Is Academic Medicine As We Know It DOA?

These revered institutions face the biggest threat of their organizational lives. Here's how the best are responding.

Academic medical centers. Educators of America's future physicians. Providers of the most complex care, for the most complex patients. Home to ground-breaking medical research. And, in a lot of trouble.

Every hospital in America faces a challenging future: Reimbursement pressures are greater than ever. At the same time, providers must expend significant capital to prepare for a future that includes payment based on value, increased risk-sharing and population health management.

AMCs must continue to provide care under strained reimbursement. They, however, face a more unique challenge: they also must continue to fulfill their educational and research missions in spite of significant funding challenges.

Three-pronged mission meets "triple whammy" of challenges
As AMCs work to fulfill their three-pronged missions, they face what Ora Pescovitz, MD, CEO of University of Michigan Health System in Ann Arbor, calls a "triple whammy" of funding cuts.

The sequestration cuts of 2013 reduced funding for all three areas of AMC's missions: patient care, graduate medical education and research. While Congress' Bipartisan Budget Act of 2013 is expected to restore most of the sequestration cuts, including those to National Institutes of Health-supported research and federal payment for graduate medical education ($63 billion in additional federal funding was approved, but specific distribution of these funds is pending the appropriations process), the 2-percent cut in Medicare payments will remain in place through 2023.

Let's take closer look at the variety of funding challenges facing AMCs:

Patient care — Payments for patient care continue to face pressure. Medicare sequester cuts mean lower-than-expected payments for hospitals. Even without the cuts, Medicare pays hospitals just 90 percent of the cost of caring for benefeciaries, according to the American Hospital Association. Additionally, many AMCs are the safety-net provider for their market. Nationally, AMCs treat 40 percent of hospitalized uninsured patients, and 23 percent of Medicaid patients.  

Education — On average, the cost of training a physician (direct graduate medical education) in the United States is $100,000. Medicare pays hospitals just $40,000 per physician through GME funding to AMCs, according to the Association for American Medical Colleges. Indirect medical education (e.g., opportunity cost of slower procedure times and fewer procedures, and/or less productive attending physicians) results in $27 billion in additional costs to AMCs. Medicare has capped its payment for IME at $6.5 billion since 1997's Balanced Budget Act, despite estimates that the country will have a shortage of nearly 90,000 physicians by 2020. While medical school enrollment has increased by 30 percent in recent years to help meet future physician demand, residency and fellowship slots have not.  

Accordingly to the AAMC, approximately 10,000 residents trained in the U.S. every year are paid for entirely by hospitals' operating margins, not federal support. While AMCs have taken on this financial burden because its supports their broader missions, their ability to take on additional residents is unlikely without some sort of intervention by the government, other payers or the public.

Research — It costs AMCs $1.25 to carry out every $1 of research that is funded, and "that 25 cents is usually transferred from the clinical side," says Joanne Conroy, MD, chief health care officer for the AAMC and former COO of Morristown (N.J.) Memorial Hospital.

Additionally, while the total amount of NIH funding rose between 1998 to 2011, the "real amount" — or value adjusting for inflation — peaked in 1998 and has declined each year since, according to the research advocacy group FasterCures.

Dr. Pescovitz of UMHS argues declining research funding threatens the medical innovation pipeline. "We can decide to reduce support for medical research and that science is not a national priority, but that means we must also accept what it means. It means fewer discoveries and a decrease in the development and production of new drugs, therapies and treatments that improve and save lives," she says.

Shifting funds
Much like a university using the revenue from its men's college football team to support women's tennis, AMCs have long helped support their educational and research missions through clinical care revenue. In 2010, AMCs transferred close to 9 percent of net patient service revenue to fund research and education, and this percent is likely increasing each year, as pressure on patient care reimbursement grows, says Dr. Conroy.

In the past, shifting funds from one column to another, while not a perfect solution, was an effective approach to sustain organizations' three-pronged missions. Today, this approach is a short-sighted strategy. Transformational changes in how care is reimbursed, and the cost-consciousness of consumers, threatens the ability of AMCs to support two missions on the back of one. As a result, business as usual is no longer an option for AMCs. Instead, they must embrace change, adjusting their strategy to carve out a competitive differentiator for themselves in the new world order of healthcare delivery and purchasing.

AMCs: No longer business as usual
But what is the best competitive strategy for AMCs?

Certainly academic medical centers stand out when it comes to treating the most complex patients. They are the only facilities with the breadth of sub-specialization required to appropriately treat the most challenging of cases.

"If you have a brain aneurysm, you really want to be in an academic medical center, or if you need a liver transplant, you want to be at an academic medical center," says Andrew Ziskind, MD, managing director and clinical solutions leader at Huron Consulting Group. "Those are the kind of things at which academic medical centers truly excel."
However, the large majority of patients treated by AMCs present with more routine conditions that often could be treated at a lower cost at a community-based facility with similar outcomes.

As payment mechanisms evolve to increasingly award lower-cost, high-quality care, how will AMCs compete? As consumers take on more financial responsibility for care, will price sensitivity become the defining factor for decisions about most routine care?

AMCs have higher cost structures because of the resources required to recruit and retain a cadre of subspecialty physicians within every medical specialty, in addition to training future physicians and carrying out research. The paradox is that while AMCs are best positioned to treat the most complex of patients (which are by nature lower in volume), they need to attract large volumes of more routine cases to cover the costs of maintaining access to specialized care.

"If you just need gallbladder removed or hip replaced, [AMCs] may not be able to be compete with a well-developed community medical center that has engineered cost and safety in," explains Dr. Ziskind.

Certainly the brand recognition of a tertiary facility carries weight in patients' care decisions today, but in the future, when cost and quality data is more accessible and transparent, will an AMC's reputation be enough to warrant paying more for the same care?

Will patients with routine cases still want to come to AMCs?

Only if these hospitals can compete on price, quality and service, say many experts. And, in the future, offering convenient, patient-centered, coordinated care will also be a requirement.

Lowering the cost of delivering a certain service, though a challenge, is fairly straightforward: reengineer processes, including clinical pathways, to drive unnecessary cost, waste and duplication from the system.

The nation's leading academic medical centers are working aggressively toward this imperative. Dr. Pescovitz says UMHS plans to reduce its operating costs by $200-$250 million, on a $3.2 billion annual budget. In September 2013, the Cleveland Clinic announced it would cut $360 million from its $6 billion annual budget through layoffs and other cost-cutting efforts. Vanderbilt University Medical Center in Nashville, Tenn., also announced a plan to cut $250 million from its $3.3 billion budget by the end of its fiscal 2015, as part of its "Evolve to Excel" initiative.

Lowering cost is particularly important in price-sensitive markets. In metro Denver, University of Colorado Health has many DRGs priced lower than Kaiser Permanente, the prominent provider of affordable care in the western U.S., says Dr. Conroy.

Coordinating care and managing the health of a population is more complex. It requires ownership of or partnership in various sites of care across the continuum. It also takes advanced data analytics, standardized care paths, targeted interventions and team-based care, to name but a few necessary capabilities.

Some academic medical centers have already recognized the importance of expanding their reach beyond a single tertiary care center. For example, BJC HealthCare, parent of Barnes-Jewish Hospital in St. Louis, operates 13 hospitals throughout Missouri and Illinois, the majority of which are community-based organizations with 400 or fewer beds. Pittsburgh-based UPMC has more than 17 contracts with "community service providers" to better coordinate the care patients receive outside of its hospitals, including skilled nursing, home health and rehab services. In July 2012, Iowa City-based University of Iowa Health Care joined with three other health systems in the state to form the 52-hospital University of Iowa Health Alliance. Each system within the alliance will remain independent but will collaborate on research initiatives, benchmarking and best practice implementation, as well as cost sharing and IT accessibility.

Rethinking the mission
Even though AMCs have an incredible aggregate of talent and capabilities, they have been relatively slow to make decisions — their academic culture makes them largely consensus-driven organizations.

"Today and into the future, we face more formidable competitors when it comes to cost, quality, service and technology. Why? Because they can do it cheaper and faster," says Dr. Pescovitz of UMHS. "AMCs have higher cost structures, incapacitating bureaucracies and two critical components of our enterprise that we subsidize. We are unable to be singularly focused, and we're not as nimble or flexible."  UofMmeded

Dr. Ziskind agrees. "Community competitors respond more rapidly to market change," he adds. "I think it's absolutely essential that academic medical centers change their mindsets from holding steady and trying to protect their price premium to actively engaging in and implementing a culture change [that empowers speedier decision making and responsiveness]."

Rethinking care delivery
If the future of healthcare delivery means coordinating care and taking on risk for population health, which many believes it does, AMCs must be guided by a strategy that moves the organization away from a focus on complex, acute care toward one that delivers the right care, at the right place, at the right time, to all types of patients.    

Many academic health systems, like the University of Michigan Health System, have launched ACOs or similar models. UMHS operates a Medicare Shared Savings organization, and a recent ACO-like partnership between UMHS and Blue Cross Blue Shield of Michigan resulted in $155 million in savings in its first three years.

At Montefiore Medical Center in New York City, 50 percent of patient revenue is at risk through various ACOs and shared savings/risk arrangements.

Successfully adjusting to this new imperative for care delivery will be critical for the survival of AMCs, but, unfortunately, it only impacts one area of it's tripartite mission — patient care.

Rethinking education
Many AMCs may continue to borrow from their operating margins to fund shortfalls in medical education and research. Successfully moving to risk-based reimbursement could improve margins just enough to sustain research and education under this approach. The most innovative AMCs, though, aren't satisfied with this remaining the only option.

In 2008, Ochsner Health System in New Orleans partnered with the University of Queensland in Brisbane, Australia, to open the University of Queensland - Ochsner Clinical School, a program that offers students from the U.S. the opportunity to receive the equivalent of a doctor of medicine degree. Ochsner offers more than 20 residency and fellowship programs, but did not have its own medical school, and saw the joint program as an opportunity to help attract more physicians to Louisiana. Students in the partnership program spend two years in classroom-based training in Brisbane, then come to Ochsner for clinical training. The program's 2012 class received a 100-percent residency match rate, says Warner Thomas, Ochsner's president and CEO.

Perhaps in one of the more creative bits of legislation for GME to date, the Florida legislature approved a bill that would allow insurers in the state to provide funding for GME. Florida insurers who do not hit their medical loss ratio requirements now have an option to take money that would otherwise be refunded to policyholders and dedicate it to a fund that will be used to support GME in the state.

The Herbert Wertheim College of Medicine at Florida International University in Miami, part of the 12-campus State University System of Florida, has proposed a demonstration project in which it will establish a psychiatry residency program in partnership with a Federally Qualified Health Center in Miami-Dade County, supported by the state GME fund.

A larger question, though, is whether the federal government and AMCs themselves should be the only parties supporting physician training during an era of physician shortage. There are multiple exchanges of dollars on a medical student's journey to becoming a physician. Medical students take often take on high levels of debt for medical school tuition, earn moderate salaries during residency and fellowship, and then receive salary increases that may be up to four times the amount of their salaries during training. Medicare pays teaching hospitals for some training costs, and the hospitals absorb the rest.

Perhaps a different exchange of dollars is in order. A different model would be difficult to sell, but could significantly help improve the economic challenges surrounding medical education and training.

"Residency training costs are significant, more than $13 billion total for the 110,000 physicians in training each year, and Medicare pays less than 25 percent of the direct costs," says Dr. Conroy of the AAMC. "Many hospitals are already supporting residency positions over the amount of Medicare support they receive. This pattern is not sustainable for hospitals if they are to meet the demand for more physicians."

Rethinking research
Patient care and education aren't the only areas benefiting from creative approaches.  How basic and clinical medical research is funded is also changing. Gone are the days of relying solely on government and other grant-making organizations.
"There needs to be a lot more partnering between industry, i.e., medical device and drug companies and AMCs," says Mr. Thomas, who indicated Ochsner has several research-focused industry partnerships in the pipeline. "We know more partnership has to happen in the clinical care of medicine, but it also has to happen in the research and education parts of medicine."

Dr. Conroy agrees. "There are so many innovations borne in our research labs," she says, adding that while academia is great at discovery, it isn't known for quickly bringing new products to market. Under a partnership, once an innovation has legs, it can be leveraged in more traditional research and development setting, supported by industry partners.

In a more creative approach, Tulane University School of Medicine decided to bypass traditional research funding by using crowdfunding to finance several proposed research projects. It partnered with crowdfunding platform Microryza to launch a website that allows anyone, anywhere in the world, help fund the school's research.

The Future of the AMC
The next five to ten years are sure to bring great change to AMCs in the United States as they adjust to new market and environmental conditions impacting the three distinct, but interrelated, parts of their missions.

Because the future is uncertain, so is how to best respond. Yet, we know differentiation is often the key to remaining competitive in a crowded market.

With so many hospitals currently struggling to keep up with their objective of "being everything to everyone," perhaps it's time for AMC leaders to reflect on their organizations' strengths, and focus strategy and decision-making around one or two characteristics — affordability; the highest level of quality; top-notch service; seamless, coordinated care; or the best health maintenance capabilities, etc. — and work today to ensure their organizations' culture supports this strategy.

"Academic medical centers have excelled at the innovation. Creativity is in our DNA. Where we need to improve is in our ability to be more nimble, more flexible and more adaptable. That requires a culture that is prepared to evolve," says Dr. Pescovitz. "We're not as adaptable or responsive as our competitors."

But AMCs have something their competitors don't: the greatest minds in medicine with the ability to offer the most specialized care in a breadth of specialties.

What they do with that is up to them.

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