How to Run a Successful Academic Practice Plan

Physicians are attracted to academic health science centers because of their interest in teaching and research. They derive income from the practice of medicine but typically struggle to find sources of remuneration to support their academic activities. A widely used mechanism for funding academic activities is the practice plan, a device that pools and then redistributes income, according to an agreement or contract. There are many approaches to practice plans, and the rules change as external forces come into play.^{1 - 5} We have managed a practice plan in a large academic department of medicine for more than 16 years. In this Commentary, we describe factors that have made it successful.

Toronto has 1 medical school and a number of affiliated hospitals. The University of Toronto has a department of medicine with a chair, and each teaching hospital has a department of medicine with a physician-in-chief and divisions (eg, cardiology, endocrinology). The practice plans are governed by the hospital departments. The university provides some guidelines and principles for practice plans but takes no “tax” from the hospital departments.

Our “hospital” department of medicine operates in the University Health Network (a merger of Toronto General, Toronto Western, and Princess Margaret Hospitals) and Mount Sinai Hospital. Each entity (University Health Network and Mount Sinai Hospital) has a physician-in-chief, and these 2 physicians jointly operate the department. All divisions (eg, cardiology, endocrinology) have 1 division head. The 253 full-time members (77 women and 176 men) belong to 1 practice plan with 1 set of rules of operation.

Because it is likely that full-time clinicians could have higher net incomes in community-based practice, it is reasonable to assume that our department members are strongly motivated to achieve a high standard of academic performance. Therefore, we emphasize that our mission is to deliver patient care, provide education, perform research, and make enough money to pay for these goals. Of the total 12-month gross income of approximately Can $90 million (US $86.7 million) in the academic year 2005-2006, 72% was derived from clinical practice, and academic activities stand or fall on this income. We are outspoken about billing and other revenue-generating activities being part of our core mission. Other sources of income include career investigator awards and salaries for university and hospital positions.

Bowman et al⁶ recently described the use of clinical income to support research at the hospital level. The essence of a practice plan is that at the level of a department of physicians, those who generate high clinical revenue accept that part of their generated revenues will be directed to colleagues who receive more income than they generate. This clearly requires a strong sense of participating in a worthy vision. Leadership from the physicians-in-chief, who are able to articulate the mission, earn the trust of the members of the group, and provide financial management is also a key ingredient.⁷

The Lesson: Determine the objectives of the plan and get “buy in” from its members.

Our practice plan rules are structured to reward success. Base support is provided from the income pool for teaching and research activities. Each member’s base support is determined by the job description and varies from 8% to 40% of the person’s total income. The amounts tend to be stable from year to year and are altered gradually if the job description changes. In addition, an academic merit bonus is awarded at year end following an in-depth evaluation that recognizes academic contribution in teaching or research for that year. Each physician's bonus varies from 5% to 20% of total income.

The relatively stable base support and the annually changing merit award are both designed to reward academic work. Economic performance is also rewarded. Each physician is set a target for revenue generation that reflects the job description (eg, higher targets for clinician teachers than for clinician scientists). The structure of the formula for this target is the same for all members of the practice plan. If a physician generates more revenue than the target (overage), that physician will receive 60% of that excess as additional revenue, with the remaining 40% going to support academic activity (ie, base and merit). A necessary corollary is that members who generate less revenue than their target (underage) receive less income, dollar for dollar.

Although the majority of revenue generation is derived from clinical service in our primarily fee-for-service environment, economic rewards are also provided for members who generate revenues from nonclinical sources, such as personal research awards or administrative stipends. As such, all income, not only clinical income, counts in the calculation. Economic success is rewarded rather than penalized. Academic base support is kept intact when members receive external research scholarships, or teaching stipends, thus encouraging members to apply for those payments.

A key management principle of our plan is that components of income (base, overage or underage, merit bonus) are independent of each other. A high-earning physician with an external salary award who publishes high-impact papers will have a very high income. Award-winning teachers, successful education leaders and coordinators, clinical investigators, and laboratory-based physician-scientists can all earn very competitive incomes. The busy practitioners with modest academic achievements will also be rewarded financially for their revenue generation.

The Lesson: Use financial incentives to reward all successful performance, clinical and academic.^{8 - 10}

Our provincial fee schedule provides a wide variety of financial rewards for clinical activity. As in many such schedules, procedures are reimbursed at a higher rate per unit of time than are cognitive activities. The well-known consequence is that cardiologists, nephrologists, and gastroenterologists may have much higher revenues from fees compared with neurologists, endocrinologists, and rheumatologists. Our practice plan makes no attempt to adjust the fee schedule. There are reasons for this schedule to be reformed but we do not accept that as a task of our plan. Attempts to mute the price signals sent by the fee schedule may well lead to loss of high-earning specialists, who play an important role in subsidizing academic activities. For this reason, although we might disagree with the fee schedule, we are mindful of its role in establishing market forces.

Another issue requiring recognition is that not all physicians in our plan are equal in terms of talent, energy, perseverance, and creativity. There are good teachers and great teachers, there are productive investigators and brilliant investigators, all are important and all have opportunity to receive rewards. We do have the financial flexibility to recruit and retain the most promising and most productive physicians who are crucial to our department.

Some members of the practice plan prefer to attend 6 months on an inpatient service, some prefer only 3 months. By having a financial incentive, we do not require division heads to demand clinical work from faculty without reward. This makes it much easier to manage a clinical service than if all members were paid a flat amount regardless of amount of work, an important by-product of our incentive-based system.

In conclusion, those physicians who perform at the top of their field are rewarded (with base support and merit awards) more than those who are in the middle of their field, and those who choose certain assignments will earn more than those who do not. The end result is a wide variation in personal income. We regard this variety as a crucial factor in our success.

The Lesson: Reward excellence and hard work and respect market forces.

Practice plans may vary in their structures. Our plan is not a partnership. The physicians-in-chief are the guardians of the practice plan. There is an elected economics committee with divisional representatives and the committee in turn elects a chair who is a member of our executive committee. The other members of the executive committee are the physicians-in-chief, the deputy physician-in-chief in charge of education, 2 division heads (1 from a division that is a net financial contributor to the group and 1 from a division that is not), and a senior hospital administrator (a former division head in our department).

Because the practice plan is essentially voluntary, it is crucial that the physicians-in-chief maintain the trust of our members. Strong business management methods are essential to generate this trust.² We are respectful of our economics committee, listen carefully to their advice, and discuss all important economic issues with our division heads to derive a consensus.

One of our first tasks was to write a “user's guide” that would provide explanations of the rules, examples, bar graphs of distributions, and details of our structure. An important section outlines mechanisms for appeal of the many decisions that are made. We are very public in that appeals have been rare in our tenure, but to date, all have been resolved according to the advice we received from the formal appeals process.

Our business office is lean (central overhead is <1.5% of total revenue) and we present overall financial performance at an annual meeting to the entire department. During the last 10 years, approximately 85% of total gross income is returned to the full-time members of the practice plan. Our senior business officer has worked with us from the beginning, attends the executive committee meetings, and has a great deal of contact with members, which instills confidence in her performance. We commissioned an external review of our business controls to ensure we were operating in a responsible fashion.

The Lesson: Develop explicit rules of operation, including a formal appeals process, and obtain external reviews of business processes.²

The department's financial operation is very conservative. By the nature of our relationship to the hospital, our practice plan is not permitted to run a deficit or be structured as an entity that can apply for loans. Each of the 253 full-time members receives his or her own revenue and expense statement every month.² Our executive committee reviews the financial key indicators every week, and the advisory economics committee reviews these every month.

Overage and merit payments are not guaranteed but depend on the overall economic performance of the plan. During the years, we have accumulated a self-insurance amount, equivalent to approximately 2 months' expenses. We have experienced fires, strikes, and a severe acute respiratory syndrome outbreak that reduced hospital activities for weeks and have never missed a single payment to our physicians or other staff. Trust and reliability are critical to the preservation of the practice plan.

The Lesson: Operate in a fiscally conservative fashion.

It is crucial that our colleagues in the hospital and university leadership understand and fully support our practice plan. We have a series of formal agreements, legal opinions, and external reviews that we are careful to present to the hospitals' chief executive officer, the chair of the university department, and the dean. The plan is critical to the successful academic performance of the hospital and the university. We have been told the plan is very much admired and appreciated in those spheres.

The Lesson: Line up influential allies who view your success as their success.

We perceive weaknesses as well as strengths in our plan. The flexibility of our approach, and the resulting income variation, produces tensions that could be resolved by uniform income distribution. Our conservative style of management leads to delay in distribution of some income. Leadership-dependent plans may not be sustainable following leadership change. These issues are frequently discussed and, as a result, the plan has evolved over the years.

The Lesson: Consider what arrangements work best in your environment and do not be afraid to change.

We define our success by measuring our performance against our vision. We deliver patient care of high quality (admittedly difficult to measure), we provide education at several levels, we perform well in research, and we earn enough money to pay for these goals (principally measured by recruitment and retention of the faculty we want in the existing market forces). We have been successful in recruiting more than 100 full-time faculty in the last 10 years and have had very few physicians leave our practice plan, except for leadership positions elsewhere.

Creating and preserving a practice plan that supports our vision, that rewards success wherever we find it, that recognizes variety and diversity, that engenders trust, that operates conservatively and reliably, and that has the respect and support of our hospital and university have been instrumental in achieving this success.