The pending combination of Arizona's only academic medical center
with the state's largest not-for-profit hospital system is an early tremor in what may turn into a major shake-up of U.S. academic medicine.
Faced with the need to cut expenses, make new capital investments and subsidize the rising cost of medical research, the University of Arizona Health Network in Tucson late last month agreed to sell its operations to Phoenix-based behemoth Banner Health
. UAHN has struggled financially so far this year and is scrambling for ways to begin delivering value-based care.
“The institution basically has been undercapitalized,” said Dr. Michael Waldrum, president and CEO of UAHN.
For Banner, the 30-year deal aligns its statewide network with the reputation, prestige and exclusivity of Arizona's only full-fledged academic medical center. Banner officials believe those attributes will be a useful complement to its long-term strategy of delivering better coordinated care.
“We see capabilities that UA has and can deliver for the direction that Banner is going—into a population health management company,” said Banner President and CEO Peter Fine.
Academic medical centers are often viewed as the crown jewels of American healthcare. Their advanced and transformational research, high-profile medical faculty and mesmerizing inpatient and ambulatory facilities all contribute to that perception.
But they are also high-cost, overly focused on tertiary care and suffering through cuts in government funding for graduate medical education and research, which come on top of declining reimbursement from Medicare and Medicaid that is hitting all hospitals. With healthcare reform dramatically shifting how hospitals operate, many industry experts believe the academic titans could become dinosaurs if they don't quickly adapt to today's economic realities.
Academic medical centers “risk becoming high-priced, anachronistic institutions in a landscape of highly organized health systems,” an advisory panel to the Association of American Medical Colleges reported earlier this year. The AAMC convened the panel to develop strategies to help AMCs become more sustainable.
AMCs have a limited range of options beyond enduring the white-knuckle ride alone and hoping for the best. They could try merging with other health systems as UAHN did. Or they can broker looser affiliations with neighboring systems that allow them to retain local control.
Full-fledged takeovers will apply only to limited circumstances because of AMCs' “relatively sound balance sheets,” said Bob Valletta, head of PricewaterhouseCoopers' healthcare provider group. The transactions that do occur will be driven in part by the need for capital, but also by payer mix and pressure to engage in population health management
. “It's all part of your strategy and what you're trying to accomplish,” Valletta said.
Future funding for graduate medical education is a particular concern for AMC leaders. The number of Medicare-funded GME residency slots has been frozen since 1996, and there is bipartisan support for making further cuts. President Barack Obama's proposed budget for fiscal 2015 slashed $14.6 billion from the GME budget through 2024.
“How are we going to pay to educate (residents) and pay for that research?” said Dr. Debra Schwinn, dean of the University of Iowa's Carver College of Medicine in Iowa City, who served on the AAMC panel. Her school is part of University of Iowa Health Care, the state's only academic medical center.
The panel report suggested AMCs must affiliate with larger systems in some fashion or “be prepared to shrink in isolation.” Those that go it alone will miss out on integrating physicians, experimenting with new payment models, exchanging data through health information exchanges, and partnering with lower-cost health centers and community hospitals.
“Increasing our clinical portfolio, both in terms of breadth and scale, is going to be critical to support the infrastructure costs to meet the missions,” said Cory Shaw, AAMC panel member and senior vice president of the system provider network at the University of Nebraska Medical Center in Omaha. “Most can't do that on our own.”
Access to capital was a major issue behind the Arizona combination. Banner will spend at least $500 million on UAHN capital projects over the next five years, create a $300 million endowment for clinical research and pay off UAHN's long-term debt of $146 million.
The deal, slated to close in September, covers UAHN's two hospital campuses, with 624 total beds, a physician practice, three health plans and its affiliation with the UA College of Medicine. “We are committed to a long-term relationship,” said Ann Weaver Hart, president of the University of Arizona. “That 30-year commitment … isn't a casual relationship.”
While UAHN has been fairly profitable, and as recently as last year posted an operating surplus of $35.5 million on $1.2 billion in revenue, this year it dipped into the red. Unaudited figures show the system posted a $24.1 million deficit in the first nine months of fiscal 2014, blaming reductions in GME funding and declining reimbursements from Medicare and Medicaid.
Banner's Pioneer accountable care organization was one of the few that produced savings, reduced readmissions and maintained high quality metrics for the CMS.
Beyond Banner's financial strength—it's the seventh-largest secular, not-for-profit system in the country by net patient revenue—the system offers UAHN proven expertise in implementing population health strategies.
Banner's Fine isn't concerned about taking on the financial problems of a high-cost tertiary center with rising outlays, dwindling revenue and higher-than-average readmission rates, which he believes Banner can turn around. “We are entering another large population market,” Fine said. “It enhances our ability to do what we do more effectively.”
There are rumblings of more combinations and partnerships to come among the more than 100 academic medical centers in the U.S. Some are already hubs of aggressively expanding systems like Massachusetts General Hospital within Partners HealthCare in Boston or Yale-New Haven (Conn.) Hospital in its eponymous system.
And most are still financially sound. Moody's Investors Service's January report remained bullish on AMCs because of their strong market positions and reputations, and their median operating margin in 2012 of 2.7%, a shade higher than the 2.5% margins at other not-for-profits.
But some systems are losing ground in the current environment. Moody's downgraded a handful of independent AMCs, including UMass Memorial Health Care in Worcester, Mass., and Temple University Health System in Philadelphia, with the latter's bonds reduced to junk-level status.
With consolidation sweeping across the rest of the healthcare landscape, many AMCs are beginning to look at their options.
“Many academic health centers for a long time focused on being a destination center, a referral network,” said Marianne Udow-Phillips, director of the Center for Healthcare Research & Transformation, a not-for-profit policy collaboration between the University of Michigan and Blue Cross and Blue Shield of Michigan.
High costs, declining government support for research and graduate medical education, and the need to align with networks may force more academic medical centers to seek partners to survive in an era of population health management.
“They still do that, but I think they recognize with all the pressures on the price side—academic medical centers generally run at a higher cost than many community-based (hospitals)—they need to be able to diversify and expand their offerings,” Udow-Phillips said.
Becoming part of a larger system is also appetizing from a coverage perspective, especially as health insurers creating narrow networks begin to cut AMCs out of the picture. “Consumers are not as willing to stay at a particular institution at all costs,” Udow-Phillips said.
A number of other AMCs have pursued partnerships recently to cope with the changing environment. The University of Michigan Health System in Ann Arbor struck affiliation deals with two Michigan systems: Allegiance Health in Jackson and MidMichigan Health in Midland.
UW Health in Madison, parent of University of Wisconsin Hospital and Clinics, is ironing out a potential collaboration with Milwaukee-based Aurora Health Care. And Northwestern Memorial HealthCare in Chicago and Cadence Health in Winfield, Ill., reached a definitive merger pact in May that will make Northwestern's AMC the nucleus of a regional system.
In June 2012, University of Iowa Health Care created the University of Iowa Health Alliance with three other health systems. The alliance, which has since added another system, now covers the lives of 2 million people, or about two-thirds of all Iowans.
For an academic medical center to pursue the “triple aim” of high-quality healthcare, improved health of a defined population and reduced costs, it will need the help of local providers, said Schwinn, the University of Iowa medical school dean.
“We're not expecting all the patients to come” to University of Iowa Health Care, Schwinn said. “We want to keep patients in the local community, so we're reinforcing what's good for all of us, and have the tough ones come here. You cannot take care of a population if they keep coming in and out of your network.”
Indeed, traditional AMCs are beginning to look more and more like stand-alone community hospitals, said Tom Enders, senior managing director of Manatt Health Solutions, who helped produce the AAMC's academic health system report.
Both face rising costs; both claim they need certain economies of scale; and both know that how well they manage and prevent disease will decide their viability long term.
“Academic medical centers look at those megasystems and (say) either I'm going to compete with them or I'm going to be part of them,” Enders said. “There are not that many options.” Follow Bob Herman on Twitter: @MHbherman