funds flow in the era of healthcare transformation

As healthcare reform creates incentives for greater alignment among industry players, organizations across the healthcare continuum will see their bottom lines increasingly tied to partnership success. Yet that success will prove elusive if organizations have not developed an effective approach to manage the flow of funds between partner organizations. To this end, a critical step in forming any partnership involving different types of healthcare organizations is to develop a plan-or guiding framework-for funds flow within the partnership.

Funds flow is a term regularly used in academic medicine in reference to remuneration to reflect the agreed-upon value within a transaction. With the proliferation of many different types of partnerships in health care, this term's meaning can be expanded to include any such remuneration between partnering organizations. Examples of such arrangements include:

* A clinical partnership between an academic medical center (AMC) and community hospital

* An accountable care model in which cost and quality incentive payments are shared among hospitals and physicians

* An arrangement between a health system and a stand-alone post-acute provider for clinical care coordination and allocation of bundled payments

* A health system partnership with a retailer, community-based not-for-profit organization, or governmental agency in support of population health management

* Two distinct medical centers that jointly develop a service line center of excellence, building upon the strengths of each (e.g., care model, facility capacity, physician sub-specialists, research, access to clinical trials)

As the various types of partnerships are developed, funds flow can become complex and opaque, underscoring the need to develop an agreed-upon approach to promote clarity in funds flow processes. By serving as a guiding framework for the integrated partnership, the funds flow plan also can help to define and organize individual agreements between the parties. It is important that these individual agreements-such as those for specific purchased services between the partners or shared resources among departments (e.g., staff, research support)-support the larger partnership agreement and do not overshadow it.

As shown in the exhibit above right, the plan should be fair, agile, transparent, and easily understandable to all stakeholders across each organization.

The Blueprint

Funds flow frameworks typically govern the flow of monies in the following types of arrangements that can define a partnership:

* Purchased services agreement. The parties agree on specific services each will sell to, and purchase from, the other.

* Discrete joint operating agreement. One party pays the other to manage a service, yet ownership of assets is unchanged.

* Joint investment/cost sharing. The parties share operating or capital costs for specific services from which they jointly operate or benefit.

* Shared margins for new services. The parties share margins for new, jointly developed services based on the initial investment percentages for those services.

* Virtual joint venture. Total enterprise margins are shared for all services based on a predetermined methodology.

The purpose of the funds flow framework is to govern funds flow wherever the partnership involves such agreements or arrangements. The framework serves asa navigator and reference point when circumstances necessitate revisiting partnership parameters, as described below. It should allow for growth and expansion while leveraging overall partnership goals and objectives to individual agreements. For instance, language may be included that allows for an expanded agreement with the advent of new clinical technologies, geographic expansion, health system aggregation, or changes in reimbursement models.

The exhibit below depicts a generalized example of a plan blueprint involving both an overall marginsharing agreement and supporting individual service agreements. Based on those agreements, the parties calculate a total dollar amount each owes the other, which is usually settled quarterly through a net transfer of funds or intercompany payables/ receivables.

Laying the Foundation

Designing the plan may be straightforward, but developing the specific funds flow parameters requires a focused effort, with great attention to detail. Management of operations, measurement of performance, and calculation of payments must all be addressed. Partnering organizations should create mechanisms for revising the parameters as the environment or individual partnership circumstances change, including the "trigger points" described below. New payment models will be introduced. New technologies will alter clinical best practices. Competitors will continue to target profitable services. Growth opportunities will sprout. In short, the plan should be sustainable to honor the original intent of the partnership without becoming subject to minutiae such as minor yearly fluctuations in accrued margins to each partner, timing of accruals, and sharing of administrative processes.

A clearly written funds flow framework will contain the following foundational elements, although circumstances often require that others be added.

These elements best support the plan when they are clear, specific, and in written form.

Governance. Specific delineation of authority to initiate, approve, and revise agreements is essential, although there might be good reasons to limit the number of individuals involved in this process. Ultimately, agreements should have an explicit governance structure with a clear link to each partner's organizational chart up to the executive leadership team.

Clinical support. Agreements between healthcare entities should support patient care and patient navigation through the care continuum. If a funds flow framework creates or incentivizes additional and unnecessary steps in the patient care protocol or layers of bureaucracy between the organization and the patient, it will put the organizations at a competitive disadvantage in the long run.

Market competitiveness. A partnership's impact suffers if the organizations, individually or collectively, fail to pay attention to market threats. Concern about "securing what is ours" within a partnership can cause organizations to focus inwardly at their own perilresulting, for example, in a failure to recognize organizational blind spots that hinder expansion into new geographies, or opportunities to bring additional partners into the mix or to address competitive threats.

Accounting basis. Prudent organizations periodically review the basis for their funds flow plans to ensure incentives continue to align with organizational goals and strategies. Accounting methodologies, major line items, and period-end adjustments should be transparent and easily understood by stakeholders whose individual performance is tied to overall partnership performance as measured by these figures.

Trigger points. As circumstances change, one party may feel that the agreement starts to favor the other. It is much easier to bring both parties back to the negotiation table if such a step is precipitated by a predetermined 'trigger point." Some examples include payment thresholds, service volumes, margin-sharing percentages, and splitting of surplus/deficits.

Each of these elements should be specifically addressed at the outset, but with the understanding that the plan is not static. Although partnerships are inherently built upon trust, change in organizational leadership is a fact of life and could have significant impacts on the future atmosphere and operations of a partnership. An enduring framework will live beyond its creators and allow for the evolution of the partnered organizations.

Framing the Margin-Sharing Calculation

Margin sharing is typically the crux of the funds flow framework. Margin can be shared between partners based on initial capital contributions, agreed-upon measurement of efforts, or a number of other methodologies. When each party maintains ownership of individual assets, margin sharing becomes more complicated; however, it is often a driver for mutually beneficial partnerships.

The illustration at left shows how two organizations may frame their overall margin sharing agreement. In this example, Partner 1 and Partner 2 each contribute a specific percentage of the initial investment (X,% and X2%, respectively). Through the course of operations, each accumulates revenue and expenses on its individually owned assets such that the resulting respective margins as a percentage of the total margin (e.g., Y,% and Y2%) differ from the initial investment percentages. Therefore, a margin settlement from Partner 1 to Partner 2 is made so that the effective margin of each partner is in line with the original investment percentages.

Of course, this relatively straightforward example can become more complicated over time, with parameters such as margin calculation methodology, margin settlement floors, and agreed-upon subsidization of certain programs. For this reason, the margin-sharing framework should be periodically reviewed to ensure it has not shifted away from the plan's foundational elements. Furthermore, the margin-sharing framework and any supplemental agreements (as explored in the sidebar, "Supporting the Partnership," on page 45) should be routinely revisited to ensure that they work together to support the overall partnership goals and objectives.

As Individual as Their Organizations

There is no one-size-fits-all approach to managing funds flow; each approach will reflect the uniqueness of the individual organizations and partnerships that adopt it. Over the next few years, new affiliations across industry segments will create new challenges and complexities, but with a focus on achieving mutual objectives, healthcare organizations can find true partnership success. *

AT A GLANCE

* To ensure success in a partnership agreement, healthcare organizations should create a funds flow framework.

* An effective funds flow framework will address not only the partner organizations' current challenges but also potential changes within the organizations.

* Funds flow frameworks are unique to the organizations and partnerships that use them.

Partnering to Fight Cancer

The Dana-Farber/Brigham and Women's Cancer Center (DF/BWCC) was created in 1999 as a joint venture of the Dana-Farber Cancer Institute and Brigham and Women's Hospital. DF/BWCC provides the latest and most innovative treatment available to adults challenged with cancer, with a vision to eradicate the disease. Each institution brings unique capabilities and focus to the partnership, necessitating a funds flow model that recognizes those unique contributions while promoting respective and joint success.

The partnership is characterized by a configuration in which the majority of outpatient care and research is provided at Dana-Farber, inpatient oncology care is provided at Brigham and Women's, and several diagnostic and treatment modalities are performed at both facilities. This configuration, plus increasing cancer specialization and expanding treatment options, led to more than 80 separate "one-off agreements since the initial partnership agreement was formed. This proliferation of individual agreements resulted in a financial funds flow model that was highly complex and increasingly difficult to manage.

In 2012, a group of DF/BWCC executives came together to develop a new funds flow plan that would simplify and clarify the financial relationships. The process included taking full advantage of the existing synergy and trust, appreciating the perspectives and objectives of each partner, reviewing the existing funds flow agreements from multiple angles, and understanding the potential financial impacts on each institution overtime.

This thorough analysis compelled the DF/BWCC executives to draft key criteria for a "future state" funds flow plan that reflects DF/BWCC's patient-centered approach, engenders trust, promotes transparency, improves agility, and provides incentives for growth. The group then developed several discrete options and modeled how each may impact specific cancer services (e.g., medical, surgical, radiation, stem cell transplantation, etc.) from both clinical and financial standpoints. This process allowed the group to review each potential plan in relation to the key criteria and make recommendations to present to each institution's most senior leadership.

The resulting funds flow plan allows for more streamlined accounting and a simplified process for approving, administering, and tracking new agreements. The plan continues to evolve to meet the needs of the partnership and each respective institution, while supporting the mission and growth agenda.

Supporting the Partnership

Even the most comprehensive funds flow framework will tend to founder if the agreements that define a partnership are not well-rounded. As healthcare delivery and the partnership models themselves become more complex, organizations often find themselves managing a growing patchwork of agreements that support the overall framework.

Examples of such agreements include:

* Medical directorships

* Physician time in clinic

* Staff sharing

* Use of owned medical technology

* Supply purchases

* Support functions (e.g., HR, IT, billing)

* Capital expenditure sharing

* Medical education funding

* Operating deficit stopgaps

A centralized, thorough inventory of individual agreements is encouraged to avoid misunderstandings, duplication of resources, and exposure to legal risks. The following are some key questions organizations might ask in developing such an inventory:

* Is there one place in the organization where all agreements are catalogued, and is it complete?

* Do the agreements promote patient-centered activities and patient satisfaction?

* Do the agreements work together strategically, or do they produce conflicting motivations and/or limit incentives for programmatic growth?

* Are they a source of confusion, frustration, or friction among staff within each respective organization?

* Have key factors (payment, clinical care models, physician/leadership departures) altered the implications of the agreements overtime?

The list of agreements often continues to grow with new clinical care protocols, technologies, reimbursement models, and reporting requirements. However, a well-defined plan might eliminate the need to create an individual agreement for every service shared or purchased between the parties. The plan can allow for a handful of general agreements, each with supporting schedules in appendices that list a group of such services.

There is no one - size-ñts-all approach to managing funds flow; each approach will reflect the uniqueness of the individual organizations and partnerships that adopt it.

Karen Bird is CFO and assistant treasurer for the DanaFarber Cancer Institute ([email protected]).

Michael Reney is CFO of Brigham and Women's Hospital and B&W Faulkner Hospital, and a member of HFM A's Massachusetts-Rhode Island chapter ([email protected]).

Ryan Ross is a senior director in FTI Consulting's Health Solutions ([email protected]).