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Funds flow in academic medical centers

Moving toward a transparent and equitable funding model

Academic medical centers (AMCs) face significant pressures that challenge them on two fronts: navigating the increasingly complex industry dynamics and managing often misaligned stakeholder groups to advance their core missions in research, education, and care delivery. As external funding sources evolve and new regulatory standards emerge, AMCs must allocate resources in the most efficient and effective manner to ensure that resource allocations are closely aligned with the strategic objectives of the enterprise. The development of an effective funds flow model can help achieve this objective.

“A revolution under way in health care is fundamentally changing how every academic medical center (AMC) operates …. Every aspect of AMCs will undergo transformation in the decades ahead: how care is delivered, how students and residents are educated and integrated into clinical care, how the research enterprise is organized and funded, and how the missions come together in a new and meaningful way.”

Source: Advancing the Academic Health System for the Future: A Report from the AAMC Deloitte Risk and Financial Advisory Panel on Health Care, Association of American Medical Colleges, 2014.

An industry in flux

The ongoing transformation of the US health care system is driving the need for AMCs to examine their funds flow and confirm that resource allocations align with cross-enterprise strategic objectives. Economic and industry challenges are placing pressure on AMCs funding needs across three missions:

  1. Clinical care: AMCs are being pressured by a convergence of forces that are impacting the cost of delivering care on one hand and declining reimbursement on the other. AMCs, therefore, will have to rethink funding priorities and find new ways of raising revenue.
  2. Research: As funding from the National Institutes of Health continues to be a topic of federal budget debates and uncertainty, competition for private donation is intensifying. Going forward, AMCs must grapple with these challenges while balancing the needs of the clinical enterprise and the mission to educate the future health care workforce.
  3. Education: The education mission is also evolving with increasing competition for funding. AMCs continue to face the challenge of complex relationships between medical schools and clinical delivery organizations as they strive to educate more and more clinicians. 

This is just a snapshot of some of the challenges AMCs now face. Many questions remain about future reimbursement models, the scale and scope of industry consolidation, and the technologies needed to deliver leading patient care and medical education. But one thing is clear: AMC funding will need to be more strategic, more transparent, and more nimble to effectively address these challenges.

Designing an effective funds flow model

Given the array of challenges facing today’s academic medical centers, it’s critical that every AMC establish a structured approach for funding the three missions of the enterprise. The approach for designing an effective funds flow model is composed of four stages:

  • Analyzing the cash inflows and outflows to understand how funding is utilized
  • Rationalizing and simplifying the existing flow of funds
  • Defining a transparent and rule-driven model
  • Laying the groundwork for sustainability through policy, process, governance, and controls

Understanding the numbers
An ideal starting point in the development of a funds flow model is to gain an understanding of the cash inflows and outflows at each entity within the academic medical center. The next step is to consolidate the data and begin analyzing the cash inflows and outflows. Because the education and research missions cannot sustain themselves through external funding sources, the objective of this analysis is to understand how these missions are funded.

Rationalization of existing funds flows
Prior to designing the actual funds flow model, the existing flow of funds from the clinical enterprise to the medical school should be further scrutinized. The objective of this review is to rationalize or eliminate funds transfers where possible, thereby simplifying the design requirements of the future state funding model. A typical opportunity for improvement lies in the contracts that are in place among the hospital, the practice plan, and the medical school.

Designing the model
After the existing flow of funds has been simplified as much as possible, it’s time to design the new funds flow model. An effective funds flow model consists of three significant components: funding categories, funding level definitions, and key performance indicators. Categories should be defined for various types of funding and should be as prescriptive as possible. The goal is to design a model that is transparent, equitable, and easily understood.

Achieving sustainability
In order to be effective, the funding amounts determined through the model should be integrated with the annual budgeting process so that funding needs are known as far in advance as possible and planned for accordingly.

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The bottom line

An AMC’s traditional methods of sustainability are becoming limited as the health care market evolves. Alternative payments, managed care models, preventative medicine, wellness initiatives, and a generation of cost-conscious consumers are disrupting many AMCs’ primary revenue channels. An understanding of the evolving marketplace is critical to securing future sustainability.

AMCs are at a point where industry pressures are forcing them to adapt in order to ensure long-term viability. Effective implementation of a funds flow model can promote discipline throughout an organization. This should better equip an AMC to face the current challenges while meeting the objectives of the enterprise as a whole.

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