Anesthesia Subsidy Requests: What They Are and How to Prepare for Them

As hospitals, surgery centers and surgeons struggle with a Medicare payment system that reimburses at rates that are often barely high enough to break even on procedures, let alone make a profit, it is easy to overlook how reimbursement declines — along with rising costs and increases in the number of Medicare patients — is affecting another critical member of the surgery team: Anesthesiologists.

For many years, anesthesiologists were fiscally solvent, providing services at hospitals and later ASCs. However, over the last decade, anesthesiologists and their groups have seen a steep decline in revenue as Medicare and private payors tightened reimbursement rates, while at the same time, higher reimbursing procedures were leaving the hospitals for ASCs This revenue decline has occurred at the same time that groups have seen the doubling of starting salaries for certified registered nurse anesthetists and newly graduated anesthesiologists, says Thomas Wherry, MD, practicing anesthesiologist and principal of Total Anesthesia Solutions, a comprehensive anesthesia consulting and management firm.

As a result of decreasing profits and increasing costs, anesthesiologists have sought — and in many cases received — subsidies from hospitals for their services, with many of these subsidies now surpassing $1 million annually, says Steve O'Neill, principal of Total Anesthesia Solutions.

To help you prepare for the day when your anesthesia group approaches you to talk about a subsidy or subsidy increase, it is important to understand the history of anesthesia subsidies and why it may soon affect your hospital. It is also valuable to understand the 10 steps you can take to prepare for and respond to your anesthesia provider requesting a subsidy or subsidy increase.

Factors that led to anesthesia subsidies
Revenue decline. In the late 80s and early 90s, anesthesia reimbursement took a sizeable hit — more than a 40 percent reduction — when Medicare developed the resource-based relative value (RBRV) units system, says Dr. Wherry. Despite the cut, anesthesia groups weren't initially affected as providers were busy working at hospitals and getting paid well with a low percentage of Medicare patients.

Then the Medicare population started to grow, and groups started to feel the pinch brought on by the RBRV system. It was also around this time that private payors started growing, becoming more aggressive by paying anesthesia providers less per unit, according to Dr. Wherry. This decline in reimbursement came on the heels of rapid surgery center growth. Surgeons, in mass quantities, began taking some of the better paying cases from the hospitals. This left the hospital-based groups with an even worse situation: poor payor mix (high Medicare and Medicaid) and empty rooms.

Manpower shortage and increase in costs. To counteract this decline in reimbursement, groups started hiring less, and the providers who were already part of the groups took on more work to maintain their income. This created a perceived glut of anesthesia providers. Then, in 1994, the American Society of Anesthesiologists commissioned a report by Abt Associates, one of the largest for-profit government and business research and consulting firms in the United States, on the future employment needs in the field of anesthesiology. The report concluded that there would be a future oversupply of anesthesiologists and led to a near 40 percent drop in graduating residents.

At the same time, large-scale health reform was on Pres. Clinton's administration's agenda. Thus by 2000, there was a severe shortage of providers. To make matters worse, the ASC movement grew exponentially during this time. This further added to the shortage because the same number of surgeries performed was spread over more operating rooms. With better pay and hours, anesthesiologists were naturally drawn from the hospital setting to ASCs. Thus, it was becoming harder and harder to retain providers at the hospital without offering significant boosts in compensation. According to Dr. Wherry, this marked the beginning of the end for financially solvent hospital-based anesthesia providers.

Beginning of subsidies
Around 2000, anesthesia providers started approaching hospitals for subsidies on top of their contractual arrangements, particularly in small- to moderate-sized markets where there was less anesthesia competition and fewer procedures, according to Mr. O'Neill.

"The reason why this is such a major challenge to the smaller markets in the country is the fact that most of the bread and butter surgery that's going to the ASCs is coming directly out of the hospital," he says. "Anesthesiologists are being asked to cover more rooms and incur more costs while serving the same amount of cases and the same individuals that they served a year ago prior in the main hospital."

According to Mr. O'Neill, anesthesiologists don't see any opportunity to grow their units in order to off-set the additional costs. "Unfortunately, they need to make it up somewhere, and they need a stipend to remain whole," he says.

Under the anesthesia "unit" system, each anesthetic procedure is billed in two parts: the base unit and the time unit. Base units are determined by the acuity of a case. Time units are determined at a rate of one unit per 15-minute increment. ASC cases tend to be less acute and have a base unit of around 3-5. An average ASC case will be billed (base plus time) at 7-8 units while an average hospital case will be billed out at 11-12 units. However, despite the difference in units per case, the provider can do better in an ASC.

"Surgery center cases are typically shorter, and anesthesiologists do better financially because they can make more units in an eight-hour period by doing more cases," says Dr. Wherry. With surgery centers packing their days full of cases, this was a welcomed opportunity for anesthesiologists compared with working at the hospital.

"In my hospital practice, I had big gaps in my day," Dr. Wherry says. "You might get six to seven cases in a day, but you'd have a few cases in the morning, have a huge gap in the early afternoon and three to four cases in the late afternoon."

While hospitals could have closed the empty operating rooms during that gap, surgeons wanted to have the option to use an operating room any time throughout the day. If the hospital would not provide this opportunity, there was a chance that the surgeon would permanently find an alternative location, such as an ASC, to perform procedures.

"Surgeons were building ASCs but also squeezing the hospital because they wanted to book cases when it was convenient for them," remarks Dr. Wherry.

To keep the rooms open and available for surgeons, hospitals needed anesthesia providers to be available for these possible procedures, so hospitals started entering into contract arrangements with provider groups. However, the groups soon started to see their revenue further decline as the multitude of factors weighing down on them already was magnified by gaps in their day where they were not providing care and making more units. Groups were already struggling to attract and retain physicians and now started looking for a way to replace their lost income.

Hospitals have been willing to give the anesthesia providers their stipend because the alternative is not a comforting thought.

"The CEOs that we have talked to are very nervous, upset and angry (about paying stipends), but they are happy with the clinical care and hear horror stories from their colleagues who lost anesthesia coverage," says Dr. Wherry. "They want to maintain local control and have a local relationship, and they will pay this money to avoid losing the group."

Often, CEOs will staff underutilized rooms in order to maintain good relations with their surgeons. "I have had several CEOs tell me that they would rather pay the anesthesia groups to cover an empty room than have surgeons in their office complaining about no operating room time," says Dr Wherry. However, this practice costs them money in the form of an anesthesia subsidy.

"As anesthesia costs rise, many CEOs are re-thinking this strategy," says Mr. O’Neill.

Rapid growth of subsidies
In 2000, the ASA sent out survey to 600 health systems and hospitals in the country, says Mr. O'Neill, citing a study presented at a 2005 ASA conference. Of those 600, the survey had a 30 percent return rate. The respondent pool was 178 hospital health systems representing 291 facilities. Of those 291 facilities, 70 percent reported paying a stipend of some amount up to $3 million annually, with 30 percent not paying any stipend to these groups. Most providers paying an annual stipend were spending less than $250,000 annually.

The same facilities were resurveyed by the ASA in 2004/2005, and all 291 facilities reported paying a stipend, says Mr. O'Neill. The largest growth was seen in hospitals paying $500,000-$1 million per group, with significant growth of hospitals paying $1 million-$3 million per group annually to cover the shortfall in anesthesia provider revenue.

The Medical Group Management Association conducted its own national survey in 2006 of 2005 data ("Cost Survey for Anesthesia Practices: 2006 Report Based on 2005 Data") which showed that 70 percent of respondent hospitals were faced with a stipend/subsidy issues. The average subsidy is approaching $120,000 annually per anesthesia provider as reported by the Clinical Advisory Board ("Navigating the Anesthesia Shortage," 2005).

While many of the hospitals that pay stipends are in small rural markets, the effects reach larger markets from coast to coast as well.

Effect on surgery centers and hospitals
Surgery centers remain very desirable facilities for anesthesia providers.

"There is no shortage of providers — both nurse anesthetists and anesthesiologists — that are willing to take a little less money to work a 9:00–5:00 or 7:00–3:00 shift with no call and no weekend coverage," says Dr. Wherry. "With more choices, it's minimizing the full impact of the need for a subsidy in the surgery center."

But this is not the case for every surgery center, especially some of those that share anesthesia providers with their hospital owners. "It's definitely trickling down to the surgery center arena, especially the joint-ventured ASCs and the hospital-owned ASCs," says Mr. O'Neill.

In these scenarios, some hospitals are expecting the ASC to pay for a proportionate share of the subsidy.

"What we're hearing from hospital CEOs recently is that the hospital is going to stop subsidizing the ASC and the ASC is going to have to start kicking in their fair share," says Dr. Wherry. "It's going to get worse as the population continues to age, and there's a greater amount of Medicare recipients. Anesthesia payments from Medicare are extremely low, and [the anesthesia groups] are not going to be able to make up the shortfall with managed care contracts."

Even surgery centers that are not involved in these joint-venture scenarios may not be able to avoid subsidies for much longer. "[Anesthesia] groups have become savvier in the last five years as stipends have grown at the hospital level," says Dr. Wherry. "They are getting paid large stipends or income guarantees often exceeding $1 million, so they're guaranteed to make very competitive salaries but are not performing as many cases as they were doing 10 years ago. So, essentially, they're being paid to be non-productive."

According to Dr. Wherry, the income guarantee/stipend is so high at the hospital level that surgery centers are no longer attractive to anesthesia groups, so the surgery centers are struggling to keep their providers. "Suddenly that surgery center, which was very enticing five to 10 years ago, is not as enticing because an anesthesiologist can go to the hospital, get the day off after call, is not as busy and can make more money than at the surgery center," he says.

The growth of surgery centers has also led to significant inefficiencies in the hospital setting. One way in which hospitals often misuse their anesthesia groups is by having them covering more locations than are necessary. As mentioned above, hospital CEOs often allow their surgeons to keep standing reservations at operating rooms, whether they have a surgery scheduled or not. As result, anesthesiologists are required to be "on-call" at that location in case the surgeon decides to schedule a surgery, prohibiting them from adding on other cases to their day. According to Dr. Wherry, this practice not only wastes the anesthesiologist's time but is not cost-effective, as nursing staff is also put on hold and other surgeons who need to schedule appointments are unable to do so.

10 steps to follow
It is likely only a matter of time until your hospital is asked to subsidize its anesthesia provider, if it hasn't already faced this request. Here are 10 steps that will help you prepare for this request, know how to respond to this request and, potentially, prevent or postpone your hospital from hearing this request.

1. Engage the anesthesia group
Anesthesia providers ask for subsidies when they are struggling financially. Unfortunately, as Dr. Wherry notes, many hospitals do not have a good understanding of the success or struggles of their anesthesia providers, so the hospital does not explore ways to ensure that their anesthesiologists are seeing strong returns on their work.

"I would strongly recommend that the administration of any hospital should develop a relationship with the anesthesia group," he says. "It sounds obvious, but many are not doing it, which is surprising since anesthesia is such an important component of the hospital."

Management should identify a point person within the anesthesia group and start a regular dialogue on how the group is performing and its experience at the hospital.

"You want to understand how the group is doing financially, if they are having problems, and what their reimbursement is like without getting into specifics," says Dr. Wherry. "If the CEO and/or CFO showed an interest in the viability of my group and my practice, speaking as an anesthesiologist, that would go a long way."

Include your anesthesia provider in on discussions about scheduling efficiency and allocation of block times, for example, as these components of your operation can have an effect on the anesthesiologist's financial performance.

"It doesn't cost the hospital anything to include the anesthesiologist in that process," says Dr. Wherry. "That alone would go a long way in keeping the stipend issue at bay."

2. Reward your anesthesiologists
Hospitals can make a number of inexpensive gestures to show appreciation for their anesthesiologists, according to Dr. Wherry.

"Little things, like providing an office with Internet access, can go a long way," he says. "I've never understood why hospitals don't provide some sort of incentive or bonus program for the group for hitting certain performance measures, such as patient or staff satisfaction."

A hospital may want to consider naming one of its anesthesiologists as the operating room's medical director and paying a small stipend for the work. This is likely to help develop a closer relationship with the anesthesiologists, which may encourage discussions on important issues such as financial challenges before problems turn into crises.

"The problem is the vast majority of hospitals view anesthesia groups and providers as a contracted service; they don't really view them as team members," says Mr. O'Neill. "I think any successful hospital will say that their operating rooms (and hospital) work better if anesthesia is part of the team and help in making the day-to-day decisions."

3. Ask for and understand anesthesia's specific needs
If an anesthesia provider asks about a subsidy, do not hesitate to ask why exactly the provider is struggling and try to find out the particulars of the situation, getting down to the provider's daily needs.

"What the hospital needs to understand from the group is what the group needs every day as a whole," says Dr. Wherry. "During a ramp-up, for example, where you have 10 anesthesia locations and cases are starting to spill over into an 11th room, anesthesiologists may say they can't afford to hire a CRNA for the extra location because there's not enough cases to pay for that CRNA. But if the other locations are busy enough, there may be more than enough revenue as a whole to cover the cost. You have to consider all locations versus treating one location as a sole cost center."

"Try to understand how many cases the group needs per day as a whole to cover its costs — how many units does it really need to cover each room per day? It's better to talk in units rather than cases," Dr. Wherry suggests.

4. Require full disclosure
If, despite all of your efforts, you are unable to keep your anesthesiologist group financially secure and are asked and agree to provide a subsidy, do not do so blindly. It is perfectly reasonable to ask the group to fully disclose its financial records so you can understand why the subsidy is necessary.

"I've seen stipend subsidies given when the group hasn't really disclosed what the problem is — they don't want to show their finances," Dr. Wherry says. "I don't know how you can ask for hundreds of thousands of dollars without that. When I deal with my hospital administrator, he has full access to my billing company so he can see where we're at and how we come up with a budget."

It is critical that your hospital involve its accounting team or find a third party who understands budgets to review the group's financial records. This will put you in a place where you can truly understand the group's position.

5. Consider a third-party representative
With hundreds of thousands of dollars potentially tied to a stipend, it is very easy for emotions to run high and the relationship between the facility and anesthesia group to become strained. One option to help prevent this is to find a third-party representative to come in and help determine a fair stipend and any parameters the group must meet to receive the stipend (see step 8).

"In order to take the emotion out and understand what the need is and what the right dollar amount is for both sides, I think it's often worth seeking out a neutral party to access actual need and what the actual coverage requirements are," says Mr. O'Neill. "This will help broker a deal where both sides can feel it's a win-win."

6. Understand the factors that should influence stipends
The subsidy that is provided should not just be based upon the group's revenue. If the group is failing to capture the reimbursement it deserves or is overspending, it is not the facility's responsibility to make up the group's shortcomings.

A third-party representative — or someone within the facility with knowledge of providing anesthesia and perhaps running a group — should assess whether the anesthesia group's subsidy request is appropriate based on the group's internal efforts to maximize its revenue and minimize costs. Some questions Dr. Wherry suggests assessing about the group include:

  • Is the group's productivity appropriate?
  • Is the group being asked to cover underutilized locations?
  • Is the group staffing efficiently?
  • Is the billing appropriate?
  • How aggressive is the group at pursuing good third party contracts?
  • Is the call (for hospitals) appropriate?

"All of that information should impact the subsidy; all of those questions need to be answered in determining the subsidies. I think sometimes organizations don't look at that the full picture," Dr. Wherry says. "[Some groups] say, 'here is our budget, here's how much we're making and you need to make up any difference.' That's a really dangerous approach because then it almost becomes an entitlement. To avoid the entitlement mentality being adopted by your group consider labeling the financial support mission support versus a subsidy or stipend. Mission support implies a collegial partnership."

This also opens up a forum where the hospital can assist the anesthesia group. For example, hospitals can use their expertise to help groups negotiate better payor contracts, which can, in return, help the group get better reimbursement.

Furthermore, the hospital may want to consider using the negotiation process to lean on the surgeons and operating room staff to be more efficient. “If the hospitals can tighten up the rooms and eliminate the concept of a standing reservation, the anesthesia group may be able to eliminate one or two full-time equivalents. This strategy alone could put a major dent into the subsidy request, remarks Mr. O’Neill. "However, this can be tricky business and before going done this slippery slope, input from a third party with a strong clinical background would be wise," he cautions.

7. Avoid one-way deals
Stay away from case/volume guarantees and money guarantees, Dr. Wherry suggests.

"What's the incentive for the anesthesia group to be aggressive in billing and not to cancel cases inappropriately?" he asks. "Guarantees become a disincentive. You don't want to enter a situation where you agree to make the anesthesia group whole every month. That's where I've seen hospitals get burned. For instance, the anesthesia group may need $200,000 to make the budget every, and if they only make $150,000, the hospital must cover the rest. Where is the incentive for the group to improve collections, lower costs or get better contracts?"

This is why it is beneficial to tie the stipend or subsidy to the group's performance, Dr. Wherry says.

"I would strongly encourage any hospital — when entering into an arrangement — to try to get something in return, whether it is showing up on time, high satisfaction, good outcomes, participation in committees or accreditation help," he says. "It really should be tied into performance."

8. Determine fair and attainable measures
If you are going to tie the subsidy to performance, both parties need to agree to the performance measures the group must meet. These performance measures should be measurable, attainable and not too easy, according to Mr. O'Neill.

"It's not fair to measure the anesthesiologists on something that is out of their control," he says. "So something like turnaround time is not always the best performance measure because there are so many things that impact turnaround time."

Reasonable performance measures may include:

  • showing up to the facility on time;
  • staying in the post anesthesia care unit until the patients are stable;
  • committee involvement;
  • providing in-service training to staff;
  • patient or staff satisfaction (with surveys that include a rating for anesthesia); and
  • surgical outcomes such as postoperative nausea and vomiting rates.

Once the measures are agreed upon, you will want to put them in a well-defined contract. Also, depending upon which performance measures are chosen, the anesthesiologists would likely appreciate an invitation to become involved with the hospital’s efforts to improve efficiency in these areas. “Before finalizing any type of incentive arrangement, third party and legal input would be advisable, remarks Mr. O'Neill.

9. Keep subsidy contracts short-term
Subsidy contract terms should run between six-month and one-year terms. If the hospital is ramping-up and adding an operating room, consider a six-month term as it will give both sides an opportunity to revisit the contract after several months of use of the new room. This term may also help serve as motivation for your surgeons.

The longest subsidy or stipend contract you will probably want to sign is one year, with a review process that starts about three months before the contract expires, says Dr. Wherry. This will allow ample time for a complete review of the hospital operating room’s and the anesthesia group's operations and profits. If the hospital's operating room budget is performing well, and the anesthesia group is benefiting from this growth, the hospital may want to explore whether a subsidy is still necessary.

10. Know your alternatives
Depending upon the relationship you have with your anesthesia provider, a subsidy request can come at any time — and unexpectedly. In addition, the provider may expect an answer fairly soon after informing you of the need for a subsidy. It is worthwhile to regularly research alternatives for your anesthesia provider just in case you cannot satisfy a request for a subsidy and ultimately lose the service of your current group.

"Once subsidy approaches 30 percent of the group's revenue, employment arrangements begin to enter the picture," says Dr Wherry. However, moving to an employment model can have its drawbacks and third party involvement is highly recommended.

"It's important to understand your alternatives," says Mr. O'Neill. "You don't have to put out (requests for proposals) or shop for other groups. However, it's good to know your alternatives when you get to that point of discussing a subsidy."

Contact Robert Kurtz at rob@beckersasc.com; contact Renée Tomcanin at renee@beckersasc.com.

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