Within the tranquility of Harvard Yard, it is difficult to imagine that an important member of the University family is struggling for financial survival. But Beth-Israel Deaconess Medical Center (BIDMC), a distinguished teaching facility of Harvard Medical School and home to a major fraction of its faculty, has lost hundreds of millions of dollars during the last five years. To staunch its losses, the medical center is contemplating measures that would have been unthinkable until recently: selling its ambulatory-care building and closing its on-campus psychiatry, dermatology, and orthopedics services. Even if it rights itself financially, it is fair to ask whether the medical center will ever be the same again. This problem would be of only parochial interest, were BIDMC not a world-class center of medical education and research--and were its plight not indicative of a larger crisis.
BIDMC is not unique among clinical affiliates of the nation's major medical schools. Around the country, eminent university teaching hospitals are facing life-threatening financial challenges and reacting with unprecedented measures. After losing $300 million in two years, the University of Pennsylvania is discussing the sale of its teaching hospital and other clinical units to a for-profit hospital chain. Tulane and George Washington University have already done so. Facing staggering hospital deficits, Georgetown University recently sold its teaching hospital and faculty group practice to a local nonprofit health system. The University of Minnesota sold its hospital to a nonprofit Minneapolis system some years ago. The University of California-San Diego Medical Center, on the verge of bankruptcy in the mid 1990s, was rescued by an infusion of state funds. In the wake of a failed merger, the primary teaching hospitals of the University of California-San Francisco and Stanford University are each losing tens of millions of dollars annually.
At a time of historic national prosperity and scientific progress, when the endowments of many universities are brimming over, the fiscal stresses of these university medical facilities seem a striking anomaly. Obvious questions arise. How widespread are the problems of the nation's academic health centers (AHCs)--the 125 medical schools and their major clinical facilities? How have the problems arisen? Why should they matter to anyone other than the universities and faculty members directly affected? What, if anything, should be done?
Financial Distress
The extent of the financial difficulties plaguing academic health centers is surprisingly hard to pinpoint because of time lags in available data and anomalies of university accounting. Operating margins for the nation's teaching hospitals collectively averaged just above 2 percent in 1999, compared to nearly 6 percent in the mid 1990s. In 1999, the major clinical affiliates of 14 of the 18 medical schools that received the largest amounts of National Institutes of Health (NIH) research funding either suffered operating losses, received a negative outlook from bond-rating agencies, or had their bond ratings downgraded. Incomplete, unaudited quarterly reports nevertheless suggest that after several years of decline, average teaching-hospital operating margins may have stabilized or even turned upward in 2000.
Skeptics correctly point out that the majority of the nation's AHCs continue to be in the black, that a bad year or two does not constitute a crisis, and that AHCs have often cried wolf about their finances in the past. Furthermore, medical schools (as opposed to teaching hospitals and faculty group practices) tend to be doing fine, since they have benefited from strong philanthropy and huge increases in NIH funding. Yet it seems clear that never since the Great Depression have so many eminent university teaching facilities been in such distress simultaneously. Their extreme reactions seem to support their claims. AHCs do not lightly sell their teaching hospitals, especially to for-profit corporations, nor do they casually lay off 15 to 20 percent of their workforce, as have Penn, San Diego, San Francisco, and Stanford.
Sources of the Problem
Academic health centers are large, complex institutions, and the sources of their current distress are fittingly intricate and multifaceted. AHCs have one foot in the placid precincts of academe, but the other in a marketplace that by any criterion has become, quite suddenly, one of the most tempestuous in the country. The advent of economic competition in healthcare during the 1990s took most AHCs (like most other healthcare institutions) by surprise. The prices they could charge for patient care fell dramatically as a result of pressure from managed-care companies, which were doing the bidding of cost-conscious employers. Traditionally, fees from private patients had been AHCs' most lucrative source of income. By the end of the decade, however, Medicare had become a far more profitable payer than most private insurance companies. Then the federal government reduced Medicare payments to hospitals under the Balanced Budget Amendments of 1997, and cut funding for graduate medical education. Even though some payments were restored in 1999 and 2000, these Medicare reductions compounded the medical centers' fiscal problems.
The measures taken by AHCs in response to these developments helped in some cases, but exacerbated their problems in others. A first step was to cut costs by reducing the lengths of hospital stays and reengineering clinical processes. Virtually every AHC hospital undertook cost-reduction programs during the late 1990s. As a result, during this period real costs per admission at AHCs fell by several percent annually--providing teaching hospitals with critical breathing room as their revenues fell.
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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.
