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Challenges of Becoming a Regional Referral System: The University of Kentucky as a Case Study

Edwards, Robert L. MBA; Lofgren, Richard P. MD, MPH; Birdwhistell, Mark D. MPA; Zembrodt, James W. MBA; Karpf, Michael MD

doi: 10.1097/ACM.0000000000000114

The U.S. health care system must change because of unsustainable costs and limited access to care. Health care legislation and the recognition that health care costs must be curbed have accelerated the change process. How should academic medical centers (AMCs) respond? Teaching hospitals are a heterogeneous group, and the leaders of each must understand their institution’s goals and the necessary resources to achieve them.

Clinical leaders and staff at one AMC, the University of Kentucky (UK), committed to transforming the AMC into a regional referral center. To achieve this goal, UK leaders integrated the clinical enterprise, focused recruitment on advanced subspecialists, and initiated productive relationships with other providers. Attracting adequate numbers of destination patients with complex illnesses required UK to have a “market space” of five to seven million people. The resources required to effect such progress have been daunting. Relationships with providers and payers have been necessary to forge a network. These relationships have been challenging to establish and manage and have evolved over time.

Most AMCs are not-for-profit public good entities that nevertheless exist in an industry driven by competition in quality and cost, and therefore scale and access to capital are paramount. AMC leaders must understand their institutions as both part of an industry and as a public good in order to adapt to the changing health care system. Although the experience of any particular AMC is inherently unique, UK’s journey provides a useful case study in establishing institutional goals, outlining a strategy, and identifying required resources.

Mr. Edwards is director, Strategic Initiatives, UK HealthCare, Lexington, Kentucky.

Dr. Lofgren is senior vice president and chief clinical officer, UHC, Chicago, Illinois.

Mr. Birdwhistell is vice president, Administration and External Affairs, UK HealthCare, Lexington, Kentucky.

Mr. Zembrodt is director, Strategic Planning and Decision Support, UK HealthCare, Lexington, Kentucky.

Dr. Karpf is executive vice president, Health Affairs, University of Kentucky, Lexington, Kentucky.

Editor’s Note: A commentary by R. Azziz appears on pages 208–211.

Funding/Support: None reported.

Other disclosures: None reported.

Ethical approval: Reported as not applicable.

Correspondence should be addressed to Dr. Karpf, Office of the Executive Vice President for Health Affairs, 900 South Limestone, 317 Wethington Building, Lexington, KY 40536-0200; telephone: (859) 323-5126; e-mail:

The health care system in the United States must change because costs are rising at an unsustainable rate and access to care continues to be limited.1,2 The implementation of the major components of the Patient Protection and Affordable Care Act and the emerging consensus that the cost of health care must be addressed have accelerated the pace of change. The central force shaping the direction of these changes is clearly emerging: value. The health care system will be value based, and providers will be expected to deliver cost-effective, high-quality outcomes. To transition to this value-based system, most experts agree that the system must move from the current fee-for-service reimbursement model to another approach that shifts risk to providers.3,4

How should academic medical centers (AMCs) respond? AMCs (defined here as the college of medicine [COM], the faculty practice plan, ambulatory services, and the hospital) constitute a heterogeneous group. Some are predominantly safety net providers, and these must prepare for the expansion of Medicaid and premium-supported insurance coverage by protecting their patient base. Others are predominately community providers, and their major concern throughout health care reform will relate to potentially increased demand for general and specialty care. Still other AMCs aspire to be regional providers that emphasize subspecialty destination services (i.e., advanced clinical services for complex patients), and these will likely face increased competition for market space in order to support their clinical programs. Finally, a limited number of AMCs are positioned as national providers and will have to attract patients from across the country and beyond. AMCs in the last two categories are usually research-intensive institutions. The perceived role of each AMC will inform its strategic initiatives and, consequently, define its resource needs. AMC leaders, including those of large regional referral centers, must explicitly set their goals and determine whether their ambitions for their institutions are feasible.

One AMC, the University of Kentucky (UK), has tried over the last decade to establish itself as a research-intensive AMC that serves as a regional referral center for destination services.5 The journey has been difficult and expensive—and is not yet complete. We propose that the lessons and insights we have gained from UK’s experience might aid other AMC leaders undertaking the similar processes of setting goals, defining resource needs, and developing and implementing feasible strategies. In this article, we review UK’s past experiences, define its current state, and anticipate challenges for the future. We present UK’s story as a case study of one AMC’s journey in developing a comprehensive response to the changing health care landscape. Specifically, UK’s strategy of becoming a regional referral center, which emphasizes subspecialty clinical services and numbers of patient discharges, ostensibly runs counter to a currently favored hospital strategy based on population health and outpatient care. However, central to UK’s strategy is helping partnering community providers develop expertise in population health to serve their respective communities; in this way, UK partners with other providers to appropriately serve a much larger population.

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The Past

In 2001, UK leaders set out to advance the institution’s role as a research-intensive, public university. They recognized that progress within the university’s health services sector (all six health colleges and the clinical enterprise)—and in particular, the AMC (specifically, in the case of UK, the COM, the faculty practice plan, the ambulatory services, and the affiliated hospital)—were critical in fulfilling this aspiration. At the time, however, the clinical enterprise was failing to effectively compete in the local and regional health care markets. The success of the AMC as a clinical provider and the success of the academic programs at the COM were—and remain—inextricably linked. The loss of critical faculty led to a decrease in clinical volume that in turn compromised the institution’s academic mission. To forge a unified strategy, the university president created the role of “executive vice president for health affairs” (or EVPHA [M.K.]) to coordinate the activities and finances of the COM, the affiliate teaching hospital, and faculty practice plan.6,7

The EVPHA revamped UK’s organizational and operational model and developed a single corporate support group to serve the hospital, the COM, the faculty practice plans, and the ambulatory services. For example, the EVPHA established a single chief financial officer role and centralized budgeting. Additionally, UK leaders developed a common vision and strategy by coordinating four simultaneous planning processes—financial, strategic, facilities, and academic—which, in turn, enhanced the clinical brand.7

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Financial planning

The financial planning process was the most significant and challenging, but also the most transformative. First, UK leaders needed to define the financial resources necessary to achieve the goals set for UK, and then they needed to determine the feasibility of generating these resources. The institution’s leaders determined that UK would need to invest more than $800 million over 8 to 10 years to expand clinical programs, recruit faculty, acquire new technology, and build facilities. Generating such extraordinary resources would be possible only if every party in the institution shared a coordinated strategy to work toward significantly greater inpatient volumes and to increase the overall revenues and operating margins in order to support a substantial bond issuance. Strong margins and a substantial bond issuance were necessary to fund capital construction, program development, key recruits, and technology.

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Strategic planning

Through the strategic planning process, UK leaders identified three key initiatives. First, clinical efforts on campus needed to focus on advanced subspecialty care and destination clinical services such as Level 1 trauma, full-service subspecialty pediatrics, advanced cancer care, and solid organ transplantation. UK’s motto became “We need to assure all Kentuckians that—no matter how ill they are or how complex their needs—they can get care in Kentucky and not have to worry about whether their insurance will allow them to go out of state.” Second, UK focused on developing mutually beneficial relationships with community providers, working to keep care local as much as possible and to transfer patients to UK only when clinically appropriate. Finally, UK leaders recognized that UK’s success depended on an unwavering emphasis on efficiency, outstanding quality, uncompromised safety, and patient satisfaction.

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Facilities and academic planning

Through the facilities planning process, UK leaders evaluated every clinical building and recognized that the core facility—the Albert B. Chandler Hospital, which dates back to 1960—would not accommodate an increase in patients with complex medical problems. Therefore, UK’s leaders initiated a building project to serve both present and anticipated needs. Academic leaders at UK defined future administrative, teaching, and research facilities needs and located sites for those vital endeavors. The institution created a facility plan with a 50-year horizon to use space judicially and maximize flexibility moving forward.

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The need to redefine and enhance the UK brand was also of critical importance. UK’s clinical brand had deteriorated as the clinical enterprise had become the medical provider of last resort rather than the preferred provider. UK adopted the trademark “UK HealthCare,” representing excellence in advanced subspecialty care, for all clinical services. Construction of the new hospital facility provided the opportunity to physically demonstrate the new brand, creating an “empathic” building that is comfortable for patients and visitors and reflects Kentucky’s communities through its architecture, landscaping, art, and music. The building came to signify UK HealthCare as a regional asset, serving Kentucky and beyond and capable of competing with the best AMCs in the country.

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The Present

Scale and finances

To date, UK has had a number of successes and has identified significant challenges. Discharges have grown from approximately 19,000 in fiscal year (FY) 2004 to a projected 36,653 in FY 2014 (Figure 1). Local market share has grown from 28% in FY 2003 to 48% in FY 2013. More important, UK has repositioned itself in both size and scope as an AMC. In 2004, UK was a 25th percentile teaching in clinical size. Now, UK is approximately a 75th percentile teaching (Figure 2) with the size, scope, and depth to legitimately aspire to be a regional referral center.

Figure 1

Figure 1

Figure 2

Figure 2

The growth has had a positive impact on the hospital’s operating margin. A significant portion of the increase in patient volume has come from patients covered by Medicare and commercial insurance. The increased volume, combined with the growth in case mix index (CMI), has enabled UK to justify higher reimbursement rates from commercial insurance companies in order to support the advanced specialty services that are vital to the communities that UK serves.

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Historically, UK strategies focused on traditional geographic service areas encompassing the eastern half of Kentucky (Figure 3). UK HealthCare’s primary geographic service area (Fayette County) included a population of approximately 300,000. The secondary geographic service area consisted of the 16 neighboring counties, which had a population of approximately 450,000. About 40% of admissions were patients with a very high CMI, referred from UK’s tertiary market of 46 counties with a population of 1.2 million. Together, these created a total market of approximately two million people.

Figure 3

Figure 3

To become a regional referral center, UK leaders recognized the need for a potential market of five to seven million people—well beyond its initial market of two million. They then identified a target geographic service region encompassing approximately 7.5 million people (Figure 4) and developed appropriate targets for volume of cases in these destination clinical services (Table 1). In particular, it became clear that the previous focus on just the eastern half of Kentucky was insufficient.

Figure 4

Figure 4

Table 1

Table 1

Destination clinical services, such as treatment for brain tumors and solid organ and bone marrow transplantation, are low-incidence events. As governmental and commercial payers continue to set volume and outcome standards for Centers of Excellence in these types of complex cases, only a limited number of destination referral centers will be able to reach adequate patient volumes (as exemplified by the heart transplant volume standard of a minimum of 10 cases per year as set by the Centers for Medicare and Medicaid Services). UK’s target population base of five to seven million can support a destination referral facility, but this reach infringes on other academic referral centers. Anticipating competition from other AMCs, UK leaders understand that UK must continue to focus on and invest in these destination services.

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Challenges for the Future

The U.S. health care system is at an inflection point. The underlying expectation is that, in response to health care reform, a greater emphasis will be on preventive care and most notably a focus on population health. In turn, care will be more efficient as providers take responsibility for a population of patients across the continuum of care. However, different populations often require different systems of care.

Nationally, 5% of the populace consumes nearly 50% of all health care resources,8,9 and there will continue to be very sick patients requiring highly specialized and expensive care. Referral-type AMCs have been designed to address this specific community of patients. UK and other AMCs have made considerable investments in specialized services to adequately meet the needs of these patients with complex illnesses. These services require a sufficient volume of patients with relatively uncommon conditions for AMCs to be able to retain and support specialized staff, optimize the use of the costly capital investments, and remain financially viable. Further, multidisciplinary teams must see sufficient numbers of patients for team members to maintain their skills. We therefore pose these questions: In an era of dynamic health care system change, what strategies should a referral-type AMC pursue to sustain its specialized services? How does an AMC with the goal of becoming a regional referral center build and sustain a patient base that can supply sufficient numbers of destination patients?

Some AMCs have responded by developing accountable care organizations (ACOs)10; others may either develop an insurance product or partner with insurers to offer insurance products; and still others, such as UK, are pursuing an incremental approach to develop broad-based networks based on mutually beneficial partnerships, and then allowing these networks to mature and evolve.

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ACOs are in vogue. We believe that these organizations may have limited utility for AMCs. Many AMCs have made enormous investments to be able to provide care for patients with complex conditions—a vital community resource. Maximizing the use of these expensive infrastructures will reduce the total cost of a complex episode of care regardless of payment methodology. Some ACOs developed by AMCs involve a modest number of individuals, which will generate a limited number of cases requiring destination services. For example, if the population base is a potentially healthy group (e.g., university faculty, staff, and students), most of the admissions will be of low acuity and may crowd out referrals for destination services. Some institutions are contemplating building substantially larger ACOs involving populations in the hundreds of thousands and even millions. AMCs trying to replicate broad, comprehensive systems to serve a large general population, like the Kaiser model, will require considerable time and huge outlays of capital to build appropriate infrastructure. Alternatively, UK’s approach is to emphasize UK HealthCare as the tertiary, quaternary referral center serving multiple ACOs established by local providers, all of which have, primarily, a community focus.

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Payer partnerships

Some AMC leaders are considering developing an AMC-affiliated or -run insurance plan. Developing the necessary infrastructure and scale to mitigate any risk resulting from random variation is resource intensive. Adverse selection is also a serious concern,11 and if premiums are not sufficiently risk adjusted, the financial burden can be substantial for the AMC. The need for adequate reserves for an insurance product may also be a barrier for some AMCs.

We believe that it is more practical to partner with one or more insurance companies in restricted networks to provide destination services to their enrollees. A natural division of labor occurs: The organizational and infrastructure costs associated with the insurance product, as well as the risk for the aggregate population, reside with the insurer, while the AMC provides clinical care. The AMC and insurance company can potentially share the benefits of medical management of complex patients, or the AMC can accept limited risk. AMCs with existing referral patterns and relationships with other providers can help insurers structure appropriate geographic, cost-effective networks by recruiting organizations with which they have experience.

As UK has executed this strategy, insurance companies now recognize the importance of UK HealthCare in the market. Additionally, insurance companies are now increasing their interest in carve-outs, specialty care networks, and targeted disease management approaches. UK is also interested in working with insurance companies in developing restricted panels, but to date that has not been a significant component of the marketplace.

UK has also engaged with large, self-insured purchasers (i.e., patients) to discuss serving as a multistate Center of Excellence in specialized areas of care. UK can offer these purchasers a higher degree of service and coordination by developing concierge services and guaranteed, appropriate communication among providers. By optimizing efficiency in managing complex episodes of care, UK is also the prudent economic choice.

Many leaders of referral-type AMCs fear they will be excluded or denied access to their traditional referral base as the market consolidates and tiered- or narrow-network insurance products emerge. UK HealthCare has attempted to mitigate this risk by nurturing its referral base and quantifiably demonstrating the value of its services in terms of quality, access, outcomes, and costs. Integrated health systems and referral networks will need to excel at rationalizing the site of care and eliminating unnecessary variation and waste. We believe that improving the efficiency in the care of complex, expensive episodes is the most important issue affecting the affordability of health care. Regardless of the ultimate market forces, AMCs that can provide the highest-quality, safest, and most efficient care for complex episodes will not only survive but thrive.

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Provider partnerships

At the present time, UK’s approach has been incremental and built on existing and targeted provider relationships. From 2003 to 2010, UK’s provider relationships were focused predominantly in Eastern Kentucky. Initially, affiliate relationships were with small rural providers. Clinical leaders worked to earn credibility and a reputation for partnering in a cooperative and collaborative manner, bringing some of the larger providers in Eastern Kentucky into service-line-oriented networks. During this time, UK leaders also worked to develop outreach clinics for UK specialists to travel to partnering organizations while also helping these partners recruit providers in primary care. The goal was to make the larger hospitals subreferral centers that would treat appropriate acuity patients locally and that would aggregate referrals of complex patients to UK.

To continue to grow its regional population base, UK has also worked to develop relationships in Louisville, Western Kentucky, West Virginia, Southern Ohio, and Eastern Tennessee and has strategically identified the most appropriate collaborators in these regions. These targeted partners are predominantly of substantial size and can function as subregional hubs to aggregate complex patients for UK over a large population base (Figure 4). In this arrangement, care as appropriate remains local; thus, the regional partners can continue to grow their patient volume and easily refer patients to UK’s subspecialty services as needed.

Some of the larger provider partners also have an interest in participating in clinical trials, particularly in cancer, which is possible through the UK partnership. UK additionally offers partners the opportunity to participate in medical student training. UK leaders hope to develop family medicine residencies, pharmacy residencies, and/or other clinical training programs at facilities whose leaders and clinicians are interested. These increased training sites support the development of primary care providers at local levels while allowing UK’s tertiary hospital to focus on training specialty providers.

UK has also helped identify primary care, specialty, and subspecialty trainees who are from the communities in which UK has developed collaborative relationships and who would like to return to their home regions to practice. In this way, UK facilitates the capacity of regional hospitals as they replenish their medical staff with individuals who understand UK’s clinical programs and clinical capabilities, as well as the local culture or community.

To date, UK’s relationships with partner provider organizations have been contractual but have not included financially integrated arrangements such as joint ventures, mergers, or acquisitions. UK leaders are receptive to the idea of merging with or acquiring organizations should greater consolidation become necessary. The hope is that if consolidation occurs, it would be a logical outgrowth of long-term relationships, minimizing the suspicions, stress, and cultural challenges that often occur with mergers or acquisitions. UK leaders keep partnering provider organizations knowledgeable as to the concomitant relationships it develops, assuring them that the partnering strategies are designed to help them (the partners) protect their current patient base as UK develops and broadens its patient base for destination services. That is, UK does not simultaneously court head-to-head competitors. The institution has also emphasized to partners that through its aggregate relationships it could develop, if necessary, a broad regional network.

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Resource requirements

One of the most important insights has been the immense need for capital. Initial estimates indicated the need to raise and spend $800 million over a decade. In reality, from 2004 to 2012 UK invested $1.4 billion in facilities, recruitment, program development, systems, and equipment. As UK leaders look forward to maintaining the aspirations set for the institution, they estimate that in the next eight years, UK will have to spend an additional $1.0 billion to sustain and enhance its gains. Transforming UK into a major referral AMC and enhancing its research capabilities will have thus required more than a $2.5 billion investment over a 20-year period. Whatever goals AMCs set for themselves, they should have a clear understanding of the financial resources required to reach them.

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In Sum

AMCs will unquestionably have to change in response to an evolving health care system.12–15 We suspect that AMCs will attempt a variety of different strategies and tactics and that these will be creative and adaptive. It will be essential that each AMC actively chooses the type of institution it aspires to be and that each understand the resource requirements necessary to achieve those aspirations. If an AMC is, for example, a local provider, it needs to understand how it will attract and maintain its patient base. The market and community needs vary by region and setting (e.g., rural versus urban), and specific elements of the strategy may vary as well. If an AMC aspires to be a regional provider of destination services, it must understand (1) whether there is a sufficient market space for it, (2) the extreme capital needs required, (3) and the competition. UK has become the referral center for a large geographic region in a rural state and beyond. Its strategy has focused on developing mutually beneficial relationships with community providers. Although most AMCs are not-for-profit public good entities, they are simultaneously participants in an industry driven by competition in quality and cost. Like in any such industry, scale and capital access are paramount. The sooner AMCs understand how they fit and compete in their market, the better they will adapt and thrive.

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