Strategic Choices for
Academic Health Centers
October 13, 2014
Charles Kim, Senior Vice President, Kaufman Hall
Rob York, Senior Vice President, Kaufman Hall
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
Today’s Agenda
1. Academic Health Centers today
2. Current challenges
3. Emerging disruption
4. Five key leadership considerations
5. Questions and answers
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
1
1
Academic Health Centers Today
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
2
AHCs Play a Critical Role in the Nation’s Current Healthcare
Delivery System, Treating a Significant Share of Sicker and
Medicaid Patients
• 110+ Academic Health Centers in the U.S.
• More than 127,500 inpatient beds1
• Nearly 6.5 million annual discharges1
• Approximately 18.2 million emergency room visits annually1
• Annual net patient service revenue of more than $175 billion2
• NIH funding of more than $14 billion annually3
• Approximately 1.2 million employees (estimate)1
• Hospital median Medicaid exposure of 18.5%, higher than the
not-for-profit hospital median of 13.1%4
Sources: (1) Definitive Healthcare; (2) Audited financial statements; (3) The Blue Ridge Institute; and (4) Moody’s Investors Service: “Academic Medical Center
Hospitals Maintain Stronger Credit Characteristics than Other Not-for-Profit Hospitals.” Special Comment, Jan. 14, 2014 (note: AHC hospital median excludes
children’s hospitals)
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
3
AHCs Vary by Focus, Ownership, Structure, and Average Revenue
Size
University-Based
Community-Based
Public/Safety Net
System
Freestanding
System
Freestanding
Number in Market
20
16
30
39
10
% of Total
17.4
13.9
26.1
33.9
8.7
Average Size per
System or Entity
(By Revenue)1
$673
$1.5B
$1.3B
$2.4B
$1.6B
Definitional Notes: “Public/Safety Net” entities have tri-partite missions – research, teaching, and clinical care—but are predominantly funded by public sources;
“system” entities have multiple hospitals within the corporation; “freestanding” entities have one primary campus where teaching, clinical care, and research
occur; “university-based” entities are owned by, or a subsidiary of, a university; “community-based” entities are independent 501(c)3 corporations (not a
subsidiary of a university).
Sources: (1) Revenue from most-current audited financial statements and University HealthSystem Consortium listing.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
4
AHCs Are Located in 41 States
Note: University Medical Center of Southern Nevada (Las Vegas, NV) and OU Medicine (Oklahoma City, OK) are included in our study, but do not appear on this map.
Source: University HealthSystem Consortium: 2014 Integrated Academic Medical Center Principal Members.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
5
On Average, AHCs Have Stronger Credit Ratings Than Not-forProfit Hospitals as a Whole
Not-for-Profit Hospitals
Academic Health Centers
2%
9%
15%
16%
Ratings
Distribution
27%
50%
32%
49%
Aa
A
Baa
Ba & Below
•
50 percent of AHCs achieve a “Aa” rating, compared to just 15 percent of all not-for-profits
•
The median rating for an AHC hospital is “A1,” two notches higher than the “A3” median rating
for the broader category of all not-for-profit hospitals
Note: N=111 for Moody’s-rated Academic Health Centers; N=402 for Moody’s-rated Not-for-Profit Hospitals, including Academic Health Centers. Sources: Moody’s
Investors Service: “Academic Medical Center Hospitals Maintain Stronger Credit Characteristics than Other Not-for-Profit Hospitals.” Special Comment, Jan. 14, 2014;
and Moody’s Investors Service: “US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance.” Aug. 22, 2013.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
6
AHCs on Average Have More Admissions, Higher Revenue, and
Newer Facilities, with Growth Rates Supporting Their Higher
Ratings
Medians
Annual Admissions
Other NFP Hospitals
AHCs
24,262
32,612
Admissions Growth (2010-2012)
5.7%
6.6%
Total Operating Revenue ($000s)
527,589
1,223,585
Operating Revenue Growth (2010-2012)
1.1%
4.4%
Average Age of Plant (Years)
10.6
9.3
Average Age of Plant (Change 2010-2012)
3.9%
(-3.1%)
1.2
1.4
185.3
150.7
Capital Spending Ratio (X)
Days Cash
•
Annual admissions generally are higher in AHCs and have grown more rapidly than at other
NFP hospitals
•
On average, AHCs earn more than twice the operating revenue than other NFP hospitals
•
The capital spending ratio for AHCs is higher than the ratio for other NFP hospitals, contributing
to AHCs lower (and declining) average age of plant
Note: AHC medians include the health system component only (not university data).
Source: Moody’s Investors Service: “Academic Medical Center Hospitals Maintain Stronger Credit Characteristics than Other Not-for-Profit Hospitals.” Special
Comment, Jan. 14, 2014.
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7
2
Current Challenges
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8
AHCs Have Higher Costs Per Discharge and a More Rapidly
Increasing Expense Base than Other NFP Hospitals
Total Expense Per Adjusted Discharge
Is 34 percent Higher at AHCs1
$10,155
Between 2010 and 2012,
AHC operating expenses
$7,596
increased 7.0%
This was 1.3 times the
rate of expense growth
for not-for-profit hospitals
as a whole2
Major Teaching Hospitals
All Hospitals
Sources: (1) Truven Health ActionOI® database. FY2014 Q1 data for study with reporting from 100 Major Teaching Hospitals and 557 Hospitals of All Types;
(2) Moody’s Investors Service: “Academic Medical Center Hospitals Maintain Stronger Credit Characteristics than Other Not-for-Profit Hospitals.” Special
Comment, Jan. 14, 2014. 14, 2014.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
9
AHCs and Their Medical Schools Generally Face Revenue
Challenges on All Fronts of Their Three-Part Mission
Research
• Researchers are competing for fewer dollars and fewer grants are being
awarded. Sequestration cuts significantly reduced NIH research
spending. Adjusted for inflation, the NIH budget in FY 2013 was 22.4%
less than it was in FY 2003; the number of research project grants fell
20.3 % during this same period1
• Privately funded research spending dropped from $83.3 billion in 2007
to $70.4 billion in 2012, representing a 15% decline2
• Competition to attract top talent is increasing, including costs in the
form of multiyear commitments
Sources: (1) Federation of American Societies for Experimental Biology: “Budget Cuts in 2013 Reduced Biomedical Research.” Press Release, Undated.
(2) Bidwell, A.: “U.S. Medical Research Spending Drops While Asia Makes Gains.” U.S. News & World Report, Jan. 2, 2014.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
10
AHCs and Their Medical Schools Generally Face Revenue
Challenges on All Fronts of Their Three-Part Mission (continued)
Teaching
• The Institute of Medicine recommends a transformation of Graduate
Medical Education including a substantial change in how GME funds are
allocated and distributed to bring “greater transparency, accountability,
strategic direction, and capacity to innovate” and “reward desired
outcomes and program performance”1
• Given state and federal budget challenges, funds for teaching support is
consistently reviewed as an area of potential reduction
Sources (1) Institute of Medicine with Eden, J., Berwick, D., and Wilensky, G. (Eds): Graduate Medical Education That Meets the Nation’s Healthcare Needs.
Washington, DC: National Academies Press, July 2014.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
11
AHCs and Their Medical Schools Generally Face Revenue
Challenges on All Fronts of Their Three-Part Mission (continued)
Clinical
• Commercial payers are pushing back on the historical “academic
premium” and creating incentives for enrollees to receive care at
lower-cost settings
• Many AHCs have an insufficient primary care referral base that is
economically and clinically aligned
• Technology diffusion, combined with increasing scale of non-teaching
health systems, is fueling competition for tertiary patients who once
were the exclusive domain of AHCs
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
12
Many Universities Have Seen Significant Growth in the Proportion
of Hospital Operations Revenue as the Source of Overall
University Revenue
Hospital Operations Revenue as a Proportion of Total University Revenue for 10
University-Owned AHCs: 2000-2013
Hospital Operations Revenue as
Share of Total University
Revenue, 2000
Hospital Operations Revenue
as Share of Total University
Revenue, 2013
Point Increase from
2000-2013
University 1
41.1%
45.6%
4.5
University 2
40.8%
66.3%
25.5
University 3
24.5%
50.3%
25.8
University 4
17.3%
41.6%
24.3
University 5
68.2%
70.3%
2.3
University 6
31.4%
62.7%
31.3
University 7
46.7%
50.0%
3.7
University 8
32.9%
43.8%
10.9
University 9
52.3%
53.1%
0.8
University 10
18.0%
31.2%
13.2
Average
37.3%
51.5%
14.2
Source: Blinded study of 10 university-owned hospital operations revenue as a proportion of total university revenue (2000-2013). Kaufman, Hall & Associates, Inc.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
13
Regional Health Systems Are Gaining Brand Power, in Some Areas
Challenging AHCs
Selected Regional Superpowers
Providence Health &
Services
Beaumont
- Botsford
-Oakwood
Allina Health
Sutter Health
Intermountai
n Healthcare
Aurora Health Care
Iowa Health
System
Kaiser Permanente
Spectrum
Health
Advocate
Health Care
ProMedica
Presbyterian
Healthcare Services
Inova Health
System
Ohio
Health
Scripps Health
Integris
Health
Carolinas
HealthCare
System
Banner Health
Texas Health
Resources
Novant
Health
Memorial Hermann
Healthcare System
Source: Kaufman, Hall & Associates, Inc.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
14
3
Emerging Disruption
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15
Healthcare’s New Model Focuses on Wellness and the Provision of
Care in the Least-Intensive Setting Possible
1946-Today
2014 and Beyond
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16
Five Points of Disruption Are Here to Stay
1. Inpatient utilization is declining or flat nationwide, signaling an end to the
inpatient-centric care model
2. New, well-funded, and highly capable competitors are entering the health and
healthcare space, offering all types of services at more convenient locations
and at costs that are significantly lower than hospitals and physicians offices
3. Transformational change is occurring with employer-sponsored health plans,
moving employees into high-deductible plans available through insurance
exchanges and other channels, and incentivizing them to make purchasing
decisions like they would for other goods and services
4. Healthcare increasingly is viewed as a “retail good” with real price sensitivity
from patients, physicians, payers, and employers—each incentivized to shop
for value, as defined with service, IT connectivity, and other points of
competition that take many legacy organizations, including AHCs, out of the
“comfort zone”
5. Healthcare is moving to an outpatient and technology-driven personal healthcentric model
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
17
Two-Thirds of Hospitals Report Flat or Declining Inpatient
Utilization
Change in Inpatient Utilization
January 1, 2014-June 30, 2014
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Increase 3% Increase 0- No change Decrease 0- Decrease 3- Decrease 5- Decrease
or greater
2.9%
2.9%
4.9%
9.9%
10% or
greater
Source: Kaufman Hall survey, September 2014.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
18
Reduction in Ambulatory-Sensitive Admissions and One-Day Stays
Will Further Reduce Inpatient Utilization
Market Examples
Denver
Chicago
Inpatient Discharges in 2012
432,256
968,746
Ambulatory Care Sensitive Cases + Med/Surg
Cases w/1-Day LOS
(94,629)
(234,856)
Market Impact From Elimination of ACSAs
and 1-Day Stay Medical/Surgical Patients
(22%)
(24%)
2012 Inpatient Use Rate per 1,000 (Before
Reduction)
90
114
Sources: AHRQ Quality Indicators: Guide to Prevention Quality Indicators. AHRQ, 2001; Milliman: Ambulatory-Care-Sensitive Admission Rates:
A Key Metric in Evaluating Health Plan Medical-Management Effectiveness. Milliman, 2009. Colorado and Illinois state inpatient database; U.S. Census Bureau
Population. Kaufman Hall Analysis.
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19
Changes to Healthcare’s Business Model Attracting New Market
Entrants, Each Pursuing a Share of the Health/Healthcare Dollar
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20
Employers Are Moving Employees into High-Deductible Health
Plans
Source: Kaiser Family Foundation/Health Research & Educational Trust: Employer Health Benefits: 2014 Annual Survey. September 2014.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
21
The Employee Insurance Market Is Transitioning to a Private
Exchange Model with National Employers Paving the Way
50
40
40
30
30
19
20
9
10
1
0
2014
2015
2016
2017
2018
Projected Growth of Private Exchange Enrollment, 2014-2018
Source: Accenture: “Are You Ready? Private Health Insurance Exchanges Are Looming.” May 17, 2013.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
22
Price-Sensitive Consumers and Purchasers Will Choose Providers
Based on Seven Competitive Dimensions
❶
❷
❸
❹
❺
❻
❼
Convenient
Access
Right product or service in the right place at the right time; may
require a diverse complement of services over a broad geography
Competitive
Pricing
Nuanced pricing strategy driven by understanding of who is making
the purchasing decision and how, as well as competitive intelligence
Multichannel
Offering
Consumer access points including virtual, mobile, telemedicine, and
e-visits, in addition to bricks-and-mortar locations
Customer
Experience
Coordinated and differentiated experience delivered to customers at
each “touch point”
Brand
Preference
Differentiated brand position in the relevant service area based on
“must-have” products, services, and experience
Understanding of
Customer Base
Product
Relevance
Understanding of how customers interact with the health system and
different needs and expectations across customer segments
Products and services that are understood by consumers and are
tailored to the needs and preferences of the customer base
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23
Care Delivery Increasingly Will Be Technology-Driven, Personal
Health-Centric, and Offered at a Lower Price Point
High
Convenience
TechnologyDriven/Personal
Health-Centric
Ambulatory
Centric
Inpatient
Centric
Current strategic positioning of AHCs
Low
High
Cost per Unit
of Service
Low
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24
4
Key Leadership Considerations for
Academic Health Centers
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25
Five Key Leadership Considerations for Academic Health Centers
1. How might AHCs need to evolve to achieve the scale and capability
required to manage population health ?
2. Which competencies might AHCs need to build to be successful in the
value-based arena?
3. The support of tertiary and quaternary programs requires the ability
to “influence” lives and think about “volume” differently.
4. AHC networks that are configured to be highly efficient, to provide
consistent quality across all sites, and to manage patients in the
lowest-intensity settings are better-positioned for success.
5. Traditional cost improvement efforts must evolve to real strategic
cost transformation.
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26
1. How Might AHCs Need to Evolve to Achieve the Scale and
Capability Required to Manage Population Health?
Very Large
1
Health
Company
2
1 Expand vertically and horizontally
using leverage and other sources
of funds to minimize impact of
evolution to value-based system
2 Acquire scale and capabilities to
Current
AHC
3
appropriately accept and manage
risk-based arrangements
3 Stay the course – limited to small
Small
Scale and Scope
Future Options
Volume
Value
group of AHCs with strong
alternative revenue (e.g.,
philanthropy) and/or unique
markets not positioned for risk
Payment Model
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27
2. Which Competencies Might AHCs Need to Build to Be
Successful in the Value-Based Arena?
Organizational Capabilities for
Healthcare’s Transformation
Clinical Integration
Quality and Care Management
Network Development, Configuration, and Relevance
Operational Efficiency
Clinical and Business Intelligence
Financial Strength
Purchaser Relationships
Leadership and Governance
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28
3. The Support of Tertiary and Quaternary Programs Requires the
Ability to “Influence” Lives and…
Selected
Tertiary/
Quaternary
Programs
National
Volume
Use
Rate
per
1,000
Lives Required
to Maintain
Referral
Volumes
AHC Volume
Implied AHC
Population Reach
to Maintain
Current Volume
300 - 400
162,668
0.52
575K - 765K
400
770K
Liver Transplant
50 - 75
4,865
0.02
3.2M - 4.8M
40
2.67M
Kidney
Transplant
75 - 125
14,941
0.05
1.5M - 2.6M
150
2.95M
Bone Marrow
Transplant
100 - 150
14,255
0.05
2.1M - 3.3M
75
1.53M
15 - 40
4,767
0.02
980K – 2.6M
25
1.25M
CABG
Cardiac
Transplant
Typical
Referral
Center Volume
Note: CABG=coronary artery bypass grafting.
Source: HCUP national discharge database (2011 national volume data). Internal AHC Patient Data and Cost Accounting Information.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
29
… to Think About “Volume” Differently
Primary Service Area
Attributed Lives
• Fixed revenue per attributed life (“PMPM”)
• Organized under Patient Centered Medical Home and ACO-like models
• AHC receives portion of revenue depending on the range of risk management
and care delivery services it provides through its assets and relationships
Out-of-Market/
Influenced Lives
• Contractual relationships with out-of-state payers, employers, and providers
• Preferred provider status for select tertiary/ quaternary services and carve-out
exceptions
• International strategies
Incidental Volume
• Non-strategic volume, including emergency room visits, cash customers, and
patient preference decisions
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30
4. AHC Networks That Are Configured to Be Highly Efficient, to
Provide Consistent Quality Across All Sites, and to Manage
Patients in the Lowest-Intensity Setting Are Better-Positioned for
Success
Source: Grube, M.E., and Morrissey, W.M.: ?Finding the Best Strategy for Service Distribution.” hfm magazine, Nov. 2011.
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
31
To Achieve Such a Network, AHCs Will Need to Expand
Capabilities, Especially in Primary Care and Post-Acute Services,
Through Strategic Investment or Partnerships
Primary Care and
Acute Care
Post-Acute
Care
Tertiary/Quaternary Care
Skilled Nursing/
Long-Term Care
Primary/Secondary
Acute Care
Ambulatory
Network
Home
Health
Clinicians
Specialists
Primary Care
Physicians
Current Coverage
Coverage Gaps
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32
5. Traditional Cost Improvement Efforts Must Evolve to Real
Strategic Cost Transformation
Cost Restructuring /
Margin Improvement
Business Restructuring
Clinical Transformation /
Value Creation
 Productivity
 Business lines portfolio
review
 Clinical integration
programs
 Service delivery costs
 Optimization of product
offerings
 Delivery of care efficiency
teams
 Service distribution
planning
 Value creation (e.g., paid for
 Revenue cycle
 Enhanced capital
allocation
 Clinical variation
 Supply chain
 Enhanced nonoperating
performance
 Care processes
(e.g., staffing)
 Overhead costs (e.g.,
duplicate management positions)
value, and at risk if not achieved)
Progress Toward Comprehensive Cost Transformation
Hard
Harder
Hardest
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33
Critical Questions Requiring Strategic, Analytically-Based
Responses
1. Can your AHC become a “Health Company?”
2. Is your AHC aggressively repositioning to operate under a population
health management construct with a fee-for-value payment system?
3. Can your organization participate in a retail/outpatient/
personal health-centric delivery system?
4. Can your AHC reshape its delivery network to emphasize care delivery
at the lowest-cost setting? Does your AHC need to consider
participating in the consolidation occurring in many areas of the
country?
5. Can your organization operate at an entirely different and much lower
cost structure?
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34
5
Questions and Answers
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35
Charles Kim, Senior Vice President
Charles Kim is a Senior Vice President of Kaufman Hall. Mr. Kim consults on a national basis with
clients including regional healthcare systems, academic medical centers, and community hospitals.
Mr. Kim’s expertise includes preparing financial and capital plans, acting as financial advisor for bond
issues, advising on merger, acquisition, and divestiture transactions, and providing training and
support to the ENUFF Advisor® software suite.
Mr. Kim has more than 15 years of healthcare consulting experience and more than 20 years of
financial advisory experience. Prior to joining Kaufman Hall, Mr. Kim was a Manager at Deloitte &
Touche, where he specialized in providing financial advisory services to healthcare organizations.
Mr. Kim is a frequent speaker on the topic of strategic financial planning for healthcare organizations.
He presents at various industry groups, including local and regional programs for the Healthcare
Financial Management Association, and seminars for the American College of Healthcare Executives.
Mr. Kim has a B.A. in Economics and an M.B.A. in Finance and Accounting, both from the University
of Chicago.
Contact Information:
Charles Kim
Senior Vice President
Kaufman, Hall & Associates, Inc.
5202 Old Orchard Road, Suite N700
Skokie, Illinois 60077
847.441.8780, ext. 115
847.441.2063 fax
[email protected]
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
36
Robert W. York, Senior Vice President
Rob York is a Senior Vice President of Kaufman Hall and a team leader in the firm’s Strategy practice.
He provides strategic services for a range of healthcare clients, including large healthcare systems,
public/safety-net providers, academic medical centers, and community hospitals. Mr. York’s
responsibilities focus on developing strategies to help providers remain relevant and viable in the
new healthcare environment. Such strategies are based on rigorous market analysis, population and
payer segment and demand analysis, and strategic partnership evaluation.
He regularly speaks to Boards and at meetings of professional societies, and has published
numerous articles in industry journals, including Health Affairs, Spectrum (a publication of the
American Hospital Association’s Society for Healthcare Strategy and Market Development), and
Strategic Financial Planning (a newsletter from the Healthcare Financial Management Association).
Prior to joining Kaufman Hall, Mr. York was a consultant with KPMG LLP’s West Coast and Midwest
Healthcare Practices. Mr. York has a B.S. in Business Administration with honors from the University
of Arizona and an M.B.A. from the University of Notre Dame.
Contact information:
Robert W. York, Senior Vice President
Kaufman, Hall & Associates, Inc.
5202 Old Orchard Road, Suite N700
Skokie, Illinois 60077
847.441.8780 | 847.441.3449 fax
[email protected]
© 2014 Kaufman, Hall & Associates, Inc. All rights reserved.
37
Qualifications, Assumptions and Limiting Conditions (v.12.08.06):
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5202 Old Orchard Road, Suite N700, Skokie, Illinois 60077
847.441.8780 phone | 847.965.3511 fax
www.kaufmanhall.com
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