and, despite the Ministry's expectations, most growth was based on patient need rather than on physician-generated clinical activity.

A second problem concerned innovations in clinical practice. SEAMO funding was based, in large part, on fee-for-service billings in 1992–93. At that time the Health Sciences Centre had, for example, no program in interventional radiology. Funds were required to expand into new and developing areas of clinical practice, but the contract with government did not provide for this. While it may have been true to say that a percentage of incomes in the fee-for-service world were being clawed back by the provincial government to ensure aggregate payment for physicians’ services did not exceed an arbitrary ceiling, SEAMO could not reduce income of its specialists in order to fund new activity. Indeed, protection of departmental and personal income was one reason why GFTs were willing to sacrifice some of their autonomy.

After almost five years, during the second round of negotiations, SEAMO accepted a Ministry offer of a process to provide flexibility. SEAMO was to provide to the ministry “business cases” explaining why new positions were required. However, this process failed to provide the needed flexibility during the 18 months of this second contract. First, creation of business cases was a time-consuming and complex process. The alternative payments program in the Ministry had little capacity to analyze and respond to these business cases. Their role was administering a program and not reviewing the desirability of expansion in clinical or academic areas. The most problematic aspect of this new agreement was that the provision for flexibility moved SEAMO a great way from alternative funding toward alternative payment. In order to receive more funding for anesthesiology, SEAMO had to identify how many anesthesiologists it had and how many it needed—and to justify these numbers to the Ministry. SEAMO was effectively on a line-by-line budget in which rates for compensation by specialty and numbers of specialists by service were subject to determination by the Ministry.

On April 1, 2002, SEAMO entered a new four-year agreement that addressed flexibility by providing annual funding adjustments. SEAMO is free to apply these increases to rate of compensation or to number of physicians. Although this places significant new responsibility into the hands of SEAMO, it should provide a necessary degree of flexibility.


How SEAMO would be accountable to the ministry for the funding it received has been a continuing issue. The Ministry expressed preference for “shadow billing,” which it felt would document precisely the volume of SEAMO clinical activity and allow for comparisons with other academic health sciences centers in the province. Such data would also forestall criticism of the Ministry by the provincial auditor. SEAMO saw shadow billing as a measure of health service inputs, not outputs, and believed that in the absence of direct benefit to physicians, the quality of data would be poor. Moreover, billing-like information would create a perverse incentive in a system designed to change conceptions of clinical service delivery. Under the terms of the original agreement, SEAMO agreed to submit encounter data based on chart extraction that provides information on inpatient services, outpatient procedures, emergency department encounters, and clinic visits.

As an additional accountability measure under the initial iteration of the agreement, SEAMO was required to perform an evaluation of the AFP. A number of studies, circumscribed by data availability, on various aspects of the AFP were completed, as was a summary final report.7

Accountability, particularly for clinical programs, remained a controversial issue. For SEAMO, the preference was to develop an accountability process that required deliverables to be defined in terms of health system outputs. Accountability would require the reporting of performance against these output expectations. For the Ministry, which was used to funding physicians for specific actions during a patient encounter, the preference was for deliverables that defined service levels. In fact, the funding agreements required both. All three contracts required SEAMO to fund all clinical activities by all GFTs, as well as the clinical activities of non-GFTs in a small number of departments. But progress on defining meaningful output deliverables was slow.

It has been recognized that SEAMO's first agreement defined deliverables in only the most rudimentary way. For clinical service, SEAMO was said to provide secondary care in the Kingston area, tertiary care in the region, and primary care as is required by the university's educational programs. These terms were not defined. During the period covered by the third agreement, however, SEAMO and the Ministry negotiated a clearly defined set of deliverables. Performance targets are being established and indicators by which to measure them agreed upon. In many ways SEAMO requires these performance measures more than does the Ministry. Departmental role descriptions are in the process of being defined, which will allow SEAMO to hold departments accountable by the asymmetric allocation of funds based on performance. As a consequence of these data needs, SEAMO has appointed a chief information officer and a senior data analyst.


There has been little change in the governance arrangements since the inception of SEAMO, but one seemingly small change has had a profound impact on the organization. Initially, the dean was both chief executive officer of SEAMO and the chair of the Governing Committee. In the fifth year, the SEAMO signatories agreed to bring in an outside governor who would chair the Governing Committee. The chosen chair has extensive experience with voluntary organizations within government and the Military. He has helped the organization better distinguish between governance and management, has increased the confidence of clinical teachers in the governing organization, and has made decision making more efficient. An external review of governance and accountability commissioned by SEAMO in Spring 2002 found the governance structure to be effective.


The AFP emerged initially as a pragmatic solution to a pressing financial circumstance in the School of Medicine at Queen's. It successfully addressed the immediate financial issues, for both government and the health sciences center. Moreover, an extensive evaluation of its internal, nonfinancial objectives over the initial four-year period found that clinical practice patterns changed little.7 The most notable change in education was an increase in continuing medical education activities, and there was a modest increase in research.8 Many referring physicians remain suspicious of the plan, fearing a service decline,9 whereas participating clinicians were positive about their ability to more appropriately allocate their time.10

Beyond these outcomes, the AFP necessarily also evolved a series of organizational innovations that addressed a range of other issues within the center including delineation of departmental and faculty role descriptions and the elaboration of a management information system. In the process, a series of organizational issues, such as governance structure and accountability mechanisms, were identified that had both internal and external implications. Dealing with these issues meant negotiating solutions with government that were at the same time deemed acceptable to SEAMO stakeholders. Inevitably there were compromises, such as a loss of flexibility in return for guaranteed funding, but generally mutual benefit negotiation externally and consensus governance internally led to workable solutions.

For its part, the Ministry of Health and Long-term Care has gained an environment in which health care reform could occur with physician cooperation. For example, a planned 20% reduction in acute-care bed days was introduced, with physicians collaborating in how best to accomplish this, a collaboration less likely in a fee-for-service environment in which physician incomes were linked to bed availability. The Ministry also gained predictability for the cost of providing specialty care to southeastern Ontario. Ministry support for the AFP has allowed for a unique recognition by the Centre for accountability in the provision of specified deliverables, and a new appreciation of the complexity of delivering service to the community while sustaining the academic mission of a health sciences center. The Ministry itself is held to public account by the report of the provincial auditor. Any agreement must, therefore, be sufficiently robust as to withstand criticism from that source. That the AFP has largely succeeded in this regard is attested to by the Ministry's declared intention of creating similar initiatives at other centers in the province.11

The AFP experience may be of interest to U.S. medical educators where, as in Kingston before the initiation of the AFP, there is a marked dependency on faculty earnings. For example, while in 1961 clinical revenues contributed only 6% to U.S. medical school revenues, by 1991 faculty-generated clinical earnings accounted for 45% of medical school budgets.1 The Association of American Medical Colleges estimated that in the 1993 academic year, 28 cents in every dollar of clinical faculty income (about $2.4 billion in total) was used to subsidize academic activities.2 The fragility of this dependency is shown by events such as the U.S. Balanced Budget Act of 1997, which proposed the removal of an amount equivalent to one year of funding from Medicare subsidies to medical education.12 Also, in the competitive managed care market, teaching hospitals are no longer able to bill at rates that reflect the extra costs associated with their academic role, traditionally a premium of 30%. Instead, they must compete by attempting to offset their discounted rates by enhanced patient volume.13,14 Such a volatile situation might inspire medical educators to discuss an AFP-like package of Medicaid and state funding for academic health sciences centers.

Summing Up

The AFP at Queen’s University has evolved over an eight-year period and is still a work in progress. During this process key issues of funding, governance, management structure, and accountability have been identified as the critical components of the plan. Because of the recognized advantages of the AFP for both the academic health sciences center and the provincial government, it has been possible to negotiate workable solutions in each of these areas. The result may be a template from which other North American centers intent on creating an AFP might borrow those lessons that suit their own unique circumstances.


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© 2004 Association of American Medical Colleges