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Alignment Update: Funds Flow Redux

March 28, 2023

To the YSM Community:

During our recent Yale School of Medicine (YSM) department town halls, we have been discussing the progress on our journey to closer alignment between YSM and Yale New Haven Health System (YNHHS).

In January we launched a newly aligned physician enterprise, under the leadership of Chief Physician Executive Peg McGovern, MD, PhD, that will allow us to provide better access for patients, ensure consistency of the highest quality care across YNHHS, and reduce duplication and inefficiencies that not only frustrate our patients but also increase frustration and administrative burden for our faculty and staff.

A growing group across the school and health system is engaged in joint strategic planning focused on five pillars: leading-edge clinical and translational research; leading system-wide service lines and destination programs; unparalleled access, patient experience and care network; exceptional value; and continuous learning and innovation. As the plan takes shape, there will be opportunity for input and refinement.

We have also been working diligently to revise the funds flow model between YNHHS and YSM, to make it transparent and formulaic, and to align incentives with our aspiration to be a premier academic health center. We have discussed the principles of funds flow at a high level in town halls. Because rationalizing funds flow is critical to the long-term success of YSM and YNHHS, and because not everyone had the opportunity to attend a departmental town hall, I wanted to further review here the rationale, objectives, and outcomes of this work.

What drives clinical funds flow?

A substantial proportion of funds flowing from academic hospitals to their affiliated medical schools covers structural deficits in salaries related to how payments are made for clinical services by commercial and government payors. Payors remit professional fees to clinicians, e.g., our faculty practice plan, Yale Medicine (YM), but technical revenues for services in our system primarily flow to the YNHHS hospitals. Professional fees often do not cover clinician salaries, and so, academic hospital systems fund the structural gaps. Because it often takes time for new physicians to build a practice, academic hospital systems also support the “startup gap.”

An additional portion of funds from academic hospitals is used to purchase services from the affiliated school, such as the time of medical directors, call coverage for certain services, or the development and leadership of training programs in graduate medical education.

Lastly, academic hospitals understand that what differentiates them from community hospitals or large for-profit hospital systems is the ability to attract exceptional trainees and faculty and to offer access to innovative therapies. Support for the academic mission of the school serves as an investment in this differentiating edge.

Why should we change our funds flow model?

In short, because the current system is broken. Today, funds flow agreements between YNHHS and YSM are negotiated as a series of one-off Program Development and Deficit Offset (PDDO) agreements between each clinical department and individual YNHHS hospitals. We have hundreds of agreements, each one different from the next, ranging in size from support for clinical programs to support for individual physicians. Department chairs, YM leaders, and YNHHS hospital leaders spend considerable time and energy negotiating each agreement, and negotiations can end in paralysis. Decisions about hiring and program growth may be based on the prowess of the individual negotiators or on relationships rather than on an overarching strategic plan, resulting in inappropriate investments in some areas and insufficient investments in others of strategic importance.

In addition, our current agreements often do not distinguish between deficits due to structural gaps (the gap between professional fee revenues and salaries for certain specialties) and deficits due to inefficiencies. They do not align incentives between YSM and YNNHS.

What are the components of the new funds flow model?

In the new model, clinical departments will be paid for clinical work based on either a “dollar per Relative Value Unit (RVU)” model or a staffing model. An RVU, developed by the Centers for Medicare and Medicaid Services, is the generally accepted measure of the value for clinical services or procedures, and is commonly benchmarked by clinical specialty. In the “dollar per RVU” model, the payment rate will be based on well-established national benchmarks for faculty salaries divided by benchmarks for median RVUs, multiplied by the number of RVUs the clinicians in a department generate. The new model will provide support for structural deficits, departmental overhead such as staffing costs, and deficits related to start-up in a formulaic way based on well-defined national benchmarks. For RVU-reimbursed departments (e.g., Surgery, Medicine, Pediatrics), the payment to departments for any structural deficit will be calculated based on a blended Medical Group Management Association/Association of American Medical Colleges (MGMA/AAMC) benchmark for salary and the University Health Consortium (UHC)/Vizient academic benchmark for wRVU per clinician. For “hospital-based” departments (e.g., Anesthesiology, Emergency Medicine), the formula will be based on staffing requirements and national benchmarks for hours or shifts per clinician. Departments will be able to garner additional funds through incentives for achieving pre-determined goals. Purchased services such as medical directorships, support for graduate medical education, and call coverage will still flow directly from YNHHS to departments.

Funds related to clinical operational expenses such as the cost of staffing will flow directly to Yale Medicine Administration from YNHHS.

Support for academic programs, currently funded through a “dean’s tax,” will be funded as a percentage of YNHHS revenue directly to YSM. The percentage has been calculated based on current enterprise revenue to be equivalent to the current amount funded through tax but will be expected to grow as revenues grow, enabling greater investments by the school in the academic enterprise. As YNHHS returns to a positive margin, departments and the school will also receive a percentage of positive net operating income.

What does the new funds flow model mean for YSM and our academic mission?

Revenues from the clinical mission support our research and educational missions.

The type of funds flow model described here has been adopted by many peer research-intensive institutions, such as University of California, San Francisco, University of Pennsylvania, Stanford, and Washington University. The net effect of implementation of this type of formulaic approach has consistently increased resources for all academic missions. (Kennedy, D., et al, (2007). Aligning Academic and Clinical Missions Through an Integrated Funds-Flow Allocation Process. Academic Medicine 82(12):p 1172-1177. and interviews.)

What does the new funds flow model mean for clinical departments?

During the last several months, the finance teams of YSM and YNHHS, together with our consultant Chartis, have been modeling the impact of the changes to funds flow department by department and refining the formula. The purpose of that analysis is to ensure that the new clinical funds flow model is as close as possible to revenue-neutral for all parties. The expectation, based on the experience of other institutions, is that the new model will have a favorable financial impact for clinical departments, the school, and YNHHS. The new model will require clinical and operational leaders to eliminate barriers to efficiency in the clinic and to ensure that compensation and the distribution of revenues within departments support the academic mission.

We are not considering changes to the flow of funds related to research funding or general allocation (GA) at this time.

What does the new funds flow model mean for faculty in clinical departments?

The funds flow model encompasses the flow of money from YNHHS to YSM, YM, and the clinical departments. It does not dictate the compensation model within departments or, therefore, compensation for individual faculty. Departmental plans will continue to determine a faculty member’s compensation based on that individual’s mix of responsibilities and performance. Departmental compensation plans are expected to adhere to the guidelines established by YSM and ratified by the Executive Group of the school.

Over time, aligned incentives to improve efficiency in the clinic, together with initiatives to reduce duplication through the aligned physician enterprise, will improve the clinical experience of our faculty and staff as well as our patients.

What does the new funds flow model mean for basic science departments and faculty?

A change in the clinical funds flow model has no direct impact on the basic science departments. Clinical revenues provide academic program support, and ensuring the alignment of incentives between YSM and YNHHS will ensure the stability of such support.

What are the remaining steps to implementation?

As we complete individual department modeling and refinement of clinical funds flow, we plan to “go live” on July 1, 2023. Together, leaders in YSM and YNHHS will follow a set of common metrics of clinical, financial, research, and educational performance. For the first year, YNHHS and YM will guarantee departmental clinical funds at the level that the department would have received under the old funds flow model. Again, we expect that the revenue to most departments, YSM, and YNHHS will increase under the new model. We also realize that there may be unanticipated consequences for some areas of YSM or YNHHS. We are committed to iterating the model to address such findings.

Change, particularly change that involves funding, provokes anxiety. The revision of funds flow is critical to the financial health of YSM and YNNHS. It is also critical to realizing the missions of YSM. Together with the creation of the aligned physician enterprise, rationalizing and simplifying funds flow will promote efforts to improve the experience of our faculty and patients. The work will require courage, trust, and communication. We will do it together.


Nancy J. Brown, MD
Jean and David W. Wallace Dean of Medicine
C.N.H. Long Professor of Internal Medicine