Anesthesia Subsidy Strategy: Ensure a Strong Support Structure is in Place
- July 9, 2019
The delivery of cost-effective, high-quality healthcare designed around an enhanced patient experience are objectives of most health systems; thus, they target specific strategies to optimize health system performance. For a hospital, success or failure is frequently dependent on leveraging such plans to create a well-functioning operating room (OR), as OR services are a major source of total services provided and revenue generated.
Anesthesia plays an essential role in ensuring the clinical and financial success of the OR services through their various responsibilities, including managing perioperative patient care, working with OR stakeholders to ensure efficient operations, establishing best practice protocols for surgical patient care, and maintaining the fiscal integrity of the OR services via implementation of cost-effective measures for patient care.
From an economic standpoint, anesthesiology groups are increasingly dependent on hospital support to ensure market-based wages that are needed to attract and retain high-quality anesthesia providers. According to various studies, 85 to 95 percent of all hospitals directly or indirectly subsidize their anesthesia services. Factors that contribute to the anesthesia group’s need for support include:
- Underutilized ORs
- Comprehensive provider coverage requirements by the hospital
- The shift of procedures to ambulatory surgical centers
- Staff shortages and intense market competition for providers combined with year-over-year increases in market-based compensation rates
- Decreasing reimbursement from governmental and private payers
- High governmental payer mix
Hospitals approach anesthesia subsidy arrangements in a variety of ways. Three common structures include:
- Collections guarantee arrangement, which involves the hospital making regular support payments to the group with a periodic audit of professional collections and a reconciliation process to ensure total revenue collected by the group does not exceed a predetermined amount.
- Fixed guarantee subsidy arrangement, which involves periodic support payments by the hospital to the group, where the payment amount is usually fixed with no audit of the group’s professional collections.
- Hybrid arrangements incorporate a fixed guarantee subsidy, but which also define a maximum threshold for professional collections, after which the group remits a portion of collections over the threshold to the hospital, essentially reducing the hospital’s subsidy.
Collection guarantee arrangements are customary when there is a high degree of unpredictability concerning the anesthesia group’s professional collections due to the group either being new to the hospital or in environments with a significant expansion of anesthesia services and associated provider coverage requirements. Under a collection guarantee arrangement, the risk for the financial performance of the anesthesia group largely shifts to the hospital, with the group having limited motivation to ensure optimal revenue cycle performance.
We recommend collection guarantee arrangements be implemented during periods of transition only, to be followed with a fixed guarantee or hybrid arrangement after a steady state is achieved.
Fixed guarantee arrangements are generally structured where coverage requirements for anesthesia services and professional collections are relatively stable from year-to-year. Under a fixed guarantee arrangement, the hospital’s financial commitment is capped, thus encouraging the group to optimize their revenue cycle performance and management of fixed and variable costs. Therefore, the risk for financial performance is shifted to the anesthesia group.
The hybrid arrangement seeks to leverage the advantages of the fixed guarantee structure while reducing the hospital’s overall support payment should the group’s professional collections allow them to achieve a stronger than anticipated financial performance. In essence, financial risk is shifted to the group consistent with the fixed guarantee arrangement.
To ensure compliance with regulatory requirements governing financial arrangements between hospitals and physicians (e.g., Stark Law, Anti-Kickback Statute, and other regulatory considerations), a fair market value (FMV) review should be performed to verify the professional collections shortfall for the services and to determine a range of potential support payments that is market based and consistent with FMV parameters.
Additionally, we recommend incorporating joint incentives around quality and operational efficiency/clinical productivity within the subsidy arrangement. Such incentives can be structured as a holdback from potential support payments or as an add-on to such payments. Based on our experience in conducting hundreds of FMV reviews of hospital-physician anesthesia arrangements, most of them lack an effective incentive structure to promote quality outcomes and operational efficiency of OR services.
With so much at stake, it is crucial for hospitals to regularly evaluate the effectiveness of the anesthesia team and ensure an appropriate support structure is in place. Contact us to learn more about how Coker can assist your organization in structuring an anesthesia subsidy arrangement aligned with best practice and within fair market value parameters.