Hospital mergers have allowed Thomas Jefferson U. to build a series of hubs for patients, says Stephen Klasko, president of the health-focused university. “We’re doubling down on the fact that health care is going to fundamentally disrupt, not just change.”Jefferson U.
A couple of years ago, the leaders of Vanderbilt University faced a difficult decision: Their academic medical center was successful, a hub of research and life-saving treatment. But the health industry was in turmoil, and the changes presented new risks to the university, whose vast medical operation approached four-fifths of Vanderbilt’s entire budget. And that number was projected to grow.
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Hospital mergers have allowed Thomas Jefferson U. to build a series of hubs for patients, says Stephen Klasko, president of the health-focused university. “We’re doubling down on the fact that health care is going to fundamentally disrupt, not just change.”Jefferson U.
A couple of years ago, the leaders of Vanderbilt University faced a difficult decision: Their academic medical center was successful, a hub of research and life-saving treatment. But the health industry was in turmoil, and the changes presented new risks to the university, whose vast medical operation approached four-fifths of Vanderbilt’s entire budget. And that number was projected to grow.
The Affordable Care Act, passed in 2010, was accelerating changes already underway. Research financing was tight. Mergers were rampant among hospitals, insurers, and drug companies. The vast sums of clinical income that prestigious university hospitals had used to buttress themselves — and often the university’s other missions — seemed likely to dry up. Everything was up for reinvention. Did Vanderbilt open itself up to such risks?
No, the leaders decided. And so last month Vanderbilt University Medical Center completed its separation from its parent. The hospital is still located on the campus and is tightly affiliated with the medical school, but now the university’s trustees will have to spend less time studying the intricacies of, say, disproportionate-share hospital payments, or lobbying the state legislature to expand Medicaid access.
The split lets the university mitigate its risks, while allowing the medical center the agility to adjust to health care’s volatility. “It’s a little like you’ve got to let your children go in order for them to succeed,” said Jeffrey R. Balser, president of the medical center and dean of Vanderbilt’s School of Medicine.
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It’s a divorce many research universities are watching as they’ve found themselves, in recent years, as much in the business of health care as education. It’s now common for medical centers to make up half a university’s budget. And while higher education may seem financially stressed, it pales in comparison to health care, said David M. Cutler, an applied-economics professor at Harvard University. “Change is basically happening everywhere. There’s no part of health care that’s being left untouched.”
If you’ve wondered what’s consuming your president’s attention, you may need to look no further than the hospital across the quad.
“Everyone wants the benefit of an academic medical center in their university,” said Atul Grover, executive vice president of the Association of American Medical Colleges. “But they’re scared to death of what can happen in the free-market medical system.”
Many university hospitals remain lucrative, especially among elite institutions. But even their long-term stability is questionable. Regulators have begun scrutinizing the moves they’ve made to survive, and their Washington lobby is less effective than it once was, as lawmakers have become more concerned about controlling health costs.
“They’re all nervous,” Mr. Cutler said. “And they should be nervous.”
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3 Missions, 3 Stresses
University hospitals are an opaque subculture of academe. Their “tripartite mission” of research, teaching, and patient care has always made them an outlier. “It’s as if the law school also ran a world-best law firm,” said Robert M. Wachter, interim chairman of the department of medicine at the University of California at San Francisco.
Academic medical centers defy patterns. Some are private, some are public. Some are owned by their university, others are independent but affiliated with academic institutions. Geography is vital: While most provide safety-net care to the uninsured, those that have a higher share of wealthy patients with private insurance, typically found in the country’s thriving cities, retain healthy margins.
Whatever their structure, the ability of academic medical centers to handle complex health problems with bleeding-edge research, and the prestige that goes with it, meant for decades that the hospitals could demand high premiums from insurers. That money subsidized the research and teaching missions — and in some cases, it might have supported, say, the philosophy department.
“They’ve spun off resources that have allowed other parts of the university to survive,” Dr. Wachter said. “That’s part of what’s catalyzing attention. Like addiction to football teams, some universities have addictions to medical centers.”
Like addiction to football teams, some universities have addictions to medical centers.
It’s difficult to tell which universities still benefit from that “addiction,” given the often opaque nature of their accounting. Many medical centers now worry about covering only their own costs. And trustees are facing a potential future where, without radical changes, their hospitals could veer toward losses, which might then require cuts in their research or educational missions.
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For the president of Emory University, James W. Wagner, the future of his medical center has “taken a disproportionate share” of his and the trustees’ time over the past four years, he said.
Emory considered spinning off its hospital system, which was approaching 70 percent of the overall budget, but ultimately decided to keep most of it, selling off only a few smaller parts that were indistinguishable from for-profit and community health care. The sale meant that all of Emory’s health institutions had an academic purpose at their core.
The financial struts that have long supported academic medical centers are ultimately derived from taxpayers, in varied forms. Research is simplest to understand: Faculty members at medical centers win a large portion of the grants given by the National Institutes of Health. It’s no secret that this budget went flat for years, causing strain for centers that had come to rely on growing NIH grants.
Teaching hospitals also receive an estimated $10 billion a year from Medicare to train residents fresh from graduate school. Much of that money goes to academic medical centers, and in the past few years lawmakers have grown more critical of that benefit, spurred partially by a 2014 report from the Institute of Medicine, the nation’s top advisory body for health, that could find no public benefit from the payments. Does the government really need to be subsidizing the education of doctors, most of whom will go on to be well paid? President Obama’s 2017 budget has proposed steep cuts in the program.
“Academic medical centers are good at crying crocodile tears about graduate medical education and how it costs so much money,” said Amitabh Chandra, director of health-policy research at Harvard’s Kennedy School of Government and an author of the institute’s report. “But society, taxpayers, has no evidence for what we get for this money.”
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Academic medical centers are good at crying crocodile tears about graduate medical education and how it costs so much money.
In the 1990s, Congress cut billions of dollars from those payments, and university hospitals said they’d stop training residents as a result. But nothing happened to patient outcomes, and resident salaries actually went up, Mr. Chandra said. “They have neither theory nor history on their side.”
The push to deliver the best outcomes at the lowest cost has also caused hospitals to revamp how they supervise trainees, Dr. Wachter said. “We have decided it’s fundamentally immoral to allow trainees to learn on patients, and particularly to learn from their mistakes.”
In the old days, when a patient was admitted in the middle of the night, the residents would probably be on their own, he said. Now an attending physician is there. The same goes for surgery. Simulation has taken a more prominent role, much as it has for airline pilots.
Even as those two struts have felt strain, however, it’s the third leg of the university hospital that’s truly kept trustees up at night. What if health care actually started becoming affordable?
Mulling Over Mergers
For decades, university hospitals faced little scrutiny for either the cost or the effectiveness of their work. But as health care came to constitute more of the American economy — it’s nearing 18 percent now — pressure has mounted. The passing of the Affordable Care Act, with its ultimate goal to pay hospitals for the health of their patients rather than the services they provide, made it clear the old ways were, at some point, going away.
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In response, many academic medical centers have pursued a simple strategy: get bigger. Hospital consolidation had been happening since the 1990s, but it escalated after the federal health law took effect, with more than 550 deals from 2010 to 2015.
The University of Pittsburgh and Duke University are two exemplars. Pitt’s medical center expanded earlier than many other systems, and it now dominates the region, to the point of offering its own health-insurance plan. Duke, earlier this decade, teamed up with LifePoint, a for-profit health company, to lend its name and expertise to an expanding network of hospitals across the country.
Pittsburgh, especially, has been a role model for consolidating university hospitals across the country. And while medical centers give many reasons for such consolidation, mostly it’s about pursuing regional dominance, which then allows hospitals to negotiate higher fees from insurers, experts say.
There’s no evidence to support the contention that larger medical centers deliver better population health, or that they have lower costs than smaller ones. “In fact there’s no correlation,” said Lawrence J. Furnstahl, chief financial officer at Oregon Health & Science University. “It’s striking.”
Federal and state governments have looked askance at such mergers. Massachusetts rejected a deal last year that would have seen Partners HealthCare, the medical center closely tied to Harvard, buy three hospitals, and Connecticut’s governor this year put a similar deal, involving Yale’s affiliated hospital, on hold. The Federal Trade Commission has also campaigned against consolidation, including a recent effort to block a merger between Penn State Hershey Medical Center and PinnacleHealth System, though this month a federal judge denied the FTC’s case for an injunction.
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Some of those mergers, especially when they involve community hospitals, are an attempt to shift patients with simple problems to venues that cost less, without losing that business, added Dr. Wachter.
It makes no sense to go to a university hospital for a routine surgery. “It’d be like going to the fanciest restaurant in town, and you come in to get a burger,” he said. “The burger would cost 49 bucks.”
It’s also true that academic medical centers can’t say why the burger would cost $49. The hospital’s administrators can’t say with any real certainty how much it costs to put a stent in or treat a particular cancer, and they often report to presidents and boards who know little about health care. “The vast majority of them don’t know their cost structure,” Mr. Chandra said. “Which is one reason they’re so often in financial trouble.”
Most hospital chief executives argue that mergers aren’t just about leverage. Take Thomas Jefferson University, which runs a medical center in Philadelphia. Over the past two years, it has announced mergers with three hospital systems that will create a $4-billion institution with a single balance sheet, said Stephen K. Klasko, Jefferson’s president.
The mergers weren’t about filling beds in Jefferson’s main hospital. They were about building a series of hubs for patients — going from, as he puts it, a Blockbuster to a Netflix model.
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“We’re doubling down on the fact that health care is going to fundamentally disrupt, not just change,” he said.
Dr. Klasko has pushed for a host of changes. He started a leadership academy for faculty members, and he has pressed the hospital to deal better with patients. And he put money into elevating “philanthropy” and “innovation” as core sources of future revenue for the university, alongside academics and clinical care, to the chagrin of an academic senate skeptical of diverting resources away from their work.
“At the end of our day, that was our math,” he told them. “If you don’t like the model, we can all take 20-percent pay cuts.”
Health-Care Holdouts
While most medical centers are expanding in some way, through mergers or affiliations, universities that own their hospitals are considering how to balance the risks of the health-care market.
At the University of California, with its five medical campuses, they’ve aimed for integration in the hope of lowering costs. Some contracting and advocacy work has become more centralized, and they’ll be moving toward joint purchasing and integrating their electronic health records.
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University hospitals that serve low-income populations have been particularly stressed. The University of Arizona’s medical center, for example, was in dire straits, losing a reported $66 million one year, and its facilities were in need of upgrades. The system was in a downward spiral. And so, in 2014, the university merged its operations with Banner Health, a nonprofit group in Phoenix.
The deal gave Banner the gloss of an academic partner, and provided $500 million in capital investment for the medical center. But it has also presented “learning curves in how to understand each other’s culture,” said Joe G.N. Garcia, senior vice president for health sciences at the University of Arizona.
Arizona was lucky in some respects — the state has expanded its Medicaid coverage. Vanderbilt’s home state, Tennessee, has not. In such states, hospitals will feel a squeeze as Medicaid cuts payments that helped cover the costs of serving the uninsured.
There’s no other industry that is organized this inefficiently.
Vanderbilt was going to feel that squeeze, while at the same time it had become affiliated with over 50 hospitals across five states. It became clear to the trustees that they were not capable of effectively overseeing such a system. Beyond spinning it off, the university also considered a sale, but it ultimately decided that such a deal was likely to compromise the academic integrity of the medical school in the future. It’s a pattern they’d seen elsewhere, said Dr. Balser, the medical-center president and medical-school dean.
More upheaval will come as profits dwindle further, Mr. Chandra said. “There’s no other industry that is organized this inefficiently.” It could be that it’s better for the health and economic well-being of the country to have, say, only 60 university hospitals, rather than more than 100, he said. That might be enough to generate medical innovations, while providing an overall lower cost of care. It’s a point that academic medical centers often miss: What might be best for the United States is not always best for them.
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No matter what, all of higher education should pay close attention to what happens to medicine. This upheaval started when the government became frustrated at how poorly the industry could justify its spiraling costs. Sound familiar? “Very few industries look the same as they did in 1950,” says Mr. Cutler, the Harvard economist. “And the two biggest holdouts are health care and education.”
Paul Voosen was a Chronicle reporter. His stories have also appeared in National Geographic, Scientific American, and Greenwire, with reprints in The New York Times.