12 Revenue Pitfalls for Academic Medical Centers

PricewaterhouseCoopers recently released a report, "The Future of the Academic Medical Center: Strategies to Avoid a Margin Meltdown," which explained some of the greatest threats to academic medical centers today.

Roughly 78 percent of the population said they would not be willing to pay a higher premium to access care at an AMC. This could severely hurt AMC's revenues and, consequently, their bottom lines. PwC analysts said there are three overarching threats to AMCs: rising budgetary and political pressures, the increased emphasis on quality standards and rankings, and a decentralized governance structure.

The following 12 topics explain those threats further, as each one specifically presents an immediate danger to revenues at AMCs.

1. Indirect medical education. A recent analysis from the Medicare Payment Advisory Commission estimated that only 40 to 45 percent of current IME payments are justified to cover the higher healthcare costs of Medicare patients. PwC analysts said the reduction of IME funding will be an easy target for policymakers, and President Barack Obama's debt reduction plan already included a reduction in IME funding by 10 percent starting in 2013.

2. Disproportionate Share Hospital payments. Medicare and Medicaid DSH payments will be winding down in 2014, when the Patient Protection and Affordable Care Act will officially begin to increase the commercial insurance base and expand Medicaid coverage. "AMCs will need to attract these newly insured patients to make up for declining DSH subsidies," according to the report.

3. Medicare basket updates. In 2012, Medicare market basket reductions of 0.1 percent will go into effect, eventually increasing to 0.75 percent in 2019. The Budget Control Act of 2011 also mandated 2 percent reductions in all Medicare payments (this affects the base rate, not the future Medicare growth rates), so AMCs will be forced to address their cost structures to maintain margins or break even on Medicare payments.

4. State Medicaid funding. A slew of states — Florida, Illinois, Arizona, North Carolina and several others — are making massive cuts to Medicaid and, in particular, to inpatient hospital rates. In addition, many states are moving toward Medicaid managed care plans with the intent of reducing hospital utilization (Connecticut being an outlier, but an interesting one nonetheless). The analysts said the reductions in Medicaid will certainly alter reimbursements, "but they will also affect operating budgets for public institutions."

5. New funding models. Accountable care organizations and bundled payments are the "here and now" of new federal funding models. ACOs and bundled payments aim to manage population health, improve quality and decrease costs, but AMCs that do not have the right infrastructure or preparation may not be able to share in the potential savings.

6. Commercial insurers tiering benefits and/or creating narrow networks. Because AMCs are often considered to be "high-cost" places for patient care, they are more likely to receive out-of-network status on certain treatments under new health insurer plans, which could debilitate certain revenue streams.

"Some tertiary and quaternary care that is typically provided at AMCs is also performed at community hospitals," the analysts wrote. "This provides payors an opportunity to exclude or limit the AMCs from performing these services, especially if the community hospital is less expensive."

7. Meeting new quality standards. There are several quality-based measures that are under way or are about to be, including value-based purchasing, meaningful use, e-prescribing, hospital-acquired condition standards and readmission reductions. Every one of these measures requires hospitals to increase their quality scores, or it will come at the expense of reduced Medicare payments. For example, hospitals not meeting readmission standards could receive up to a 1 percent reduction to Medicare payments in 2013, reaching 3 percent by 2015.

AMCs will need to implement and monitor all quality programs and scores, according to the report. Poor quality outcomes could have negative consequences for AMCs' reputations as well as their finances.

8. Federal research grant funding. Several AMCs have large research facilities and investments, but their scope of research could be in danger due to declines in federal grants. The American Reinvestment and Recovery Act of 2009 injected funding for healthcare research, but this expired in 2010. Because last summer's supercommittee was not able to find savings in federal spending, funding from the National Institutes of Health is projected to be cut by 7.8 percent in 2013.

9. Philanthropy. Philanthropy and donations are always sensitive to volatile markets. Analysts believe AMCs will need to find additional philanthropic donations from the aging baby boomer crowd — the population expected to utilize healthcare most over the next decade — if they want to keep donation revenue steady.

10. Tuition. According to the latest data from the Association of American Medical Colleges, tuition for first-year public medical school non-resident students rose 6.2 percent from 2010-2011 to 2011-2012, while tuition for first-year private medical school non-resident students increased 4.2 percent during that same period. If tuition rates keep rising at current levels, many medical students may be reluctant to take on a bigger student debt load, "especially if they are going into primary care," according to the report.

11. Sustainable growth rate. For yet another year, physicians avoided a massive cut to their Medicare payments. Congress froze current Medicare rates, also known as the sustainable growth rate, until Dec. 31, 2012, but now physicians will be facing a Medicare payment cut of more than 30 percent next year unless Congress decides to repeal the SGR or, as has been the case for the past decade, add another temporary patch. These SGR decisions have negatively impacted physicians and hospitals and will continue to do so until a permanent solution is reached.

12. Loss of privately insured patients. This revenue threat is not particular to AMCs alone, since many hospitals across the country will be fighting for their commercial payor mix. The PPACA's health insurance exchanges may alter that payor mix, and that may be in flux as the Supreme Court weighs the constitutionality of the healthcare law.

More Articles on Academic Medical Centers:

3 Threats Facing Academic Medical Centers

100 Non-Profit Hospital, Health System CEOs to Know

Average Department Chair Compensation at Academic Medical Centers

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