M ajor teaching hospitals make more profit off Medicare than any other hospital group and haven't experienced a closure or sale in more than two years. But a volley of studies unleashed recently aims to convince Congress that teaching hospitals, as we know them, may not be around much longer.
Though they have costs that are more than 30% higher than other hospitals', according to a Greater New York Hospital Association study, the nation's 125 major teaching hospitals have Medicare margins that are more than twice those of other acute-care facilities (See chart, p. 16). They will reap a 19.5% profit margin on Medicare payments for inpatient services and a 10.8% margin on Medicare for all services in 2002, according to estimates by the Medicare Payment Advisory Commission. These figures include scheduled cuts at the end of the year in indirect medical education and disproportionate-share payments-extra reimbursement for treating large numbers of indigent patients. The plump margins on Medicare have prevailed despite various hospital cuts made during the past five years that were set in the Balanced Budget Act of 1997. Congress, through provider "giveback" legislation, so far has saved teaching hospitals from a 15% cut in IME payments that was scheduled to take effect last year. However, if lawmakers don't reverse current law, the cut will take effect in October.
Recent studies, funded by hospital associations and the Commonwealth Fund, a New York-based foundation that supports health research, argue that a drop in funding to major teaching hospitals may mean that they will falter in their efforts to educate new physicians and take care of underserved populations, and may possibly face bankruptcy.
The timing of the reports' release coincided with Congress' consideration of legislation that threatens hospital funding. In fact, major teaching hospitals argue that the assortment of government cuts to hospital payments, including scheduled reductions to Medicare IME and disproportionate-share payments as well as a recent paring of Medicaid's upper payment limit, threatens the social missions that help form their identity.
Teaching hospitals received $4.8 billion from Medicare in 2000 for the indirect costs of medical education. The pending 15% cut would reduce the IME payments by $800 million in fiscal 2003 and $4.2 billion over five years.
"It appears to us likely that a regime of significant Medicare payment reductions could weaken the academic medical infrastructure, potentially forcing policymakers to consider payments to teaching hospitals based on financial distress," according to a study by the Moran Co., a healthcare consulting firm in Fairfax, Va. The study, released last month, was funded by the GNYHA and the Association of American Medical Colleges.
Another report, released earlier this month by the American Hospital Association, noted that in 1999, 43% of all major teaching hospitals and 31% of other teaching hospitals had negative operating margins.
The AHA report on teaching hospitals concluded, "While demand for teaching hospitals and their services is strong, public and private payers are less willing to pay for these services and teaching hospitals are feeling the effects financially."
Another recent study from the Commonwealth Fund raised concerns that teaching hospitals may already be failing in one of their primary roles: teaching. The report said the financial pressure on teaching hospitals has contributed to a culture in which medical education is less valued than research and patient care. Also, teaching hospitals aren't making innovations to support teaching in emerging healthcare environments, such as ambulatory-care settings.
The recent flurry of attention to teaching hospitals echoes a similar period two years ago, when teaching hospitals were riding the political winds of favor and won a delay of the IME cuts (May 1, 2000, p. 2).
The identity and prestige of teaching hospitals, which former U.S. Sen. Daniel Patrick Moynihan (D-N.Y.) called the "crown jewels of the American healthcare system," have historically helped ensure that the institutions received special protection from lawmakers when they were setting Medicare policy.
But to accommodate the drop in government payments, teaching hospitals have begun to look and act more like other hospitals. Although they've done so later than community hospitals, teaching hospitals have imposed cost-cutting plans and layoffs; they've worked to milk more money from their medical staffs; they've sold their unprofitable managed-care plans; and they've even been bought out by for-profit chains.
Like heavyweight wrestlers on crash diets to make a lower-weight class, the challenge for teaching hospitals is to drop the pounds without losing their strength and power.
"For most of our members, if their survival pathway is to be like everybody else, then, in many cases, the community doesn't need them," said Robert Dickler, senior vice president of healthcare affairs at the AAMC.
Which is one reason Paul Levy, the new president and chief executive officer at Boston's financially troubled Beth Israel Deaconess Medical Center, refused to cut residency programs earlier this year, despite a recommendation to do so by the consulting firm engaged to turn around the hospital.
Teaching hospitals have been revered and protected by the public and by Congress because they typically offer the most advanced life-saving technology, they train the next generation of physicians and they are often the safety net providers in their communities.
Teaching hospitals and others question how Congress will respond to pleas from national associations to at least lighten the upcoming Medicare cuts. Moynihan, who served as ranking member on the Senate Finance Committee, retired in 2000. He "would fall on his sword to protect urban hospitals," said Ellen Kugler, executive director of the National Association of Urban Hospitals.
Teaching hospitals say that a failure of federal and state governments to support them would be crippling.
"You will see (major teaching hospitals) slowly degrade from a capital standpoint, and they will become less and less attractive to paying patients," said Timothy Goldfarb, president and CEO of Shands Healthcare in Gainesville, Fla.
How close teaching hospitals sit to the edge of financial collapse is debatable.
The investment community, which tracks the creditworthiness of teaching hospitals, still considers them to be a shining star. Terry Goode, a credit analyst with Standard and Poor's, earlier this year described academic medical centers as "among the strongest credits in the healthcare sector," with most earning an "A" rating or better from S&P.
The Commonwealth Fund study noted that major teaching hospitals have improved financially in 2000 and that net revenue may be increasing.
"We see their finances as quite strong," said MedPAC analyst Jesse Kerns. "Even with this big (indirect medical education) cut, their (Medicare) margins are still going to be very high."
But major teaching hospitals dispute MedPAC's assessment.
"I know that our margins don't look anything like what MedPAC says," Kugler said.
The AAMC argues there are several errors in MedPAC's calculation of Medicare inpatient margins, specifically that while revenue from Medicare disproportionate-share payments is included, hospitals' costs associated with providing services to the uninsured are not.
Also, although teaching hospitals may make more on Medicare, partly because of the annual inflow of $5 billion in IME payments, they make a smaller overall profit margin on all payers than do other hospitals.
In 1999, the most recent year for which data were available from MedPAC, major teaching hospitals received a total margin of 2.4%, compared with 4% for nonteaching hospitals.
However, the difference between teaching and nonteaching hospitals in overall margin, 1.6% in 1999, is shrinking, according to MedPAC. From 1988 to 1998, it averaged 2.1%.
Regardless of the true severity of their plight, all observers interviewed by Modern Healthcare for this article agreed that teaching hospitals have become better-run businesses as they have struggled to deal with cuts under the balanced-budget law.
Their business acumen has included becoming better negotiators with insurers. In one of the more celebrated examples of how to leverage the prestige of major teaching hospitals, Partners HealthCare System in Boston walked away from the table during contract negotiations with Tufts Health Plan in 1999. Tufts, soon realizing that it couldn't take access to Massachusetts General Hospital and Brigham & Women's Hospital away from its 910,000 members, called Partners back and eventually settled on a sweeter deal for the system.
Teaching hospitals have historically had trouble negotiating higher rates from private insurers to cover their higher costs. But Kerns said 1999 data show that teaching hospitals made greater improvements than nonteaching hospitals in receiving payment for their costs from private insurers.
"I think that teaching hospitals have learned how to negotiate more effectively for stronger contracts with payers," said Jay Levine, vice president of ECG Management Consultants, a Boston firm that specializes in consulting services to academic medical centers.
Teaching hospitals also have gotten out of failing businesses and streamlined their operations.
Over the past two years, academic medical centers such as those at the University of Virginia in Charlottesville; Duke University in Durham, N.C.; and Washington University in St. Louis have sold their health plans to for-profit companies. Leonard Sandridge, the University of Virginia's executive vice president, described its QualChoice HMO as a "distraction" when it sold the money-losing plan to Bethesda, Md.-based Coventry Health Care last year.
And the changes at teaching hospitals have gone even deeper than selling unprofitable business units.
"Seems to me that we have done more with academic medical centers lately than we have earlier," said David Hunter, CEO and founder of the Hunter Group, a St. Petersburg, Fla.-based consulting firm that specializes in hospital turnarounds.
Hunter said his company has 15 to 20 academic medical centers as clients now, with most of those coming on board in the past three years. Two of the firm's clients-Henry Ford Health System, Detroit, and Beth Israel Deaconess-announced workforce reductions of 500 and 630 positions, respectively, earlier this year.
But hospital executives, as well as Hunter, insist that teaching hospitals' key to success is in generating more revenue, not just cutting costs.
Hunter said academic medical centers often have done much of the possible cost-cutting by the time his team arrives. Also, with chopping away staff and programs, teaching hospitals run the risk of affecting their teaching, research and community service roles.
Shands' Goldfarb said that while it makes sense for teaching hospitals to reduce expenses, "there is a point you fall off the cliff in terms of your mission."
But even the pursuit of new money has its mission risks for teaching hospitals. Focusing energy and money on building new relationships with physicians who can help fill operating rooms with high-paying surgery patients can disrupt the delicate "town-gown" balance between physician faculty members and community doctors.
For Levy it has become a necessary risk. "If you are not paying attention to the relationships with referring physicians from the community, you cannot meet the financial targets you need to meet to support the entire medical center."
The last teaching hospital to close was Cleveland's 344-bed Mount Sinai Medical Center-University Circle in 2000; more typically the fate for major teaching hospitals that fail financially is to be acquired by for-profit systems.
In 1998, for-profit Tenet Healthcare Corp., Santa Barbara, Calif., bought 427-bed Hahnemann University Hospital and 401-bed Medical College of Pennsylvania Hospital, both in Philadelphia, as part of a deal to acquire Allegheny Health, Education and Research Foundation in Pittsburgh.
Earlier that year, Tenet bought 303-bed St. Louis University Hospital. In 1997, Universal Health Services in King of Prussia, Pa., bought 231-bed George Washington University Hospital in Washington.
Though closings and buyouts have been rare in recent years, the AAMC's Dickler cautioned that widespread damage to the teaching hospital sector may not come with such visible early warnings as a rash of facility or program closings. Even the rise and fall of profit margins may not provide a clear measure of their health.
For teaching hospitals, Dickler said, "It's not simply an equation of `Do I make money or lose money?' It's, `How do I do what I am supposed to do?' "