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Financial Planning
for a Hospitalist Program
Chirayu J. Shah*, Tuhin Pankaj†and Surinder Kaul
‡
Key Pearls
• Clearly state the primary purpose of the program (education, hospital
efficiency)
• Define your Hospitalist model (shift work, night float, etc.)?
• Know your payer-mix
• Define the support services for your program (IT, Physician
Assistants, Nurse Practioners)
• Will you need hospital support and how much?
Introduction
Healthcare systems in the US are complex adaptive systems.¹ The healthcare industry in the US is growing at an alarming rate. As per CMS
annual report of January, 2011,² US healthcare spending decelerated in
2009, increasing 4.0% as compared with 4.7% in 2008. The total health
expenditures reached $2.5 trillion, which translates to $8,086 per person
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*Internal Medicine Residency Program, Baylor College of Medicine, Houston, TX, USA.
†
Office of the President, Baylor College of Medicine, Houston, TX, USA.
‡
Section of General Internal Medicine Director, Hospitalist Program, Baylor College of
Medicine, Houston, TX, USA.
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Chapter
or 17.6% of the nation’s gross domestic product ( GDP ), the largest oneyear increase in the last 50 years. About 21% ($506 billion) of healthcare
spending is accounted for by physicians. The breakup of physician share —
private insurance accounted for 240 billion; public funding (Medicare —
113 billion and Medicaid — 40 billion and others — 35 billion), $188
billion; out of pocket $50 billion; and other private fund, $28 billion.
There are many causes that contribute to the escalation of healthcare
spending and the major cause can be attributed to the technological
advancement in diagnostics and therapeutics and availability of new
treatment options which are more effective and expensive as well. Better
care has resulted in prolonged survival with secondary increase in complication rates which add to the consumption of healthcare resources.
Compounding these is an ageing population with increased prevalence of
multiple chronic diseases such as diabetes, hypertension, stroke,
ischemic heart disease, dementia and many other diseases.
Hospitalist Movement a Way Out to Provide Cost Effective Treatment
The major drivers of the development of hospital medicine are: care fragmentation arising from specialization; dependence on technology; rise in
chronic complex diseases due to ageing populations; and escalation of
healthcare costs. The significant changes in medical practice also contributed to its growth. The changes that have occurred are:
1. Limitations on house staff duty hours which has resulted in overall
reduction of inpatient coverage by 10–25%.
2. Most primary care physicians involved in traditional practice in inpatient and outpatient settings are confining themselves to exclusive
outpatient practice, and require hospitals to make arrangements to
provide comprehensive inpatient care to their patients.
Presently in nearly 70% of US hospitals, hospitalist programs are
becoming an increasingly important mode of care. Since 1996, the
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C. J. Shah, T. Pankaj and S. Kaul
specialty has grown to more than 31,000 practicing hospitalists today,
according to the Society of Hospital Medicine.
Multiple studies, prospective and retrospective, have supported the
notion that the use of hospitalists lowered both length of hospital stay and
overall cost of inpatient care. Hospitalist programs have also gained favor
amongst the nursing and other ancillary staff of the hospital in view of the
quick availability of physicians when needed. Preliminary studies have
revealed that hospitals with hospitalist programs have done well, with
cost reduction owing to decreasing direct variable cost (DVC);
increased revenue generation resulting from decreasing average length
of stay ( LOS ) which increases patient flow and limit ED diversions; and
cost avoidance by adhering to the hospital policies to decrease medical–
legal liability cases and decrease in re-admission rates.
Business Plan for a Hospitalist Program
Establishing a hospitalist program requires a viable business plan.
Initial Phase of Financial Planning: This is perhaps the most important
phase which will lead to overall success of the program and should
include the following considerations:
a) A thorough evaluation of the purpose of the program — is the purpose
to increase the volume of patients (as in private hospitals), to manage
ER throughput, (as in academic hospitals), etc.
b) The mix of the hospital — ratio of patients who are having private
insurance, Medicare, Medicaid, and uninsured.
c) Structure of the hospital — whether an academic hospital, private
hospital, community hospital, rural hospital.
d) How much a hospital is going to support the program.
e) An estimate of how busy the hospital is by way of total annual
admissions and what proportion of admissions the hospital needs
help with.
f) Which model of hospitalist — coverage 365/24 days, nights included
or weekdays only.
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Financial Planning for a Hospitalist Program
g) Use of allied health workers (Nurse Practioners, Physician Assistants
or nurses).
h) Availability of hospitalists and other allied health providers in the
community.
Developing a Business Plan: Hospital administrators will closely scrutinize the business plan to integrate a new hospitalist program. As further
detailed below, the value of a hospitalist program to the overall patient
flow of the hospital needs to be highlighted.
Staffing Structure of the Program
Staffing needs vary widely depending on the hospitalist model implemented.
Most hospitalist groups utilize three groups of employees: physicians, clinical support staff (physician assistants, nurse practitioners, case managers,
etc.), and nonclinical support staff (secretary, billing and collections).
Another option would be to use a third-party company to offload some of the
nonclinical support staff activities, such as billing and collections. An example of a staffing model is shown below in Table 1.
Cost Projection
Costs vary widely across the country, so some research into the local environment will be necessary. An example of expenses is shown below in
Tables 2 and 3.
Revenue Generation
Revenue generation is directly related to the compensation for professional services provided. Identical physician services are compensated at
different rates depending on the payer. Understanding the payer mix for
the hospitalized patients will be essential for accurate revenue estimates.
This information is not publicly available, but hospitals generally track
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C. J. Shah, T. Pankaj and S. Kaul
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Financial Planning for a Hospitalist Program
Table 2. Staff Expenses (Annual)
4 FTE Hospitalists 4 × $220,000 = $880,000
1 FTE Night Hospitalist 1 × $350,000 = $350,000
2 Clinical staff 2 × $65,000 = $130,000
2 Nonclinical Staff 2 × $45,000 = $90,000
Staff Benefits (estimated 15%) 15% of $1,450,000 = $217,500
TOTAL STAFF EXPENSES $1,667,500
Table 3. Operational Expenses (Annual)
Information Technology (pagers, computer $20,000
hardware, Internet, phones, etc.)
Centralized pager/call answering service $10,000
for group
Office space $20,000
Recruitment/Advertising $5,000
Legal Consulting Fees $10,000
Misc. Other Expenses $5,000
TOTAL OPERATIONAL EXPENSES $70,000
Table 1. Hospitalist Group Staffing Model
Physicians
4 FTE Physicians Responsibilities include admitting new patients from the ER and
from PCPs, daily patient care, and inpatient consultation.
Shifts are 12 hr 7 am–7 pm on a 7 days on/7 days off schedule.
1 FTE Night Responsibilities include cross coverage of acute patient care
Hospitalist issues between 7 pm–7am, admitting new patients
from the ER.
Clinical Support Staff
2 Physician Responsibilities include daily rounding on the established
Assistants inpatients. Schedule 7 am–5 pm Monday through Friday.
Nonclinical Support Staff
1 Secretary Responsibilities include coordinating of administrative
activities (providing support to physicians, communications
by fax, phone, email).
1 Business Responsibilities include coordinating billing/collections
Operations process and office management.
this data. Based on recent hospitalist productivity surveys in 2011, the
median work relative value unit (wRVU) for each FTE hospitalist is
approximately 4200 wRVU/year. In addition to work RVU, Medicare
compensation takes into account practice expense RVU, professional liability insurance RVU, and adjustments based on the geographical practice
cost index. Each piece of this formula is available on the CMS website. The
sum of the work, practice expense, and professional liability insurance RVU
forms the total RVU. This number is then multiplied by the Conversion
Factor set by Congress. Fee schedule calculators are available on the
Internet to assist with these calculations.
In our example, each FTE hospitalist generates 5480 total RVUs
(4200 wRVU + 1080 PE-RVU + 200 PLI-RVU). The 2011 Medicare conversion factor is set at $33.9764. FTE Hospitalist Revenue = 5480 total
RVUs × $33.9764 = $186,190. For the 5 FTE Hospitalists in our example,
the total revenue would be estimated at $930,953.
Revenue generation continues to evolve with a movement towards
increased payments based on achieving quality measures. This “pay for
performance” model is already impacting primary care physician and
hospital facility compensations.
Based on the example presented here, the costs exceed the revenue generation. This occurs for 90% of hospitalist groups across the nation.
Additional funding sources need to be identified, and partnering with the hospital becomes very important. On average, each hospitalist receives $135,000
per year of support from the hospital. The business plan should emphasize
the value added to the hospital by partnering with a hospitalist group.
Employing a hospitalist group can provide the hospital with significant
benefits that cannot directly be included in the cost/revenue analysis. These
include decreased patient length of stay (which corresponds to better hospital payments); reduced resource utilization; and increased throughput including reducing ER congestion and earlier discharges. In addition, hospitalists
often lead quality and patient safety initiatives which become more important
as health agencies increasingly scrutinize core clinical quality measures.
These measures are now being made public in efforts to provide customers
objective information to possibly attract them to a better scoring hospital.
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C. J. Shah, T. Pankaj and S. Kaul
Business Plan Outline and Factors
Developing a Business Plan: Hospital administrators will closely scrutinize the business plan to integrate a new hospitalist program. As further
detailed below, the value of a hospitalist program should be outlined using
the following structure:
• Expected volumes — The analysis around volume projections from
the Emergency Department, private physician referrals, and man-
aged care referrals will be critical in driving the economics relating
to the hospitalists programs viability and profitability. Two major
categories that should be identified are payer mix and sources of
referrals.
• Revenue Projections — Once volume projections have been estab-
lished, revenue projections can be calculated using the same volume
projections along with payer mix and reimbursement rates specific to
levels of care and/or procedures. There are available resources, such
as your local Medicare carrier and also private insurance carriers, to
tap into and to acquire your local area’s typical reimbursement rates.
In addition, you need to determine how the mix of capitation and fee-
for-service in your area will affect the revenue analysis.
• Staffing Matrix — The first step in determining your staffing
ratios is to make a decision on whether the hospitalist program will
be a 24/7 program or will there only be a need for rounding on
weekdays, weekends, days or nights? Once this is determined, a
staffing grid which outlines daytime and nighttime coverage should
be developed with costs associated with staffing. One final step in
this process is to determine sources of staffing, i.e. will there be
significant recruitment from the community to staff the hospitalist
positions or will there be an internal network developed. Expenses
associated with recruitment and development have also to be
considered.
• Expense Projections — When identifying total expenses to operate
the hospitalist group, it is critical to include all expenses sources so
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Financial Planning for a Hospitalist Program
that a calculated estimate can be established. Below are some of the
regular ongoing expenses that should be considered:
ο Hospitalist Salary
ο Hospitalist Benefits
ο Administrative Support
ο Clinical Support
ο SSO (Staff, Student, Other)
ο Equipment
ο Marketing / Promotional
ο Malpractice
• Projected First Year Profit / Loss Statement — A profit / loss state-
ment will bring the aforementioned categories together for a full view
of the program to better understand the profitability of the practice. It
is important for the key stakeholders and investors to know, from a
projections standpoint, how long it will take for the practice to
breakeven and in turn begin returning a profit (ROI).
References
1. State of Hospital Medicine: 2010 Report Based on 2009 Data. Society
of Hospital Medicine and Medical Group Management Association,
September 2010.
2. Centers for Medicare and Medicaid Services: Physician Fee
Schedule Overview. (Accessed August 1, 2011 at https://www.cms.gov/
physicianfeesched/)
3. Establishing a Hospitalist Program: Society of Hospital Medicine.
(Accessed August 1, 2011 at http://www.hospitalmedicine.org/AM/
Template.cfm?Section=Practice_Resources&Template=/CM/HTML
Display.cfm&ContentID=4505)
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C. J. Shah, T. Pankaj and S. Kaul
Metrics and Dashboards
Jeffrey I. Farber*
Key Pearls
• Understanding key metrics is critical to a hospitalist program’s
success.
• Physician dashboards are powerful tools to manage a program, drive
improvements, and demonstrate effectiveness.
• Increasing financial pressures require greater attention to clinical doc-
umentation and a deeper understanding of the revenue cycle, coding,
billing, and publicly-reported quality data.
• Medical necessity drives utilization management and is the backbone
for audits and payment denials.
• Hospitalists should leverage their unique skill sets to assume leader-
ship positions and drive care quality improvements.
Metrics
Hospital Medicine has a vital role to play in healthcare quality and successful hospitalist programs need to have a firm understanding of healthcare finances and hospital reimbursement to best leverage their positions
with administration and effect improvements in value. Hospitalists must
appreciate the commonly used metrics in hospital operations, including
volume and growth, length of stay (LOS), avoidable readmissions, patient
satisfaction, and clinical documentation.
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Chapter
* Mount Sinai School of Medicine, New York, NY, USA.