The new academic health center hybrids: part business, part academic.

Over the last decade. increased competition from community hospitals and physician groups and a dramatic rise in managed care penetration have forced the nation's 125 academic health centers (AHCs) to maintain the structures and funding required for high-quality teaching and research programs, while developing a service delivery system that is competitive with the private sector.[1]

The result has been a flurry of mergers and consolidations. Some AHCs have established joint ventures with for-profit corporations. such as Columbia/HCA, which have the resources and strategies to keep them afloat. Others have formed PHOs, PSOs, MSOs, IPAs, and statewide primary care networks. A few offer their own managed care products and come very close to fitting the true definition of fully integrated systems.

In fact, 43 percent of those responding to the Association of Academic Health Centers' "1994 Critical Data About Academic Health Centers: Survey Report" reported owning or operating an HMO, PPO. or IPA, a figure that represented seven percent of the nation's HMOs, PPOs, and PAs in 1991. A total of 49 percent of the university-owned operations were university-based, according to the survey.

AHCs have also reconfigured their teaching programs, repriced clinical services, and generally restructured themselves to more effectively compete in the marketplace. These are radical changes for the traditionally conservative AHCs that never worried about being competitive.

J. K. Iglehart maintains that AHCs have traditionally been steeped in a "culture of collegiality and decentralized decisionmaking under which learning thrived and tenure was a hallmark of academic success. Academicians were largely shielded from :he rigors of the marketplace. Now, a more business-oriented style seems called for. one that recognizes the emergence of competing providers (most of whom the centers trained), who are providing medical care at substantially less cost than are physicians affiliated with academe."[2]

Traditional AHCs are financed by a complex arrangement of cross subsidies because such things as medical education. biomedical research, and treatment of severe and unusual diseases do not pay for themselves. Revenue comes from patient care provided by faculty practice plans and hospitals. The subsidies are tacked onto patients' bills, which is why treatment costs at tertiary care centers are much higher than those at community hospitals.

The AHCs also receive heavy support from the federal government through Medicare payments and from the Departments of Defense and Veterans Affairs, the latter of which is the largest source of funding for medical education. The growing dominance of managed care is threatening the concept of cross subsidization.[2]

AHCs are also reporting lost state funding and losses relative to cost on Medicare and Medicaid. According to the study referenced above by the Association of Academic Health Centers, 67 percent reported decreased state funds, while 72 percent indicated Medicare losses totaling. in aggregate, $805 million and 90 percent reported losses relative to cost on Medicaid totaling, in aggregate, $745 million. However, the vast majority of respondents (85 percent) reported overall increases in research funding that averaged 14 percent, according to the same study.

"It's a tug-of-war," says David Burnett, MD, MBA, Vice President of the University HealthSystem Consortium and Director of its Clinical Practice Advancement Center, whose members comprise 70 not-for-profit U.S. teaching institutions.

AHCs have flourished since the 1960s and even managed to survive the shift toward prospective payment. But in their current quest to expand the number of managed care patients and compete with the private sector, they often must price services below cost and reduce the number of faculty members and other personnel. Unless their prices are competitive, managed care companies will not do business with them. AHCs that cannot compete find they are overbedded, underused, and in turmoil.[3]

"Academic medical centers have played an important role in the improvement of health care delivery during the past century," said Ralph Snyderman, Chancellor for Health Affairs and Dean of the Duke University School of Medicine, at a Duke-sponsored conference two years ago to discuss the future of AHCs. "Now, at a minimum, we need to become hybrid organizations--part business and part academic."[2]

Robert Dickler, Senior Vice President for Health Affairs at the American Association of Medical Colleges (AAMC) says that while most AHCs have changed their focus, it may be too soon to tell if they have made the right decisions.

"I don't think anybody has really found a solution," Dickler says. "That's not a condemnation. I think that's true of all health care organizations. Most have responded in appropriate ways. Those that have had a couple of years under their belts have cut costs and improved their finances. That goes for freestanding centers, too. But there are different ways to cut costs."

The AAMC was founded in 1876. It is a national association whose constituents are allopathic medical schools (125 of them) and major teaching hospitals, most of which have affiliations with four or more residency programs (there are 400 of those). AAMC has members in 92 academic societies, and the focus here is on faculty and research issues. Its charge also includes providing education and resources for members who need help managing change.

AAMC also administers the Medical College Admission Test, the Medical College Admission Service, and manages the National Residency Matching Program.

Down the road, Dickler sees a downsizing of graduate medical education programs and more partnering among medical schools to change their curriculums and train new physicians for the world of managed care. He predicts AHCs will develop cross-disciplinary partnerships by merging with other organizations or working with venture capitalists to come up with new sources of funding.

"The ability to cross-subsidize is diminishing," Dickler points out. "We're still in transition; fee-for-service is still alive in some parts of the country, but in the next three to five years, it will decline or vanish, so it's important to have something in place."

Dickler believes the federal government may have to step in at some point to keep research and education funds coming. "It's hard to envision that the problem can be solved at a state or institutional level," he says.

University Health-System Consortium's role

The mission of the University HealthSystem Consortium is to strengthen the competitive positions of members and their network partners through pooled resources, economies of scale, improved clinical and operating efficiencies, and to influence the director and delivery of health care. As such, its programs are focused in four areas: supply and services, information resources, value management, and market management.

"We help our members to understand how AHCs need to form networks in order to retain their research," explains Burnett. "We teach them about the components of network development, developing specialty contracts, home care. We help them identify the number of patients that they either need to support the faculty they have, or we tell them how to organize their faculty if the patient bases stay the same,"

The consortium's help is expensive: $60,000 annual dues, plus another $23,000 dues to participate in the shared information program, plus whatever other services members may need. Burnett says most members pay about $100,000 annually and find they recoup the expenditure by operating smarter.

Identification of market stages

In 1993, the Oak Brook, Illinois-based consortium developed what it observed to be four stages of market evolution. Stage One is characterized by independent hospitals, physicians, employers, and HMOs. In Stage Two, lead HMOs or PPOs emerge and loose provider networks and weak hospital affiliations develop. In Stage Three, the lead HMOs/PPOs achieve critical mass and begin to consolidate. Hospital systems form and there is aggressive recruitment of primary care group practices and selective contracting by major purchasers. Large multispecialty, primary care, and IPAs develop. Specialist practices are underutilized and discounts increase. Beds close as hospitals shed excess capacity. Finally, in Stage Four, purchasers contract with integrated hospital/physician systems to provide comprehensive services to their beneficiaries. Financial risk is shifted to primary medical groups/provider networks, and there are very strong incentives for beneficiaries to use contract networks. Also, the capitation model becomes prevalent.

Consortium members identify at which stage they are operating and are advised on strategies they should be implementing, such as building primary care distributions, before the window of opportunity closes.

AHCs get involved in managed care

Given the dramatic growth of managed care and AHCs, and problems staying competitive enough to attract their fair share of contracts, the consortium created a managed care program. The idea was to help members and their network partners create revenue streams that work under managed care.

The consortium has created models of network sizing and capitation economics that members can customize to meet the needs of their organizations. They also receive assistance in evaluating managed care products and services and in obtaining preferred group contract terms. The consortium can even develop a product or contracting strategy for each market segment, such as Medicare or Medicaid, to allow its members access through a wide range of third-party payers.

The Clinical Practice Advancement Center

The consortium's Clinical Practice Advancement Center works with members to create and implement clinical guidelines, pathway models, benchmarking, outcomes management, and case studies. It also works to foster clinical research by providing study management services to research sponsors, focusing on multicenter trials of innovative technologies and health care economics studies. Its technology assessment staff conducts literature reviews, member data analyses, and provider surveys. The published documents include recommendations, management guidelines, survey results, and reimbursement implications. The clinical information management system offers members and their partners software to access and use comparative data to change behavior, measure outcomes, and improve performance.

"We also have a hospital group purchasing organization for drugs," says Burnett. "We're not the largest, but on a per-hospital basis, we are the largest."

Some case histories

University of Vermont

On January 1, 1995, the Medical Center of Vermont, Burlington, merged with Fanny Allen Hospital, the community hospital there, and University Health Center, a fulltime physician faculty practice plan. It is now a single entity that functions under a single board and layer of management called Fletcher Allen Health Care. The College of Medicine was brought in as a functional partner to integrate the management structures.

"We recognized that to succeed in the future, we could not survive and flourish independently," said Fletcher's Senior Vice President of Operations Jim Reuschel. "We didn't do it because the wolf was at our door. We think the market is going to change significantly, and we want to be well positioned."

The merging organizations share missions, and there was the realization that as one entity they could ring up significant cost reductions. This year, the goal is to cut $6 million in expenses, and as part of that plan, Fletcher has just announced it will reduce its work force by 200 to 300 employees. Next year's savings goal is $20 million.

"By 2004 or 2005, we expect to be in (market) Stage Four, and our cost structure will be one-third lower, and we clearly plan to achieve that," Reuschel says, adding that Fletcher will move from a 600-bed hospital to one of 200 to 300 beds at the same point in time. "Revenues will be fixed, and most business will be done on an outpatient basis. The beds that remain will be for very sick patients."

In the Burlington, Vermont, and the Upper New York State markets, Fletcher will dominate. But to achieve continued success at Stage Four, Reuschel says the organization's medical staff will need to be reduced by 15 percent and there will be other program reductions as the market becomes more fully capitated, and costs are scaled back to become more competitive in its pricing.

Unfortunately, this growth will do nothing to increase research funds. "Clearly, the amount we have available continues to shrink, but we build it into our budget," he says. "The medical school is significantly concerned about resources."

Reuschel is proud of the progress his organization has made in the past year. "It shows it can be done," he says. "Doctors and hospitals can work together to achieve integration and reduce cost in a short time."

Duke University Hospital and Health Network, Durham, North Carolina 

Mark Rogers, MD, CEO, Duke University Hospital and Health Network, says AHCs must make several changes in order to thrive in today's health care arena:

* Lower the cost to market levels; the mar market is not going to pay for research.

* Develop a primary care base beyond the confines of the traditional faculty practice plan.

* Become a major player in managed care.

* Become a testing ground for research and development for other organizations in health care.

Duke has done all of the above. It has partnered with New York Life operations in North Carolina, South Carolina, and Virginia for referrals. It has a yearly capitated supply contract with the Baxter Corporation and acts as a testing center for Hewlett Packard.

"These four strategies we believe will make the difference," Rogers says. "They aggressively deal with issues of how to position an academic health center to offer the highest quality at a comparable cost." Rogers believes AHCs must find new sources of revenue and ways to drastically lower expenses. Duke has lowered expenses by $70 million, cut employees, and slashed waste.

"We did an audit on the complexity of care and got rid of duplication and waste," he says. "There were separate labs for endocrinology and pediatrics. We consolidated all that, and we consolidated purchases so we could use fewer purchasing clerks."

Duke retained its physician practice plan, Duke University Affiliated Physicians, which comprises 50 physicians in an area surrounding the Research Triangle. "That was to make sure we had an adequate referral base for managed care contracts for Duke University employees," Rogers explained. "We needed to provide care for them throughout the region, not just on the campus."

Currently, Duke is studying the potential impact of reducing its hospital beds by 30 to 35 percent, Rogers said, adding that the AHC downsized 500 of its original 1,500 employees over the last 18 months. "The future is going to be very different than AHCs knew in the past," Rogers said. "We are going to focus on strategies that will allow us to be a more regional provider. There are three or four major players in any given region, and we hope to be one of those players."

University Hospital of Cleveland/Case Western Reserve University Medical School/QualChoice Program

In 1989, University Hospitals of Cleveland in Ohio, the 1,000-bed teaching hospital of Case Western Reserve University Medical School, bought a multispecialty group practice with 110 physicians, 45 of whom are primary care doctors. In July 1994, University Hospitals set up Lakeside Pavilion as a community hospital with 60 beds, and started buying up physician practices. A total of 130 primary care physicians in the Greater Cleveland area began referring patients to University Hospitals.

The faculty first formed an IPA, then a professional corporation. It is currently working toward integrating into a single group practice. In 1990, University Hospitals established its own home health agency, and its multispecialty group did the same. A merger is expected. Additionally, the multispecialty group practice established a durable medical supply company.

The system established a fitness club and a wellness organization that provides cardiac screening and rehabilitation, as well as consumer education programs. In 1994, University Hospitals assumed the assets and liabilities of two more community hospitals and began buying and leasing medical buildings in the region. This year, a subacute skilled nursing unit was added to University Hospitals and a subacute skilled rehabilitation unit will follow next year. Also this year, University Hospitals bought an ambulatory surgery center in the neighboring suburb of Westlake.

Despite all this expansion activity, developing new care paths, and finding ways to operate more efficiently, University Hospitals remained among the country's top 10 teaching hospitals in the research category, securing approximately $50 million, predominately through grants and sources aside from patient revenues. And there was a 20 percent increase in the number of hospital discharges at University Hospitals, as well as a tremendous increase in gross revenues, according to Gerald P. Herman, MD, President and CEO of QualChoice Health Plans Inc., Cleveland, which is the managed care administrator for University Hospitals.

QualChoice was launched in 1990 as a third party administrator, offering managed care and a triple option point of service program. In 1993, it got an insurance license and began to market fully insured products to smaller companies. Last year, QualChoice began to sell HMO plans and got into the Medicaid business, offering voluntary coverage for managed care. This coverage will be mandated by Ohio law July 1.

"We have passed the first round of getting licensed for the mandatory program and got into the HMO Medicare business this year," Herman says. "University Hospitals is at the center of our network with physicians practicing in 10 counties."

In addition to all the changes occurring at University Hospitals, QualChoice has also been undergoing substantial turmoil. Herman, who was Medical Director and Executive Director of CIGNA in Cleveland until 1992, then Vice President of Managed Care at University MedNet until 1995, took over QualChoice during a period fraught with financial losses. He is fighting to stem those losses by increasing premiums and administration fees to a competitive level, decreasing medical expenses through decreased utilization of inpatient hospitalization, unit cost, and resources, more restrictive preauthorization requirements, and renegotiation of contracts with its prescription drug company. His strategies are apparently working, as University Hospitals' 1995 bottom line indicates.

"I think that University Hospitals of Cleveland is one of the half-dozen AHCs ahead of the rest," Herman says. "AHCs have been way too expensive. Managed care is leaving them out of their programs, and they can't make it just doing tertiary care. AHCs have become noncompetitive. Community hospitals can do the same things cheaper and just as well; their medical staffs were trained at the AHC, but they don't have to maintain the high fixed overhead and maintain teaching and research programs.

Herman predicts Cleveland will eventually have two or three network systems that will dominate health care in the area, "one of which will be University Hospital of Cleveland, which has reduced its cost structure."

Tulane University Medical Center, New Orleans, Louisiana

Last February, Tulane University Medical Center, New Orleans, Louisiana, entered into a joint venture with Columbia/HCA. Essentially, Columbia purchased 80 percent, took over the daily management of the hospital, and now occupies half of its board seats. The joint venture corporation is called University Healthcare System, and it is capitalized at $165 million, plus a commitment from Columbia of $75 million over five years to subsidize Tulane University Hospital and Clinic's construction and renovation projects and another $20 million to support Tulane's academic programs.

"There was cynicism at first," admits Edward F. Foulks, MD, PhD, Associate Dean for Clinical Affairs and Graduate Medical Education, at Tulane Medical Center School of Medicine. "But that has vanished now. So far, it has been a very congenial, forward-looking process, and we're all pretty enthusiastic."

"We are one year into the partnership, and Columbia/HCA is still consolidating its acquisitions in the New Orleans region," Foulks says. "They anticipate this will take another year or two, at which time there will be more integration of Columbia/HCA hospitals in the region and the state."

During the past year, Foulks' job has changed substantially. He was selected to chair a new academic network committee to look at opportunities within the Columbia/HCA network to establish a formal consortium for training of undergraduate and graduate medical students and to create continuing medical education (CME) programs. There are nearly 30 hospitals across Louisiana. Currently, 17 of them have formed an affiliation agreement for training medical students and residents.

"We will look into the feasibility of family practice residency programs in various regions of Louisiana that will provide a base of referral to Tulane University Hospital as a tertiary hub and a training base for medical students and residents who choose to go into primary care, primarily in an ambulatory setting," Foulks explains. "This is an important move away from bed-based care to ambulatory care."

Working in parallel with his committee are several others whose charges are to explore new requirements in view of the expansion, to monitor the number and mix of faculty in specialties and subspecialties, and to see how those numbers correlate with the number of students and residents that can be trained. Centers of excellence have been proposed by Tulane's Chancellor in such areas as gene therapy, women's health, infectious diseases, molecular medicine, cancer, cardiovascular, and transplantation therapies Foulks said. These would be research and education centers funded by resources from the sale of a portion of University Hospital to Columbia/HCA.

Additionally, Foulks' office has been made responsible for tracking all 490 residents linked by the Columbia/HCA hospital affiliations. "We bill where we can for their services, and from that billing we provide a uniform salary and package of fringe benefits," Foulks said. "We follow them wherever they rotate through the 17 hospitals. Prior to this, whenever the residents rotated, they had to deal with the separate personnel policies of each hospital."

Changes for AHC physician executives

Robert Dickler of AAMC says many AHCs prefer physician executives as their leaders rather than lay people. This is been true for years at large teaching hospitals in certain parts of the country, particularly the Northeast, but Dickler believes there's more incentive to hire physicians today "because of the integrated nature of these organizations and the bringing together of physicians and hospitals. People feel that physician executives can sometimes more effectively deal with physician integration and the change process."

"I think that in the past, the Chiefs of Staff and Medical Directors who were full-time and paid by the hospitals had very little authority over the medical staff," Gerald Herman of QualChoice points out. "They had to do the job by persuasion and negotiation and really didn't have much to do with the individual practices (owned by hospitals). Now, they have to do a lot more from a business standpoint."

Herman says physician leaders at AHCs have always needed good communication skills. Financial skills were necessary to stay within budget and apply for grants, but today's AHC leaders need more even more business skills. And they need to learn to adapt to changes that are not always positive.

"I think what they haven't had to deal with from an economic standpoint is providing economic health care," he says. "They've been in a position for the past 20 years of being paid more than privately practicing physicians, and they tended to think they were worth more. That's one of things they have had to learn. They can't live like they used to. Academia in the early 1960s earned smaller increases than privately practicing physicians. It was a sacrifice economically, but they gained a better life-style. They weren't on call and had regular hours. Things changed in 1965. Academic physicians began earning as much or more money than private doctors, and they still had the better life-style. In the 1990s, if they want the lifestyle, they can't make the money."

Edward Foulks says the biggest change he's noticed is that the traditional "just tell me what you want from me, and I'll do it" attitude has been replaced by a "much more interactive, creative process." Foulks encourages staff interaction at meetings because he's the first to admit that he can't be an expert in every aspect of his AHC. He relies on the feedback and ideas of the staff. But there are still some AHC executives who remain part of the old way of thinking.

"My job is organizational," he asserts. "I have to gain the cooperation and motivate other executives here who are part of the our corporation, but who are working in other directions, to achieve the goals I've set as priorities. And that's a challenge."

Foulks also believes physician executives at AHCs need to bone up on health policy and learn to be resourceful in getting information and talking to the right people. "The state system is undergoing as much change as the private system," he says. "It requires a different kind of skill and expertise. You have to develop a liaison with people in state government, both in the legislature and the office. You have to learn how government agencies work and what their regulations and policies are. And you have to discover how to keep people involved in those processes and ways to communicate with them in a working way."

References

[1.] Kralewski, J.E. et al. "Can Academic Medical Centers Compete in a Managed Care System?" Academic Medicine 70(10):867-72, Oct. 1995.

[2.] Iglehart, J.K. "Duke University Conference on the Private Sector." Health Affairs 304-11, Spring 1995.

[3.] Kassirer, J.P. "Academic Medical Centers Under Siege." New England Journal of Medicine 331(20):1370-1, Nov. 17, 1994.

Donna Vavala is a health care journalist and frequent contributor to Physician Executive.