Health care and higher education are weathering significant disruption to their respective traditional business models. Within the highly regulated, capital- and labor-intensive, technology-driven environment that both sectors must navigate, each must also address significant changes to its funding structures and intense scrutiny of an increasingly skeptical public about quality measures and service costs.
Perhaps nowhere are these pressures more acutely understood than at institutions where the academic mission includes health-care delivery. Academic medical centers—AMCs—are among the most complex components of U.S. higher education institutions, combining high-end clinical care, research, and a direct teaching element. The nature of the relationship between the university and the hospital can vary widely, from ownership to loose affiliation. Regardless of structure, this relationship—as well as relationships within the university—can become strained because of lack of clarity about governance, unsustainable funding obligations, or a failure to incorporate the medical enterprise into the central mission of the institution.
External forces further complicate the AMC mission. These include a rapidly evolving health-care marketplace and perceptions of credit risk by ratings agencies and investors that can impact, among other things, access to capital for the university as a whole. Additionally, increased competition among providers and lower rates of patient reimbursement overall are putting downward pressure on AMC operating margins.
This article looks at factors affecting today’s AMC business and revenue models, risk management and cost-containment challenges, and university-AMC governance approaches. On all these fronts, the university chief business officer has increased involvement and responsibility. There are lessons to learn even for CBOs and finance professionals serving non-AMC institutions, since what AMCs are doing to position themselves for future growth and relevance is not unlike what colleges and universities across the country are exploring to expand their academic enterprise and enhance institution mission to serve a wider audience.
Shifts in Structure and Scope
For higher education institutions that have a medical school and clinical care mission, the health-care component often represents a significant portion of the university’s revenue. For years, many AMCs have generated substantial dollars from clinical operations that have supported the broader institution research function, helped pay nonmedical faculty salaries, and offset stagnant tuition revenues. This has been especially true in more recent years, during which clinical income has helped mitigate the impact of cuts in state appropriations and dwindling federal research grants. Unchecked, this reliance on clinical income could spell significant risk for an institution, notes Michael Gower, senior vice president for finance and treasurer at Rutgers, The State University of New Jersey.
In broad strokes, health-care delivery in the United States is moving away from an inpatient, fee-for-service focus on volume—such as the number of tests or visits—to an outpatient, health-management focus on value and quality of care. While there is debate about how quickly these changes are taking place, AMCs and their affiliated universities face significant decisions about the strategic directions to stake out in this dynamic marketplace.
In hand with this move toward value and improving quality of care is the creation of larger networks of physicians and services to provide a broader spectrum of care to a bigger base of patients. This has led to realignment throughout the industry. John Augustine is a managing director for Barclays and leads the company’s higher education AMC group. He notes five basic approaches to achieve this growth: consolidation, mergers, acquisitions, vertical integration (e.g., through the purchase by hospitals of physician practice groups), and joint ventures with affiliation agreements that allow for extending the reach of practices and expertise while limiting debt capital use.
In reality, AMCs straddle two sectors, each of which is undergoing significant change to its business and funding models, says Kimberly Tuby, vice president and senior credit officer at Moody’s Investors Service. “While universities are pursuing a range of strategies with regard to AMC structure, in the past 10 years, one clear trend has been toward closer relationships and better collaboration between the two entities,” says Tuby. (See sidebar, “Team Work: AMC Governance Best Practices.”)
The role of reform. Industry reform is also playing a hand in shaping health-care delivery. While uncertainty remains, in the short term at least, about the future direction of health care in general and the ability of patients to pay, the initial impact of the Patient Protection and Affordable Care Act (ACA) has resulted in more insured patients, an expansion of Medicaid in many states, and changes to the overall patient mix, notes Gower.
Jeffrey Eyestone, executive director of health-care solutions for J.P. Morgan, cautions not to think exclusively of the ACA when considering the impacts of health-care reform. “We look at a range of government and industry reforms that include changes in payment approaches, consolidation and centralization, upgraded infrastructure, realignment of providers and payers around new business and payment models, and stricter rules on data security and patient privacy.” While his primary involvement in the university-AMC relationship centers on workflow and process improvement, Eyestone observes that this new era of evolving health-care business and payment models, realignment of hospital-physician–health plan relationships, and the need for leadership in these new provider organizations paves the way for AMCs to take a more central role in health-care delivery models of the future.
The move toward accountable care. The concept of accountable care—in which an organization assumes the risk and responsibility for the total care for a specific population over time—also marks a shift toward focusing on what keeps individuals well, within a large patient population, versus what drives the next procedure or test, notes Eyestone. “This model is still very new, but AMCs may be particularly well-positioned to adopt this model depending on their network of specialty- and primary-care offerings through their relationships with area hospitals, clinics, and services such as emergency room care.”
Gower suggests that AMCs can take not only a lead position in the move toward a population health-management context, but that if they don’t, they may be left behind. For those intent on pursuing this transition, a first step is much greater coordination of practice, he notes. He has witnessed a fundamental shift in this regard within medical schools. “In the past, these tended to be feudal kingdoms, with silos between medical fields and surgical fields and those ancillary to surgery or medicine. Today, this paradigm is quickly being replaced by a focus on providing the full range of primary care through tertiary care in an organized and patient-centric fashion,” explains Gower.
He describes a public health and population management model that is starting to emerge within his state. “Patient access is a major initiative for Rutgers, with a lot more planning across medical disciplines and even extending beyond to hospitals and ancillary services like radiology,” says Gower. “One of our big challenges ahead is developing a multispecialty group practice that is efficient, patient-centric, financially stable, and contributes to our research mission.”
In part, financial realities are behind these emerging models that attempt to spread risk and seek greater revenue. “There is no one-size-fits-all model, and there are distinct differences for what works in one part of the country versus another, or even what works at one institution versus another,” argues Gower. Regardless of structure or where an AMC may be on the trajectory toward accountable care, most are, in some manner, expanding and diversifying their patient base and breadth of services, he adds.
Three of Many Models
Consider these three quite different approaches to AMC growth.
The Ohio State University. The university and OSU’s Wexner Medical Center have been a single entity since inception of the institution’s academic medical program. While the hospital’s physicians previously practiced independently, all are now OSU employees, explains Geoffrey Chatas, OSU senior vice president for business and finance and CFO. Like many AMCs, OSU has been methodically expanding its reach over the years. Its growth strategy, however, has been to partner rather than acquire, notes Chatas. OSU also has broadened its capacity by adding facilities in ambulatory and outpatient care, primary care, women’s health, and other specialties throughout Columbus. And, in December 2014, the university opened a new 1.1 million-square-foot, 21-floor tower as the expanded home of the Arthur G. James Cancer Hospital and Richard J. Solove Research Institute.
Rutgers, The State University of New Jersey. Relationship management has been a big part of Gower’s job. He has been centrally involved in ironing out the details of perhaps one of the largest mergers in higher education history. In September 2013, Gower stepped in to help drive financial and system integration between “legacy” Rutgers and a confederation of health-care related institutions that were part of the University of Medicine and Dentistry of New Jersey. These included two separate medical schools, a school of dentistry, a school of nursing, a cancer institute, and schools of public health and health-related professions.
Rutgers acquired its broad-based health-care mission as a result of planning efforts launched in 2012 by Governor Chris Christie and the New Jersey state legislature, developing the state’s Medical and Health Sciences Education Restructuring Act, to merge these disparate entities with the state university, explains Gower. The planning of this megamerger took nearly a year, and by July 2013 Rutgers had officially acquired these other entities. The result is the three campus-based universities that have traditionally formed Rutgers—with physical locations in New Brunswick/Piscataway, Camden, and Newark—and the new Rutgers Biomedical and Health Sciences (RBHS) division, a conglomerate that is spread across the state.
In terms of sheer size and impact, the combined, acquired academic health units essentially represent an addition on the scale of the flagship campus in New Brunswick, says Gower. The many efforts to meld all these once-disparate entities include mapping a solid clinical care model and research plan. This requires taking two medical schools that previously existed within a competitive environment and reshaping them to work in a complementary fashion, along with all the work internally to define relationships between RBHS and legacy Rutgers, notes Gower. This has also required reworking affiliation agreements for education and clinical care with the two primary teaching hospitals and developing additional alliances with other providers throughout the state.
Currently, Rutgers has demonstration projects underway between one of its medical schools and an affiliated hospital to test the viability of establishing an accountable care organization for Medicare patients within New Jersey. “We are on the path to a unified mission, but something of this scale will take awhile,” admits Gower. Nonetheless, he says the general sentiment is that this combined entity provides incredible potential to develop an innovative health-care paradigm in New Jersey and to significantly extend the university’s research capacity.
University of Washington. UW Medicine is equally robust in terms of its scope; though it has grown to its current comprehensive status over the course of several decades. Today, UW Medicine is composed of eight entities, including two AMCs; two community hospitals; one practice plan that handles physician billing; neighborhood clinics (nine total) providing primary care; an air ambulance company with fixed- and rotary-wing aircraft operating throughout a five-state region; and a school of medicine.
“One question we faced many years ago was where our school of medicine graduates could do their internships and residency work,” says Lori Mitchell, UW Medicine CFO and UW vice president for medical affairs. UW Medical Center, along with its associated clinics, was the first hospital brought into the fold. The university next added Harborview Medical Center in the 1960s, in part because the institution needed more teaching capacity, notes Mitchell. “Harborview is also the only Level 1 trauma center in a five-state region, which represents one-third of the land mass of the United States. As such, it provides much-needed medical care to people in remote locations,” she says.
In the 1990s, UW leaders decided to form a network of neighborhood primary care clinics to expand the university’s community reach, notes Mitchell. “From a market perspective this turned out to be one of our best strategic moves, even though managed care didn’t take off the way many envisioned it would at that time.” The most recent additions to the health-care conglomerate include two community hospitals. These have been pivotal in rounding out UW’s health-care delivery within the Seattle market, she says.
Consolidation versus affiliation is a key consideration, suggests Mitchell. “You have to factor size, service model, and competitors into your decisions,” she adds. “Finding opportunities to make consolidation work has been quite beneficial in our case, but integrating separate entities into one clinical administrative organizational structure is harder than it looks.”
The latest venture for UW Medicine is one that promises to further fulfill its mission. Through a preferred partnership contract with aerospace giant, Boeing, to provide health care to a subset of the aircraft company’s employees, UW Medicine has entered the arena of population health management. “This not only provides us with the opportunity to continue to serve a large population of patients but also to solidify future revenue streams,” Mitchell says. Yet, assuming responsibility and risk to deliver health care to a set population is not a simple matter. “We’ve had to come to a financial agreement with Boeing about operating successfully within a budget that includes the cost of all services provided to the employees and dependents for whom we are responsible,” she notes.
Cost-Containment Approaches
While its medical research–related philan-thropic gifts are on the rise, OSU has an even stronger reliance on clinical dollars, which is why leaders remain “laser focused” on clinical endeavors, says Chatas. Currently, margins generated by the university’s hospital and ambulatory facilities are invested in the cost of OSU’s research facilities and teaching mission. “Going forward, we all have to assume that our revenues will decline—not because of less inpatient activity or fewer surgeries, but because as the market becomes more transparent, this allows the revenue per procedure or per patient to go down,” explains Chatas. AMCs must focus on how to preserve their margins, he cautions. The way more are doing this is by pursuing increased productivity, growing current lines of service, or launching new business initiatives while simultaneously focusing on expense management to prevent erosion of margins.
Eyestone agrees that the need to preserve margins is real. “All health-care organizations—AMCs, county hospitals, and specialty-care organizations alike—are under increasing pressure in terms of revenue and must determine how to provide higher quality care for lower reimbursement,” says Eyestone. “For many of the more aggressive health-care organizations with which we work, we often hear of ambitious goals like: ‘We must treat 20 percent more people for 20 percent less revenue by 2020.’”
John Case likewise agrees that institutions must take a hard look at the cash flow and business models for AMCs, in light of current challenges with patient reimbursements and declining research dollars. “AMCs cannot be structured as they have been in the past—siloed, with minimal sharing, and lots of duplication—like much of higher education itself has too often operated,” says Case, senior vice president for operations and CFO for Morehouse School of Medicine (MSM), Atlanta.
Founded originally as a part of Morehouse College in 1975, MSM became a standalone HBCU medical school in 1981 and was fully accredited to award MD degrees in 1985. MSM students receive clinical training through the college’s affiliations with community-based public hospital Grady Memorial, the Atlanta VA Medical Center, Children’s Healthcare of Atlanta, and several other facilities across Georgia. There are graduate residencies in seven different programs. MSM also operates health-care centers in four locations within the state of Georgia.
The school’s social mission, focused on training doctors to serve the underserved in rural areas and inner cities, requires a concerted focus on providing scholarships to cover students’ costs so they graduate with the least amount of debt, says Case. State and federal appropriations and federal grants and contracts are critical to MSM, accounting for about half of the institution’s funding, while less than 12 percent of the school’s overall funding is derived from tuition and fees.
Compensation Questions
Case argues that characteristics of the kind of new business models AMCs must devise include a range of cost-containment approaches such as shared services, consortium buying, partnerships with vendors, better use of technology, and restructuring of departments and schools. He also cautions that, like higher education in general, AMCs should concentrate on their unique niche, instead of trying to be all things to all people. “Most of us simply don’t have the resources to duplicate everything on a small scale.” As part of that comprehensive review, everything must come under scrutiny, including faculty compensation plans, says Case. “A big question for many going forward will be determining how salary relates to productivity and how to formalize a plan with established performance criteria.”
Mitchell agrees that one looming challenge for many AMCs is counterbalancing a culture of entitlement that can come with tenure and high benefit levels. “The most valuable asset to an AMC is its faculty and medical team, so motivating them to be leaders of change is key,” she argues. “Decisions about physician compensation have to be collaborative and based on multiple factors, but we do need to provide incentives related to customer satisfaction, quality of care, and safety concerns.” This has become all the more critical since, over time, loss of government funding for teaching positions and reduced reimbursements for patient care have been chipping away at capital that might otherwise be used for IT and infrastructure investment, says Mitchell.
Chatas believes AMCs are at a disadvantage compared to for-profit health systems with regard to physician compensation. “We have a higher cost base to start with, because instead of our surgeons spending 100 percent of their time in surgery, we must cover the cost of their time spent teaching. So, our mission for an appropriate balance means we have to keep up with what the market will bear.”
In OSU’s case, since all faculty are OSU employees, the university is arguably aligned to look more holistically at research, teaching, and clinical responsibilities. Even so, the drive to get everyone on the same page about productivity measures and targets for revenue generation can be difficult, and this has been a work in progress for OSU, since its physician networks were previously autonomous, notes Chatas.
At the same time that OSU has focused on academic accountability and monitoring expense and revenue per patient, the university has turned serious attention to cost containment, concentrating specifically on supplier contracts, new hires, and limiting raises for highly compensated individuals. All these decisions have been carried out with the approval of a council of leaders, notes Chatas. He is proud to point out that at the same time that OSU has trimmed $100 million in costs from its $2.3 billion budget, the university’s medical center has risen in national rankings in patient safety and quality care.
UW Medicine has likewise tackled issues of cost and productivity. “As far back as 1999, we were discussing our need for a formalized infrastructure for process improvement,” says Mitchell. These discussions pinpointed three areas on which to focus. “One is revenue cycle: How do we maximize the money coming in? The second is supply chain: How do we minimize spend in the supply world? And third is transformation of care: How can we provide patient care more effectively and efficiently while improving quality?”
Over the years UW Medicine has implemented hundreds of process improvements in all three categories, mostly initiated at the individual entity level, but in the past four years this has been tackled at the system level—and with great success, with more than $90 million in savings, says Mitchell. And yet, efficiency efforts can’t be singularly focused on cost containment, she argues. “We really need to focus on investment in key areas. In addition to ongoing needs for IT solutions and systems, one place where we need to put more resources is in our accountable care network infrastructure so that we can be more successful with delivery methods.”
The full UW Medicine Accountable Care Network includes 17 organizations serving 46 cities throughout the Puget Sound region. This need has become all the more evident after securing the Boeing contract, notes Mitchell. “Part of building out infrastructure to increase patient capacity is figuring out what is scalable, and where and how to enhance our outpatient care to mitigate the need for emergency department or urgent care.”
Mission Critical
Even as health-care delivery models are rapidly changing, AMCs must continue to evolve, and a big part of that includes the education provided in our nation’s medical schools, Mitchell says. “Continued curriculum reviews are necessary to understand opportunities, and research should be evaluated for both communal benefit and interdisciplinary potential.” For Mitchell, the magic ingredient for balancing the education, research, and clinical components of AMCs is to focus on the success of all three. “Nothing about a partnership works if only part of it is doing well.” Because UW values excellence in teaching, research, and clinical care equally, this allows for a closer partnership than in some situations where the balance might be 90 percent clinical, with very little teaching and research, she says.
Chatas agrees that it is crucial to consider all three components in tandem. As part of his oversight of Ohio State’s AMC, he requested that the cash flows for the hospital, the academic enterprise, and physician practices all be on one page to help make the links among these more evident for everyone. “Tools like this also aid in assessing where it makes most sense to focus along the medical spectrum—what is necessary, what to eliminate, and where to become outstanding,” says Chatas. “We are a teaching hospital and so we always need to maintain a strong education focus; but we also have an outstanding cancer center, and we have plans to focus on neuroscience.”
As mission-driven organizations invested in education and training and advancing knowledge and research, AMCs are never solely about the bottom line, says Gower. “When considering how university-affiliated AMCs are advancing knowledge that can be applied for the benefit of a state or region, you begin to see opportunities to improve health across a large population and to serve a greater good,” he notes. “Many of us at Rutgers believe that with our new mission we can make a real impact on improving the health of New Jersey residents with what we do in the coming years.” Gower likens what is happening at some AMCs as analogous to the original land grant mission. “Instead of institutions serving the public through agricultural services, we are now talking about the benefits to the public of biomedical research and health services.”
Institution Impacts
Eyestone believes that amid the uncertainty of the health-care marketplace, every higher education institution that has an AMC mission is well positioned to take a leadership role in this changing environment and to thrive within these new health-care business models. “AMCs represent a solid brand. They are a known place for research and specialty care and can leverage the innovation and technology of their universities.” That said, every academic medical center must grapple with several key questions, suggests Eyestone: What is our plan? Where is there opportunity for our institution to lead? How can we innovate and change the dynamics of health care within our community and beyond?
For Gower, the best-case scenario for AMCs 10 years hence will be if AMCs as a sector have figured out accountable care, are managing to health and wellness, and have a customer-oriented delivery system that works. They also should be taking full advantage of the data they collect on patients and capitalizing on the opportunities for clinical research, notes Gower. “Questions that leaders of every university-affiliated AMC need to ask are: Where is health care in the university’s mission? What is our AMC’s role in the state? How do we make the mission and the dollars work?”
While there is no single-best approach for AMCs to pursue the necessary structural changes that may be required to thrive in the health-care marketplace of the future, Gower believes those continuing to operate on a small scale may be at greater risk. “Institutions must at least be open and willing to align with other institutions or organizations in order to stay relevant.”
This only reinforces the need for those in the center of the institution—the president, CBO, and board members—to understand these new health-care models and structures, argues Gower. Equally important is understanding and staying true to your niche, even as leaders look to expand their institution’s sphere of service. “If we focus first on mission and direction, we all will have a better opportunity to succeed in this fast-changing environment.”
KARLA HIGNITE, Ogden, Utah, is a contributing editor for Business Officer.