Performance-Based Strategic Investment: The Evolution of a More Integrated School of Medicine/Teaching Hospital Funds Flow


Performance-Based Strategic Investment: The Evolution of a More Integrated School of Medicine/Teaching Hospital Funds Flow

The relationship between a school of medicine (SOM) and its primary teaching hospital has been and will continue to be a foundational element of an academic medical center (AMC). Through their collaborations in education and research, the SOM and teaching hospital are able to differentiate themselves in the patient care marketplace and elevate their standing and status to levels that could not be achieved independently. However, the pressures on and uncertainty surrounding all major sources of funding for these two entities have never been greater, resulting in increased scrutiny on the financial underpinnings of the relationship. SOM leadership and faculty members question the level of support that the teaching hospital provides in exchange for the services rendered and the value of the academic brand, while hospital executives struggle to define the value and return on investment (ROI) relative to the millions of dollars that the hospital typically flows to its academic partner. As described in our introductory publication on AMC integration,1 the current environment demands more contemporary affiliation arrangements that describe mutual responsibilities and the value derived from the partnership.

The financial arrangements between an SOM and teaching hospital include a myriad of transactions, but they essentially may be defined as (1) purchased services or (2) strategic investment.

… the opportunity for greater integration and alignment lies with an investment strategy that is grounded in business planning principles [and] is in line with performance.

Purchased Services. These include services that most hospitals, either academic or community-based, must secure, such as medical direction for clinical programs/units and coverage for key clinical services (e.g., anesthesia). Indeed, teaching hospitals and SOMs (often in conjunction with a faculty practice plan) have made significant strides in improving accountability and transparency for purchased services through joint evaluation and decision making. Medical directorship effort and performance expectations are more defined, and the individuals filling those roles are rewarded or replaced based on specific criteria. Similarly, clinical coverage requirements and attendant payments are more formula-driven, flexible, and grounded in fair market value principles.

However, this evolution in purchased service methodologies has not fully occurred in graduate medical education (GME), an area that greatly impacts AMCs. The presence of GME programs define a “teaching” hospital, with significant value realized through the related academic brand, the clinical coverage provided by residents and fellows, and the built-in physician recruitment pipeline. Financial arrangements for GME, though, are often based on a pass-through of direct GME reimbursement that is received by the hospital from government payors and/or a “block grant” budget rooted in history, neither of which may represent the true cost borne by the SOM.

Following the lead of other purchased services agreements, payments for GME program direction and teaching should be linked to an FTE requirement (often specifically defined by ACGME) and expectations of program performance (e.g., match rates, board certification pass rates). Support for other costs associated with administering GME programs should also be benchmark-driven and formulaic (e.g., identified support per resident) to provide consistency and predictability while incentivizing cost management.

Strategic Investment. Strategic investment by the teaching hospital in its SOM partner’s academic endeavors is rife with ambiguity and uncertainty, despite its importance to both parties. This financial landscape commonly includes a hodgepodge of historical deals that predate current leadership teams, unsubstantiated deficit support, and promises of funding that only materialize in part (or not at all). Moreover, in only very limited instances are the benefits to and performance of the SOM and teaching hospital linked to these arrangements. A zero-based approach to strategic investment is often required, with a standardized business plan process applied to each investment opportunity. For mission-critical programs that require start-up and/or ongoing support, a fully loaded budget (i.e., faculty physicians, midlevel providers, support staff, and non-personnel and indirect costs) must be clearly defined, as should the financial contributions from the hospital and SOM to offset these expenses. Projections for financial performance, faculty effort across missions, and productivity must also be included so that all parties understand commitments and expectations. Finally, risk profiling and an attendant remediation plan are necessary in the event that anticipated funding sources do not materialize or productivity levels do not achieve projected levels. This prevents a “fiscal cliff” from suddenly derailing a key programmatic investment and placing the SOM and teaching hospital in the position of determining which entity will provide additional support.

Another element of strategic investment that must continue to evolve is the discretionary or mission support provided by the teaching hospital to the SOM for academics. This is funding that the SOM dean has sole responsibility for allocating to mission-critical programs (including basic sciences) that put the “academic” in AMC. In many AMCs, this type of support has never existed, and in those where it has, the payment has often taken the form of an above-the-line block grant. More progressive AMCs are aligning discretionary academic support with the teaching hospital’s performance.

Furthermore, as with the program-specific investments described above, the dean must clearly communicate to the teaching hospital and the SOM faculty how he/she has invested this funding through a business planning and monitoring process. The outcomes from such an arrangement are truly in the win-win category, with both entities having greater predictability regarding levels of discretionary funding, SOM faculty clearly seeing how their contributions within the teaching hospital link to academics, and the teaching hospital demonstrating a commitment to the academic brand of the AMC.

While many AMCs have improved the clarity and objectivity of the purchased services agreements that exist between the teaching hospital and SOM, the opportunity for greater integration and alignment lies with an investment strategy that is grounded in business planning principles, is in line with performance, and has discretionary academic support at its core. This is a fundamental mechanism for instilling a sense of common purpose around clinical and academic programs and for strengthening the academic brand that will differentiate an AMC from community-based competitors looking to erode its market share.


  • 1.

    ECG Management Consultants, “AMC Integration – Five Points of Opportunity for Real Alignment,” June 2012.