Will academic medical centers sink or swim?

Academic medical centers' three-pronged mission — education, research and patient care — makes them uniquely vulnerable to financial pressures.

These institutions have thrived as centerpieces in the American healthcare landscape. Now they face their own kind of financial and governance distress.

Hospitals and health systems affiliated with medical schools face some of the highest costs across all healthcare institutions. Designed to deliver complex, specialized care, they are simultaneously saddled with the costs of supporting medical education and research.

Because many are based in urban areas, they often end up treating a disproportionate share of Medicaid or under- and uninsured patients for emergency, Level 1 trauma and psychiatric emergencies. Approximately 60 percent of AMCs' business comes from Medicaid, Medicare and other government programs.

Consumerism intensifies these challenges even further. "Now there are added complications because there is more scrutiny on quality," says Igor Belokrinitsky, partner at PwC Strategy&. "If you're an AMC and you're treating very complex patients, quality scores may not actually be very good."

Demands for price transparency, combined with less than desirable quality ratings and higher mortality rates, may not cast AMCs in the best light. The traditional appeal of AMCs may diminish as more people view them as cost centers, choosing instead to seek routine care elsewhere.

"AMCs really need to articulate why they are superior places for patients to get medical care," says Mr. Belokrinitsky.

There are several key areas where AMCs should focus their change efforts to adapt to the current healthcare landscape, according to Mr. Belokrinitsky and Richard Zall, chair of the healthcare department and partner in the corporate healthcare division of Proskauer, an international law firm based in New York City.

The antiquated cost structure and delivery strategy

Many AMCs' current cost structures are simply unsustainable in a healthcare system built around accountable care and pay for performance. Teaching hospitals will be unable to continue negotiating the premium pricing they have in the past, especially for services available in community hospitals. Continued pressure on Medicaid and Medicare reimbursement will drive all rates down, according to the Association of American Medical Colleges. Also, AMCs are not seen as must-haves in many commercial payers' narrow networks. 

Second, medical education and research programs incur extremely high costs, and the specialized care AMCs deliver for rare conditions is particularly expensive. According to research from McKinsey, AMCs have generally been able to preserve a 3- to 5-percent operating margin and a 15- to 20-percent operating cash flow margin. Those margins could drop by 4 to 5 percentage points by 2019, driving many into the red.

Despite differences in regions and markets, McKinsey said "few AMCs are likely to escape what we believe will be a fundamental dislocation of their traditional model."

According to Mr. Belokrinitsky, AMCs can improve their cost structures through new partnerships and re-evaluating the use of their facilities.

"Most people don't need such a complex ability to address their healthcare needs," he says. "AMCs' facilities target a small percentage of the population with complex illnesses, but end up treating the rest of the population, which is very costly."

According to Steve Levin, director of management at consulting firm Chartis Group, 70 percent of inpatient care provided at AMCs could be transferred to lower-cost settings.

Because AMCs cannot turn away patients in need of routine care, they end up absorbing them. However, through partnerships with community hospitals or other local medical providers, AMCs can operate satellite locations and devote certain settings to high- and low-acuity care. In exchange, the partnering health system can send patients with complex conditions to AMCs for specialized treatment in highly sophisticated facilities.

Part of the solution is modernizing the traditional network and including more extenders. AMCs that seek multi-tiered partnerships — including those with retail clinics and medical homes in addition to hospitals and physician groups — will reap the most value, according to Mr. Belokrinitsky. Telemedicine will play an increasingly important role in connecting AMC physicians to their colleagues at partnering institutions, as well as patients.

Increasing scale has many cost benefits, according to Mr. Belokrinitsky. Larger scale makes AMCs more attractive to insurance companies, it makes it easier to contract directly with employers and it might even give them leverage with suppliers.

"Scale in general is a very positive thing," he says. "Medicine is expanding from specialized providers toward retail clinics, ambulatory surgery centers and telemedicine, and AMCs are sitting on this highly complex asset. To continue getting more patients, they will need to cast their nets wider."

Strike non-medical relationships needed for population health

As providers and payers move more of their business toward value-based reimbursement, they are increasingly directing their attention and resources toward population health management. Partnerships and affiliations with other healthcare organizations and community partners like local schools, churches and other institutions that advocate for individuals can serve as a gateway for AMCs to enhance their population health management efforts while keeping costs down.

"AMCs can do a lot of complex work, but 90 percent of patients are people who need to quit smoking, eat better, improve their literacy and find a better-paying job," says Mr. Belokrinitsky. "Although AMCs aren't equipped to help people in this capacity, in the future, they may be accountable for these things."

Many hospitals are already seeking community partners, according to a survey by the Health Research & Educational Trust and the Public Health Institute. 

The survey, which included responses from more than 1,400 hospitals and health systems between January and May, found hospitals are most likely to partner with public health departments, chambers of commerce, health insurance companies and federally qualified health centers or community clinics. Hospitals are least likely to partner with housing and community development organizations and transportation authorities.

Nearly 70 percent of hospitals reported that they are currently part of a communitywide coalition. Most hospitals (87 percent) reported having at least some degree of a working relationship with other local hospitals — either funding, networking, collaborating or an alliance.

Be receptive to new donor demands and alternative sources of funding

Traditional sources of funding to AMCs have dwindled over the last several years. Research grants from the National Institutes of Health flat-lined for many researchers. The agency said its budget was effectively cut by 22 percent in the past decade when accounting for medical inflation, although President Barack Obama slated a 6 percent boost in funding for fiscal year 2016.

Large, reputable universities traditionally bolstered AMCs' opportunities for fundraising. Philanthropy efforts have grown more complicated over the past few years, but gifts are still made to the most attractive causes, according to Mr. Belokrinitsky.

"It's easy to get into a death spiral where, if your organization is economically shaky, people are reluctant to give money to save the hospital because they're worried everything will get shut down and their contribution will have had no impact," says Mr. Belokrinitsky.

Donors still contribute, however. Pediatric and oncology programs draw some of the highest donations, he pointed out.

Future donors' higher expectations for better outcomes and increased transparency on how money is spent will mark a significant departure from the expectations of older donors, according to Mr. Belokrinitsky.

"There is this whole new generation of donors coming up. They're relatively young people, tech-savvy and not as focused on building relationships as they are on hacking the system and fixing issues," he says. "Their donations will come with strings attached. They don't want a plaque with their name on the hospital wall, they want to see outcomes."

This new class of donors will more likely contribute to causes they can track. Getting the ".com" billionaires to donate money will be more about finding ways to fix the system, not about hosting galas, according to Mr. Belokrinitsky.

Achieve better physician alignment by changing governance structures

There is no shortage of red tape in academia, and when paired with the highly regulated world of healthcare, this can leave AMCs with some of the most onerous governance and decision-making structures in the industry. Departments within these institutions have traditionally operated independently, and physicians don't always see patient care as their top priority. 

"Physicians in AMCs are often focused on tenure, seniority, what kind of papers someone is publishing — it doesn't always have to do with delivering care," says Mr. Belokrinitsky. "Try managing a bunch of doctors whose main priorities and responsibilities — in their minds — are teaching and research, not direct patient care."

When physician employment isn't driven by care delivery, CEOs find broader goals — creating partnerships with employers, developing an insurance product or creating a bundle — much more difficult to achieve. One solution is to hire or partner with a physician group that is not engaged in research or academia, and whose main priority is care delivery.

Another strategy is to introduce new dialogue with AMC physicians aimed to achieve greater standardization and commitment to clinical care, in addition to their research and academic pursuits. "If you lead with quality and outcomes and engage physicians in these conversations, you can create focus and attention on the clinical programs and achieve better alignment," says Mr. Belokrinitsky.

AMCs can start by looking at their physicians' allocation of hours spent on clinical, administrative, research and teaching duties, documented in a CART record. In many cases, AMCs let adherence to the CART model fall to the wayside, which can result in physicians spending a disproportionate amount of hours on one responsibility over another.

After analyzing each physician's adherence to CART, organizations can employ zero-based budgeting to determine how much research time they can afford. This refers to how much time is covered in the organization's budget and how much additional support is needed from philanthropy, grants, private donations or funding from partnerships with pharmaceutical companies.

"These are not easy conversations. They can be very contentious and painful," says Mr. Belokrinitsky. However, open dialogue leads physicians to re-examine their research portfolios, and potentially skip over esoteric research projects in favor of more fundamental, widely applicable research with bigger payoffs.

In addition to the need to enhance physician alignment, Mr. Zall says forward-looking AMCs are beginning to streamline or modify their governance structures.

"AMCs are complex organizations that include hospitals, faculty practice organizations and medical schools. In some settings, these different organizations within AMCs have their own management and boards of trustees, so getting anything done could take a long time, and the objectives and missions of each aren't always coordinated," says Mr. Zall. "As we see more AMCs consolidate their governance and decision-making into a single, more connected enterprise, they can act faster and negotiate the different competing needs, develop an overall institutional strategy and implement it."

Due to increasing financial pressure surrounding AMCs, some universities are beginning to distance themselves from their medical operations, including Nashville, Tenn.-based Vanderbilt University and Atlanta, Ga.-based Emory University. Academic medical centers are essentially losing a letter of the acronym to become medical centers. That said, some aren't so surprised by the divorce between institutions in higher education and healthcare.

"They're totally different businesses," Vanderbilt Chancellor Nicholas S. Zeppos told The Wall Street Journal.

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