Blog Post May 1, 2019 Is It Time to Abolish the Dean’s Tax? Authors Dan Harrison Chris Collins While its methodology and percentage vary by university, the typical “dean’s tax” is an assessment applied to topline professional revenue generated by the school’s clinical faculty. It provides much-needed funding to the dean for overhead costs of the medical school, cross-subsidization of mission-critical programs, and/or start-up packages (e.g., for department chairs and faculty). However, if we set politics aside and examine the macroeconomics of an academic medical center (AMC) in today’s market, we find that the dean’s tax is often misplaced and outdated, and it can be an impediment to partnerships with health systems and other providers. Reimbursement levels and other market factors call for tight alignment of financial interests between the medical school and affiliated teaching hospital(s), but the legacy dean’s tax does not promote this—in fact, it accomplishes the opposite.Origin of the Dean’s Tax The emergence of the dean’s tax was rational. It was born in the late 1970s and early 1980s when the Center for Medicare & Medicaid Services (CMS) was formed and the federal government established a $10 billion budget that extended healthcare coverage to 19 million Americans.1 This resulted in an influx of unexpected income into the clinical departments of medical schools. At the time, departments were able to generate positive operating margins from their own clinical operations (with little to no support from affiliated hospitals). They made necessary investments into the academic enterprise through the revenue-based assessment that became known as the dean’s tax.Current StateFast forward to 2019: The median loss per physician/faculty member is $228,000 as professional reimbursement has declined significantly, particularly for medical specialties (on average; it varies by specialty), and technical revenue has shifted to the hospitals.2 Medical education and research-related revenue to support medical school operations and faculty compensation has flattened or decreased in recent years. Physician/faculty compensation continues to rise for most specialties. From the perspective of the three core AMC entities, common scenarios are as follows: Medical schools carry additional costs allocated by the university, seek increases in discretionary funding, and are under pressure from affiliated clinical partners to justify ROI for additional funding. Faculty group practices (FGPs) only generate a net positive margin with the help of Medicaid supplemental programs; lucrative service agreements and program support from affiliated teaching hospitals; and/or commercial reimbursement in the top 10th percentile (which is out of reach in most markets). Teaching hospitals have an average operating margin of 3.7%3 ; are under pressure to gain cost efficiency in a market demanding value; are in need of capital for reinvestment in facilities and technology; and are hesitant to provide an increase in funding to medical schools and/or faculty practices without greater control and integration. Irrational (and Somewhat Circular) Funds FlowKeeping in mind the common disposition of the three core AMC entities described above, figure 1 below depicts an internally focused, cyclical funds flow conundrum that many AMCs experience today. At the center of it all is an outdated approach to dean’s tax and interentity mission support: Figure 1: Dean’s Tax Funds FlowMost interentity funds flow models comprise a complex constellation of contracts that fail to align the strategic and financial interests of the parties. Patchwork financial agreements between the various entities provide necessary funds to reward productive faculty, invest in programs of strategic importance, and keep the departments solvent despite the prevailing economics of academic medicine. For many academic health systems, hospital partners provide additional funding directly to departments, recognizing the need to support and retain the clinical faculty. These financial arrangements began as ad hoc agreements that aimed to stabilize a particular department or group of faculty. Over time, however, the number of agreements supporting FGPs across the country has increased along with the dollar amounts attached to them. This situation begs the question: Is there a more effective and simplified approach for a health system to use to provide support to its medical school that aligns financial interests to optimize overall performance? The short answer is yes; however, it will require bold leadership and likely an investment of political capital. This question does not contest a medical school’s need for revenue generated by the dean’s tax; it is related more to how the medical school should receive those funds and where they should come from. The dean’s tax mechanism burdens the FGP, its departments, and the faculty and is not aligned with today’s market. Most notably, taxing a revenue base that is declining on a per faculty basis does not present a viable funding model for the medical school or a sustainable future for its departments. Furthermore, at a time when FGPs need to be as innovative as possible, the dean’s tax often serves as a deterrent for external parties who may otherwise want to contract with the FGP to purchase physician services (and provide the medical school with a much-needed revenue source). Reengineering Funds FlowRather than taxing faculty, which oftentimes exacerbates an existing deficit, modern academic health systems are coming together to reengineer their funds flows in a rational way that takes into account the current market dynamics and ensures the sustainability of both the departments and the medical school. Many AMCs are replacing the dean’s tax with mission-support dollars originating in the health system. Instead of relying solely on the professional fees generated by faculty, these AMCs are utilizing the broader revenue sources available to the system to ensure that adequate funding makes its way to the medical school, regardless of changes in reimbursement for physician services. Figure 2 highlights some of the key features and limitations of the dean’s tax in comparison to a more contemporary funds flow model whereby mission support is provided by the health system. Figure 2: Dean’s Tax vs. Health System Funded Mission SupportMore deliberate payments from the health system to the medical school offer the flexibility required to manage the academic enterprise and provide increased transparency, giving the system insight into its investments. In the future, more academic medical centers will adopt performance-based mission support models with the following attributes: A fixed dollar amount set aside for the medical school that is both reliable and predictable (replacing the dean’s tax)A variable incentive amount that is linked to the performance of the collective clinical enterpriseTime-limited investments in areas of strategic importance for both the clinical and academic enterpriseSimplified funds flow methodologies between the health system and the medical school ensure there are no hidden subsidies and eliminate the unrealistic expectation that all clinical subspecialties will be able to generate a profit margin. Ready for Change?As the healthcare market has evolved, many academic organizations have not modified their funds flow to reflect the current environment. A critical first step in the process is to delineate what you want your funds flow to achieve. Do you want to drive alignment of your AMC’s various entities and make purposeful investments in what you value as an enterprise? Are simplicity and transparency important to your organization? Does your current funds flow have the parity and integrity required to effectively manage your business and guide decision-making? Do you need a funds flow that is flexible, nimble, and not a deterrent to potential partners? If so, it may be time to abolish the dean’s tax and replace it with a modern approach to academic mission support. Footnotes 1. The initial budget of $10 billion was established in 1965 with the signing of H.R. 6675 by Lyndon Johnson. The Prospective Payment System was established by CMS as a result of the Social Security Amendments of 1983. 2. ECG 2017 Medical Group Cost and Infrastructure Survey. 3. Optum360 2017 Almanac of Hospital Financial & Operating Indicators.