Sick hospital? UVA’s rapidly expanding medical center is its biggest financial challenge

Photo: Jack Looney Photo: Jack Looney

Last Thursday in a basement auditorium at UVA’s Harrison Institute, the administrators and board members who oversee more than $1 billion of the local economy gathered for a status update on the institution in their charge: the University of Virginia Health System.

The picture painted for the University’s Medical Center Operating Board during the meeting’s open session was one of security and strength. Patient stay lenths were down. Revenues were solid.

But all is not well in the world of of academic medical centers. Rising health care costs have the potential to hit AMCs—university hospitals focused on research and training as well as clinical care—harder than their care-only oriented counterparts. Public AMCs like UVA, dependent on increasingly uncertain government support and often slowed down by those same ties to government, face an even shakier future.

With shrinking profit margins, looming funding cuts, and a less ambitious approach to regional growth than its local competitor, the UVA Health System could soon be a poster child for imperiled state-owned academic medical institutions. The undercurrent of concern over the Medical Center’s future manifested during the failed ouster of University President Teresa Sullivan in June implies UVA leaders know there’s a problem. While it’s impossible to say how much worries over the Medical Center’s future contributed to the controversial coup, former COO Michael Strine’s appointment and early exit are clues.

The University maintains its Medical Center is financially healthy and guided by a strategic plan that’s setting it up for success. Meanwhile, Martha Jefferson, which recently joined the growing regional hospital network Sentara, is eyeing a bigger share of the market, and health care experts around the country say academic medical centers are facing a do-or-die moment.

Trouble for public academics
Dr. Roice Luke, a health care strategy expert and the former chair of Virginia Commonwealth University’s Department of Health Administration, said that to understand the complexity of the challenges UVA and other public academic medical systems are facing, you have to back up and get a broad view of the major trend in the last 40 years in America’s health care systems: consolidation.

Starting in the early 1970s, hospitals began forming systems under common ownership, though they were largely still operating independently. For 20 years, Luke said, that’s how it went: Let somebody own you, but carry on as before. The attitude, he said, was, “It doesn’t matter if there’s another hospital next door run by the same company, you’re just going to do your thing.”
Then came the ’90s, when the entire industry braced itself for Clinton-era reforms that would have encouraged stiffer price competition in health care. The response was for medical centers to grab more of the local market share and integrate the various parts—a couple of hospitals, say, and a handful of outlying clinics—into true local systems. And while the anticipated reforms of the ’90s never materialized, the ball was rolling, and many medical systems of all stripes—be they non-profits, for-profits, or university-affiliated publics—carried on swallowing the competition and taking advantage of economies of scale. It happened in the Tidewater, in northern Virginia, and in Richmond with Sentara, Luke said, just as it happened in Denver and Dallas and New York City.

According to Luke, we’ve entered a new era, and it’s a natural evolution from the last one. Larger regional systems with big central hospitals that can capture referrals from a wide network of affiliates are emerging as the dominant players, he said, and now they’re making bolder moves, forging new partnerships and reaching beyond their regions to take over hospitals hundreds of miles away. Many of those pushing the envelope are academic medical centers.

In early 2011, Duke University Health Systems announced it was merging with national hospital network LifePoint—one of the first pairings of academia and a for-profit health care company. Officials hailed the partnership as a way to pair a strong research center with a shrewd clinical management strategy, and Duke-LifePoint has been expanding its reach since. The latest acquisition was not in North Carolina or even southern Virginia, where the system has begun to expand, but Michigan. When it was announced this spring that Marquette General Health System on the Upper Peninsula would be wholly bought by Duke-Lifepoint, the president of the Michigan hospital, Gary Muller, made no bones about hailing a for-profit future.

“Not-for-profits lack the capital and the scale that we will have,” Muller said, “and their communities will suffer.”

Johns Hopkins Medicine—another private academic institution and arguably the country’s best medical center—made its first acquisition outside the greater Baltimore and Washington, D.C. area last year, bringing All Children’s Hospital in St. Petersberg, Florida into the fold.

Rising health care costs are the engine behind the expansionist trend. It’s weakened smaller local hospitals and spurred the big to get bigger. “Revenues for supporting health care are not going to go up as fast as the supporting costs are,” Luke said. “They’re going to have to find ways to cut the cost. Unquestionably, we’ll see larger systems.”

But other academic medical centers are struggling to keep up. According to a February report from consulting and advisory firm PricewaterhouseCoopers’ Health Research Institute, up to 10 percent of AMCs’ revenue could be jeopardized by largely uncontrollable threats in the near future, including significant reduction in Medicare reimbursements and declining state support. “On average, hospitals may find that the level of services they provide increases more than the increase in revenues to finance those services,” the report says.

PwC also highlighted a less obvious force affecting AMCs: brand breakdown. Pressure on hospitals to show outcomes in order to receive insurance reimbursements is increasing, the report said. The Affordable Care Act is sparking the creation of what are called “Accountable Care Organizations,” networks of hospitals that agree to take on a certain number of Medicare patients in return for extra financial incentives—but only if they meet strict care and cost reduction guidelines.

The report warns that the more data-focused approach to rating medical centers could be a harsh wake-up call for some academic institutions that have in the past received high popular rankings based on more subjective measures, like reputation in the eyes of doctors and peers.

Luke said that kind of reputation erosion is a real possibility for UVA and other public health centers. “They have a lot of confidence and pride,” he said. “A lot of academic medical centers sort of felt like nobody could compete with them, and it’s not true.”

And in an increasingly competitive industry, a hospital’s state-owned status could hold it back, Luke said.

In the past, public AMCs “have been pretty much able to operate as a distinct group with a distinct role,” he said. “They’ve often had government subsidies, or they’ve had private and significant endowments. They’ve been able to operate independently of the local environment.”
Not so any more. Consumers have more choices, and with greater competition, public AMCs have had to shift their game plans. “They have to operate like delivery systems and compete in the marketplace,” Luke said.

But that can be difficult to do when you have many masters to answer to.

“That’s historically been a problem to responding strategically to a changing environment,” Luke said. “It is essentially the cumbersome nature of a publicly owned academic medical center, with all the bureaucratic fingers in the pie, from the governor down.”

It’s not just about red tape and the cost of complying with state policies on purchasing and pay. Politics can get in the way, too.

If the owners of a private health care system find themselves on the other end of a UVA-led hostile takeover, for instance, “they’ll send their lobbyists to Richmond and say, ‘We’re paying taxes. Why are you letting this public institution take business away from us?’” Luke said. “You get this public interference that takes place. You’ve got to think that for these academic medical centers to flourish, they have to get out from under the wrap of public institutions.”

That’s exactly what Florida State University’s medical center did in the ’80s. A 2008 report in the journal Academic Medicine lays out what happened: Facing significant cutbacks in Medicare reimbursement and stiff competition from private rivals—sound familiar?—university leaders cut the cord, and the hospital system became a spinoff private nonprofit corporation with a new board of directors appointed by the school’s president.

The move worked for the medical center, according to the report’s author, a Florida State physician. “Transitioning from a state university institution to a private nonprofit corporation almost immediately improved the ability of the hospital to operate as an efficient business and helped ensure its financial viability,” he wrote.

Some national rankings support the notion that public academics are having a hard time competing. U.S. News and World Report’s highly cited annual “honor roll” of the country’s top hospitals is composed of institutions that can claim at least half a dozen departments that get top marks in the magazine’s rating system. This year, of the 17 hospitals that made the cut, only one, Ronald Reagan UCLA Medical Center in Los Angeles, is a public institution.

The difficulty public academic medical centers face in balancing the security of state ownership with the need to have the ability to adapt quickly to changing markets is nothing new. But in a still struggling economy where government support for higher education is dwindling, the equation is getting lopsided.

There’s room for models that still steer state funds to hospitals through subsidies, said Luke. “But you have to let them make strategic decisions as if they were private institutions. And UVA’s not there.” Instead, he said, it’s like a giant Gulliver, tied down by a Lilliputian Virginia that won’t let go of the ropes.

“I think what you’re witnessing is this natural, inherent tension between an institution that’s threatened financially and needs to maneuver strategically, but is still controlled.”
Undoubtedly, said Luke, there are some at UVA who want to put the possibility of privatization on the table.

“They’d have to be crazy not to be considering that,” he said.

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