The pinnacle of American health care delivery is the large academic medical center. Envy of the world, they are at the confluence of excellence in clinical service, medical education and research. Just 141 medical schools and their 400 affiliated hospitals comprise the "triple-threat" institutions that account for only 6 percent of hospitals but deliver 25 percent of the clinical care in the United States, 40 percent of the charity care, and the vast majority of specialized services such as comprehensive cancer care, trauma centers, burn units and pediatric intensive care. In addition, they train 80,000 resident physicians annually, and they conduct almost half the National Institutes of Health spending on research. They are a big deal.
Yet, AMCs constantly seem to be predicted to be in trouble. Precarious financing through elaborate cross-subsidies, town and gown clashes, lack of market relevance, tensions with other stakeholders, and uneven standards of performance have been mentioned in countless academic and industry reports over the decades. For example, one multinational effort in 2005 (the International Campaign to Revitalize Academic Medicine) brought together leaders from around the globe and engaged them in a sophisticated scenario planning effort that made us futurists drool. It pointed to all the ways academic medicine could stumble if it did not change.
More recently, high-profile academic articles and scores of consulting reports point to AMC vulnerabilities in a changing environment, even though many of them seem to be doing remarkably well. Is this time different?
Zeke Emanuel, M.D., distinguished oncologist and bioethicist, Obama health care adviser and now professor at the University of Pennsylvania, pointed out in an interview that AMCs confronted real change during the Clinton health reform years (when Emanuel was also closely involved), but reverted to their past behavior as the huge threats of managed care receded. "Absolutely, this time is different, precisely because of the impact of the [Affordable Care Act] … and the market dynamics it creates through greater cost visibility to consumers through exchanges … . AMCs are not going back this time," Emanuel told me.
Emanuel is not alone in his assessment. McKinsey & Co.'s Brendan Buescher, a practice leader who works closely with flagship AMCs, points to the key vulnerability of what he terms the "soft underbelly of AMCs," namely community-level clinical services that are being delivered at inflated prices to sustain the cross-subsidy to other mission-related functions such as teaching and research.
Buescher told me: "As the market moves more toward a retail value decision for purchasers and consumers, AMCs will have to adjust to the potential volume loss or present a significantly improved value proposition particularly for the 80 percent of services that community hospital competitors deliver at lower cost and with imperceptible differences in quality." I will explore this key factor in more depth.
Triple Threat Meets Triple Aim
Traditionally, AMCs all have the same generic mission statement: "to be excellent in clinical service, training of new health professionals and advancing medical science through research." These are three big, hairy, audacious (and expensive) goals.
But the funding streams for these interrelated activities are all under assault, ironically in some cases, because of the broader pressures of the Triple Aim (better care, better population health and lower per capita costs).
Research (public purse). Historically, public opinion polls showed that Americans strongly favored increased spending on medical research. Indeed, NIH budgets basically tripled from $9 billion at the start of the Clinton administration to $30 billion by the end of the Bush administration. However, as Emanuel pointed out in a recent Journal of the American Medical Association editorial: as science becomes more of a polarized partisan issue, this broad amorphous goodwill toward medical research may not translate into sustained political support for NIH budgets.
As the recent Washington debt ceiling lunacy revealed, Washington pols certainly don't want to be seen cutting money off for kids getting cancer care at the NIH that particular morning, but they may be less interested in funding some obscure stem cell scientist's megabillion-dollar lab for the next decade. By the same token, the staunch political defenders of AMCs in Congress (the Moynihans, Porters, Specters and Kennedys) are all gone. All that is left is sequestration and tough choices.
Research (private purse). AMCs often look to big pharma and big device manufacturers as "partners" (code for "send checks") to help support the cause. Venture capital and technology licensing deals also have provided sources of income. But, as these industries deal with their own price pressures and value demands from customers, the funding may not be as generous. I live in Menlo Park, ground zero for venture capital, and most of the VC money in health care is moving away from expensive clinical innovation toward "better, faster, cheaper" solutions for a more value-conscious market.
Education (public purse). AMCs likely will have to fight a rearguard action to defend against graduate medical education cuts and to restore Disproportionate Share Hospital funding and its derivatives to offset the fact that half the country is not expanding Medicaid as planned. Polls show that regarding Medicare reform, the popular path is to cut provider rates, not raise taxes or cut benefits. Graduate medical education payments will be vulnerable.
Education (private purse). AMCs are at the intersection of the two highest-priced services on the planet: American health care and American higher education. Both are likely to receive a dose of disruption over the next decade. Universities are wary of Kahn Academy-type innovations and the host of massive online open courses that have emerged. Sophisticated startups such as Coursera and Udacity are piloting business models to bring the Ivy League to the global masses and are growing rapidly.
I am not saying your heart surgeon of the future will learn it all by MOOC, but you have got to believe that her undergraduate chemistry and her continuing medical education credits will not involve sitting in an expensive classroom or attending at a bedside in an AMC. Indeed, pioneers such as the Hofstra University partnership with North Shore Long Island Jewish Health System in New York are launching a new medical school that brings contemporary learning and teaching techniques (such as simulation and case-based learning in the ambulatory setting) to develop a much more applied approach to the medical education curriculum.
Clinical service (public purse). Demographic and economic forces will create more (not less) dependence on government payment for clinical services. Medicare and Medicaid will grow substantially as a share of all patients, with the increased pressure that will bring on overall margins for AMCs. Most health care leaders see these changes and exhort their institutions to "learn to live on Medicare level of reimbursement"; but for AMCs, that may be an impossible "aspirational" goal requiring 30 to 40 percent cost reductions.
Clinical service (private purse). The biggest single threat to AMCs may be the shift to a more retail model of care in which patients will have significant incentives to pick sites of care based on value. The three biggest factors likely to impact private payment for AMCs are the growth of exchanges, reference-pricing initiatives and accountable care organizations' direct strategies.
The impact of exchanges: With so much media attention paid to the computer failures of the federal exchange launch, the public and the media have not yet become fully aware of how skinny the networks are underneath the exchange products. In California, only Anthem Blue Cross is including the University of California AMCs in their network, and Cedars-Sinai Medical Center is not included in any exchange offering. If exchanges grow over the longer haul, as many (including me) believe they will, this will put significant pressure on price outliers like AMCs.
In Harris Interactive Surveys, consumers say they are willing to trade off lower premiums for narrower networks that exclude prestigious institutions (even patients with chronic conditions or those with cancer declare those preferences when they are asked if they would pay $100 to $200 more per month in premiums). We will find out as the exchanges unfold over the next two to three years whether these stated preferences are reflected in the marketplace choices consumers actually make.
Reference-pricing payment models: The reference-pricing models such as the CALPERS joint replacement reference-pricing scheme focus consumers' attention on price outliers such as AMCs. As these models are extended to other shoppable conditions such as maternity care, diagnostics and routine imaging, price outliers will come under greater scrutiny. Similarly, many private purchasers (particularly self-insured employers and their administrative services organization partners) are becoming much more sophisticated in managing and negotiating out-of-network costs with institutions that often charge five to 10 times Medicare rates for services delivered outside of contracted networks.
Accountable care organization direct strategies: But perhaps the greatest disruptive force will come from AMCs that recognize and embrace the shift from volume to value, and are willing to be at risk for the populations they serve, as a cornerstone of their emerging strategy. The recent case of Stanford University is an excellent example of an AMC "going direct" (in its case with its own employees and the employees of the university) as a plank in its strategy for the future.
The Stanford HealthCare Alliance Story
In a recent interview, Stanford Hospital & Clinics CEO Amir Dan Rubin told me about the new Stanford HealthCare Alliance, an ACO-like offering to the hospital's own employees and to the university-covered population as a whole. Historically, Stanford's benefits offerings to university employees have followed the "managed competition" teachings of the great Alain Enthoven. As a result, the contribution strategy has favored the low-cost plan, namely Kaiser. For individuals, this has meant zero contribution from individual employees for the Kaiser option, with contributions rising with more open-ended preferred provider organization choices (such as those that included Stanford's own providers) that cost employees several hundred dollars a month.
In the past, this strategy has resulted in almost half of all Stanford employees picking Kaiser. However, starting in the next open enrollment cycle Stanford employees will still have the Kaiser choice, but there will be another low-cost plan stepping up to compete on a head-to-head basis: the Stanford HealthCare Alliance. Stanford has built an ACO-based product that uses its own network of physicians, the hospital and clinic infrastructure, as well as related delivery partners crafted with the help of its administrative services organization administrator, Blue Shield of California. Stanford HealthCare Alliance will operate on a shared-risk basis with an agreed risk-adjustment formula to protect against adverse selection. Stanford is stepping up to "eat its own cooking."
Stanford's Rubin sounds confident and excited at the prospect of competing in a value-based way. He frames the decision to aggressively step forward in accountable care as consistent with taking advantage of the assets in Stanford's four "strategic domains": complex clinical care, the growing network of ambulatory care, virtual care (Stanford's Health Cloud initiative) and accountable care.
The Stanford HealthCare Alliance is clearly in the fourth domain, but will employ the expertise of the other three and will work with partners to develop and apply sophisticated population health, virtual visit and care management tools. This strategy is not just about giving a professional courtesy discount on a fee-for-service basis and doing nothing to change the business model. This is going at risk and going into head-to-head competition with an experienced integrated system like Kaiser. And Stanford wants to succeed at this, not just survive the experience.
AMC Strategies for the Future
Stanford's new initiative is being emulated across the country in different forms and flavors. But there are several other different strategies being pursued.
The big, front-wheel strategy. McKinsey's Buescher uses a tricycle metaphor to describe the triple threat mission of clinical service, research and education. He says that "some AMCs like Cleveland Clinic and Mayo have made it really clear that the big, front wheel is complex clinical care, the other two are in support behind. In this model there is more alignment and integration and fewer competing interests." In pursuit of this strategy, both Mayo and Cleveland in different ways have built partnerships and networks of referral that support the growth of complex clinical care, even though the mother ship is located in a city with declining volumes.
Triple-threat regional giants. Some AMCs are simply so market-dominant that they seem impervious to the obvious threats that skinny networks and tight public purses would imply. Many have war chests and momentum that will see them through sequester and value consciousness, if they exert enough self-discipline to redirect care to the lowest cost parts of their empire and manage their portfolios toward sustainable consolidated financial returns.
Special delivery. Some institutions that have a special niche may hit on the right combination of philanthropy and regional referral networks that keeps them in the phone book. But there may be fewer of them, and some — like the independent children's hospitals that fall in this category — may be swept into larger consolidated regional organizations. Or maybe there is a Louis Vuitton or Fortune Brands play in health care where all the boutique brands get economies of scale through one über brand? We'll see.
Big Sophisticated Systems at Risk
Many of us believe that we are headed to an American health care delivery system that consolidates into only 100 to 200 large, integrated regional systems of care that are at risk for populations. They will be reimbursed on a capitated basis where consumers pick networks through Medicare Advantage-like products on an exchange. Many AMC and non-AMC health care systems are pursuing this vision. It is not yet apparent whether being an AMC is an advantage or a disadvantage in this race. But let's be clear: this time is different. AMCs need to learn to play a new game.