Criteria for Excellence | Chapter 10: Residency program finances
Build the financial foundation needed to sustain a high-functioning residency program.
Understand family medicine residency finances
The mission, services, and income/expense model for primary care practices is in a state of rapid evolution. This can lead to confusion when income and costs change due to practice changes that would have occurred even if there were no academic program. Residency finances are best approached by separating the income and costs associated with the clinical operation from those associated with the academic operation. The test should be simple: How would each income and expense item change if there was no residency and the faculty physicians and other nonresident providers cared for all patients directly?
The program director and other residency leaders should fully understand the budgeting and accounting process for the program and actively participate in budget development and ongoing financial reviews. All income streams and expense savings to hospitals and other associated health care entities that would be lost if the residency were to cease functioning should be attributed as income to the residency. Only expenses that are dependent on the residency (i.e., would go away if the residency ceased operation) should appear as expenses on the residency budget.
Separate clinical and academic residency finances
The residency income and expenses should be fairly divided between the clinical and academic enterprise, such that the clinical enterprise is:
Financially comparable to other non-residency family medicine clinical centers within the larger parent health care organization (if any)
Financially comparable to other regional/national organizations that provide state-of-the-art family medicine care with and without residents
If the organization’s accounting practice (i.e., chart of accounts) does not clearly separate clinical from academic finances according to the above standard, then the program should have a relationship with the chief financial officer (CFO) and financial analysts that facilitates the development of a commonly agreed-upon analysis that provides this separation.
Fund the academic mission of the residency program
The academic enterprise of the residency should be funded to provide enough support staff and to support adequate time for the program director and other faculty to accomplish the academic mission of the residency. See Staffing for a detailed explanation). The program director should be funded to provide a minimum of 50% of his or her week for “residency academic/administrative time.” Similarly, each core physician faculty should be funded to provide a minimum of 25% of his or her week for “residency academic/administrative time,” defined as time spent educating residents apart from direct supervision, faculty academic endeavors (e.g., research, publication, presentations, state/regional/national residency organizational involvement), and local residency administration.
This is exclusive of time that faculty spend caring for patients and supervising the care residents provide for patients. The test for whether activities fall into this “residency academic/administrative time” category is whether those activities would occur if this was not a residency program. Therefore, this does not include administrative duties (e.g., that of clinic/hospital/nursing home medical director) and medical school teaching duties that would be expected to continue if there was no residency program.
Assess the residency program’s financial impact on stakeholders
The program should analyze its impact on the stakeholders and present that analysis to stakeholder leaders annually.
Address common residency program financial challenges
There are many common challenges in meeting the above goals:
- Residency leaders may not have a working relationship with hospitals’ and other stakeholders’ financial managers such that fair and complete operating statements (or analyses beyond the standard statements) are being used for residency financial analysis.
- Residency leaders may not fully understand the residency finances and/or may not have any direct participation in budget development and approval.
- Income to hospitals via the Medicare graduate medical education system, such as direct graduate medical education (DGME) and indirect medical education (IME), may not be fully attributed to the residency. Particularly hospitals may argue that the IME should not be attributed as residency income—even though IME would go away if there were no residencies and it can be shown (using the hospital’s own data system) that family medicine residents who help provide care in the hospital do NOT increase the cost of care. Capitol IME payments may also not be attributed to the residency.
- Medicaid GME income (if any) may not be fully attributed to the residency.
- Savings in expenses (e.g., fewer hospitalists hired by hospitals, reduced recruiting expenses) may not be considered in the direct financial model or in larger residency impact analyses.
- There may be no or poor apportionment of income and expenses to the academic side of the residency compared with the clinical side of the residency. The residency clinical operation may then be judged as losing money when the reality of the situation is that the parent organization(s) do not adequately support the academic enterprise.
- If the residency family medicine practice (FMP) provides disproportionate care for poor/uninsured/underinsured patients, then the finances must take into account how that serves the larger organization and its mission, and must ensure that it results in some income (e.g., disproportionate share hospital [DSH] payments) that should be partially attributed as income to the residency, or at least seen as offsetting residency costs as part of the residency impact analysis. It is important to note that the Patient Protection and Affordable Care Act (ACA) introduced significant changes to DSH payments, so these may no longer be a predictable form of revenue for hospitals.
Develop a residency program impact analysis
A “program impact analysis” or “larger financial model” should be developed for the program and include value provided to stakeholders by the residency beyond directly attributable costs and revenues, as discussed in the article, The Direct, Indirect, and Intangible Benefits of Graduate Medical Education Programs to Their Sponsoring Institutions and Communities. This analysis should be updated and reviewed with stakeholders annually.
Determine adequate financial support for a residency program
While the amount of financial support received by residencies can vary dramatically from program to program and locale to locale, a minimum amount of $150,000 per full-time equivalent (FTE) resident per year is considered “adequate” for a Program of Excellence, calculated as follows:
Add all net hospital support credited to the residency (DGME, IME, other support from DSH and/or margin).
Add in any direct state or sustaining local support (Medicaid GME, other state support).
Divide by total number of active FTE residents.
This amount should provide coverage for the following expenses:
- Resident salaries and benefits
- Faculty salaries and benefits for “academic/administrative time” (excludes patient care time and time spent directly supervising resident care in clinic or hospital for billed services). This should include non-core faculty and paid specialty faculty, if any.
- Residency support staff salaries and benefits (including dean’s tax or designated institutional official [DIO] office, if applicable)
- Continuing medication education (CME) for faculty and residents, including faculty development expense
- Administrative space lease, rent, or depreciation, plus all administrative supplies, utilities, taxes, and insurance
- Resident malpractice coverage. Faculty malpractice coverage expense should be considered a “clinical” expense
- Information technology (IT)-related expenses attributable to the academic function of the residency
- Library and educational software expenses
This document does not attempt to define the specific dollar amount that sets the standard for “excellence” due to the many variables associated with program financing.
Use financial modeling to separate academic and clinical costs
The following example* illustrates how revenues and expenses can be apportioned between academic and clinical work. An interactive version of this financial workbook is provided to all Residency Program Solutions (RPS) clients who opt for a detailed financial consultation, as well as to participants in the National Institute for Program Director Development (NIPDD).
*Workbook below developed by Lou Sanner, MD, MSPH, FAAFP, for Residency Program Solutions
