AMCs: Efficiency in Governance

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“Some people don’t like change, but you need to embrace change if the alternative is disaster.” – Elon Musk

The Current State

In a 2012 report by PwC entitled “The Future of the Academic Medical Center: Strategies to Avoid a Meltdown,” the authors cite “organizational misalignment” as one of three major forces that will require AMCs to adapt the way they do business in the new healthcare environment.[1] The authors note:

“Most AMCs are relatively decentralized organizations, sometimes consisting of a swarm of related institutions – a medical college, several hospitals, faculty practice organization(s), and research centers – each with separate leaders and competing goals. Personal agendas often take preference over organizational needs in the boardroom, and crucial cost-cutting measures often are redirected away from ‘sacred cows.’ As a result, the can is kicked a little further down the path and no real change is implemented.”

Interestingly, a significant majority of AMC leaders surveyed by PwC responded unfavorably to initiatives that would require changes to governance structure. Whatever the reason for this – fear, politics, self-preservation, board pressure, etc. – the market threats to AMCs are well documented: (a) risk-based contracts and payor consolidation are compressing reimbursement rates; (b) decline in clinical revenue is impacting research and education programs, which are key to AMC differentiation; (c) rising costs of infrastructure and technology are straining balances sheets; (d) provider consolidation is leading to massive health systems that are encroaching on AMC market share; (e) narrow insurance networks are restricting patient access; and (f) political wrangling in Washington is further fueling the uncertainty.

The result of these market forces is financial volatility at some of the top AMCs in the country:

  • University of Texas MD Anderson Cancer Center – The nation’s top ranked cancer center incurred $170 million in operating income loss for the first four months of fiscal 2017, and announced that it was cutting 1000 jobs. The projected loss for the full year could be upwards of $450 million. In 2016, the institution lost $266 million on $4 billion in revenue.
  • Partners HealthCare – Partners reported operating loss of $108 million for fiscal year 2016, even though revenue had increased by $794 million over the prior year (up to $12.5 billion).
  • Brigham and Women’s Hospital – Brigham (a member of Partners) reported operating loss of $17 million in the first quarter of 2017, and announced that it was buying out 1600 employees.
  • Cleveland Clinic – The nation’s second ranked hospital reported a 71% decline in operating income in 2016. During the same period, revenue increased from $7.2 billion to $8 billion.

In each case, the institutions blame market forces for at least part of the decline. Cleveland Clinic CEO Toby Cosgrove recently stated that more than half of the hospitals in the United States lost money on operations in 2016.[2] However, to be clear, the financials of each institution cited above are highly complex and there may be many other reasons for the numbers as well. In some cases, the institutions have invested heavily in new infrastructure, technology, and expansion initiatives, which may be impacting short-term financials, but lead to dividends in the long-run. Therefore, my intent is not to comment on the financial health of these organizations, but rather to highlight that on both the revenue and expense side of the ledger, there will be volatility in the near future.

Realignment

In order to respond to the threats in the current healthcare environment, one of the starting points for AMCs will be to create more efficiency in governance. Efficiency will allow AMCs to quickly capitalize on market opportunities such as partnerships, joint ventures, affiliations, network expansion, new services lines, innovations, etc. As for-profit CEOs in other industries will testify, the free market is fickle and fast moving. Consumers, clients and partners will not wait for you to decide whether you are ready to act; their decisions will be based on their own timelines and strategic imperatives. Therefore, “analysis paralysis” – a challenge faced by many AMCs – could lead to lost opportunities.

To avoid this and achieve a more streamlined decision making process, AMCs should consider some or all of the following steps:

  • Unified Governance Structure – Establish a unified governance structure over the tripartite mission of clinical care, research and education. This can be done by creating a new legal entity or by realigning existing entities.
  • Consolidation of Departments – Eliminate excessive or redundant departments and centers that impede decision making. Consolidation will allow for simplicity and clarity.
  • Chain of Command – Develop a clear chain of command for decisions and establish parameters for when decisions can be made independent of that chain. For example, project size, scope, type and impact will determine whether a decision needs to go through the formal chain of command or can be made outside thereof. Considerations include: (a) Stakeholder Input – Who are the stakeholders for the various types of projects? How will the input be gathered? Does the decision require majority or unanimous approval? (b) Analysis – Who will conduct the clinical, financial, and strategic analyses? Will it be done internally or will consultants be retained? How long is the analysis period? (c) Review – Who is part of the review team? How much information does the team need? and (d) Decision Point – Who is the final decision maker(s)?
  • Deadlines – Create and enforce deadlines for each step in the decision-making process (e.g., if input is not received by X date, we will move forward)
  • Execution – Move quickly to execute on contracts and commitments

Case Study: Johns Hopkins Medicine

One of the most high-profile structural realignments in academic medicine occurred at Johns Hopkins in the 1990s. At the time, the institution, which was over 100 years old, consisted of three separate entities: Johns Hopkins Hospital (JHH), Johns Hopkins University (JHU), and the JHU School of Medicine. The hospital and university each had its own president and board of trustees; and the school of medicine had a separate governing board. While the three organizations had functioned well for many years, by the mid-1990s, the various leadership groups and governing bodies had begun to diverge on their visions for the institution. Additionally, pressures in the healthcare market to deliver higher quality at a lower cost, while seeking new sources of revenue, demanded that the institution consider a new structure.[3]

In response to these challenges, JHU created a coordinating body – with equal representation from each of the entities – to overhaul the governance structure. In February 1996, this group finalized its work and announced the creation of a “virtual corporation” called Johns Hopkins Medicine (JHM), which would govern the combined medical school and hospital system. It would be led by a Dean/CEO, and overseen by board consisting of university and health system leaders.

The new unified governance structure allowed the Dean/CEO to immediately begin addressing threats to the institution, including losses from the medical practice plan, which were a major source of revenue for the school of medicine. Within a few years, JHM had created a significant turnaround:

  • By 2001, the medical practice plan was profitable again, with 75-80% improvement in collected billings over the prior year;
  • In 1999, JHM created its international group to provide hospital management, consulting and knowledge transfer services to healthcare institutions worldwide. It currently has partnerships and affiliations in 16 countries and is among the most successful global venture divisions among all American AMCs;
  • JHM also began expanding its clinical services and acquiring other hospitals. After about a decade, JHM had acquired five hospital facilities (four in the Maryland/DC area and one in Florida); four surgery centers; and 40 primary and specialty care outpatient sites

Conclusion

Market forces are challenging AMCs to adapt to a rapidly changing healthcare environment. There is no “one strategy” that will fit all. Some organizations will grow; some will shrink; others will maintain their size; and certainly all will need to focus on their value proposition. However, one thing is certain. Decisions will have to be made in a clear and streamlined manner. Personal agendas and politics will have to be set aside and leadership will have to be decisive. If not, AMCs run the risk of losing market share and faltering in the new economy.

Footnotes:

[1] PwC Health Research Institute. [Feb 2012]; The future of the academic medical center; strategies to avoid a margin meltdown. http://www.pwc.com/us/en/health-industries/health-research-institute/publications/the-future-of-academic-medical-centers.html

[2] Healthcare Dive. Byers J, May 3, 2017, http://www.healthcaredive.com/news/hospital-competition-consolidation-macra/441679/

[3] Reece EA, Chrencik RA, Miller ED, Fully Aligned Academic Health Centers: A Model for 21st-Century Job Creation and Sustainable Economic Growth. Acad Med. 2002 Jul; 87(7): 982-987. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3737774/#R26

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