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Simone's OncOpinion: Academic Medical Centers Facing New Financial Challenges

Simone, Joseph V. MD

doi: 10.1097/01.COT.0000415675.00084.7a
Opinion
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JOSEPH V

JOSEPH V

Academic medical centers (AMCs), particularly those that include a medical school, are headed for rough financial seas, according to some analysts. This prediction is based on the current and future effects of health care reform and national and state economies that still are not on solid footing. But the story starts much further back than that. I shall provide a short history that may help make sense of these very complex organizations.

The modern AMC began to be shaped during and after World War II. The growth, influence and financial resources of the NIH fueled the start of a steady growth around that time leading to an increasing number of pockets of medical research excellence around the country.

The medical scientists became the influential “golden boys” of AMCs because they brought in a lot of grant money and prestige. In addition to funding the direct costs of research, an additional sum for indirect costs (variable, but currently around 50% of direct costs) was given to the medical school or university to support infrastructure for the research. So a grant of $100,000 to Dr. Smith resulted in another $50,000 going to his institution.

Although the quantity of grant dollars fluctuated over the years, money steadily flowed, leading to a large number of excellent to outstanding research programs in the AMCs.

During this same post-WWII period, health insurance was not widely available. The trade unions managed to get insurance included in their benefit packages in many of the larger industries, such as the booming auto industry. But the average lower-income family, like my own, did not receive health insurance benefits from employers. They were expected to pay for their health care at doctors’ offices and hospitals, often in installment payments.

Doctors and hospitals wrote off many bills for those who couldn't pay; that was considered a normal part of doing business and collection agencies weren't used. Doctors (and dentists) often provided care to each other without pay, which was called “professional courtesy.”

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‘Charitable Institutions’

Most community hospitals, many with religious affiliations, as well as large county-supported hospitals, viewed themselves as charitable organizations (how quaint that seems today). Charity Hospital in New Orleans, Los Angeles County Hospital, Cook County Hospital in Chicago, Bellevue in New York, and others cared largely for the poor and indigent. Their costs were relatively low by today's standards because staff pay was very low; they expected employees to sacrifice greater income for the privilege of working in a charitable organization. County hospitals were also among the best teaching hospitals for generations of students, interns, and residents. I was a house officer in that system in the early 1960s.

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Big Change with Medicare

That environment began to change with the establishment of Medicare in 1965. For the first time, the elderly now had health insurance to go along with the Social Security benefits signed into law in 1935. Medicare was a huge benefit for the elderly, of course, but it was also a huge benefit for doctors and hospitals. They were now compensated for caring for patients who previously could not pay at all or not in full.

Gradually, from 1965 onward, Medicare became a larger and larger part of the income of doctors and hospitals, sharply reducing the uncollectable bills. Adding to this financial transition, more and more employers offered health insurance benefits, which soon became an expected benefit of employment. This financial boon for what later became known as the “health care industry,” however, had some unintended side effects that haunt us today.

First, the focus of hospital and medical practice management shifted more and more to business issues and less and less to professional and charitable missions. University-owned hospitals, mostly minor players in health care before WWII, began to grow. By the 1980s, the “golden boy” designation, previously held only by high earning grantees at AMCs, had to be shared with “rainmaker” physicians who brought into the system lots of profitable business made possible by generous insurance coverage for most patients.

Taking care of patients, previously viewed by AMCs largely as a mechanism for teaching students and house staff now became the major source of revenue and, especially, profit. (Government grants have never covered the total cost of doing research, so there is no net financial profit from grants to offset non-reimbursed costs like education or capital expenditures; other government funds and philanthropy, when available, were needed to cover those costs.)

So the boon of profit from health insurance provided discretionary funds to pay for growth, equipment, recruitment, new research initiatives, and other activities. So far so good; the rich got richer and the big got bigger.

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Effects from Expansion and Increasing Dependence on Clinical Outcome

But by the 1990s this expansion and increasing dependence on clinical income had a number of effects:

1. Deans and department chairmen (the worst jobs in health care today) started getting MBAs to help them deal with running large businesses, for which they were ill prepared. This offered less time and emotional energy for academic development. They began making academic compromises to “feed the beast” and started installing corporate structures in AMCs, leading to the amazing proliferation of assistant and associate deans and chairs.

The problem was that an AMC is not a traditional corporation, so the challenges in many cases became insurmountable or so chronically ingrained that complex and inefficient Rube Goldberg workarounds were constructed as temporary fingers in the dike.

2. Community hospitals and hospital systems were not dormant during this time. They too profited from the broad insurance coverage and, particularly in the past decade or two, have gobbled up smaller hospitals and become regional providers of care. In contrast to the leadership of AMCs, their CEOs were trained for the job and knew that the trustees would look closely at only two factors when it came to their job security and bonuses: good financial performance and no scandals.

Community hospitals became formidable competitors of AMCs. Their costs were lower because they did not have the financial burden of research or extensive training programs. And in many metro locations they were more conveniently located and more user-friendly with easier parking, shorter waiting times, and greater staff accessibility.

But health care costs kept rising rapidly in AMCs and community settings. The causes of this escalation have been reported and explained ad nauseum in the public and medical media.

Basically, there are a handful of factors that have done the most to raise the cost of care: (1) The rapid increase of new and expensive technology, often without rigorous proof of superiority; (2) The cost of new drugs, reached levels that would have been incomprehensible only a decade ago; (3) The prices charged by physicians in the U.S., which are five-fold greater than in other medically modern countries; (4) The meteoric increase in expensive regulatory requirements; (5) Undisciplined financial management; (6) And sad to say, in some cases, pure greed.

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Which Brings Us to Today

So that brings us to today, waiting to see what the Supreme Court will do with the Obama plan for health care reform. Community hospital systems and some AMCs are not waiting. Many are moving aggressively to structure their systems so they can thrive as Accountable Care Organizations. They are employing physicians and inserting infrastructure to respond to the requirements; employed physicians should make it easier to manage bundled payments for services.

But AMCs may be in financial trouble irrespective of the Supreme Court's decision. A study* by PwC (formerly Price Waterhouse Coopers, a large consulting firm heavily involved in health care) lists a number of challenges for AMCs. Here are just a few:

  1. Although AMCs are respected, 78% of the public polled said they were unwilling to pay a higher premium to go there. Brand strength goes only so far.
  2. Funding sources are changing. Research costs continue to rise while grant dollars do not; state and federal governments are cutting support; the limping economy affects philanthropy; and AMCs are viewed as high cost providers in an “accountable care” environment focused on lowering costs.
  3. The PwC analysis predicts that Medicaid will become a much more prominent funder of AMCs while their share of higher paying insurance will decline. Also, up to 10% of traditional AMC revenue could be at risk due to external funding threats such as those noted in #2 above and stiffer competition; with the average AMC operating margin at only 5%, profit margins may disappear.
  4. The old AMC organizational alignment is a major problem. This, in my view, may be the most important threat. A quote from the report: “The highly decentralized governance structures at AMCs threaten their ability to respond to the challenges of the current and future healthcare environment. When AMC leaders were asked how they would respond to internal and external challenges, actions that required modifications to the governance structure at AMCs were among the lowest ranked.”

But the modern AMC is an attempted fusion of a medieval university system with its tenure, and caps and robes with a modern health system in a fast-moving, highly competitive, and lucrative health industry—a marriage made in hell characterized by values and leadership in fluctuating, but perpetual, conflict.

Furthermore, the fixed cost in most AMCs is quite large and difficult to manage or change because of a common mentality of entitlement and exceptionalism exemplified by tenure.

The report offered several strategies for AMCs to “avoid a margin meltdown.” I will list only three:

  1. Build the AMC's brand by holding faculty accountable for quality and cost. The challenge, however, is that “well-entrenched faculty and organizational structures have made it difficult to address costs and quality.” Duh!
  2. Become part of a larger community network. Fifty-nine percent of the consumers surveyed by PwC said they were likely to seek treatment from a community hospital if it was associated with an AMC.
  3. “Align the research pipeline with clinical and business strategies.” This latter may be anathema to the laboratory research purist, but this is a new age when translational research is a key competitive activity of AMCs.

AMCs are the engines of medical progress in this country. They appear to be at an increasing risk of financial straits in the immediate future. Bold action** is not normally a strong suit of AMCs; nonetheless it is called for now with some degree of urgency. It certainly wouldn't be easy, but it is a question of whether the inevitable changes ahead will be made with us or to us.

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Now Available in Book Form: Simone's Maxims—Updated and Expanded: Understanding Today's Academic Medical Centers

Simone's Maxims book

Simone's Maxims book

Dr. Joe Simone's popular “maxims” about the behavior of academic medical institutions, their leaders, and their faculty, first published as an editorial in Clinical Cancer Research in 1999, are now available in book form, greatly expanded and updated. The 160-page paperback book ($15, ISBN 978–0-9832958–9-1, available from Editorial Rx Press and Amazon, also includes updated versions of many of his related columns in Oncology Times.

He notes that the maxims were accumulated and developed from years of personal experience and many mistakes, as well as occasional revelations, both personal and from the experiences of colleagues.

Additional information is available at editorialrxpress.com; info@editorialrxpress.com

*The entire PwC report cited here can be found at %.http://www.pwc.com/us/en/health-industries/health-research-institute.
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**Recommendations for bold action in healthcare, called “disruptive innovation,” are described in The Innovator's Prescription, by Clayton M. Christensen (McGraw-Hill, 2008).
Cited Here...

© 2012 Lippincott Williams & Wilkins, Inc.
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