Perspectives on Academic Medical Center and the Marketplace

Report of the January 29 Faculty Symposium: Sponsored by The Medical Faculty Senate

Dr. Alan Wasserstein, M.D.,chair, Medical Faculty Senate, presented an overview of the difficulties in the current healthcare market and challenges faced by academic health centers, focusing on Penn. Although there has been a dramatic financial turnaround, the University trustees and a special committee of selected faculty and trustees are investigating options available to the system for the future, including sale or merger. Dr. Wasserstein stated that there will be broad and deep faculty involvement in this process. Experts with interest in governance and financing of academic health institutions, as well as academic leaders who have been through sale or merger of a health system presented their findings and experience.

Dr. Arthur K. Asbury, M.D., interim dean, School of Medicine, summarized strategic planning at Penn from 1986 when Penn's trustees formed the Medical Center and created the CEO/Dean position through the present period. Most notably, the changing reimbursement climate nationally and locally and the failure of the anticipated full-risk scenario to evolve resulted in unprecedented operating deficits from 1997 through 1999. A dramatic turnaround occurred when UPHS went from a $200 million operating loss in FY99 to a $30 million operating loss in FY00, fairly close to budget. For the first six months in FY01, UPHS is operating well ahead of budget. Dr. Asbury praised the extraordinary efforts of faculty, chairs, staff and health services administration led by Robert Martin. However, he cautioned that although the health services component is operating in the black, the margin is small in relation to its annual budget of over $1.6 billion. In total, liabilities comprise a substantial fraction of the assets, that is, $1.4 billion in liabilities and $1.8 billion in assets. Dr. Asbury emphasized the importance of supporting the academic programs that received support in recent years from transfers from the health services component to the School of Medicine (SOM), much of which was spent for building projects such as Stellar-Chance and BRB II/III. Some level of annual and predictable support must continue in order to meet the requirements for annual reinvestment in the academic enterprise. In FY01, the SOM is staying on budget with help but circumstances are still constrained. He said that it is appropriate for the trustees to explore ways of managing better the capital needs and balance sheet of the health services component and the needs of the academic programs of the SOM and that the special committee, chaired by President Judith Rodin, is weighing various strategic options. Dr. Asbury stated "this superb faculty is the core of the academic mission, which we value, and must preserve, and augment. This is the task that the special committee is addressing and it is using the set of values.

Dr. David Blumenthal, is the director, Institute for Health Policy, Massachusetts General Hospital/Partners HealthCare System, professor of medicine and rofessor of health care policy, Harvard Medical School. Dr. Blumenthal's research focuses on problems in academic health centers (AHC) and solutions to those problems. He presented three case studies illustrating the sale of the clinical enterprise to for-profit investor-owned hospital organizations:St.Joseph's Hospital/Creighton University; Tulane University Medical Center; and George Washington University Medical Center. Unlike Penn, all three institutions are modest size, below the median in NIH funding, include hospitals only (no health systems) and have modest indigent care. He cautioned that the experiences may not be generalizable to the Penn situation. He stated that evidence indicates that for-profit sales can offer attractive short-term arrangements so that capital can be used to support the academic mission, leadership is freed to concentrate on academics, and contracts can provide on-going support of the mission. However, a partnership based on shared values is replaced with a business relationship and the long-term consequences for the mission are uncertain. He recommended getting everything in writing, establishing iron-clad buyback arrangements with specified pricing terms, and retaining control of academic programs. He also commented on sales to non-profit organizations. Non-profits may be more sympathetic to missions and may have more commitment to the local community. However, they are less likely to have the money to return the ailing institution to its former status, they may be the local competitor and they may have "history" with the teaching hospital that causes suspicion. He stated that it is most important to determine who will make the decisions and have control.

Kenneth D. Bloem, is a senior fellow at the Association of Academic Health Centers, senior fellow at Johns Hopkins, Center for Civilian Biodefense, (formerly CEO, Georgetown University Medical Center). When Mr. Bloem was CEO of Georgetown Medical Center, he worked with Dr. Sam Wiesel, Exec. Vice President and Dean of the Medical School in a unified administration. They participated in the sale of the Medical Center to MedStar, a non-profit organization. When Mr. Bloem and Dr. Wiesel assumed leadership in 1996, Georgetown was losing at least $30 million/year and, before the situation was stabilized over a four-year period, Georgetown lost more than $200 million. The university endowment was $650 million. The Medical Center represented two-thirds of the total operating budget of the university. It was determined that Georgetown required a clinical practice partner for its financial survival. MedStar was identified as a partner that was strongly committed to academic medicine and had respectable marketplace performance. He emphasized the need for on-going communication with faculty leadership during the negotiation process.Results to date include increased hospital volume and faculty practices, renegotiated managed care contracts with rate increases, investments of $20 million, no decrease in sponsored research, maintenance of high student quality and minimal faculty losses. It is too early to measure any changes in culture. Last year, Mr. Bloem studied the phenomenon of consolidations among AHCs as a participant in the University Health System Consortium. They concluded that requirements for success were market leverage, market tolerance, and leadership. It is too early to tell the impact of consolidation on academic mission.

Dr. Jay H. Stein, M.D., is senior vice president /vice provost for health affairs, Medical Center and Strong Health CEO, University of Rochester Medical Center. He described their situation, which he considers most relevant to Penn. In the 1990s, the university trustees grew concerned about the high risk of the hospital, even though the hospital was making a profit. A new organizational structure of integrated leadership required that the dean of the medical school and the head of the hospital report to Dr. Stein in his position as Vice Provost for Health Affairs. In 1996, he introduced a new strategic plan regarding clinical, research, and educational aspects of the medical center. He attributes their success to the integrated structure and concluded that that model works best.

Dr. John A. Kastor, M.D., professor of medicine, division of cardiology, University of Maryland School of Medicine, reviewed his findings on three specific mergers of teaching hospitals in Boston, New York and California that constitute conclusions in his new book. In 1994, Mass General(MGH) merged with the Brigham and Women's Hospital to form a holding company, rather than merging. Partners HealthCare System is considered a qualified success. In New York, Presbyterian (teaching hospital for Columbia) and New York (teaching hospital for Cornell) formed the New York-Presbyterian Healthcare System. They are just breaking even, partly by applying income from endowment to operating expenses. In California, UCSF (state) and Stanford (private) merged their principal teaching hospitals into a new corporation, which lasted only 23 months. Both hospitals continue to lose money. Dr.Kastor observed that some mergers are a result of merger mania, that hospital boards assume that what works in private companies should work in health care; financial parity of different institutions is not possible; trustees boards play an important role in what succeeded and what failed; clinical programs attempted to merge but most failed. Some have experienced increased income, savings through economies of scale and improved clinical programs.

Almanac, Vol. 47, No. 21, February 6, 2001

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