Are Academic Medical Centers Toast in a Post-Healthcare Reform World?

Are Academic Medical Centers Toast in a Post-Healthcare Reform World?

26
SHARE

My hospital, UCSF Medical Center, is thriving. Our profits this year will be nearly $200 million. We’re building a sparkling clinical complex – a combined women’s, children’s, and cancer hospital – adjacent to our new downtown biomedical research campus. We are installing a state-of-the-art computer system. US News & World Report calls us the 7th best hospital in the country. Our students, residents, and fellows have never been better.

Yet angst is in the air, borne of a sense that the future is coming at us fast, and we are not prepared.

We’re not alone, mind you. Every hospital enjoying a positive bottom line today is contemplating a bleaker future. Traditionally, hospitals planned to lose about 30% on every Medicaid patient and 5-10% on every Medicare patient, while banking enough profits from commercially insured patients to make the math work out. All of these payers – both governmental and private – are getting stingier, and this latticework of cross-subsidies will soon be a fading memory.

This threat to profitability is roiling hospital board rooms everywhere, but the threats to academic medical centers seem particularly daunting. After all, the community hospital simply (I guess that should be “simply”) needs to make enough of a profit to refurbish the physical plant, pay everybody’s salaries, keep the docs and nurses happy, and save for a rainy day. Academic medical centers, on the other hand, suffer from a different problem: Mission-O-Megaly.

Here, I refer to our need to not only run a hospital and clinic, but also to educate future generations and conduct cutting-edge research. To succeed in all of these missions, we confront another cross-subsidy problem – on top of the necessity to cross-subsidize Medicaid or Medicare patients because their insurance pays less than their costs, we also need our hospital profits to cover some of the costs of teaching and research.

This may surprise you. While our educational mission’s dependence on outside support is widely known, the need to subsidize the research mission is not. In fact, most people likely think about this in just the opposite way; namely, that research funding can keep the academic enterprise afloat during tough times. When I think about this belief (which may have been true in the past but is definitely not today), I immediately chuckle, reminded of one of my favorite family stories:

When my kids were younger, I worried that they weren’t gaining a full, honest appreciation of the real world and the way it worked. At least, not like I had as a kid. My dad was a small businessman in New York’s garment district, and we talked about money constantly at home. But with their dad an academic physician and mom a medical editor, my own kids were raised in a more genteel, scholarly environment; dinner chatter was more likely to be about a JAMA article than a tough negotiation or a bargain mutual fund. I was thinking about how to make this point – that money influences nearly everything – to them, and one day, walking around with my 10-year-old son Doug in downtown San Francisco, I saw my chance.

A condominium was under construction. I pointed it out to my son and said, “Doug, the owners of the building have to put the apartments up for sale even before the building is finished. To do that, they need to set a price, based on how big and fancy the condo is, and on what similar condos have sold for in the past.” He nodded his head in understanding; so far, so good. Now I was ready to make the problem a little tougher and the lesson more memorable.

“So what do you think happens if nobody buys it for the price they’ve set?” I asked. This was the teachable moment, the chance for him to learn about supply and demand and the Invisible Hand of capitalism; all the lessons I’d learned at my father’s knee.

He looked at me, scratched his head, and said simply, “Do they get a grant?”

The need for remediation was even greater than I thought.

I suspect that my pre-teen wasn’t alone in believing that the academic health center could be propped up by its research enterprise, particularly at places like UCSF that bring in hundreds of millions of NIH grant dollars every year. But, even if it might have been true in the past, those days are over.

Now, both the educational and research missions require subsidies. The best estimate is that every medical student costs his or her school about $100,000 (the true training costs minus tuition), and each dollar in research grants requires a 30-40% match to cover all the true costs (including grants management and administrative support). This research funding gap is so serious that, at a recent UCSF Leadership Retreat, guest speaker Duke CEO Victor Dzau declared that Duke would no longer try to maximize its NIH grants – potentially jeopardizing its prized place on the NIH top recipients list (Duke was 8th last year) by “rightsizing” its research enterprise.

I see this challenge playing out in my own hospital. That $200 million profit? By the time we’re done building buildings and implementing our new IT system, there won’t be enough money left to pay for all the hospitalists and NPs to cover for shorter housestaff work-weeks, to provide a lifeline for physicians whose reimbursements are plummeting, to meet growing accreditation and regulatory requirements, and to address these teaching and research deficits.

Those of you who understand academic Inside Baseball might wonder why deficits in research or student funding would be the concern of the academic medical center (AMC)? After all, shouldn’t the medical school’s dean, who controls education and research, be on the hook to fill these gaps? Perhaps so, but in virtually every school I know, that particular cupboard is bare. Medical schools, particularly state schools like mine, which have traditionally depended on tax dollars for some of their funding, are seeing their state funding slashed faster than a Wisconsin unionite. This leaves the medical center as the only deep pocket in the neighborhood, and everybody has his or her hands inside, rummaging around for spare coins.

For some AMCs, this Death-by-1000-Cross-Subsidies may soon get even worse. A colleague recently pointed out to me that the only profitable part of the entire University of California system (other than its sports teams) may be its teaching hospitals. We may soon reach the day when medical center revenues will not only be tapped to help prop up unprofitable clinical services, but also the philosophy department at UC Santa Cruz.

If AMCs remained as profitable as some (including my own) are now, they could probably survive all of these outstretched hands. But nobody thinks that they will be. And therein lies another even more daunting problem.

In the new world of healthcare, the winners will be those organizations that figure out how to deliver care of the highest value – the safest, highest quality, most satisfying care at the lowest cost. Doing this will require the creation of new entities (“Accountable Care Organizations”) that integrate the docs and the delivery system – not just hospitals but clinics, nursing facilities, hospices, home care – into a seamless whole that can deliver cost-effective care across the continuum. ACOs will profit if they can deliver high value care, and fail if they can’t.

In a recent NEJM article, Dr. John Kastor, former chair of medicine at Maryland, analyzed the chances that academic medical centers could become successful ACOs. John based his research on discussions with 37 senior faculty members and administrators at AMCs, government agencies, and foundations (I was one of them), and his analysis is sobering. In category after category, John chronicled how AMCs are disadvantaged on the new healthcare payment playing field. The challenges include:

Organizational and Structural: most AMCs and their faculty physician groups work in separate organizations and have distinct reporting relationships. Fusing them will be messy. As Kastor writes,

Without an official who can resolve differences and to whom the dean and the CEO both report, this division of authority can interfere with an institution’s ability to make the changes necessary to form a successful ACO.

The Costs of Training: Our training model is expensive and inefficient. As Kastor notes, an inexperienced trainee is more likely to over-test than under-test, particularly if he or she is embedded in a culture that ladles out criticism for “missing something” and atta-boys for diagnosing zebras.

The Departmental Model: ACOs will require close collaboration between leaders of clinical departments, not exactly our forte. Writes Kastor:

The effectiveness of ACOs will depend on the centralization of the administration of medical care, whereas clinical departments in medical schools operate on a decentralized model…. Without such coordination, it will be difficult for academic medical centers to reduce the costs of practicing medicine….

Faculty Incentives and Culture: Kastor points out that many academic faculty operate under incentives that drive them to focus more on their teaching and research than on the provision of high-value clinical care. Moreover, the culture of AMCs is entrepreneurial and individualistic, not team-based and definitely not welcoming of standardization in the name of cost savings.

Lack of Primary Care Infrastructure: Most AMCs are dominated by specialists and concentrate on the care of patients with highly unusual problems. But ACOs require a strong primary care network to ensure that patients receive coordinated and efficient care. Many AMCs will not be able to build and manage an efficient primary care network or develop model patient-centered medical homes. And relatively few have crafted alliances with community-based networks that are free of the town-gown frictions that rob systems of the sense of shared mission needed for success.

After reflecting on all of these issues and considering the counsel he received from the 37 experts, Kastor was unable to find a silver lining: “Given the challenges, several leaders with whom I spoke doubt that ACOs can readily be established at AMCs.”

Perhaps overly influenced by my experience at UCSF, I am more optimistic. I am continuously struck by the skills and passion of the faculty in my division, who see the challenge of providing high value care as an utterly worthy cause, are training the next generation of physicians to be better than we are, and are helping to rewrite the rules of the road – developing new computer systems, new training models, new quality improvement initiatives, even new promotional standards.

And they’re not just doing it for our division of hospital medicine. Increasingly, they are assuming leadership roles in the medical center, the department of medicine, the school of medicine, even other departments such as neurosurgery. Every day, I see our culture moving closer to that of an ACO. Sure, we may be further ahead in this regard than many other places (and it’s not like we’ve figured every last piece out), but this is proof of concept time; what I’ve witnessed tells me that this can be done.

To me, the lesson is that AMCs can transform themselves into value-producing entities, but they need to begin with small pilot units with engaged faculty and strong leaders, folks who believe that improving quality, safety and efficiency isn’t just important, it’s also interesting and cool. For those AMCs that lack a core group of faculty and leaders committed to this change, it will be a very long and bumpy road.

But I suspect we’ll get there. Transforming the AMC into a high-value-producing clinical machine will not be easy, but we’re awfully good at responding to our dominant systems of incentives. We built our old system in response to incentives that promoted research over clinical care, rewarded profligacy over efficiency, and provided no incentive for quality, safety, and patient-centeredness. As these incentives give way to new value-driven ones, I predict that AMCs (at least some of them) will do just fine – and forward thinking AMCs will not only survive in this environment, they’ll thrive. As Berwick and Finkelstein recently observed,

We think that the anxiety, demoralization, and sense of loss of control that afflict all too many healthcare professionals today directly come not form finding themselves to be participants in systems of care, but rather from finding themselves lacking the skills and knowledge to thrive as effective, proud, and well-oriented agents of change in those systems…. A physician equipped to help improve healthcare will be not demoralized, but optimistic; not helpless in the face of complexity, but empowered; not frightened by measurement, but made curious and more interested; not forced by culture to wear the mask of the lonely hero, but armed with confident to make a better contribution to the whole.

There are many things that AMCs do uniquely well: deliver complex clinical care, educate trainees, perform cutting-edge research. The great AMC of the future will continue these traditions as they pertain to clinical medicine and basic science, while broadening its agenda to include quality and safety, cost-effective care, and new models of healthcare delivery. The functions that AMCs provide are crucial, and irreplaceable. Failure is not an option. So let’s get started.

Leave a Reply

26 Comments on "Are Academic Medical Centers Toast in a Post-Healthcare Reform World?"


Guest
Feb 28, 2011

“…the skills and knowledge to thrive as effective, proud, and well-oriented agents of change…”
___

And, “the only person who enjoys change is a baby with a wet diaper.” – Brent James, MD, M.Stat

Guest
pcp
Feb 28, 2011

Any academic medical center that makes 200 million in profits has so totally lost sight of its mission that it doesn’t deserve to survive.

Guest
anon
Feb 28, 2011

Bizarre headline. Are you blaming healthcare reform for your difficulties? As an academic medical institution, surely it should be a primary *responsibility*, not a burden, for you to assist in figuring out how the healthcare system can deliver quality, patient-centered health care based on primary, preventive care to everyone in the United States, not just to people who can contribute to your profit margins via highly specialized and extremely expensive care. I sympathize with the fact that AMCs do have many more responsibilities (and thus budget lines) to deal with than your average community hospital, but you are right – failure is not an option. Don’t blame healthcare reform, blame the system as it is, and fix it! Isn’t that what you’re training some of the most brilliant minds in America for?

Guest
Barry Carol
Feb 28, 2011

If our society expects AMC’s to educate the next generation of doctors, we should be prepared to pay such hospitals the fully allocated cost to run an efficient physician education program. Similarly, NIH and other research grants should cover the fully allocated cost of performing medical research possibly supplemented by philanthropy. AMC’s, in theory, could be at the center of an ACO which includes community hospitals, rehabilitation facilities, nursing homes, etc. The name of the game should be to provide the patient with the right care in the right setting for a reasonable price. The sophisticated procedures that only AMC’s can handle should be performed there and priced appropriately. Routine procedures, to the extent possible, should be done at community hospitals at prices that reflect the much lower cost of operating such facilities. If necessary, for the convenience and benefit of medical students and residents, the community hospital could be located adjacent to or even within the AMC (separate floors, wings, etc.)

Guest
Feb 28, 2011

“AMC’s, in theory, could be at the center of an ACO which includes community hospitals, rehabilitation facilities, nursing homes, etc. ”
___

I like that.

Guest
bev M.D.
Mar 1, 2011

Um, Bobby, rlght now I think that’s called Partners’ Healthcare in Boston, with some of the highest costs around. We shall see how they handle global payments.

Guest
Mar 1, 2011

Putting AMCs at the center of ACOs is precisely the wrong direction. ACOs need to be based on the primary care system, with AMCs in a service role. AMCs generally do not understand how to provide efficient management of patient care across the spectrum of care. Putting them in a controlling position is topsy-turvey.

Guest
Barry Carol
Mar 2, 2011

Paul – I don’t doubt that PCP’s who are well compensated and have the ability to spend an appropriate amount of time with patients should have the key role in managing care. However, I think the large hospitals are in a better position to build the administrative infrastructure, if they don’t already have it, to ensure that each piece of their ACO’s care continuum is adequately compensated, to project costs, and to negotiate the size of a global payment in the first place. I don’t think it would work to give a PCP, say, control of a $10-$15 million budget for a panel of 2,000 patients and tell him to provide and pay for all the care that his patients require and negotiate prices with the specialists and hospitals to which he refers patients. A large hospital or group of hospitals would, presumably, be in a better position to negotiate payment rates and to hold financial reserves to cover cost overruns in bad years. That all said, with some, possibly meaningful, portion of care performed outside of the ACO network, I’m not sure how it all can be made to work financially. Perhaps Kaiser is the future where providers and insurers will be part of the same organization and on the same team.

Guest
Mar 2, 2011

Good points, Barry. I think it’s best not to think of this as being run by an individual PCP. Rather, as you suggest, think of a large practice group of PCPs — Atrius Health comes to mind here in Eastern MA — which does have the administrative tools and sophistication — and also the ability to source tertiary services as needed from those hospitals that run safely and efficiently.

I realize, too, that you envision a continuation of negotiating the global payment with the payer. That certainly won’t be the case with Medicare or Medicaid, and it might even become less common with private payers, who will find themselves under more and more government control or required to disclose rates publicly. In short, the differential among provider groups in payment rates is likely to narrow in the future — with rates based on true population statistics rather than market power.

Guest

[…] Tweet this Share on Facebook […]

Guest
Barry Carol
Mar 2, 2011

Paul – As you know, I’m a big supporter of the public disclosure of contract reimbursement rates. The sooner reimbursements are disclosed and based on quality instead of market power, the better, though AHIP CEO, Karen Ignagni, said her members didn’t support disclosure when I asked her about it recently. Also, rate convergence would be a good thing as long as the profit margins for efficient providers and insurers are well within a zone of reasonableness.

If we can advanced the state of the art around risk scoring for individual patients, perhaps ACO’s could submit bids to insurers that would cover the cost of all care needed for a patient population with average risk to which risk adjustment payments would be added or rebates (for below average risk) subtracted as appropriate. This is essentially how Medicare Advantage bidding works now within each county where an MA insurer does business. There might be a need for reinsurance or some other form of risk sharing in the early years until ACO’s gain experience with the global payment model. ACO’s would also need to maintain reserves for adverse aggregate claims experience just as insurers do.

Guest
Mar 2, 2011

Regarding this point: “There might be a need for reinsurance or some other form of risk sharing in the early years until ACO’s gain experience with the global payment model. ACO’s would also need to maintain reserves for adverse aggregate claims experience just as insurers do.”

If so, then we don’t need both insurers and ACOs to maintain insurance reserves. We will have paid twice for the same risk protection.

As I note on my blog: “There has been no talk of reducing the capital requirements of insurance companies in return for this shift …. Are they going to be permitted to maintain large capital reserves, on which they earn money, while their liabilities diminish? Who will ensure that the savings that insurers gain from these changes will be passed through in lower rates to consumers?” http://runningahospital.blogspot.com/2011/03/power-er-no-risk-to-people.html

Finally, let’s recall that ACOs will comprise both doctors and facilities (like hospitals.) How would you apportion that risk between the two categories? Thinking of the doctors, alone, how would you apportion the risk among the PCPs, procedural specialists, and service specialists like radiologists and pathologists. There are a lot of details here that need to be worked through.

Guest

“Thinking of the doctors, alone, how would you apportion the risk among the PCPs, procedural specialists, and service specialists like radiologists and pathologists.”

You only need to do this if said physicians are independent, and since it would be practically impossible to do this, it seems that the easier way is not to apportion risk at all and have all physicians be employed by the ACO, which begs the question of what exactly is an ACO, or what type of entity can successfully function as an ACO?
I don’t even understand how profits would be apportioned (unless everybody is employed), let alone risk.

Guest
Barry Carol
Mar 3, 2011

Paul – If the need for insurers to carry reserves declines as they lay off risk to ACO’s under a bidding approach, I’m confident that the savings would be passed on to employers and individuals. The industry is just too competitive and never has been excessively profitable in comparison to the average company in, say, the S&P 500 Index.

As for paying providers within the ACO, if they’re ACO employees, they would presumably be paid a salary probably with bonus potential as well. The trickier part would be in evaluating physician performance, especially as it relates to the issue of “productivity.” Outcomes, following evidence based protocols where they exist and patient satisfaction metrics should be at least somewhat easier to deal with. If they’re not employees or owned facilities, the ACO would have to negotiate a payment arrangement probably keyed off of Medicare rates.

It would probably be at least somewhat instructive to understand how Kaiser, with over 8 million members in several geographies, does all this. Of course, Kaiser is also the insurer and their doctors outsource at least some care that their staff model HMO can’t handle. As I said in an earlier comment, the Kaiser model may be the future.

There will probably be some significant subset of doctors that don’t want any part of an ACO or HMO. Also, ACO’s may not be practical in rural areas which suggests that the fee for service payment model may have to co-exist indefinitely, at least in some places, with global payments and/or shared risk and shared savings.

Guest
Mar 3, 2011

Re: “I’m confident that the savings would be passed on to employers and individuals.” True if there is competition, but if you look at a lot of states, there is one dominant insurer. In the absence of state rate-setting, companies in those states will hold on to their monopoly profits.

Like Kaiser, Geisinger also owns an insurance company. As you suggest, it is easier to rationalize care and the finances if you are both the provider and the insurer.

Guest
Jeff Goldsmith
Mar 3, 2011

It is astonishing how much energy is being wasted on the ACO concept. Academic health centers won’t be able to do this (they did a terrible job as health plan sponsors). Most community hospitals won’t be able to do it. Even among the elite multi specialty group practices chosen for the only field test of the ACO idea- the Physician Group Practice demonstration- only two of the ten groups managed to generate bonuses for the full first four years (ironically, one was the Univ of Michigan practice plan!).

The famed Geisinger Clinic managed only two years, despite running a successful health plan AND Medicare Advantage plan. The Park Nicollet Clinic in Minn, with more capitation experience than just about any group in the nation, was shut out. The ACO is a terrible idea hatched by fuzzy minded academics with no real world managed care experience. ACO’s are managed care without the risk. Gin and tonic without the gin.

Pursuing this idea is going to waste billions of dollars and distract managements and clinical leadership for five years. AND raise costs for the non-Medicare population. We need to look at the literally dozens of other ideas for reforming healthcare payment in the ACA and begin paying some attention to them.

Agree with comments about the real problems of AHC’s driven by things other than health reform. Change of ANY kind is difficult for these places, because they deliberately shield their faculties from economic reality. Plus, they pay a huge price for their brand names. . . How much money did the University of California skim off UCSF before they got to keep the money they earned? How much closer to breaking even on research would UCSF be if they got to keep the indirect cost money spun off to the University from all their research grants. Suppose junior faculty were actually rewarded for their clinical or research productivity? Suppose they got to keep some of the money claimed by the University for patents they developed on their ideas?

The real problem is that AHC’s aren’t enterprises, they are more like enormous coral reefs- a colorful ecosystem that’s generating profits only by scandalously overcharging for routine services. THe real threat to AHC’s is that private health plans will no longer be able to pay them $5000 for an MR scan. That’s where every dime of the $200 million came from- private insurers who will be blocked from passing on the huge cost shifts from AHC’s.

AHC’s are going to need to join the real world. THey will need to run on regular gas, and they will have to dramatically improve the continuity and quality of the service they provide, or they are going to be in big trouble.