Wietecha, Mark MS, MBA; Lipstein, Steven H. MHA; Rabkin, Mitchell T. MD
The question of how to characterize the many variants of academic health center (AHC) organization has been discussed widely in the literature.1,2 For the purposes of this article, we define an AHC as any organization or collaborative of organizations, including an accredited medical school and one or more affiliated hospitals, where many of the medical staff physicians are faculty members. At the AHC, clinical care is delivered, undergraduate and graduate medical education are conducted, and biomedical and other research is carried out. We suggest the organizational anatomy of the AHC exists along one of two general models.
Single Versus Multiple Leadership Models: Framing the Question
The first of the two general models of AHC organization is the “single fiduciary, one executive leader” format typified by the University of California systems. In this model, at least one major teaching hospital, the faculty practice, and the educational and research endeavors are set up under the overall university framework.
The second general model is the “multiple fiduciary, multiple executive leaders” format typified by Washington University and Barnes–Jewish Hospital in St. Louis. In these arrangements, the teaching hospitals and the universities each have their own fiduciary boards and executive management.
In arrangements of both types, agreements exist at varying levels of specificity defining the exchange of service and funding support between the clinical and academic enterprises. Although a host of variations exists around this exchange of support, including “virtual” enterprise formats with shared operating boards between otherwise distinct fiduciary enterprises (e.g., Johns Hopkins Medicine), we suggest the two general formats are useful reference points for discussing success in governance. (Figure 1)
Given the differences in these two structural groupings, the question of how most effectively to govern an AHC is of considerable interest to trustees, particularly in those settings with multiple fiduciary and executive leadership formats. Although it may not be feasible to unify the fiduciary oversight and responsibility in many settings, the organization of executive leadership of the AHC presents an important question. Specifically, is it more effective to have the AHC led by a single executive with accountability for and responsibilities over both the clinical and academic enterprises, or by multiple executives each dedicated to a separate enterprise?
The principal stakeholders of this question are the teaching hospital CEO, the medical school dean, the practice plan leader, and the executive vice president (EVP)/vice chancellor, who may have responsibility for some or all of these positions. In the “one executive leader” model, a single individual is accountable to a university president or to a board or boards for all aspects of the AHC. In the “multiple leaders” model, the several executives report separately and relate to each other as essential but arms-length business partners. Because of the differing primary missions, the confrontations and conflict in governing the AHC in times of dispute can lead trustees to conclude that one-leader models are better. Why?
The most cited AHC responses include the need for a single vision, a unified point of accountability, and overall “peace on campus.” Although reasoned, this rationale is not necessarily consistent with academic or business success across the AHC. One can cite many successes in the one-leader environments, but many notable institutional failures in the AHC sector have also occurred under single leadership. In fact, the original move towards multiple leader “independent” models was driven by the lack of success of the clinical enterprise inside single-fiduciary, one-leader university environments.
The Original Context for Multiple AHC Component Organizations
Although many AHCs were initially organized under university governance, the growth of commercial health insurance in the 1950s and the emergence of Medicare and Medicaid in the 1960s set the stage for clinical revenue growth. University structure quickly proved a poor foundation for the operation of a competitive clinical business. For hospital and clinical faculty practice alike, the ability to establish competitive frameworks for governance, compensation, procurement, and capital financing proved challenging. Operating losses at the teaching hospitals were not uncommon, and the university-governed clinical enterprises became viewed as financial liabilities even to the point of adversely affecting university credit ratings.
In response, significant restructuring occurred during the period from 1960 through the 1990s, with separation of both hospital and faculty practice plan from the university. These newly distinct organizations, the teaching hospital and faculty practice plan, developed their own governing and executive management structures. Most clinical faculty practice plans separated to varying degrees from the university to ensure competitive compensation and benefits, particularly those in the public sector. Major hospital restructuring occurred on such health sciences campuses as the University of Alabama, the University of Colorado, the University of Florida, the University of Kansas, the University of Maryland, the University of North Carolina, the University of Washington, and the University of West Virginia, to cite just a few examples.
The subsequent improvements in growth and profitability of the newly organized teaching hospital sector were dramatic. For many AHCs, the creation of capital via the hospital balance sheet proved to be the decisive means through which the AHC could renew facilities and technology over time. Neither the physician practice plans nor the universities have been as effective in capital creation on the scale needed to sustain the growth in physical infrastructure for clinical care.
Hospitals’ financial success has led to contention over how best to allocate monies across the clinical, research, and educational missions. This has been particularly so in the multiple-leader models, in which AHCs are necessarily governed across a matrix of “separate but inseparable” organizations, bound together through a complex web of financial interdependencies. This conflict over money has led many trustees to consider moving towards a one-leader structure. Apart from the qualitative “strategic” rhetoric behind the rationale for this change, we suggest this trend has more to do with who controls the profits generated by the clinical enterprise.
Contemporary Funds Flow in AHCs
The inherent profitability of the AHC mission has been the subject of much discussion over the years. Although the literature does not clearly address the comparative profitability of clinical vis-à-vis academic activities, the academic costs of education and research have been well vetted.3,4
The profit potentials across the hospital, subspecialty faculty practice, primary care faculty practice, research, and educational endeavors are strikingly uneven. It is our experience that margin potential is typically greatest on the inpatient and subspecialty outpatient clinical “business lines” of the AHC, which account for most or all of the operating profit. In contrast, the educational program, whether that for medical students (undergraduate medical education) or for residents (graduate medical education), often requires subsidy, as virtually always do the research efforts. By direct accounting, with rare exception, both research and education are unprofitable. The education effort can appear solvent in light of the vagaries of Medicare’s added payment to teaching hospitals under the rubric of indirect medical education (IME) payments (hospital payments adjusted for the factors that increase costs in teaching hospitals, like specialized services and treatments and the additional costs associated with training residents). This perceived effect is the exception, however, especially in the context of the added costs the IME is intended to fund. And, in the most recent years, the IME adjustment continues to decrease. Although it has been argued5 that elements of education are self-funding, and though the rare case can be found where research is profitable through patent/royalty revenue, we have not identified an individual who has served in the role of AHC dean, EVP, or CEO who would contend that the academic mission generates a net profit in any representative AHC. The fact that several prestigious institutions apply large nonoperating revenues derived from philanthropy and/or large endowments as offsets for education and research costs should not obscure this observation. Such nonoperating support fosters larger and more ambitious academic efforts but does not make them intrinsically more profitable. (Figure 2)
The teaching hospital or hospitals, along with the clinical subspecialty faculty, are the margin drivers on almost every campus, typically resulting in a flow of funds across institutions from those activities making profits to those requiring subsidy, all of which contribute collectively to the societal benefit of the AHC. But it is from the major elements of this flow that much of the behavioral dynamic of the AHC derives.
Funds flow: From payors to teaching hospitals and clinical faculty
Teaching hospitals and clinical faculty receive the majority of their revenues from Medicare (the federal government), Medicaid (federal and state government), and employer-sponsored health insurance. The intended use of these funds, particularly from the perspective of the commercial payors, is payment for the delivery of patient-care services. Because the sources of funds include taxpayer dollars, the flow of funds is highly regulated, and the use and benefit of these monies are subject to public scrutiny.
Funds flow: From teaching hospitals and clinical faculty to medical schools
In almost every AHC there is a flow of funds from the teaching hospital and the clinical faculty to the affiliated medical school. The levels of flow are substantial, often in tens of millions of dollars. Funds from the hospital compensate the school for faculty services, such as supervision of medical education programs and management of various clinical services. Some teaching hospitals pay for these services at market-competitive rates. Some teaching hospitals pay in excess of market rates, with the “overage” often referred to as embedded subsidies of the academic mission. Still other teaching hospitals make annual or periodic equity transfers to their affiliated medical schools with the rationale that the teaching and research missions of medical schools run at a deficit, and therefore the school’s financial and functional viability requires generous transfers from the clinical enterprise.
Similarly, there is a flow of funds from the clinical faculty to the school above the direct costs (salary, benefits, and administration) of the faculty practice plans. The uses of these dollars include recruitment of new faculty, support of unfunded (extramurally) faculty time, and support of overheads relating to academic departmental and school operations. This funds flow almost always includes an overall assessment by the school against professional fees (“dean’s tax”) and usually includes further departmental assessments (“chair taxes”) and, sometimes, divisional assessments in the larger departments of medicine, surgery, and pediatrics. These clinical dollar sources are critical to U.S. medical school budgets in aggregate, today constituting nearly half of total funding. (Figure 3)
Funds flow: Medical schools to universities
In almost every university setting, the various schools of the university are assessed overhead charges or prorated shares of the costs associated with operating university central units, such as libraries, athletic facilities, development offices, and administration. Because schools of medicine can represent the largest single operating unit and budget within a university, especially among the nation’s elite research universities, their pro rata share of university central expenses can run in the tens of millions of dollars.
Funds flow: A summary
As we have illustrated, the chain of clinical funds flow begins with taxpayer dollars and patients’ insurance premiums paid to teaching hospitals and clinical faculty for their services. A substantial portion of these dollars is passed along to respective medical schools to support academic activities (i.e., education, recruitment costs, innovation, and the negative margins in research). In turn, the medical schools pass portions of those dollars along to their universities.
Governance Over the AHC Funds Flow
The governance of this funds flow and the levels of reinvestment are central in shaping the viability of both the clinical and academic activities. In the “multiple fiduciary, multiple executive leaders” models, the teaching hospital board of trustees and their employed executive team watch over the flow of funds from the teaching hospital to the medical school. The terms, amounts, and responsibilities of this funds flow are often the subject of lengthy negotiations and are formally defined. Accountability for performance and transparency regarding the use of these funds is of ever-increasing importance.
In the “one-leader” model, the hospital CEO, the dean, and the practice plan leader typically report to a provost, EVP, or vice chancellor for health affairs who, in turn, reports to the university president or chancellor. In this case, the ultimate reporting authority for the clinical enterprise is an academic institution, and it is this academic institution on the receiving end of the funds flow transactions.
In both models, the academic enterprise is accountable to the university, which is directed by its academic mission. However, emphasis on the clinical mission can be attenuated more readily in the single-fiduciary or one-leader model under the direct auspices of the university. In such a situation, who protects the financial interests of the teaching hospital? Who focuses on the welfare and well-being of the patients in the teaching hospital beds? Is it the university president? The university trustees? How well do these governors prioritize the needs of a clinical business vis-à-vis the needs of the academic colleges?
In both models, the trustees must play an essential role. Trustees, not management, bear ultimate accountability for the quality of patient care delivered in the teaching hospital and for the quality of the active medical staff. The trustees have the responsibility to ensure that the funds flow within the academic enterprise does not compromise the ability of hospital leaders to put the needs of patients above all others.
When payments and profits again decline for teaching hospitals, as surely occurs in the cycles of reimbursement, trustees must maintain their roles as governors of the teaching hospital to safeguard the well-being of patients, monitoring the flow of funds to ensure that where patient care is concerned, “first, we do no harm.”
The Current Impetus Towards One-Leader Models
Over the past five years, teaching hospitals and all hospitals have enjoyed better economic performance. Relief from the Balanced Budget Act of 19976 helped. A cycle of substantial managed care rate increases helped further, along with a growing appropriation of federal money for entitlement programs, even in the context of greater deficit spending (Medicare Modernization Act).7
The improved finances have been timely, given the need for higher margins to fund contemporary clinical strategy. Rapid advances in both medical knowledge and diagnostic and therapeutic technologies require significant infrastructure reinvestment to sustain competitive leadership positions. At the same time, academic strategy demands investment of significant capital to fund new researchers and their necessary space and technology. Most medical schools have been tasked by their universities to expand research. Many are also being asked to expand and modify education to deal with manpower shortages, the burgeoning of basic science, and the evolving clinical environment confronting medical students and resident physicians.
Although both the clinical and academic missions demand growing levels of investment, they are not equally capable of supporting their respective needs for capital renewal and expansion. Near-term clinical payments will continue to support profits, albeit less robust ones, and will accrue largely to the benefit of the hospital. Sustaining these margins will not only require capital investments in infrastructure on scales unprecedented over recent decades, but will also call for systems improvements in hospital operations to yield efficiency and economies. With total campus replacement costs running up to $3 to $4 million per bed,* many teaching hospitals require all of their margin plus philanthropy just to renew their infrastructure. Older facilities are no longer able to accommodate the complexity of care of the hospitalized patient today, a problem that will only worsen tomorrow.
Because the profit margin in education is typically negative, and because it is almost always so in research, continued expansion of research and needed investment in medical education become fundamental challenges to medical school economics in the absence of significant public or private funding support. The higher potential for growth and profitability of the clinical sector over extramurally funded research and education serves further to underscore clinical margins as a major funding source for enterprise growth. And because the hospital and faculty practice plan margins are increasingly required for clinical asset renewal, fund transfers from the clinical to the academic “businesses” are proving increasingly contentious. The dilemma, then, is the potential of underfunding the future of one enterprise for the benefit of another. Disputes over such academic tithes can prove lengthy and divisive, with the leaderships of the hospital, school, and practice plan often finding themselves at loggerheads. This basic dilemma frustrates volunteer trustees who often have little basis for judging which side of the argument carries the greater weight, where the judicious decision should lie, and how to get there.
One option for addressing such disputes is to reorganize the AMC under a single management leader accountable to a single governance body, thereby reducing the number of conflicting interests around the boardroom table. “Peace on campus” can become a priority for those trustees fatigued by the inevitable debate across the independent models.
Are these single-fiduciary and/or single-leader models better positioned for long-term success when compared with the multiple format models? The answer is that it depends. Both models have documented records of success and failure.
Successful Governance of the AHC—Considerations
Independent of structure, the most successful AHCs have consistently demonstrated a capacity to recognize and balance the diverse requirements of their businesses. The clinical business of patient care and the academic business of discovery and teaching remain different domains of expertise and requirements. The AHC is not a “three-legged stool” of patient care, research, and teaching—a metaphor implying greater similarity of purpose, functioning, and financing than is the case. The “legs” of that stool are distinct and different business models. Successful management of all three by any single body and individual requires sophisticated understanding and exceptional capacity.
The contemporary teaching hospital has enjoyed considerable success when run as a competitive clinical business involving a highly accountable board of trustees overseeing a focused executive management team. The typical successful operating culture is one of a management hierarchy capable of value creation and high impact, working as a team, with accountability for performance measured against industry benchmarks.
The medical school and, by extension, its affiliated clinical practice plan, are different but equally complex organizations. Medical schools are firmly rooted in the paradigm of the Western university, a model involving the establishment of a collegial climate conducive to individual innovation, scholarship, and accomplishment. Accountability is measured in different terms and on different time frames than is clinical output. Leadership via strong centralization over any long-term period is generally unsustainable. Department chairs and their star faculty have their own extramural means of support, and the practical powers of the dean and often the chairs tend to be limited by the more decentralized environments typical of many universities.
Improvement in productivity and efficiency in today’s medical school environment calls for ever more accountability, integration, and teamwork across the clinical departments. While progress is being made in this regard, the necessary attributes of performance are challenged by the very academic characteristics so attractive to talent: individual entrepreneurship and career progression based on personal merit in one’s selected, often narrow, field, and on the advancement of one’s CV.
Recognition of the differing business requirements within the AHC is the basis on which leadership selection, performance metrics, and decision processes must be organized and integrated to ensure success across its several but interconnected missions.
Strategic imbalances wrought through indecisive or feuding leadership, lack of transparency, or outright favoritism in resource allocation can give an advantage to one component of the AHC at the expense of the others. Case examples of such imbalances are legion, with the academic “side” invested at the expense of the clinical enterprise or the converse, yet either bias risks the futures of both. While short-term decisiveness may improve under the integrated organization as the boardroom becomes more peaceful, deliberate care must be taken to balance the longer-term viability of the collective AHC. Effectively striking a balance is the goal, and it supersedes the preferred desirability of any specific model.
In place of endorsing a particular model of governance, we suggest three governing behaviors of paramount importance: (1) astute selection and collaborative review of executive leadership, (2) alignment of trustees’ delineations of mission and performance metrics in defining successful stewardship, and (3) embracing rather than de facto delegating trustees’ fiduciary responsibility for the collective AHC enterprise
Astute selection and collaborative review of executive leadership
Appointing a single executive leader of an AHC is a formidable challenge to the trustees. Among those AHCs with prestige university status, a strong bias often exists for a highly credentialed academician/physician–scientist, but the balancing perspective to seek out management expertise as well as committed clinical leadership can be overlooked. Although a board or university president may rationalize that the newly appointed academician can delegate running the clinical enterprise to qualified “administrative” subordinates, this provides assurance of neither effectiveness nor balance.
The academic reward system can affect the faculty practice, particularly across large, research-intensive departments where concerns over clinical productivity and administrative efficiency may become subordinated by academic priorities. Although on occasion the inverse may occur, in general the needs of the clinical enterprise in the single-fiduciary and/or one-leader models are more at risk.
Similar challenges exist in the “multiple” models. What the multiple model can bring is clarity of purpose to both the academic and clinical business domains. What it does not bring is the unity of voice possible through the single leader and board. Instead, collaboration of the two leaders and the two boards is required. Success dictates that such collaboration exist on the highest order, ideally with both the two board leaders and the two operating executives having comparable insight and compatible personality sets strengthening the capacity of each to create the balance between their respective governing bodies and that between their operating units.
Achieving and maintaining such compatibility mandate that the leadership selection processes of each institution are highly collaborative, even with the respective fiduciary obligations understood as fundamentally separate, albeit interrelated. Furthermore, the education of the respective governing bodies is coordinated to generate mutual understanding of the complexity of their respective responsibilities and the need for balance.
Three sets of learning related to the successful selection and review of AHC leaders emerge from our assessments of the most successful AHCs. These are detailed below.
Balanced criteria in the selection of executive leadership.
Leaders must have a keen sense of the cultures and operating requirements of both the academic and clinical enterprises, and meaningful prior experience with each venue. At a minimum, the executive leaders must exhibit significant understanding and ability to reach out, such that the range of priorities can be sensed and balanced. A brilliant individual, successful in his or her own profession but inexperienced with the AHC and its competing missions, has been at the center of many a failed case study in AHC leadership and operation. The requirement for high management competence of the executive leaders—not always easy to determine—is, of course, a given.
Trustee selection and performance.
Trusteeship itself is a challenge, and understanding the nature of the AHC, its medical school, and its hospitals is an even bigger challenge. Selection of trustees must therefore be based on the critical criteria of knowledge, experience, and willingness to commit time, thought, and effort in support of the institution’s mission and goals. The best trustees are willing to make compelling arguments for change in recognition of the multiple missions of the AHC.
Highly collaborative executive performance review.
A successful executive performance review process deeply engages both the academic and clinical trustees. Beyond the letter of the affiliation agreements, executive leadership must exercise a genuine accountability to the multiple missions, regardless of the governing model. Participation in executive review by trustees from both the clinical and academic perspectives is not a denial of specific fiduciary responsibility if the missions are understood and affiliation agreements are adequately defined. Rather, such collaboration represents an important venue for driving the essential balance of priorities.
Alignment of trustees’ delineations of mission and performance metrics in defining successful stewardship
The sustained success of the AHC requires achieving long-term financial health of both the academic and the clinical enterprises. Although separate fiduciary boards oversee their respective enterprises as their primary obligations, each board should duly consider the best interests of the partnership while maintaining the fiduciary duty to advance its own mission. For the clinical enterprise, mission is invariably led by patients’ interests supported by academic advancement. For the academic enterprise, mission is led by the advancement of knowledge and training that in the end supports better patient care. Both the distinction and the interrelationship are of great potential consequence in the allocation of resources.
Working on the adage, “You are what you measure,” it becomes incumbent on the trustees to define the data and information they will use to evaluate management performance. In any single-fiduciary and/or one-leader model, these metrics must include relevant and detailed profiles of revenue allocation to both the clinical and academic enterprises and the major flow of funds to and from each in the accomplishment of the mission. As examples:
* Trustees should benchmark their annual capital investment in the clinical enterprise as a percentage of clinical revenues. If the level of expenditure against a well-thought-out benchmark is favorable, a trustee can reasonably conclude that capital resources are invested appropriately, enabling clinical programs to remain competitive with other AHCs or with competing hospitals in local markets.
* Similarly, trustees can request benchmarking data to evaluate resource allocation to and utilization of research assets, such as extramural funding as a ratio against square feet of space allocated to research activities.
* Other financial metrics, particularly debt burden on clinical revenue sources versus the proportionality of capital assets devoted to the clinical enterprise, can provide valuable insight for trustees as to the overall stability of the underlying components of the AHC.
More representative, complete, and balanced information provides a superior platform on which the trustees can govern without becoming ensnared in the myriad operating details routinely served up to them—details that should largely remain the purview of management.
Performance metrics must be defined and reviewed regularly in a disciplined manner. It is incumbent on the trustees not to allow the measures to be changed or unreported when results lag, or to allow the introduction of less relevant but positive reports to obscure lack of progress. In those models that are or must necessarily be independent of each other, comparable collaborative sets of metrics should be demanded and shared by the trustees of both organizations. These metrics must factor in the considerations, requirements, and status of their essential partners, be they clinical or academic.
The hospital boards must not view their academic partners in an adversarial sense, nor should they allow their management leaders to take them to such positions. Whether the AHC is integrated or independent, the long-term success of each component institution remains dependent on the other.
Embracing rather than de facto delegating trustees’ fiduciary responsibility for the collective AHC enterprise
Board membership in most university environments represents a heterogeneous cross-section of business and scientific acumen, as well as philanthropic, community, political, student, and demographic representation. Appointment to boards of publicly sponsored AHCs can result in membership through university, gubernatorial, or electoral processes. Couple the nuances of board composition to the fact that most all AHC board members are volunteers; the result can be a majority of individuals with neither the time nor expertise to understand and govern meaningfully the complexities of the AHC. That can lead individual trustees and even entire boards to become deferential to the appointed executive leadership, sometimes skirting the essentials of their fiduciary responsibility. Although good governance dictates that boards stay “strategic” and above operational decisions, the fiduciary duties of the trustees must remain primary.
Sufficient expertise, time, and judgment must be available on the boards to ensure that the fiduciary interests of both clinical and academic enterprises are balanced and advanced. Many boards overseeing integrated AHCs are challenged in this regard. The propensity to defer to executive management presents a potential shortfall in meeting the fiduciary responsibilities of governance.
Because diverse membership will remain a feature of AHC boards, it is essential to have at least a subset of trustees with the expertise and time to serve as the fiduciary tie to management. Such a group, along with management, also serves further to educate their board colleagues. The subset can be formal or informal, but is critical given the complexities of today’s AHC and the environment in which it exists. Education of this subset is of high priority because it tends to be impractical for a larger trustee group to maintain a solid and ongoing understanding of all the issues.
With respect to executive accountability, oversight by boards has improved over the past decade. The spectacular failures of such large systems as the Allegheny Health, Education, and Research Foundation and losses at other prominent AMCs have refocused boards on the issues of transparency and accountability. What remains critical yet highly variable is the information on which management focuses the board, and the degree of granularity accorded both clinical and academic metrics and their financial details. In particular, funds flows from the clinical enterprises to academic advancement have little standardization and often no visibility to trustees. This is true of the distinct subcomponents of hospital transfers to both the school and its departments, as well as transfers from faculty professional fees to the dean and chairs/chiefs. The details, uses, and expected “returns” of academic investments have been relatively opaque in comparison with clinical expenditures.
Although there are trustees who have requested or complained about such lack of transparency, we observe there is often little follow-through on such requests, with the respondents citing lack of credible information. It is the rare and persistent trustee indeed who takes the time and energy to force this issue when the information requested is not forthcoming. Many boards rate the success of their executive management on the large aggregate financial picture affirmed by the auditor and by whatever else may be put forth for their consideration. However good that information may look, it may be inadequate to ensure that balance can be judged at the governance level. Balance is considered and achieved by the trustees demanding and receiving meaningful information reflecting success or its lack on both clinical and academic fronts.
Thus, although the issue of one-leader or multiple AMC models represents important dialogue, the structures themselves provide no assurance of the balance achieved by the most effective AMCs. How executive leadership is developed, how well it performs, how measures of success are understood, crafted, reported, shared, and monitored, and how trustee awareness and stewardship are exercised are more important to striking the necessary balance. These must be the strategic objectives for AMC governance.