Reassessing Value in Hospital-Based Subsidy Arrangements

Evaluate and document the value of your service provider.

The delivery of cost-effective, high-quality healthcare designed around an enhanced patient experience and care continuity are objectives of most health systems; thus, they target specific strategies to optimize health system performance.

For hospital-based professional clinical services (e.g., emergency medicine, hospital medicine, critical care, anesthesiology, behavioral health), hospitals typically secure physicians and advanced practice providers through direct employment or partnering with local, regional, or national physician practices that specialize in the services.

From an economic standpoint, groups are increasingly dependent on hospital support to ensure market-based wages needed to attract and retain high-quality providers. Based on our extensive experience working with hundreds of hospitals across the U.S., it is common for hospitals to provide a financial subsidy for their hospital-based professional service arrangements. Services with the largest provider footprint, such as hospital medicine and anesthesia, typically require higher levels of support; other services, such as emergency medicine, need less (or sometimes no) financial support.

Factors that contribute to a group's need for hospital financial support include:

  • Comprehensive provider coverage requirements by the hospital
  • Underutilized capacity
  • The shift of services to the ambulatory setting
  • 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

To ensure that the hospital and its stakeholders are receiving the best value, we recommend hospitals periodically review their professional services relationships to confirm that terms for the services are being met and the providers are still well suited for the hospital and its service lines. A formal process to evaluate professional service arrangements against other alternatives in the market is a structured Request for Proposal ("RFP") process.

In our experience, hospitals typically move to employ a formal RFP process in response to one or more underlying causes, including inadequate service levels of the current group, economic considerations and subsidy levels, leadership challenges within the current group, or the desire to increase accountability and expectations regarding overall services.

Even when a hospital is satisfied with its current group, formalizing an assessment via an RFP process before an agreement renewal will assist the hospital in ensuring and documenting the value proposition of its current group. It will also offer the hospital a stronger negotiating position relative to aligning the services with evolving best practices in critical areas such as service mix, quality performance and outcome expectations, service coverage model, provider staffing structure and mix, revenue cycle performance, overhead costs, and subsidy structure.

As a means of overcoming clinical and system inertia, better performing hospitals commonly evaluate the effectiveness of their professional service arrangements for alignment of services and value.

Next Steps

  • Read more about financial sustainability in a subsidized world
  • Learn more about our approach
  • Contact us to learn more about how Coker can assist your organization in conducting and evaluating an RFP process, aligning services with best practices, and ensuring an appropriate support structure is within fair market value parameters.

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