Has the time for universities to exit the hospital business arrived? 4 key thoughts

Last month, Nashville, Tenn.-based Vanderbilt University Medical Center officially separated from Vanderbilt University. The university leaders' decision in 2014 to sever the entities' financial and legal ties came in response to the increasing challenges and costs academic medical centers impose on the schools with which they are affiliated. Now, industry experts question whether the trend of separation will continue, according to The Chronicle of Higher Education.

As a result of the split, the university's trustees will not be required to spend as much time studying certain challenges central to hospitals, such as disproportionate-share hospital payments, nor will they be required to lobby state lawmakers on various healthcare-specific matters, such as expanding Medicaid. At the same time, VUMC is still located on the university's campus and remains closely affiliated with the medical school. Ultimately, the separation enables the university to mitigate its cost risks while simultaneously allowing the medical center to enhance its agility and ability to react to the healthcare industry's volatile market, according to the report.

"It's a little like you've got to let your children go in order for them to succeed," said Jeffrey R. Balser, MD, PhD, president of VUMC and dean of Vanderbilt University School of Medicine, according to the report.

Should Vanderbilt University's divorce from VUMC serve as an example to other universities? Here are four thoughts on the matter.

1. The financial implications of operating a hospital are huge. It is now common for medical centers to account for half of a university's total budget. And although many university hospitals remain profitable, particularly among elite institutions, even their long-term viability is questionable. "Everyone wants the benefit of an academic medical center in their university," said Atul Grover, MD, PhD, executive vice president of the Association of American Medical Colleges, according to the report. "But they're scared to death of what can happen in the free-market medical system."

2. Universities often feel "addicted" to their medical centers. University hospitals are typically powerhouses for education, research and clinical care, and their ability to handle complex healthcare issues with cutting edge research and technology has traditionally enabled them to demand premium prices from insurers. This money supported their research and teaching missions, making them an important source of a university's revenue. "They’ve spun off resources that have allowed other parts of the university to survive," said Robert M. Wachter, interim chairman of the department of medicine at UC San Francisco, according to the report. "That's part of what's catalyzing attention. Like addiction to football teams, some universities have addictions to medical centers." But not all universities benefit from this "addiction." If a university hospital begins to lose money, this could lead to cuts in the university's research or educational missions.

3. University hospitals are facing more scrutiny for the cost effectiveness of their work. The passage of the Affordable Care Act, which aims to pay providers for the quality of the care they provide instead of the volume of services, has changed expectations placed upon healthcare organizations, and also changed the way providers approach strategic partnerships. Because of their three-pronged mission, many university hospitals charge higher prices for services as a means to cover the overhead cost of care. This has prompted many to forge ties with community hospitals, as these partnerships enable patients to receive care in a less expensive setting without university hospitals losing business. However, expanding scale by affiliating with community hospitals is not an end-all to university hospitals' financial strains. For instance, VUMC had become affiliated with more than 50 hospitals across five states by the time it separated with Vanderbilt University, but at that point it had become clear to trustees they were not capable of effectively overseeing such a vast system.

4. University hospitals that serve low-income populations are particularly stressed financially. The high cost of care delivered in an academic setting combined with an unfavorable payer mix means a university hospital is likely losing a significant amount of money. The University of Arizona's medical center, for example, reported losing $66 million in 2014, and its facilities needed an upgrade, according to the report. So in 2014, the university was acquired by Phoenix-based Banner Health. The deal gave Banner Health the prestige associated with and AMC, and provided $500 million in capital investments for the medical center.

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