The threats to profit in academic medical centers

My hospital, UCSF Medical Center, is thriving. Our profits this year will be nearly $200 million. We’re building a sparkling clinical complex – a combined women’s, children’s, and cancer hospital – adjacent to our new downtown biomedical research campus.

We are installing a state-of-the-art computer system. US News & World Report calls us the 7th best hospital in the country. Our students, residents, and fellows have never been better.

Yet angst is in the air, borne of a sense that the future is coming at us fast, and we are not prepared.

We’re not alone, mind you. Every hospital enjoying a positive bottom line today is contemplating a bleaker future. Traditionally, hospitals planned to lose about 30% on every Medicaid patient and 5-10% on every Medicare patient, while banking enough profits from commercially insured patients to make the math work out. All of these payers – both governmental and private – are getting stingier, and this latticework of cross-subsidies will soon be a fading memory.

This threat to profitability is roiling hospital board rooms everywhere, but the threats to academic medical centers seem particularly daunting. After all, the community hospital simply (I guess that should be “simply”) needs to make enough of a profit to refurbish the physical plant, pay everybody’s salaries, keep the docs and nurses happy, and save for a rainy day. Academic medical centers, on the other hand, suffer from a different problem: Mission-O-Megaly.

Here, I refer to our need to not only run a hospital and clinic, but also to educate future generations and conduct cutting-edge research. To succeed in all of these missions, we confront another cross-subsidy problem – on top of the necessity to cross-subsidize Medicaid or Medicare patients because their insurance pays less than their costs, we also need our hospital profits to cover some of the costs of teaching and research.

This may surprise you. While our educational mission’s dependence on outside support is widely known, the need to subsidize the research mission is not. In fact, most people likely think about this in just the opposite way; namely, that research funding can keep the academic enterprise afloat during tough times. When I think about this belief (which may have been true in the past but is definitely not today), I immediately chuckle, reminded of one of my favorite family stories:

When my kids were younger, I worried that they weren’t gaining a full, honest appreciation of the real world and the way it worked. At least, not like I had as a kid. My dad was a small businessman in New York’s garment district, and we talked about money constantly at home. But with their dad an academic physician and mom a medical editor, my own kids were raised in a more genteel, scholarly environment; dinner chatter was more likely to be about a JAMA article than a tough negotiation or a bargain mutual fund. I was thinking about how to make this point – that money influences nearly everything – to them, and one day, walking around with my 10-year-old son Doug in downtown San Francisco, I saw my chance.

A condominium was under construction. I pointed it out to my son and said, “Doug, the owners of the building have to put the apartments up for sale even before the building is finished. To do that, they need to set a price, based on how big and fancy the condo is, and on what similar condos have sold for in the past.” He nodded his head in understanding; so far, so good. Now I was ready to make the problem a little tougher and the lesson more memorable.

“So what do you think happens if nobody buys it for the price they’ve set?” I asked. This was the teachable moment, the chance for him to learn about supply and demand and the Invisible Hand of capitalism; all the lessons I’d learned at my father’s knee.

He looked at me, scratched his head, and said simply, “Do they get a grant?”

The need for remediation was even greater than I thought.

I suspect that my pre-teen wasn’t alone in believing that the academic health center could be propped up by its research enterprise, particularly at places like UCSF that bring in hundreds of millions of NIH grant dollars every year. But, even if it might have been true in the past, those days are over.

Now, both the educational and research missions require subsidies. The best estimate is that every medical student costs his or her school about $100,000 (the true training costs minus tuition), and each dollar in research grants requires a 30-40% match to cover all the true costs (including grants management and administrative support). This research funding gap is so serious that, at a recent UCSF Leadership Retreat, guest speaker Duke CEO Victor Dzau declared that Duke would no longer try to maximize its NIH grants – potentially jeopardizing its prized place on the NIH top recipients list (Duke was 8th last year) by “rightsizing” its research enterprise.

I see this challenge playing out in my own hospital. That $200 million profit? By the time we’re done building buildings and implementing our new IT system, there won’t be enough money left to pay for all the hospitalists and NPs to cover for shorter housestaff work-weeks, to provide a lifeline for physicians whose reimbursements are plummeting, to meet growing accreditation and regulatory requirements, and to address these teaching and research deficits.

Those of you who understand academic Inside Baseball might wonder why deficits in research or student funding would be the concern of the academic medical center (AMC)? After all, shouldn’t the medical school’s dean, who controls education and research, be on the hook to fill these gaps? Perhaps so, but in virtually every school I know, that particular cupboard is bare. Medical schools, particularly state schools like mine, which have traditionally depended on tax dollars for some of their funding, are seeing their state funding slashed faster than a Wisconsin unionite. This leaves the medical center as the only deep pocket in the neighborhood, and everybody has his or her hands inside, rummaging around for spare coins.

For some AMCs, this Death-by-1000-Cross-Subsidies may soon get even worse. A colleague recently pointed out to me that the only profitable part of the entire University of California system (other than its sports teams) may be its teaching hospitals. We may soon reach the day when medical center revenues will not only be tapped to help prop up unprofitable clinical services, but also the philosophy department at UC Santa Cruz.

If AMCs remained as profitable as some (including my own) are now, they could probably survive all of these outstretched hands. But nobody thinks that they will be. And therein lies another even more daunting problem.

In the new world of healthcare, the winners will be those organizations that figure out how to deliver care of the highest value – the safest, highest quality, most satisfying care at the lowest cost. Doing this will require the creation of new entities (“Accountable Care Organizations”) that integrate the docs and the delivery system – not just hospitals but clinics, nursing facilities, hospices, home care – into a seamless whole that can deliver cost-effective care across the continuum. ACOs will profit if they can deliver high value care, and fail if they can’t.

In a recent NEJM article, Dr. John Kastor, former chair of medicine at Maryland, analyzed the chances that academic medical centers could become successful ACOs. John based his research on discussions with 37 senior faculty members and administrators at AMCs, government agencies, and foundations (I was one of them), and his analysis is sobering. In category after category, John chronicled how AMCs are disadvantaged on the new healthcare payment playing field. The challenges include:

Organizational and structural. Most AMCs and their faculty physician groups work in separate organizations and have distinct reporting relationships. Fusing them will be messy. As Kastor writes,

Without an official who can resolve differences and to whom the dean and the CEO both report, this division of authority can interfere with an institution’s ability to make the changes necessary to form a successful ACO.

The costs of training. Our training model is expensive and inefficient. As Kastor notes, an inexperienced trainee is more likely to over-test than under-test, particularly if he or she is embedded in a culture that ladles out criticism for “missing something” and atta-boys for diagnosing zebras.

The departmental model. ACOs will require close collaboration between leaders of clinical departments, not exactly our forte. Writes Kastor:

The effectiveness of ACOs will depend on the centralization of the administration of medical care, whereas clinical departments in medical schools operate on a decentralized model…. Without such coordination, it will be difficult for academic medical centers to reduce the costs of practicing medicine….

Faculty incentives and culture. Kastor points out that many academic faculty operate under incentives that drive them to focus more on their teaching and research than on the provision of high-value clinical care. Moreover, the culture of AMCs is entrepreneurial and individualistic, not team-based and definitely not welcoming of standardization in the name of cost savings.

Lack of primary care infrastructure. Most AMCs are dominated by specialists and concentrate on the care of patients with highly unusual problems. But ACOs require a strong primary care network to ensure that patients receive coordinated and efficient care. Many AMCs will not be able to build and manage an efficient primary care network or develop model patient-centered medical homes. And relatively few have crafted alliances with community-based networks that are free of the town-gown frictions that rob systems of the sense of shared mission needed for success.

After reflecting on all of these issues and considering the counsel he received from the 37 experts, Kastor was unable to find a silver lining: “Given the challenges, several leaders with whom I spoke doubt that ACOs can readily be established at AMCs.”

Perhaps overly influenced by my experience at UCSF, I am more optimistic. I am continuously struck by the skills and passion of the faculty in my division, who see the challenge of providing high value care as an utterly worthy cause, are training the next generation of physicians to be better than we are, and are helping to rewrite the rules of the road – developing new computer systems, new training models, new quality improvement initiatives, even new promotional standards.

And they’re not just doing it for our division of hospital medicine. Increasingly, they are assuming leadership roles in the medical center, the department of medicine, the school of medicine, even other departments such as neurosurgery. Every day, I see our culture moving closer to that of an ACO. Sure, we may be further ahead in this regard than many other places (and it’s not like we’ve figured every last piece out), but this is proof of concept time; what I’ve witnessed tells me that this can be done.

To me, the lesson is that AMCs can transform themselves into value-producing entities, but they need to begin with small pilot units with engaged faculty and strong leaders, folks who believe that improving quality, safety and efficiency isn’t just important, it’s also interesting and cool. For those AMCs that lack a core group of faculty and leaders committed to this change, it will be a very long and bumpy road.

But I suspect we’ll get there. Transforming the AMC into a high-value-producing clinical machine will not be easy, but we’re awfully good at responding to our dominant systems of incentives. We built our old system in response to incentives that promoted research over clinical care, rewarded profligacy over efficiency, and provided no incentive for quality, safety, and patient-centeredness. As these incentives give way to new value-driven ones, I predict that AMCs (at least some of them) will do just fine – and forward thinking AMCs will not only survive in this environment, they’ll thrive. As Berwick and Finkelstein recently observed,

We think that the anxiety, demoralization, and sense of loss of control that afflict all too many healthcare professionals today directly come not from finding themselves to be participants in systems of care, but rather from finding themselves lacking the skills and knowledge to thrive as effective, proud, and well-oriented agents of change in those systems…. A physician equipped to help improve healthcare will be not demoralized, but optimistic; not helpless in the face of complexity, but empowered; not frightened by measurement, but made curious and more interested; not forced by culture to wear the mask of the lonely hero, but armed with confidence to make a better contribution to the whole.

There are many things that AMCs do uniquely well: deliver complex clinical care, educate trainees, perform cutting-edge research. The great AMC of the future will continue these traditions as they pertain to clinical medicine and basic science, while broadening its agenda to include quality and safety, cost-effective care, and new models of healthcare delivery. The functions that AMCs provide are crucial, and irreplaceable. Failure is not an option. So let’s get started.

– Bob Wachter is Professor of Medicine and Chief of the Division of Hospital Medicine at the University of California, San Francisco. Author of 200 articles and 6 books, he coined the term “hospitalist” and is considered one of the nation’s leading experts in health care quality and patient safety. He blogs at Wachter’s World, where this post originally appeared.

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