Academic medical centers may face shrinking profits

Up to 10% of traditional revenue may be lost if they don’t restructure their operations, a report says.

By — Posted April 4, 2012

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Academic medical centers face an uncertain future and must adapt to keep afloat in a rapidly changing health care system, says a report released March 21 by PwC.

Overall, academic medical centers have done well, with operating margins averaging about 5% during the last three years. But funding cuts and shifts in how care is provided and paid for are projected to reduce the centers’ traditional revenue by as much as 10%, said the report (link).

“Academic medical centers are facing a scenario where profit margins could completely evaporate if they do not respond quickly to revenue challenges,” the report said.

Such institutions have a three-part mission of patient care, teaching and research, and they are a vital part of the health care landscape, said Gerry McDougall, partner and U.S. leader of PwC’s health sciences practice.

“They are vibrant backbones to the community, and they foster huge economic development,” he said.

But hospitals face budget cuts at the federal and state levels, the report said. For example, Medicare disproportionate share hospital payments are expected to be cut by 75%. Health system reform is set to increase by 8% the number of Americans with insurance coverage by 2014, but those individuals are expected to use more services as a result.

“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 said.

  • Researchers offer five recommendations to help academic medical centers evolve:
  • Build a brand name by holding faculty accountable for cost and quality.
  • Become part of a larger community network.
  • Increase effectiveness by maximizing use of extenders such as telemedicine and simulation technology.
  • Become an information hub.
  • Align research efforts with clinical and business strategies.

Some of PwC’s strategies miss the mark, said Joanne Conroy, MD, chief health care officer with the Assn. of American Medical Colleges. It is impossible to predict how patients will seek out care under health system reform, she said.

“Right now, we have a lot of speculation, but it’s kind of a black box between what consumers say they will do and how they will vote with their feet,” she said.

Academic medical centers don’t have to restructure their entire organizations to initiate change. Institutional leaders should work in partnership with faculty, instead of trying to dictate quality initiatives, she said.

“It’s not about the organization,” Dr. Conroy said. “It is how our leadership teams are working together. All of our members are thinking about how to be more integrated.”

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