Bridging the Gap: Designing Financial Structures that Benefit Both AMCs and Safety Net Hospitals

Through research, teaching, and patient care, Academic Medical Centers (AMCs) stand at the forefront of American medical innovation. They are vital to our healthcare system, training the next generation of physicians and pioneering some of the world’s most transformational and lifesaving care. An AMC typically consists of three distinct institutions: 1) a medical school, 2) a faculty/medical group, and 3) a teaching hospital.

Through affiliations between their faculty group and community-based safety net hospitals, AMCs expand patient access by bringing high-quality clinical care and cutting-edge medical advancements to some of our nation’s most vulnerable patient populations.

AMCs are not immune to the economic pressures facing their community-based counterparts today. The ongoing physician shortage, declining reimbursement environment, and the growing demand for physician services continue to present challenges for physician recruitment and retention. Additionally, AMCs are increasingly competing against historically non-traditional entities, such as insurance conglomerates, pharmacy benefit managers and private equity or venture capital funds, for physician services.

Coupled with recent uncertainty surrounding research funding, AMCs are at an inflection point in securing the resources needed to support their mission. Many are now looking for ways to optimize their economic engine — the clinical enterprise. This article highlights critical considerations when designing or updating the financial structure of clinical service arrangements.

Understanding the Services

In any clinical service arrangement, a clear understanding of the services is essential to establishing a compliant financial arrangement. Frequently, it is a misinterpretation of the services, not the agreed-upon rates, that results in under- or over-funding.

When entering clinical service arrangements with AMCs, it is important to recognize that these arrangements are often fully turnkey. As such, financial arrangements should consider not only direct clinical services but also provider-level overhead expenses such as payroll taxes, health and dental benefits, continuing medical education, and malpractice premiums.

Beyond direct provider expenses, building and operating a turnkey clinical service requires significant investment in operational and administrative support. These investments are necessary for the successful operation of such a program and are appropriate to include in financial planning, as a hospital would incur similar costs if it were to build the program internally.

Investing in the academic and research enterprise can yield numerous intangible benefits, including:

• Access to medical students, residents, and fellows
• Recruitment of high-caliber, highly specialized physicians
• A stronger reputation that attracts both physicians and patients
• Enhanced quality of patient care

Determining the Framework for the Financial Arrangement

Once the parties have come to an agreement and shared understanding of the services to be provided, they should evaluate each specialty individually to determine which payment model best aligns incentives with organizational goals. These models typically fall into three broad categories:

1. FTE or Shift-Based: This approach may be suitable for some new or hospital-based programs, such as anesthesiology and hospital medicine, as well as most administrative and supervisory services.
2. Production-Based: May be suitable for specialties where work volume and complexity are easily quantifiable, and/or programs and services that require increased patient access.
3. Value-Based Care: Ideal for programs emphasizing prevention, chronic disease management, and population health.

Determining the Rates:

Compliance with federal regulations such as the Stark Law, the Anti-Kickback Statute, and private inurement rules is critical. Failure to adhere to Fair Market Value (FMV) principles can expose both parties to considerable legal and financial risks. To navigate these risks, many parties engage third-party valuation firms to conduct data-driven FMV assessments and benchmarking analyses.

To ease the administrative burden of contract renewals, service additions, and contractual oversight and reconciliations, it is considered a best practice to agree on a specific methodology for rate determination. Typically, rates are applied on a specialty-by-specialty or program-by-program basis.

Conclusion:

Designing a compliant financial structure is complex, but essential to ensuring regulatory compliance and long-term financial sustainability. By employing objective methodologies, leveraging independent FMV assessments, and maintaining comprehensive documentation, AMCs and their partners can mitigate legal risk while fostering transparency and fairness in their compensation structures.

Have Questions?

If your organization is evaluating or restructuring its academic-clinical partnerships, the CBIZ Healthcare Valuation team can help. Our team specializes in FMV analysis, compensation strategy, and compliance support tailored to the unique needs of AMCs and safety net hospitals.