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March-April 2001
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Unhealthy Hospitals
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AHCs also reorganized to improve their positions in healthcare markets, not always successfully. Fearful that managed-care companies would channel patients to less expensive facilities (AHCs' costs, because of their academic responsibilities, are 10 percent to 30 percent more than their community competition), some academic health centers began buying up primary-care practices and community hospitals in their markets, hoping thereby to assure themselves referrals from these institutions. AHCs also theorized that the acquisitions would make them such large players in local markets that they could negotiate better prices from managed-care companies.
Unfortunately, these acquisitions were costly--sometimes excessively so. In retrospect, AHCs often overpaid for primary-care practices. Furthermore, primary care is a marginal business at best, and newly acquired networks proved financial drains for many AHCs. The infrastructures required to manage far-flung clinical enterprises were also costly, and hoped-for economies of scale through consolidation of departments and backroom functions sometimes fell victim to internal politics.
Another organizational maneuver pursued by AHCs during the 1990s produced mixed results. Several nationally prominent teaching hospitals merged with local rivals in an effort to cut costs and improve bargaining power with local managed-care organizations. Harvard-affiliated institutions pioneered this trend with the 1994 merger of Brigham and Women's Hospital (BWH) and Massachusetts General Hospital (MGH) to form Partners HealthCare System. Boston's Beth Israel Hospital and Deaconess Medical Center followed, forming BIDMC, which became the core of the larger Caregroup System. In New York City, Columbia Presbyterian Hospital merged with New York-Cornell, and Mt. Sinai with New York University Hospital. On the West Coast, UC-San Francisco and Stanford merged their teaching facilities.
Of these mergers, only the BWH-MGH union has proved a qualified success. The UCSF-Stanford merger was abandoned after only a year and the final word is still out on the other major combinations. But such mergers clearly have major financial costs in the short term. Their benefits in terms of cost reduction and improved market position are realized later, if at all.
In responding to the shock of healthcare's market transformation, AHCs have often taken cues from the playbooks of large corporations in other economic sectors and the consultants who peddle those solutions. Given the sudden and surprising turn of events, the AHC reactions were logical and predictable--but may not have been well-suited to the centers' special circumstances. After all, professors and aspiring professors form a critical component of their workforce. Faculty cannot be ordered willy-nilly out of the lab and classroom and into the clinical breach when a threat arises on the perimeter of an AHC market. Futhermore, AHCs have social missions that add costs and are likely to frustrate the ability to reduce expenses and reorganize quickly. The unique situation of academic health centers makes it questionable whether they will find adequate solutions to their economic problems by using classic competitive strategies, and also hints at why those problems create broader social concerns.
Social Missions Endangered
If the clinical facilities of AHCs were indistinguishable from other local healthcare providers, their problems might be dismissed as just another painful but unavoidable step in downsizing a bloated system. AHC clinical departments, however, play important roles in serving a variety of social missions that the public, wittingly or unwittingly, has vested in these institutions.
The nation's 125 medical schools and their roughly 160 primary teaching hospitals conduct 28 percent of the nation's healthcare research and development and a preponderance of its basic biological research. (Most of the other 72 percent occurs in industrial labs.) AHCs train all of the nation's medical students, almost 50 percent of its interns and residents, and 60 percent of its doctoral candidates in the biological sciences. Though they represent only 3 percent of acute-care hospitals nationally, AHCs account for 20 percent of the nation's burn units and 34 percent of its expert trauma facilities. They are the primary providers of specialized services to the nation's poor and uninsured patients, and provide up to 30 percent of the unreimbursed care offered in the urban markets in which they are located.
Thus academic health centers exert an influence on the healthcare system that extends well beyond their walls. They play a pivotal role in applying the fruits of the biological revolution (much of it funded by NIH dollars) to relieve human suffering. They maintain the quality of our healthcare workforce. And they are providers of last resort both for highly specialized and technological services, and for patients who lack the means to pay for their own care.
The extent to which current fiscal pressures are affecting academic health centers' ability to carry out these missions is not known. But AHCs have definitely come to rely on excess revenues from their clinical departments to subsidize their academic and charitable work. Nationally, roughly 50 percent of medical-school budgets flows from the clinical billings of faculty members and contributions from their teaching hospitals. The financial problems of AHCs, therefore, are of legitimate concern for community leaders and policymakers at all levels of government.
Potential Solutions
AHCs are far from perfect. Some of their current problems are self-inflicted, the result of unwise responses to competitive pressures. Those problems cannot be remedied without tough internal reforms at academic health centers themselves, including continued cost-cutting and improvements in management. The wider community could decide that forcing AHCs to undertake these painful changes requires external fiscal pressure, and is worth short-term disruptions in their social missions.
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But if policymakers wish to protect AHCs from the full brunt of market forces and the consequences of their own missteps, various options are available. One, already underway, is to restore recent cuts in Medicare payments to hospitals. Congress recently completed work on the second of two measures returning funds that were removed under provisions of the Balanced Budget Amendments of 1997, including monies targeted at teaching hospitals.
Cuts in the Medicare program were not solely responsible for the difficulties facing AHCs, however, and the incremental funds are unlikely, therefore, to make them whole. The competitive transformation of healthcare markets and reductions in payments by private insurance companies and managed care have also been major factors. Advocates believe that their social obligations render AHCs incapable of competing on a level playing field with nonacademic care providers, and that AHCs therefore should receive additional, direct public support for these social missions. One approach would be to create a federal "academic health center trust fund" that would funnel support to AHCs that demonstrate substantial involvement in teaching, research, indigent care, and innovation. This approach has been endorsed by the Commonwealth Fund task force on academic health centers, which has been studying the problems of AHCs for the last five years.
But academic health centers are unlikely to be rescued by the federal cavalry anytime soon. Such intervention was a long shot even before the election of George W. Bush, and prospects have declined further with the retirement of Daniel Patrick Moynihan, who was the most tireless advocate of AHCs in Congress.
It seems likely, therefore, that AHCs will have to resolve their current difficulties mostly on their own. This means there will be further downsizing and the sale of some major teaching hospitals, including a few with national reputations. Such changes, unprecedented in modern times, will continue to roil the nation's universities, which might never have entered the medical business if they had known what lay in store. When things settle down, we will likely have fewer, larger, and leaner academic health centers. Whether Americans will be happier with the result remains to be seen.
David Blumenthal '70, M.D. '74, M.P.P. '75, is professor of medicine and professor of health care policy, based in the Institute for Health Policy at Massachusetts General Hospital. He also serves as executive director of a task force on academic health centers established in 1995 by the Commonwealth Fund, a private, nonpartisan foundation that supports independent research on health and social issues. Copies of the task force's publications may be read or ordered on-line at www.cmwf.org.
