The operating margin from the clinical enterprise is now the economic engine for the vast majority of academic medical centers (AMCs) in the United States due to an array of compound-ing market factors over the past 10 years.
This economic reality, coupled with increasing competition from lower cost nonacademic health systems in a highly volatile market, has resulted in academic health systems (AHSs) becoming increasingly integrated operationally and financially—most notably among faculty practices and primary teaching hospitals. The need to align the strategic and financial interests of the faculty practice and teaching hospital/health system to sustain the three-part mission of AMCs is an unquestionable trend in academic medicine today. With consideration given to the AMC’s organizational design, financial condition, public/private status, culture, and other factors, the approach required to achieve this alignment varies.
This article exams and compares how two very different AMCs, the University of Kansas Health System (UKHS) and the University of Rochester Medical Center (URMC), arrived at the same rationale for a more integrated model, pursued different paths and achieved the same desired outcomes.
While there are shared characteristics and themes, each AMC in the United States has a unique organizational structure and operating model that has evolved over time in response to internal and external factors. Over the past five years, there has been a spike in transformational changes AMCs are actively pursuing or seeking to make with their clinical enterprise that will enable them to be more responsive to the more complex healthcare market and address an increasing gap for investment dollars for the academic enterprise. These changes include merging of entities, changes to governance structures, new leadership/management models, and new approaches to funds flow. For example, a 2014 study found that 31% of members are changing their governance structures or significant reporting relationships.1 This percentage has increased to at least 40% based on publicly available data and announcements of major organizational changes.
The most notable transformation is a movement toward greater integration of an AMC’s clinical enterprise—the faculty practice(s), employed nonacademic physicians, and hospitals. This enhanced alignment is being achieved through structural and/or functional integration. For purposes of this article, “structural integration” refers to the degree to which the component entities of the AMC or clinical assets are under a single legal entity and therefore under one governance body (e.g., University of Michigan). “Functional integration” refers to the degree to which the clinical entities of the AHS are synchronized and behave as one, regardless of their corporate/legal structures. For example, the faculty practice and teaching hospital may be separate legal entities, yet their leadership structure, policies, and decision-making construct cause them to function as essentially one unified organization (e.g., Duke Health). This perspective discusses the drivers for change and the insight gained from two organizations that recently underwent significant changes to become more integrated—one already having a single-entity model and choosing to focus on functional integration and the other needing to change the corporate structure as a means to achieve full integration.
With the convergence of economic factors, including the direction of federal, state, and commercial healthcare reimbursement; NIH funding; GME-related funding; and competition to recruit and retain high-caliber faculty, it is becoming imperative for AMCs to develop and maintain a high-performing clinical enterprise, as that margin has become the net source of investment to sustain the three-part mission. Studies and industry literature in recent years, including from the Association of American Medical Colleges (AAMC)2, National Academy of Medicine (formerly the Institute of Medicine [IOM])3, and Blue Ridge Academic Health Group, reinforce the premise that the success of each AMC component entity is inextricably interde-pendent; therefore, the component entities must embrace a higher degree of integration as external market factors continue to present new challenges. While this is not a pioneering concept (10 years ago, UPMC, a market leader and risk taker, stated that “the current market can no longer accommodate the disconnect between the hospital, medical school, and faculty practice in areas such as financial and strategic planning”4), there is tremendous pressure on all AMCs to make bold changes and spend political capital to find ways to act as one unified AMC.
Case studies over the past 10 years from a number of AMCs demonstrate the benefits of greater cooperation among their component entities, with a primary focus on the relationship between the school of medicine (SOM) and the adult primary teaching hospital and overlapping issues with the affiliated physician organizations. 5,6,7,8 However, little research has been done that more narrowly focuses on the benefits of a more integrated relationship between the teaching hospital and faculty practice. There are many articles suggesting tactics to bring nonacademic, community hospitals and private practices closer together; however, they do not address the specific issues attached to the unique obligations of a teaching hospital and faculty practice, which can complicate more common alignment strategies.
Recent Market Activity
The teaching hospitals and physician organizations of AMCs have been some of the most active participants in corporate restructuring in recent years. While major teaching hospitals account for less than 7% of nonfederal hospitals in the United States, AMCs have been involved in 20% or more of the announced change-of-control hospital transactions over the past three years—nearly three times the number in 2009.9 The primary driver for this activity is the desire to more effectively align the teaching hospitals with the physician organizations in a more nimble vehicle to achieve higher performance of the health system to the benefit of the AMC as a whole. Vanderbilt and Northwestern are recent examples of this (in addition to the organizations featured in this perspective). Northwestern integrated the teaching hospital with the faculty practice to form Northwestern Medicine roughly three years ago, and in that span of time has climbed in NIH funding ranking from 22nd to 17th.10 With approximately 40 AMCs having the teaching hospital and faculty practice in separate corporate structures, the number of reorganiza-tions and major transactions is expected to increase over the next three to five years. At the same time, those single-entity AMCs that remain functionally fragmented will undergo significant changes in response to market and economic pressures. Moreover, there has been no evidence that suggests a more integrated clinical enterprise is a disadvantage strategically or financially compared to a more fragmented, entity- and/or department-centric model.
Potential Benefits from Increased Integration of AMC’s Clinical Enterprise
There exists a long-standing concern that focusing on the performance of the clinical en-terprise could jeopardize an AMC’s obligations to sustain its medical education and research missions. However, economic and market factors would suggest the opposite is true. AMCs that focus on the academic enterprise in an uncoordinated and reactionary manner without a well-aligned and high-performing AHS will increase the risk of falling behind in the market, as the investment gap will grow. The market is calling for AMCs to examine their three-part portfolio through a single lens and ensure (a) maximum value is generated from the clinical enterprise to make resources available and (b) trade-offs are examined and strategic goals prioritized. Achieving a higher degree of integration between the teaching hospital and physician organiza-tions can yield benefits, including but not limited to those outlined below.
1. Higher-performing and more cost-efficient infrastructure across physician organi-zations and hospitals
2. Collaborative strategic planning and prioritization
3. Joint operating and capital planning
4. Proactive program development/planning
5. Joint workforce planning, including recruitment and retention of top talent
6. Improved payor contracts, including both fee-for-service (FFS) and risk arrange-ments
7. More conducive environments to build and sustain major service lines/centers
8. More responsive and informed decision-making and clearer points of accountabil-ity
9. A more engaged physician leadership model that fosters a dyad reporting relation-ship between physician leader and administrators
10. Alignment of compensation with health system performance
The balance of this perspective profiles two AMCs that had different starting points or-ganizationally and pursued different paths (one functional and the other structural), yet both drove toward a more integrated clinical enterprise to the benefit of the AMC as a whole.
UKHS Path to Integration
Historically, UKHS in Kansas City, Kansas, was composed of three separate but related organizations: University of Kansas Medical Center (KUMC), University of Kansas Physicians (UKP), and University of Kansas Hospital (KUH). The AMC included a 700-bed flagship teaching facility that served more than 32,000 inpatients annually and more than 600 clinical faculty. The organizations had a long-established reputation for excellence in patient care, research, education, and community engagement.
The leadership team of the collective entities recognized that providing clinical care through their current structure was simply too complicated and did not allow for an efficient and adaptive model to respond to the changing healthcare industry. The structure included 21 separate corporate entities (a hospital, practice plan corporation, 18 separate clinical foundations, and a state university), each governed by its own board of directors and with overlapping but separate missions. This promoted operating in silos and led to fragmentation, and sometimes conflicting strategies. In the past, attempts had been made to achieve greater levels of collabora-tion across the AMC through several mechanisms, such as a stronger affiliation agreement. Although these efforts signaled an interest in greater cooperation, it was clear to the leadership of the collective entities that significant structural changes were required to achieve a meaningful level of collaboration and success in the increasingly competitive environment.
The goal was to develop a more streamlined structure that recognizes the benefits that an integrated health system provides for patients, faculty, and staff to further enhance quality of care and improve overall experience for patients. The leadership team committed to 10 core objectives that would help redefine the way care is delivered in the greater Kansas City area, as outlined below.
1. Align strategic interests: one AMC moving in a single direction.
2. Distribute resources and revenue more effectively.
3. Manage/reduce costs, beginning with core infrastructure/services.
4. Ensure market-competitive compensation for clinical faculty.
5. Become more proactive in growth strategy and competitive position.
6. Redesign care delivery models for population health management.
7. Preserve and grow the academic enterprise through new investments.
8. Develop more formal service lines/COEs.
9. Climb the ranks as an AMC and integrated health system.
10. Optimize quality and the patient experience across the system.
After more than three years of preparation and planning, on January 1, 2016, KUMC, UKP, and KUH began implementation efforts toward forming a single physician organization and a consolidated health system. The new model resulted in the dissolution of the 18 foundations and the establishment of a single, integrated, multispecialty physician organization with a lean governance and management structure that serves as a direct partner to the primary teaching hospital. The plan calls for the various clinics operating under UKP to operate within UKHS as a single clinical enterprise. The system will be overseen by the University of Kansas Hospital Authority, which oversaw KUH previously but will have an expanded charge to recognize the introduction of the physician enterprise into the health system. Further, in order to achieve integration, the organization developed new leadership positions and matrixed leadership positions across the hospital, faculty practice, and SOM.
The redesigned funds flow model includes a series of new financial arrangements be-tween the clinical enterprise (the new AHS) and the university to better align the strategic interests of each party. The new financial model included a shared risk/reward mechanism with the university and a professional services arrangement with the faculty group that replaced the traditional (and failing) FFS model.
This integration effort is yielding a more efficient and robust clinical enterprise with a co-hesive strategy that allows the health system to remain a market leader. It involves all aspects of healthcare, from easing clinic appointment access to enhancing the inpatient care experience; all organizations on campus are aligned in order to provide effective healthcare to patients. With a more nimble governance structure that promotes streamlined decision making, the system is poised to take on risk-based contracting strategies and thrive in an environment defined by value-based care.
URMC Path to Integration
URMC is a university-based AMC composed of the university’s SOM and school of den-tistry; Strong Memorial Hospital, an 800-bed teaching hospital recognized as being among the best in the nation by U.S. News & World Report; and the University of Rochester Medical Faculty Group (URMFG). In many ways, because of its integrated structure, the medical center has collectively been very successful in the past. In recent years, however, the downward economic pressure on SOMs and faculty practices has caused the medical center’s leadership to look for ways to drive greater functional integration. Despite the component entities being consolidated from a financial perspective, internal silos exist, and leadership is now looking to break them down to ensure continued financial sustainability of the entire enterprise.
Historically, the medical staff at the university have been closely aligned with their aca-demic departments and managed accordingly. However, given the significant growth of the faculty’s clinical practice (accounting for 500,000 resident-driven clinic visits and an additional 1 million ambulatory visits annually), URMC is undergoing a period of transformational change, focused on creating greater alignment of the faculty with their hospital partners. For URMC, this means both pursuing a more functionally integrated faculty practice and moving away from a federated department-centric model as well as exploring options for greater alignment between the system hospitals and physicians.
Despite a vibrant teaching and research environment, URMC, like many of its national peers, is facing a financial shortfall both in the SOM and in many departments within the faculty practice. This economic reality, coupled with the organization’s desire to remain proactive and position itself for success in a value-based environment, has provided the impetus for change. What began as a URMFG transformation has evolved into an AMC-wide effort to foster greater alignment among the entities, rationalize the funds flow, empower the physician community, improve patient care, and prepare the organization for risk-based reimbursement and the future of healthcare.
Now, three years into their transformation, URMC and its faculty practice have evolved significantly. In order to functionally integrate the group practice, the organization’s leadership team developed and activated a contemporary governance structure for URMFG. This structure, which includes an executive committee and five key subcommittees led by department chairs, has brought the departments together for effective shared decision-making. Through this governance structure, the faculty practice plan is successfully operating as a single unit with eyes wide open about the impact of certain decisions. For example, the finance committee regularly reviews robust business plans for new clinical operations that any department is going to undertake. As a result, if a particular initiative is beneficial for the system but is economically not sustainable, the group collectively decides whether to pursue it. This transparent decision-making process places both accountability and authority in the right places and ensures the organization stands by the decisions made as a whole.
In addition to the redesigned governance model, the faculty practice has come together to redesign and centralize certain operations, including looking for opportunities to share services with the hospital. Historically, commercial payor contracts were negotiated by the hospital and faculty practice plan at the same time, but by separate teams with little coordination among them. As a component of the transformation, reporting relationships have been redesigned to ensure a single coordinated voice during payor negotiations. Additionally, the finance teams of the hospital and faculty practice that were once separate and distinct are coordinating efforts and acting as one. The budget process was completely redesigned to ensure that hospital case projections are synched with physician recruitment and budgeted volumes within the group practice. Additionally, the hospital finance team and the faculty practice team work side by side during the budget process to coordinate the rollup of divisional budgets into a single medical center budget that is reconciled and rational.
Lastly, the entire medical center has embarked on a pilot program to test alternative funds flow models. Rather than allowing the SOM and the group practice to face structural deficits, the parties are exploring options for prospectively set funds flow models that pool the resources of the entire health system and reward for performance among the divisions. This effort is also linked to a contemporary new compensation plan that spans all clinical faculty, brings consistency to the incentive structure, and provides rewards that will enable the AMC to be successful as external economic factors continue to shift.
Through these efforts, a far more coordinated approach to managing the healthcare enter-prise has already been realized. Efficiency in decision-making and coordinated efforts ensure there is no unintended internal competition, and the organization is managing its business in a more transparent manner. Additionally, this increased coordination will enable the health system to be facile and react quickly to increasing risk- or performance-based payment models.
The Imperative for Integration
The opportunity cost is too high for teaching hospitals and large clinical faculty organiza-tions to be disjointed in how they approach strategy, operations, and finance. There are no prevailing trends toward the fragmentation of the faculty practice and/or its relationship with the adult primary teaching hospitals. When large academic physician organizations (which commonly account for the majority of a teaching hospital’s medical staff) are structurally and/or functionally integrated with their hospital partners, the entire AMC is positioned for better performance across all three mission areas. UKHS and URMC are two organizations that have taken the time to work toward a more streamlined and integrated structure, given the market realities in healthcare today, especially those facing the AMC. The goal of these organizations is to integrate the clinical enterprise to further enhance care delivery while ensuring the best-quality environ-ment for educating healthcare leaders. Other leading health systems and AMCs across the country are taking similar steps as they work toward a more integrated, cost-efficient, and quality-driven environment to support the tripartite mission of the AMC.
Organizations that choose not to act need to accept that the opportunity cost of not tak-ing steps to build a more integrated AHS will be high for the clinical enterprise and will have a direct adverse impact on the AMC as a whole (i.e., together with the university and medical school), as fewer resources will be available to reinvest in the academic mission. Although the path to a more integrated relationship presents many hurdles, such as fear of an SOM yielding control of the clinical faculty, difficulty designing a mutually acceptable structure, and cultural and political barriers, the healthcare market will not wait for AMCs to catch up. An AMC cannot reach its full potential without an integrated, well-organized and market-dominant AHS. Today’s rapidly evolving healthcare market requires streamlined decision making and organizational structures (structural or functional) that support clinical integration.
1 http://www.aahcdc.org/Perspectives/PerspectivesArchive/LP-Fall2014.aspx.
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10 Blue Ridge Institute for Medical Research.
Author Bios:
Michael F. Rotondo, MD, is the Associate Vice President for Administration, Strong Memorial Hospital; Chief Executive Officer, University of Rochester Medical Faculty Group; and Vice Dean for Clinical Affairs, University of Rochester School of Medicine and Dentistry
Steven W. Stites, MD, is the Vice Chancellor for Clinical Affairs, Senior Vice President for Clinical Affairs, and Peter T. Bohan Professor at the
University of Kansas Medical Center
Christopher T. Collins, MHSA, is a Principal and Director of the Academic Healthcare Division at ECG Management Consultants