When it comes to one-stop shopping in healthcare, academic medical centers aren't likely to be the featured attraction on the acute-care version of New York's Fifth Avenue.
"Can you be a boutique and survive? No, you can't," said John LaRosa, M.D., chancellor of Tulane University Hospital and Clinics, New Orleans.
The nation's 120 academic medical centers have been commonly viewed as the elite of U.S. healthcare providers, offering medical research, graduate medical education and an unparalleled range of specialized patient care.
But there's the rub. In today's healthcare environment, those three distinctive, but costly, missions may really be liabilities as teaching hospitals strive to adapt and compete with community hospitals that only have to focus on patient care.
The expense of keeping up the quality of research and education is why some academic medical centers are selling off the hospital portion of their business. With tens of millions of dollars in proceeds from those sales, they are able to concentrate on their teaching missions while attempting to fulfill their obligation to the community through foundations.
"When it comes to our missions, the business of academic education and research is going to have to come first," LaRosa said.
Gone are the days when academic medical centers tried to be No. 1 at everything. "To the extent that they're trying to run a hospital and a college, they're going to fail," said former U.S. Sen. David Durenberger (R-Minn.), who now serves as a senior counselor at APCO, a Washington healthcare consulting firm.
Market pressures are boxing in academic medical centers that can't get third-party payers to support the multiple services of these tertiary facilities.
"More and more, academic medical centers are asking themselves, `Do we need our hospital?'*" said Daniel M. Cain, president of New York-based Cain Brothers, a financial consulting firm. "We've had a cost-driven structure and now the market is taking over."
As the marketplace moves from fee-for-service to managed care, patients can't always see what they're getting from teaching hospitals in return for the higher medical bills they're paying. It's also increasingly hard to sell the value of quality medical education to managed-care plans that are looking only at costs.
In addition, national estimates show that 75% of academic medical centers' specialized acute-care services also are available at community hospitals.
Meanwhile, teaching hospitals' costs are typically 30% to 40% higher on an average-per-case basis than those of community hospitals, according to the federal Prospective Payment Assessment Commission (See chart).
In 1993, the average cost per case for large teaching hospitals-those with 25 or more residents for every 100 beds-was $8,822, compared with $5,020 in costs per case for nonteaching hospitals. Meanwhile, the overall average cost per case was $5,854.
"Academic medical centers are all looking at what they do best, and they can't try to compete with community hospitals for every bed," said Gerard Anderson, director of the Johns Hopkins University Center for Hospital Finance and Management, Baltimore.
Dealing with for-profits.
At Tulane, the hospital is getting ready to close a deal with for-profit giant Columbia/HCA Healthcare Corp., which has agreed to pay $130 million for an 80% interest in the 269-bed tertiary facility.
"You're seeing a restructuring of alliances that have been around for 50 or more years," Anderson said.
Reasons for selling off all or part of the hospital business are rooted in academic medical centers' desire to continue to meet their missions without losing a substantial amount of their resources.
Through creating an endowment, academic medical centers believe they can fulfill their obligation to charity care as well as remain an integral part of healthcare systems.
Many academic institutions have retained their affiliations with the hospitals they used to own. And, in a growing number of instances, teaching hospitals not owned by academic medical centers have broken off relationships to shop for new academic partners.
An example of a success story involving a teaching hospital sale occurred in Omaha, Neb. There, Saint Joseph Hospital, a not-for-profit academic medical center, had been affiliated with Creighton University for 92 years before it was sold in 1984 to an investor-owned hospital chain, Dallas-based American Medical International.
Saint Joseph, with 273 staffed acute-care beds, had been unable to maintain steady financial reserves, so hospital and university executives agreed to a sale to AMI for $100 million. Some $60 million went to pay off the hospital's debt, while the remaining $40 million built an endowment, the Health Future Foundation.
The endowment allocates $1 million a year to the hospital's charity-carebudget, with Saint Joseph contributing another $5 million.
Forming endowments at academic medical centers should be a natural since universities have countless years of experience with them, said Richard O'Brien, M.D., vice president of Health Sciences at Creighton University.
"Our endowment has grown through prudent management," O'Brien said. Today, the Health Future Foundation boasts assets of $70 million and creates grants and programs that the Creighton University School of Medicine has used for an array of purposes.
"We have established new programs with significant research capacities," O'Brien said.
Flush with funds. Today, AMI Saint Joseph Hospital is on solid financial ground. The hospital had net income of $7.8 million on net revenues of $153.7 million in 1993, according to HCIA, a Baltimore-based healthcare information company.
Meanwhile, Matthew Kurs, AMI Saint Joseph's president and chief executive officer, said the Creighton-AMI deal actually bolstered the hospital's value to the community. Because the hospital is no longer tax-exempt, $3 million a year has been added to the local tax base.
Academic medical centers affiliated or owned by private non-tax-supported universities are the most likely targets of investor-owned chains. "We don't get state or county tax support like others," O'Brien said.
Thus, the AMI-Creighton deal has become a pioneer.
"The environment is changing now nationally like it was at Saint Joseph 10 years ago," O'Brien said.
Critics of deals with investor-owned companies have asked whether the commitment to charity care will continue after the hospital is sold. They say the endowments could run out of money, especially if they are used solely to pay for uncompensated care.
"If it creates a $50 (million) to $70 million endowment, that isn't much," Anderson said. "An endowment (used for charity care) either wouldn't last, or they have minimal payouts."
The goal of an endowment is to make it last forever.
"With endowments, you generally pay out about 5% of the total endowment in any given year," Anderson said. "If we're talking 5% of $100 million, we're looking at $5 million. Generally speaking, (not-for-profit) academic medical centers pay out more than $5 million annually in uncompensated care."
At Tulane, steps have been taken to ensure the financial stability of the endowment as well as the hospital, which isn't using up a substantial amount of the university's resources.
In the Tulane-Columbia/HCA deal, the academic medical center will retain a 20% equity position in the new entity, so the hospital would continue to have a cash flow to its foundation. The deal with Columbia/HCA is expected to close in the next month.
Tulane hasn't decided what to do with the capital, but said the facility is likely to invest the money to bolster its primary-care teaching function, among other programs.
Tulane executives are quick to answer anyone who thinks they are selling out. "If I sold you my car, I wouldn't expect to use it four days a week," LaRosa said. "We'll still have a presence at the hospital."
Tulane will continue to train residents and use the hospital for its clinical side.
The Creighton-AMI deal also enhanced an academic program. In the last 10 years, the number of residents trained at AMI Saint Joseph has nearly doubled to 165 residents from 88 residents in 1984. Meanwhile, the university increased its medical faculty to 300 from 180 during the same period.
A range of uses. A realm of other possibilities exist when academic medical centers sell off their hospitals.
"You can take the income or whatever the sale proceeds are into the academic side or research," Cain said. "The endowment can be used for whatever the `public purpose' of the institution's 501(c)(3) (not-for-profit filing statement) says. At the Mayo Clinic, it's clinical care, and at Harvard it may be education and research."
Research capabilities of academic medical centers also are an attractive bait for investor-owned chains. They benefit because it's just one less reason for a patient to have to leave a system to find more specialized care.
For-profit chains also can tap into academic medical centers' major research programs. Creighton has established a Hereditary Cancer Center, while its endoscopic surgery program is known worldwide for developing new treatments for hernias and gall bladders.
Creighton's endowment has spun off an additional foundation known as the Center for Health Policy and Ethics. It receives $200,000 in contributions a year from AMI and now boasts a $5 million endowment of its own.
Despite the trend toward more teaching hospital sales, some academic medical centers are going in opposite directions. In several markets, academic medical centers are the hub hospitals in building networks.
For example, at least four of the Chicago area's budding networks are being led by academic medical centers.
University of Chicago Hospitals, Northwestern Memorial Hospital and Rush-Presbyterian-St. Luke's Medical Center, all in Chicago, have each been quite competitive in attracting community hospital partners. Meanwhile, Loyola University Medical Center in suburban Maywood, Ill., figures to be the anchor of a Catholic healthcare network that includes nearly a dozen Catholic hospitals.
Academic medical centers could use up too much of universities' resources in efforts to pull off networks in which they have to buy physician groups.
"It's slower to grow through your own medical school and residency programs, but you're not expending the capital by buying practices," said Truman Esmond, senior vice president for hospital affairs at Rush-Presbyterian-St. Luke's, the lead academic medical center of Rush System for Health, which hopes to be the provider for 1.5 million to 2 million people in the Chicago area.
Some analysts believe academic medical centers don't have enough capital or expertise in acquiring group practices, clinics and other outpatient facilities that aren't traditionally part of their systems.