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June 7, 2016

Facing uncertainty, more universities reevaluate their relationship with academic medical centers

Daily Briefing

    Read the Advisory Board's take on this story.

    Research universities are reassessing their academic medical centers (AMCs) in the midst of a health care industry in transition, Paul Voosen reports for the Chronicle of Higher Education.

    "Everyone wants the benefit of an academic medical center in their university," says Atul Grover, EVP of the Association of American Medical Colleges. "But they're scared to death of what can happen in the free-market medical system."

    AMCs face several headwinds. In the past, AMCs often have been able to demand high reimbursement rates from insurers and use that money to subsidize research and teaching missions. Many AMCs—particularly those affiliated with elite institutions—continue to have healthy margins.

    But the changing health care landscape is creating new financial pressures. Anthony D'Eredita, EVP of consulting at the Advisory Board, notes in a "Practice Notes" blog post that "times are changing for AMCs" and "narrow networks are keeping high-cost systems on the outs." D'Eredita says that has caused many AMCs to "doubl[e] down on community partnerships."

    D'Eredita: With academic-community integration, structure is everything

    Further, AMC faculty typically are paid in part from grants awarded by NIH. But the agency's budget has plateaued for years, causing stress for medical centers that have come to rely on its grants. 

    Lawmakers have also become more critical of a practice that provides an estimated $10 billion from Medicare to teaching hospitals to train newly graduated medical residents, with a significant portion of that money going toward AMCs.  A 2014 report from the Institute of Medicine found the payments resulted in no public health benefits, and President Obama proposed major cuts to the program in his 2017 budget.

    Some look to mergers

    In response to market pressures, many AMCs are looking to expand, in part to increase services and to gain leverage to negotiate higher reimbursement rates.

    But federal and state regulators have been wary of mergers. For instance, last year, Massachusetts rejected a deal that would have allowed Partners HealthCare, which is associated with Harvard University, to purchase three hospitals. Connecticut's governor earlier this year put on hold a similar deal involving the hospital tied to Yale University.

    Facing a deficit, the University of Arizona's (UA) medical center merged with the not-for-profit Banner Health in 2014. The merger provided UA's medical center with $500 million in capital investment, but it also presented "learning curves in how to understand each other's culture," says Joe Garcia, SVP for health sciences at the university.

    So far, few AMCs have split off completely from universities. One exception is Vanderbilt University Medical Center, which separated from Vanderbilt University at the end of April, a move that positions "both the University and the Medical Center for dramatic and sustained success," says Vanderbilt University Chancellor Nicholas Zeppos.

    The medical operation was responsible for nearly four-fifths of the university's entire budget and was projected to grow further. Now, the university has reduced its exposure to financial risks from the changing health care landscape, and VUMC can be more agile. For instance, the split will allow VUMC to partner with other medical organizations without needing the university's approval, as well as to expand its reach throughout the state.

    "It's a divorce," Voosen writes, that "many research universities are watching as they've found themselves, in recent years, as much in the business of health care as education" (Voosen, Chronicle of Higher Education, 5/31).

    The Advisory Board's take

    Anthony D'Eredita, EVP, Consulting

    AMCs are not immune to changes taking place across the health care industry, and so many AMCs are rightfully going back to the drawing board to refresh their strategies.

    But what will separate the most successful AMCs will be their fortitude to explore strategies that may require an alternative organizational structure. This includes exploring options to pull away from the university and solving for the negative financial implications of doing so—if warranted by market imperatives. It may also involve exploring how to merge or partner with other players.

    At the end of the day, the determining factor is ability to accept change. The right strategy will, in most cases, necessitate some change to the organizational structure—and leaders will need to catalyze and quantify the extent of that change within their AMC.

    Read how the University of Maryland Medical System embraced community physicians as a catalyst for change

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