Financial Sustainability of Academic Health Centers: Identifying Challenges and Strategic Responses
Stimpson, Jim P. PhD; Li, Tao MD; Shiyanbola, Oyewale O. MPH; Jacobson, Janelle J. MPH
Dr. Stimpson is associate professor, Department of Health Services Research and Administration, College of Public Health, University of Nebraska Medical Center, Omaha, Nebraska.
Dr. Li is graduate research assistant, Department of Health Services Research and Administration, College of Public Health, University of Nebraska Medical Center, Omaha, Nebraska.
Mr. Shiyanbola is graduate research assistant, Department of Health Services Research and Administration, College of Public Health, University of Nebraska Medical Center, Omaha, Nebraska.
Ms. Jacobson is graduate research assistant, Department of Health Services Research and Administration, College of Public Health, University of Nebraska Medical Center, Omaha, Nebraska.
Funding/Support: None reported.
Other disclosures: None reported.
Ethical approval: Reported as not applicable.
Correspondence should be addressed to Dr. Stimpson, 984350 Nebraska Medical Center, Omaha, NE 68198-4350; telephone: (402) 552-7254; fax: (402) 559-9695; e-mail: firstname.lastname@example.org.
Academic health centers (AHCs) play a vital role in the health care system. The training of health care personnel and delivery of health care services, especially to the most complex and financially challenged patients, has been a responsibility increasingly shouldered by AHCs over the years. Additionally, AHCs play a significant role in researching and developing new treatment protocols, including discovering and validating new health technologies. However, AHCs face unique financial challenges in fulfilling their social mission in the health care system. Reforms being implemented under the Affordable Care Act and shifting economic patterns are threatening the financial sustainability of AHCs.
The authors review challenges facing AHCs, including training new health care professionals with fewer funding resources, disproportionate clinical care of complex and costly patients, charity care to uninsured and underinsured, and reduced research funding opportunities. Then, they provide a review of some potential solutions to these challenges, including new reimbursement methods, improvements in operational efficiency, price regulation, subsidization of education, improved decision making and communication, utilization of industrial management tools, and increasing internal and external cooperation. Devising solutions to the evolving problems of AHCs is crucial to improving health care delivery in the United States. Most likely, a combination of market, government, and system reforms will be needed to improve the viability of AHCs and assist them in fulfilling their social and organizational missions.
Academic health centers (AHCs) play a vital role in the health care system by training the next generation of health care workers; providing valuable clinical care for challenging medical cases in regional, national, and global communities; fulfilling a social mission; and researching new solutions to improve individual and population health.1–4 Further, AHCs are an economic engine, creating jobs and revenue for local communities, with far-reaching effects across states and regions in some instances.5 Reforms being implemented under the Affordable Care Act (ACA) and shifting economic patterns are threatening the financial sustainability of AHCs.6–9 Here we describe AHCs’ unique contributions to the U.S. health care system and possible strategies to address the financial challenges they face.
One of the primary missions of AHCs is to train health care professionals.2,4 Medicine is unique among professional occupations because it requires years of specialized education and clinical skill building within a health care environment that can provide a variety of training experiences.2 The intensity and diversity of training requirements contribute to higher patient care costs at AHCs than at nonacademic facilities because, compared with physicians in practice, trainees take longer to perform clinical tasks, use more diagnostic and therapeutic services per patient, and require faculty supervision in the provision of these tasks.10,11 AHCs’ educational activities can be viewed as a social good because the revenues from these activities do not make up for the costs, thereby requiring AHCs to finance the costs of providing training opportunities for medical students and residents through other revenue streams such as government subsidies, private foundation funds, research and educational grants, or profits from clinical services.10,11
In addition, AHCs do not have the flexibility of eliminating unprofitable clinical services if such services are required for graduate medical education (GME) and medical student instruction. The Accreditation Council for Graduate Medical Education establishes standards for residency programs. In meeting these standards, AHCs incur substantial administrative costs.12 Furthermore, the unfunded mandate to restrict working hours for residents, despite its potential to reduce medical errors, may lead to more costs in the form of hiring physician extenders to make up for lost work hours from residents.13
The need for physicians and other health care professionals in the United States is expected to increase because of several factors, including the aging of the population, increasing chronic disease burden, and the influx of newly insured patients into the health care market through health insurance exchanges and expanded government insurance programs under the ACA.14,15 The ongoing federal budget battles in Congress threaten GME funding, which presents a serious concern because GME is not a billable health service to health insurance providers or to patients paying out of pocket.16,17 Without a change to how GME support is financed, AHCs and hospitals may be limited in their ability to grow residency and fellowship program positions, or possibly be faced with reducing positions, which would exacerbate the physician workforce shortage.16,18
Treatment of complex cases
AHCs provide a disproportionate share of necessary but unprofitable services, such as complex trauma care, burn care, care for patients with complex diseases such as AIDS, and intensive care for patients with multisystem organ failure.10 Patients requiring these services in AHCs are disproportionately uninsured or quickly exhaust their insurance coverage.10 Furthermore, the risk of readmission increases with the complexity of the cases being managed in AHCs, which is a challenge because Medicare implements financial penalties for readmissions without regard to case complexity.19
AHCs compete in the medical care marketplace with nonacademic providers for revenue from insured patients’ co-pays and health insurance payments. Providers at AHCs provide a larger proportion of necessary but unprofitable care to poor and uninsured individuals than do their nonacademic counterparts. This, coupled with the low Medicare/Medicaid reimbursements for complex services (if they are even covered), can put financial strain on AHCs.10 As AHCs begin to establish accountable care organizations,20 new reimbursement and care models will emerge from these organizations and will require careful study on how these models affect the provision of complex clinical care in AHCs.6 New models of sustainably delivering these services are being researched through the Center for Medicaid and Medicare Innovation (the Innovation Center).21 For example, a demonstration project22 in Colorado successfully tested a comprehensive outreach trauma program that increased referrals of critically injured patients from outside the Denver metropolitan area while enhancing the social mission of the trauma center. This increase in outreach patients resulted in higher injury acuity of patients, more academic publications, and higher reimbursement at the AHCs.22 Continued work in this area will be needed.
Treatment of the uninsured and underinsured
Traditionally, AHCs have served a disproportionate number of the uninsured or underinsured with an estimated cost of nearly $30 billion annually across all AHCs.23–25 As safety-net providers for many communities, AHCs currently receive Medicare Disproportionate Share Hospital (DSH) payments for serving a large proportion of the uninsured or underinsured.26 AHCs account for a large share of DSH payments.27 The ACA will substantially reduce DSH payments starting in 2014.26,28 The logic behind this ACA provision is that patients who previously received charity care will qualify for Medicaid or will be insured through the insurance exchanges, and therefore, less charity care will be required. Although the large number of individuals who are currently uninsured is expected to decrease substantially upon implementation of the ACA, a significant proportion of the population will not be eligible for insurance through Medicaid or the insurance exchanges, especially in states that reject Medicaid expansion.29,30 Therefore, these individuals will continue accessing services, but AHCs’ ability to offset this expense through DSH payments will be limited, especially AHCs in states that reject Medicaid expansion.27,31
Furthermore, the Emergency Medical Treatment and Active Labor Act (EMTALA), an unfunded mandate, requires federally reimbursed hospitals to provide care to patients needing emergency health care treatment, regardless of citizenship, legal status, or ability to pay.32 Under EMTALA, because AHCs typically have an emergency center, AHCs are disproportionately exposed to the most vulnerable patients lacking health insurance coverage, further increasing the financial burden on these institutions, especially with reduced DSH payments.27,31
AHCs conduct health research that generates new insights into the causes and treatments of illness.2,4,10 However, government funding for biomedical research has been flat over the past few years, which has made pay lines significantly more competitive.7,33 The National Institutes of Health (NIH) have recently revised financial compensation policies for researchers, decreasing funding awards in support of their salaries from level I to executive level II pay scale.34 The highly competitive funding climate was exacerbated by the 2013 federal budget sequestration and raises the question of how AHCs can sustain scientific research. Such a funding climate makes it difficult for AHCs to fulfill their mission of discovering meaningful medical knowledge and applications that promote and improve health and possibly could make it more difficult to recruit physician scientists if the extramural funding climate continues to be at risk.
Solutions to improve the financial health and viability of AHCs fall into three categories: economic, government intervention, and system reform.35,36 It should be acknowledged at the outset that some of the following solutions may be implemented quickly, whereas others may take longer to implement. Likewise, the following solutions have varying degrees of being within an AHC’s control, which will undoubtedly influence the likelihood of implementation. However, even solutions that might not be as feasible, such as solutions that require government intervention, should be discussed and debated because changes within the organization alone may not be sufficient to improve the financial health and future of AHCs.
Create reimbursement methods that more closely reflect the cost of services.
There is a need in hospitals to control costs and, at the same time, improve quality. The Diagnosis-Related Group (DRG),37 a system of classifying hospital cases for reimbursement purposes, is an example of a policy that exposes AHCs and other Medicare-recipient hospitals to significant financial risk because the true prices of services are not reflected in allowable billings to third-party payers. An alternative to DRG reimbursement would be to help AHCs address financial risk. For example, some components in the reimbursement model of critical access hospitals, such as allowing cost-based payments for some health care services, could be adopted for AHCs, as recommended by the Medicare Payment Advisory Commission.38 Another alternative would be to reimburse the first three days of each admission on a fee-for-service basis, with two per diems (one for “ICU days” and the other for “routine days”) beginning with the fourth day.37 The logic of this alternative formula is that cost and uncertainty are prominent at the beginning of each admission, whereas patient outcomes are likely to become homogeneous, regardless of incoming diagnoses, beginning on the fourth day. This approach could capture the case-mix feature of the AHCs better than the DRG and ultimately lower costs while maintaining quality. However, this formula was created based on data from a single AHC (the University of Michigan Health System)37 and should be evaluated further to determine whether it could be applied in other health systems.
Improve operational efficiency.
Patient care is the main source of revenue for AHCs to cross-subsidize research and teaching. Thus, it is important and reasonable for AHCs to optimize allocation of resources. Various strategies have evolved to improve operational efficiency, among which are the use of incentives to stimulate efficient productivity by AHC staff members, including researchers.35 Additionally, focusing on clinical services that generate revenue is a strategy that may increase efficiency and reduce financial risk. However, dropping low-volume/high-risk clinical services (e.g., trauma units, burn units) may jeopardize an AHC’s commitment to education and research along with its institutional identity and commitment to social responsibility.37 Hence, it is critical for AHCs to strike a balance between provision of profitable health care services and delivery of uncompensated care, perhaps by specializing in a set of core competencies.
Government intervention solutions
As suggested by Blumenthal and Meyer,39(p1813) “in states and localities that have little experience with competition and little prospect that it will develop (such as rural areas), the equivalent of government-operated single-payer systems may take hold.” Maryland is a successful policy lab for this ambitious government intervention through the Health Services Cost Review Commission (HSCRC), which is an independent state agency with the authority to set hospital rates.40,41 The HSCRC may set different rates for different hospitals after adjusting for their case-mix and social missions (e.g., education, charity care, bad debt) to better align the price with the cost, but the rates do not vary by payer. In Maryland, all payers, including public and private insurers and self-pay patients, pay nearly identical rates for hospital services. The rationale of Maryland’s policy is that the cost of the social mission should be treated as a common responsibility to be shouldered by all payers.40 More important, by spreading the cost of the social mission across all those who consume health care, serving social missions will not impair the financial viability of the hospitals, and the hospitals are encouraged to serve all patients in need regardless of their ability to pay. Finally, this system is fair because every insurer is paying the same rate, which reduces the incentive for cost shifting and price discrimination. Such a system helps to reduce the financial burden borne by AHCs as a result of charity care, leading to an increase in revenue that can help cover GME costs. There has been some evidence in the literature that the Maryland model has been controlling costs and improving health care quality.41,42
Subsidize the social mission and education.
AHCs are responsible for carrying out social missions that place them at a disadvantage in the competitive health care marketplace and may require government subsidy for financial survival.36,39 Medicare subsidizes GME primarily by making direct and indirect medical education payments to hospitals involved in training residents.26 It remains unclear whether GME reimbursements are sufficient to fully cover the cost of training residents and fellows, and the current payment system does not reimburse for the cost of training medical students.43,44 Increasing reimbursement for GME and initiating reimbursement for medical student education might be an option should policy makers consider medical education a priority. The ACA has provisions for increasing the number of residency training slots available for primary care training and also encourages the redistribution of unused Medicare-funded residency positions to hospitals that require them.45 The ACA also makes funds available for resident training outside the AHC setting.46
System reform solutions
Improve decision-making and communication processes.
All barriers to decision making among departments and hierarchies within an AHC should be evaluated. The organizational structure of AHCs includes various units, usually consisting of an academic arm (college of medicine/university), a teaching hospital, and a group practice plan. The level of autonomy and integration of these units varies among AHCs.47 The decision-making process in an AHC also needs to be consistent with its other organizational aspects, such as governance structure, organizational culture, and the strategic planning process.48 The organizational model used in AHCs could involve the integration of all units or a combination of units. For example, the University of Florida implements a fully integrated model whereby the hospital, academic arm, and group practice plan all fall under a single organizational structure.47 Decentralized and bottom-up decision making might not work effectively in vertically integrated systems with tight arrangements.49 However, a fully integrated model can be a challenge when state regulations of public-owned entities add cost and bureaucracy, thereby limiting the ability of the organization to be competitive within the market. The model adopted by any AHC should be the best one for achieving efficiency and effectiveness in the performance of its mission.
Improving communication within AHCs is important to solve problems, face challenges, and receive feedback more effectively and efficiently under dynamic circumstances.40 There is an ongoing drive to incentivize the application of information technology in the health care system to help reduce costs and improve communication.50,51 Improving communication is a key strategy to increase employee morale and consolidate organizational culture, which is critical to the survival of any organization.48 Personnel turnover can cost an organization more than 5% of its operating budget.52 The sense of being heard in the decision-making process is important to stabilize personnel and maximize return on investment.52
Utilize industrial management tools and models.
Tools widely used in other industries, including hedging, risk pooling, creating logistical and financial buffers, developing forecasting and information systems, and cultivating sophisticated scheduling strategies, can help AHCs better manage their risk.36 Initiating a department focused exclusively on risk management is also an option.36 Mission-based management that aligns revenues with strategic initiatives can also help AHCs use financial resources more efficiently.48
Increase internal cooperation.
Given the trend of a greater percentage of NIH funds being awarded to a declining number of institutions,53 most AHCs must find new ways to sustain funding for their research endeavors. Breaking down barriers among departments and increasing cooperation among basic science, clinical research, and public health have great potential to improve competitiveness for large multidisciplinary grants.54 Moreover, operational efficiency can also be achieved from sharing facilities and personnel among departments and colleges, which will increase the cost-effectiveness of research. For example, institutions such as the University of Florida are able to better translate research into clinical application because there is internal cooperation between its research centers and institutes and its clinical teams.47 Hence, medical innovations discovered in the research lab (e.g., new drugs or treatment protocols) can be tested in the clinical setting of AHCs according to specified guidelines, thereby achieving synergy and maximizing return on investment. This would likely be incentivized if promotion and tenure policies recognized team-based science and commercialization of research.
Increase external cooperation.
In addition to encouraging internal cooperation, AHCs may also want to increase cooperation with external institutions (including other AHCs) to further benefit from operational efficiencies in patient care, with the additional possibility of benefiting the AHCs’ research endeavors. This might include pooling resources and facilities. A recent model of strategic partnership is between AHCs and rural primary care clinicians. The University of New Mexico Health Sciences Center created a partnership with primary care clinicians in underserved areas to deliver complex chronic disease care using telemedicine technology.55 This partnership resulted in a significant increase in patient consultations in rural areas, with high ratings on patient satisfaction scores among users and providers.
Besides using internal resources more efficiently for research, AHCs should make efforts to reduce their financial dependence on NIH funds and seek alternative external funding sources. A promising strategy to promote both research and clinical services is for AHCs and corporations to affiliate.56 The partnership between General Electric medical systems and New York-Presbyterian Hospital serves as an example.43 In such partnerships, AHCs can benefit from a negotiated price for corporate products and services, while the corporation benefits from a stable contract and shared research product. AHCs have a unique advantage to participate in this type of affiliation, with both laboratory and clinical space.39 Such an affiliation can facilitate the translation of research findings into clinical practice, creating a synergy between academic products and economic benefit. However, this public–private partnership should be in line with ethical and other prescribed guidelines to avoid conflicts of interest and unfair exploitation of AHC patients and faculty. Nonetheless, the timely translation of research to clinical practice also helps AHCs demonstrate to the public that they are meeting their social mission to improve community health and generate innovations that benefit society.2,4,10
The pivotal role of AHCs as trainers of health care professionals and providers of expert care to various sectors of the population, including complex and indigent patients, is a significant benefit to society. Furthermore, as innovators pioneering and nurturing the development of novel treatment techniques and medical products, AHCs play a critical role in the U.S. health care system. However, increased competition for profitable clinical services, fulfillment of a social mission, and recent federal legislation are putting an increasing financial strain on AHCs, thereby jeopardizing their economic sustainability. The clinical services that are currently profitable may change significantly under the ACA as compensation models change. Services that are currently well reimbursed on a fee-for-service basis, such as cardiac stenting, will be reimbursed under global reimbursement models that would include a range of treatment options to improve patient outcomes. Devising solutions to the evolving problems of AHCs is crucial to improving health care delivery in the United States. Most likely, a combination of market, government, and system reforms will be needed to improve the viability of AHCs and assist them in fulfilling their social and organizational missions.
Acknowledgments: The authors wish to thank John Adams, Bradley Britigan, and Sue Nardie for their valuable input on earlier drafts.
4. Anderson G, Steinberg E, Heyssel R. The pivotal role of the academic health center. Health Aff (Millwood). 1994;13:146–158
6. Berkowitz SA, Miller ED. Accountable care at academic medical centers—Lessons from Johns Hopkins. N Engl J Med. 2011;364:e12
7. Campbell EG. The future of research funding in academic medicine. N Engl J Med. 2009;360:1482–1483
8. Robertson RAssociation of Departments of Family Medicine. . Academic health centers: Will they survive? Ann Fam Med. 2011;9:90
10. Blumenthal D, Campbell EG, Weissman JS. The social missions of academic health centers. N Engl J Med. 1997;337:1550–1553
11. Jones TF, Culpepper L, Shea C. Analysis of the cost of training residents in a community health center. Acad Med. 1995;70:523–531
12. Nasca TJ, Veloski JJ, Monnier JA, et al. Minimum instructional and program-specific administrative costs of educating residents in internal medicine. Arch Intern Med. 2001;161:760–766
13. Kamath AF, Baldwin K, Meade LK, Powell AC, Mehta S. The increased financial burden of further proposed orthopaedic resident work-hour reductions. J Bone Joint Surg Am. 2011;93:e31
15. Shomaker TS. Commentary: Preparing for health care reform: Ten recommendations for academic health centers. Acad Med. 2011;86:555–558
16. Iglehart JK. Financing graduate medical education—Mounting pressure for reform. N Engl J Med. 2012;366:1562–1563
17. Colletti LM, Kolars JC, Woolliscroft JO. GME Innovations Grant Program at the University of Michigan Health System—Fostering changes in education and clinical care. J Grad Med Educ. 2013;5:665–667
18. Goodman DC, Robertson RG. Accelerating physician workforce transformation through competitive graduate medical education funding. Health Aff (Millwood). 2013;32:1887–1892
19. Patient Protection and Affordable Care Act. (2010)
20. Patient Protection and Affordable Care Act. (2010)
21. Patient Protection and Affordable Care Act. (2010)
22. Biffl WL, Moore EE, Offner PJ, Franciose RJ, Johnson JL, Burch JM. The outreach trauma program: A model for survival of the academic trauma center. J Trauma.. 2002;52:840–846
23. Gazewood JD, Rollins LK, Galazka SS. Beyond the horizon: The role of academic health centers in improving the health of rural communities. Acad Med. 2006;81:793–797
24. Lofgren R, Karpf M, Perman J, Higdon CM. The U.S. health care system is in crisis: Implications for academic medical centers and their missions. Acad Med. 2006;81:713–720
25. Koenig L, Dobson A, Ho S, Siegel JM, Blumenthal D, Weissman JS. Estimating the mission-related costs of teaching hospitals. Health Aff (Millwood). 2003;22:112–122
28. Patient Protection and Affordable Care Act. (2010)
29. DeNavas-Walt C, Proctor BD, Smith JC Income, Poverty, and Health Insurance Coverage in the United States: 2010. 2011 Washington, DC U.S. Government Printing Office
32. Emergency Medical Treatment and Labor Act. (1986)
33. Boat TF. Insights from trends in biomedical research funding. JAMA. 2010;303:170–171
35. Blumenthal D, Edwards N. A tale of two systems: The changing academic health center. Health Aff (Millwood). 2000;19:86–101
36. Blumenthal D, Weissman JS, Griner PF. Academic health centers on the front lines: Survival strategies in highly competitive markets. Acad Med. 1999;74:1038–1049
37. Taheri PA, Butz DA, Dechert R, Greenfield LJ. How DRGs hurt academic health systems. J Am Coll Surg. 2001;193:1–8
39. Blumenthal D, Meyer GS. The future of the academic medical center under health care reform. N Engl J Med. 1993;329:1812–1814
41. Murray R. Setting hospital rates to control costs and boost quality: The Maryland experience. Health Aff (Millwood). 2009;28:1395–1405
42. Kastor JA, Adashi EY. Maryland’s hospital cost review commission at 40: A model for the country. JAMA. 2011;306:1137–1138
43. Gerber DR, Bekes CE, Parrillo JE. The future of hospital economic health. Crit Care Med. 2006;34(3 suppl):S88–S93
44. Pugno PA, Gillanders WR, Kozakowski SM. The direct, indirect, and intangible benefits of graduate medical education programs to their sponsoring institutions and communities. J Grad Med Educ. 2010;2:154–159
45. Patient Protection and Affordable Care Act. (2010)
47. Barrett DJ. The evolving organizational structure of academic health centers: The case of the University of Florida. Acad Med. 2008;83:804–808
48. Bacigalupo A, Hess J, Fernandes J. Meeting the challenges of culture and agency change in an academic health center. Leadersh Organ Dev J. 2009;30:408–420
49. Dubbs NL, Mailman JL. Organizational design consistency: The PennCARE and Henry Ford health system experiences/practitioner application. J Healthc Manag. 2002;47:307–318
50. Blumenthal D. Launching HITECH. N Engl J Med. 2010;362:382–385
51. Noel HC, Vogel DC, Erdos JJ, Cornwall D, Levin F. Home telehealth reduces healthcare costs. Telemed J E Health. 2004;10:170–183
52. Waldman JD, Kelly F, Arora S, Smith HL. The shocking cost of turnover in health care. Health Care Manage Rev. 2004;29:2–7
53. Moy E, Griner PF, Challoner DR, Perry DR. Distribution of research awards from the National Institutes of Health among medical schools. N Engl J Med. 2000;342:250–255
54. Kirch DG, Grigsby RK, Zolko WW, et al. Reinventing the academic health center. Acad Med. 2005;80:980–989
55. Arora S, Kalishman S, Dion D, et al. Partnering urban academic medical centers and rural primary care clinicians to provide complex chronic disease care. Health Aff (Millwood). 2011;30:1176–1184
56. Moses H 3rd, Braunwald E, Martin JB, Thier SO. Collaborating with industry—Choices for the academic medical center. N Engl J Med. 2002;347:1371–1375
© 2014 by the Association of American Medical Colleges
What does "Remember me" mean?
By checking this box, you'll stay logged in until you logout. You'll get easier access to your articles, collections,
media, and all your other content, even if you close your browser or shut down your
To protect your most sensitive data and activities (like changing your password),
we'll ask you to re-enter your password when you access these services.
What if I'm on a computer that I share with others?
If you're using a public computer or you share this computer with others, we recommend
that you uncheck the "Remember me" box.
Data is temporarily unavailable. Please try again soon.
Readers Of this Article Also Read