Academic medical centers stand to lose about 10 percent of their traditional revenue because of declining reimbursement levels under federal health reform, sinking state support, and shrinking research dollars, according to a report being released on Wednesday.
The report, “The Future of the Academic Medical Center: Strategies to Avoid a Margin Meltdown,” offers tips for the teaching hospitals and programs that graduate about 17,000 new doctors a year. It was produced by the Health Research Institute at PwC (formerly PricewaterhouseCoopers).
“Academic medical centers run very tight operating margins, and any significant revenue change can be devastating,” Alicia Harkness, a partner in the company’s health-industries division, said in an interview on Monday. Those margins are typically about 5 percent, but some teaching hospitals are barely breaking even today, she said.
The report was based on 26 interviews with industry leaders and an online survey of 100 leaders of academic health centers and 1,000 health-care consumers.
The comprehensive health-reform legislation that President Obama signed into law in 2010 will cause a potentially expensive shift in the mix of patients being treated at the nation’s teaching hospitals, according to the report. Those hospitals will be seeing more Medicaid patients, whose care is reimbursed at lower levels, and proportionately fewer patients with commercial insurance policies, which pay higher rates.
The good news, with the extension of coverage to 32 million new people, is that there will be fewer uninsured patients adding to teaching hospitals’ burden of charity care. But on the flip side, these safety-net hospitals will lose a big chunk of the “disproportionate share hospital” payments they have received from Medicare and Medicaid as compensation for the free care.
Such tradeoffs illustrate the uncertainty these hospitals face as they look ahead to their next budget cycles. “There’s a lot of fear about the unknown,” Ms. Harkness said.
The report recommends greater use of simulations and other technology, like telemedicine, in teaching and patient care, and more emphasis on translational research that can be commercialized.
It also suggests that some centers might want to consider mergers.
“Many are reconsidering whether it makes sense for an institution to stand on its own. Those that are on thin or even negative margins are looking for creative solutions,” Ms. Harkness said.
Last year, Loyola University Chicago sold its financially struggling health center, with its teaching hospital, to a Michigan-based nonprofit health system, Trinity Health, in a deal worth $1-billion to Loyola, according to local news reports.
The PwC report recommends that medical centers “hold faculty accountable for cost and quality” by keeping better track of how much clinical revenue and research support they’re bringing in. That requires taking on “well-entrenched faculty and organizational structures” that keep faculty members working on their own silos, on their own pet projects, according to the report.
Working against change, the authors say, is the fact that many academic health centers are highly decentralized, with a medical school, multiple hospitals, a faculty practice group, and a research institute, “each with separate leaders and competing goals.”
