Making the Most of Your Hospital-Based Subsidy Arrangements
July 28, 2025
Discover how to transform rising provider subsidy costs into performance-based partnerships that drive measurable results.
Performance Transformation
The Subsidy Dilemma
As staffing costs continue to climb across hospital-based specialties, many healthcare organizations are finding themselves burdened by escalating subsidy expenses. Whether in anesthesiology, hospital medicine, emergency medicine, or radiology, rising compensation trends paired with an aging workforce and provider shortages are pressuring hospitals to rethink how they approach professional services arrangements (PSAs). These subsidy arrangements aren't just line items on a budget—they are investments that should yield measurable returns. The question becomes: Are you maximizing that return?
Why Model Matters: Structuring for Success
The structure of your PSA is foundational to your success. Models range from traditional professional services agreements to direct employment and co-management arrangements. Each model offers distinct advantages and limitations depending on your organization's goals, partner dynamics, and service line requirements.
Hospitals usually subsidize independent provider groups to bridge the financial gap between professional fee collections and the full cost of maintaining staffing levels. These subsidies are necessary, but a strong operational and strategic rationale must justify them. A well-structured model reflects not just service delivery needs but also ensures risk-sharing, cultural alignment, and long-term viability for both parties.
Defining Value in the PSA
Once the structure is in place, defining and tracking value becomes paramount. Subsidy arrangements should be designed as performance-based investments. Embedding key performance indicators (KPIs) into the PSA ensures both accountability and the opportunity to reward excellence.
Common KPI categories include:
- Clinical quality outcomes
- Operational efficiency (e.g., throughput, patient access)
- Financial performance (e.g., improved collections, RCM metrics)
- Patient satisfaction and engagement
A scorecard-based incentive approach allows for partial payouts based on performance achievement, further aligning provider behavior with organizational goals.
Governance: The Missing Link
Even with the proper structure and defined metrics, governance brings the arrangement to life. A strong governance framework fosters transparency, collaboration, and continuous improvement.
Effective governance includes:
- Regular joint operating committee meetings
- Use of shared dashboards to monitor KPIs
- Predefined processes for addressing underperformance
Balanced scorecards within governance can help ensure the subsidy remains tied to tangible results and provide a roadmap for evolving the program over time.
Managing Risk and Recognizing Tipping Points
There may come a point when a subsidy-based model no longer effectively serves the organization. This "tipping point" is often economic in nature: the cost of the subsidy may outweigh the strategic benefit. In such cases, hospitals may explore transitioning to an employment model—if they have the infrastructure and appetite to do so.
Key indicators of reaching a tipping point:
- Persistent underperformance despite incentives
- Unsustainable staffing expenses
- Inability to retain top talent without deeper integration
Leveraging Technology and Data
Technology and data analytics are vital tools for enhancing clinical and operational performance. Real-time decision support systems, intelligent scheduling platforms, and improved documentation workflows can all play a role in:
- Reducing avoidable costs
- Improving provider efficiency
- Enhancing care coordination
Investing in these tools is another way to protect and enhance the ROI of your subsidy arrangements.
Case in Point: Real Examples of ROI
- Case 1: A multi-state health system identified $50M in combined value through anesthesia-related savings and downstream revenue increases from improved documentation by hospitalists.
- Case 2: A coastal hospital transitioned from a PSA to an employed model, optimizing staffing, negotiating better payer contracts, and placing more than 35 anesthesia providers in under six months.
- Case 3: A regional system eliminated a $1M subsidy and generated a $750K margin by aligning staffing and RCM performance with updated demand and capacity data.
Compliance Still Reigns Supreme
No matter the model or incentive structure, all arrangements must comply with federal fraud and abuse laws, including Stark Law and the Anti-Kickback Statute. This means:
- Independent third-party FMV assessments should be part of any compensation review.
- Arrangements must be commercially reasonable, even in the absence of referrals.
Failing to meet these standards invites legal risk and undermines the integrity of your hospital’s strategic initiatives.
What to Do Next
📘 Read our white paper on aligning hospital-based providers to explore deeper insights
💼 Explore our Performance Improvement solutions to support your hospital-based arrangements
📅 Talk to a Coker consultant about designing performance-based PSAs that reduce costs and improve outcomes
