Wave of con­sol­i­da­tion rum­bles to­ward aca­demic med­i­cal cen­ters

Modern Healthcare - - NEWS - By Bob Her­man

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 high­priced, 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 Price­wa­ter­house Coop­ers’ 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.”

Cap­i­tal ac­cess im­per­a­tive

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 longterm 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.

Be­yond Ban­ner’s fi­nan­cial strength— it’s the sev­enth-largest sec­u­lar, not-for­profit sys­tem in the coun­try by net pa­tient rev­enue—the sys­tem of­fers UAHN proven ex­per­tise in im­ple­ment­ing pop­u­la­tion health strate­gies.

Ban­ner’s Pioneer ac­count­able care or­ga­ni­za­tion was one of the few that pro­duced sav­ings, re­duced read­mis­sions and main­tained high qual­ity met­rics for the CMS.

Ban­ner’s Fine isn’t con­cerned about tak­ing on the fi­nan­cial prob­lems of a high-cost ter­tiary cen­ter with ris­ing out­lays, dwin­dling rev­enue and high­erthan-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.

“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,” UdowPhillips said.

Be­com­ing part of a larger sys­tem is also ap­pe­tiz­ing from a cov­er­age per- spec­tive, 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,” UdowPhillips 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 stand­alone 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.”

The Univer­sity of Ari­zona Health Net­work, the par­ent of the Univer­sity of Ari­zona Med­i­cal Cen­ter, has been strug­gling fi­nan­cially. As part of a 30-year deal, Ban­ner Health will de­vote $500 mil­lion to UAHN cap­i­tal projects over the next five years.

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