Are Academic Medical Centers Toast in a Post-Healthcare Reform World?

By  |  February 27, 2011 |  12 

My hospital, UCSF Medical Center, is thriving. Our profits this year will be nearly $200 million. We’re building a sparkling clinical complex – a combined women’s, children’s, and cancer hospital – adjacent to our new downtown biomedical research campus. We are installing a state-of-the-art computer system. US News & World Report calls us the 7th best hospital in the country. Our students, residents, and fellows have never been better.

Yet angst is in the air, borne of a sense that the future is coming at us fast, and we are not prepared.

We’re not alone, mind you. Every hospital enjoying a positive bottom line today is contemplating a bleaker future. Traditionally, hospitals planned to lose about 30% on every Medicaid patient and 5-10% on every Medicare patient, while banking enough profits from commercially insured patients to make the math work out. All of these payers – both governmental and private – are getting stingier, and this latticework of cross-subsidies will soon be a fading memory.

This threat to profitability is roiling hospital board rooms everywhere, but the threats to academic medical centers seem particularly daunting. After all, the community hospital simply (I guess that should be “simply”) needs to make enough of a profit to refurbish the physical plant, pay everybody’s salaries, keep the docs and nurses happy, and save for a rainy day. Academic medical centers, on the other hand, suffer from a different problem: Mission-O-Megaly.

Here, I refer to our need to not only run a hospital and clinic, but also to educate future generations and conduct cutting-edge research. To succeed in all of these missions, we confront another cross-subsidy problem – on top of the necessity to cross-subsidize Medicaid or Medicare patients because their insurance pays less than their costs, we also need our hospital profits to cover some of the costs of teaching and research.

This may surprise you. While our educational mission’s dependence on outside support is widely known, the need to subsidize the research mission is not. In fact, most people likely think about this in just the opposite way; namely, that research funding can keep the academic enterprise afloat during tough times. When I think about this belief (which may have been true in the past but is definitely not today), I immediately chuckle, reminded of one of my favorite family stories:

When my kids were younger, I worried that they weren’t gaining a full, honest appreciation of the real world and the way it worked. At least, not like I had as a kid. My dad was a small businessman in New York’s garment district, and we talked about money constantly at home. But with their dad an academic physician and mom a medical editor, my own kids were raised in a more genteel, scholarly environment; dinner chatter was more likely to be about a JAMA article than a tough negotiation or a bargain mutual fund. I was thinking about how to make this point – that money influences nearly everything – to them, and one day, walking around with my 10-year-old son Doug in downtown San Francisco, I saw my chance.

A condominium was under construction. I pointed it out to my son and said, “Doug, the owners of the building have to put the apartments up for sale even before the building is finished. To do that, they need to set a price, based on how big and fancy the condo is, and on what similar condos have sold for in the past.” He nodded his head in understanding; so far, so good. Now I was ready to make the problem a little tougher and the lesson more memorable.

“So what do you think happens if nobody buys it for the price they’ve set?” I asked. This was the teachable moment, the chance for him to learn about supply and demand and the Invisible Hand of capitalism; all the lessons I’d learned at my father’s knee.

He looked at me, scratched his head, and said simply, “Do they get a grant?”

The need for remediation was even greater than I thought.

I suspect that my pre-teen wasn’t alone in believing that the academic health center could be propped up by its research enterprise, particularly at places like UCSF that bring in hundreds of millions of NIH grant dollars every year. But, even if it might have been true in the past, those days are over.

Now, both the educational and research missions require subsidies. The best estimate is that every medical student costs his or her school about $100,000 (the true training costs minus tuition), and each dollar in research grants requires a 30-40% match to cover all the true costs (including grants management and administrative support). This research funding gap is so serious that, at a recent UCSF Leadership Retreat, guest speaker Duke CEO Victor Dzau declared that Duke would no longer try to maximize its NIH grants – potentially jeopardizing its prized place on the NIH top recipients list (Duke was 8th last year) by “rightsizing” its research enterprise.

I see this challenge playing out in my own hospital. That $200 million profit? By the time we’re done building buildings and implementing our new IT system, there won’t be enough money left to pay for all the hospitalists and NPs to cover for shorter housestaff work-weeks, to provide a lifeline for physicians whose reimbursements are plummeting, to meet growing accreditation and regulatory requirements, and to address these teaching and research deficits.

Those of you who understand academic Inside Baseball might wonder why deficits in research or student funding would be the concern of the academic medical center (AMC)? After all, shouldn’t the medical school’s dean, who controls education and research, be on the hook to fill these gaps? Perhaps so, but in virtually every school I know, that particular cupboard is bare. Medical schools, particularly state schools like mine, which have traditionally depended on tax dollars for some of their funding, are seeing their state funding slashed faster than a Wisconsin unionite. This leaves the medical center as the only deep pocket in the neighborhood, and everybody has his or her hands inside, rummaging around for spare coins.

For some AMCs, this Death-by-1000-Cross-Subsidies may soon get even worse. A colleague recently pointed out to me that the only profitable part of the entire University of California system (other than its sports teams) may be its teaching hospitals. We may soon reach the day when medical center revenues will not only be tapped to help prop up unprofitable clinical services, but also the philosophy department at UC Santa Cruz.

If AMCs remained as profitable as some (including my own) are now, they could probably survive all of these outstretched hands. But nobody thinks that they will be. And therein lies another even more daunting problem.

In the new world of healthcare, the winners will be those organizations that figure out how to deliver care of the highest value – the safest, highest quality, most satisfying care at the lowest cost. Doing this will require the creation of new entities (“Accountable Care Organizations”) that integrate the docs and the delivery system – not just hospitals but clinics, nursing facilities, hospices, home care – into a seamless whole that can deliver cost-effective care across the continuum. ACOs will profit if they can deliver high value care, and fail if they can’t.

In a recent NEJM article, Dr. John Kastor, former chair of medicine at Maryland, analyzed the chances that academic medical centers could become successful ACOs. John based his research on discussions with 37 senior faculty members and administrators at AMCs, government agencies, and foundations (I was one of them), and his analysis is sobering. In category after category, John chronicled how AMCs are disadvantaged on the new healthcare payment playing field. The challenges include:

Organizational and Structural: most AMCs and their faculty physician groups work in separate organizations and have distinct reporting relationships. Fusing them will be messy. As Kastor writes,

Without an official who can resolve differences and to whom the dean and the CEO both report, this division of authority can interfere with an institution’s ability to make the changes necessary to form a successful ACO.

The Costs of Training: Our training model is expensive and inefficient. As Kastor notes, an inexperienced trainee is more likely to over-test than under-test, particularly if he or she is embedded in a culture that ladles out criticism for “missing something” and atta-boys for diagnosing zebras.

The Departmental Model: ACOs will require close collaboration between leaders of clinical departments, not exactly our forte. Writes Kastor:

The effectiveness of ACOs will depend on the centralization of the administration of medical care, whereas clinical departments in medical schools operate on a decentralized model…. Without such coordination, it will be difficult for academic medical centers to reduce the costs of practicing medicine….

Faculty Incentives and Culture: Kastor points out that many academic faculty operate under incentives that drive them to focus more on their teaching and research than on the provision of high-value clinical care. Moreover, the culture of AMCs is entrepreneurial and individualistic, not team-based and definitely not welcoming of standardization in the name of cost savings.

Lack of Primary Care Infrastructure: Most AMCs are dominated by specialists and concentrate on the care of patients with highly unusual problems. But ACOs require a strong primary care network to ensure that patients receive coordinated and efficient care. Many AMCs will not be able to build and manage an efficient primary care network or develop model patient-centered medical homes. And relatively few have crafted alliances with community-based networks that are free of the town-gown frictions that rob systems of the sense of shared mission needed for success.

After reflecting on all of these issues and considering the counsel he received from the 37 experts, Kastor was unable to find a silver lining: “Given the challenges, several leaders with whom I spoke doubt that ACOs can readily be established at AMCs.”

Perhaps overly influenced by my experience at UCSF, I am more optimistic. I am continuously struck by the skills and passion of the faculty in my division, who see the challenge of providing high value care as an utterly worthy cause, are training the next generation of physicians to be better than we are, and are helping to rewrite the rules of the road – developing new computer systems, new training models, new quality improvement initiatives, even new promotional standards.

And they’re not just doing it for our division of hospital medicine. Increasingly, they are assuming leadership roles in the medical center, the department of medicine, the school of medicine, even other departments such as neurosurgery. Every day, I see our culture moving closer to that of an ACO. Sure, we may be further ahead in this regard than many other places (and it’s not like we’ve figured every last piece out), but this is proof of concept time; what I’ve witnessed tells me that this can be done.

To me, the lesson is that AMCs can transform themselves into value-producing entities, but they need to begin with small pilot units with engaged faculty and strong leaders, folks who believe that improving quality, safety and efficiency isn’t just important, it’s also interesting and cool. For those AMCs that lack a core group of faculty and leaders committed to this change, it will be a very long and bumpy road.

But I suspect we’ll get there. Transforming the AMC into a high-value-producing clinical machine will not be easy, but we’re awfully good at responding to our dominant systems of incentives. We built our old system in response to incentives that promoted research over clinical care, rewarded profligacy over efficiency, and provided no incentive for quality, safety, and patient-centeredness. As these incentives give way to new value-driven ones, I predict that AMCs (at least some of them) will do just fine – and forward thinking AMCs will not only survive in this environment, they’ll thrive. As Berwick and Finkelstein recently observed,

We think that the anxiety, demoralization, and sense of loss of control that afflict all too many healthcare professionals today directly come not from finding themselves to be participants in systems of care, but rather from finding themselves lacking the skills and knowledge to thrive as effective, proud, and well-oriented agents of change in those systems…. A physician equipped to help improve healthcare will be not demoralized, but optimistic; not helpless in the face of complexity, but empowered; not frightened by measurement, but made curious and more interested; not forced by culture to wear the mask of the lonely hero, but armed with confidence to make a better contribution to the whole.

There are many things that AMCs do uniquely well: deliver complex clinical care, educate trainees, perform cutting-edge research. The great AMC of the future will continue these traditions as they pertain to clinical medicine and basic science, while broadening its agenda to include quality and safety, cost-effective care, and new models of healthcare delivery. The functions that AMCs provide are crucial, and irreplaceable. Failure is not an option. So let’s get started.


  1. Brad F February 27, 2011 at 3:57 pm - Reply

    Great post Bob, and speaks to a host of issues.

    I was unaware of the shortfall (“30-40% match”) in funding support, and am interested in knowing whether this is a UCSF or national gap. Can you elaborate a bit more.

    A bit of commentary:

    Given all the attention cost shifting is receiving, and the evidence MedPAC and academia produces…

    …It is difficult to discern how much spending on hospital side accrues from 5-star amenities vs essential operations at AMC’s (read: research)–that in turn get flipped to commercial payers. This distinction is essential, if, like congressional leaders profess, innovation is our future and we must invest. There is definitlely some cognitive dissonance in this dept as there really seems to be momentum in the “commit for tomorrow” movement, and this is on both sides of the aisle. Here is one example:

    Assuming money is not misspent on perks, ? at UCSF currently, society cannot let sterling pedigree institutions like yours rot on the research vine. Clearly the wrong message if the best we have cannot underwrite tomorrows breakthroughs–and MedPac and CMS need to tread lightly. THe alternative is taxing and supporting the research enterprise. Pharma is not the right venue to seek support.

    Finally, on the AMC front, my guess is, everyone will adjust, begrudingly. I dont usually resort to off color quotes, but when they come from former presidents (LBJ in this case), you get a pass: “”If you’ve got ’em by the balls, their heart and mind will follow.” Yup. Whether AMC health care innovation zones will flourish is anyones guess. I have my doubts on this iteration, but again, AMC’s will adapt:

    Thanks for the forum, and terrific post.

  2. Brad Stephan February 27, 2011 at 4:02 pm - Reply

    I agree with your optimism that bright minds can overcome challenges, if the incentives and pressures are appropriate and sufficient. However, the challenge of value-based care, which you address, I believe is only transitional as we move toward an even greater challenge: risk-based care – which is the only solution that can transform our industry from disease-based to health-based. Even pay-4-performance requires sick people to generate revenue. The root cause of rising healthcare costs will only be addressed when physicians and hospitals are rewarded for preventing and mitigating the incidence and burden of disease.

  3. Menoalittle February 27, 2011 at 9:43 pm - Reply


    Your excellent report provides a meaningfully important exemplar for the need to call Watson to solve the problems of purchasing EMR systems, costly systems for which there is not any evidence that they improve safety or efficacy, nor help mitigate the zebra hunt. Watson can do it! Really, as an answer Abe Varghese proposed for Watson in the NY Times today, “An emergency treatment that is administered by ear”.

    It is additionally an exemplar of the need to train physicians to think creatively about medical care, patient examination, and interpersonal interaction, rather than coming up with creative workarounds to protect the patients from the dangers posed by the HIT systems, that may ultimately bankrupt yours and other AMCs without infusions grants and philanthropic largesse.

    Then again, with the EMR facilitated and corner suite encouraged cut and paste 6 page progress notes, aka bills, to which you have referred in prior reports, I do not see how AMCs can not remain profitable using this method of maximizing cash flow.

    Your good friend, Don Berwick, should take heed of this frad if he espouses value. It behooves CMS to audit each and every hospital with EMRs for evidence of this new approach to gaming.

    Finally, Doctor Berwick pontificates esoteric and meaningfully depreciating solutions in the segment of his presentation that you quote when it is considered that no one, including Berwick, is paying attention to the physicians who take care of the patients, actually.

    This group is already well equipped with skills and knowledge…to make a better contribution to the whole. What are words of wisdom?

    It is merely that those Watsons who are put in positions to generate policy are doing so regardless of those subject to the policy (and may not have the fact knowledge of the real Watson), and those who challenge and object, experience Ad Hominem attacks as being disruptive influences.

    Best regards,


  4. AD February 27, 2011 at 11:59 pm - Reply

    The concern about ACO’s is really overblown. Their creation is a bureaucratic tuck-away in the Affordable Care Act. Yet to be defined are the structure,payment mechanisms, anti-trust issues that must be god parents at their baptism.
    Has any one really considered that they are HMOs with different phenotype.
    Even those monsters produced good progeny…….Hospitalists.
    UCSF will survive because of the quality of it’s medical staff. Boutique stores are yet profitable despite Walmart, Costco and their ilk.
    UCSF however could learn from the customer service behaviors of the successful merchants. They could be more accessible to referring physicians and their patients’.
    Medicine is an art ,a science and in the future a business

  5. Brian Clay, MD February 28, 2011 at 8:11 am - Reply

    Greetings from a sister UC medical center in San Diego.

    Although I tend to side with the guarded optimism of the Brads above, we likely will not be able to determine the fate of the academic centers until the post-health care world actually arrives. As AD astutely implies above, the devil will be in the details.

    I am also somewhat taken aback to hear that the subsidization requirement for the research mission of a typical large academic center is as large as you cite.

    So will academic medical centers be able to live up to the promise of the thus-far-only-conceptual accountable care organization? Most likely better than we think we will, but also likely NOT precisely according to what the current received wisdom is regarding what an ACO should look like or be able to do. I suspect that the ACO concept will undergo substantial evolution as organizations other than the Mayo and Kaiser try to actually pull it off in real-world conditions.

    On a local note — we launched our inpatient EMR earlier this morning, and, as far as I am able to discern, the fabric of space-time was not torn asunder. All appears to be going just fine.

  6. Joe February 28, 2011 at 4:02 pm - Reply

    I am left to wonder why, given such a dire financial future as indicated here, a hospital would go on such a wild spending spree. That seems quite irresponsible to me.

    Also AD, medicine is already a business. 100%. It’s just a rather poorly run, tantrum-throwing business.

  7. Suit March 1, 2011 at 12:48 am - Reply

    Is UCSF the high quality -low cost choice in your market?
    When more publicly reported data are available, including rates, the gloves will be off. Reputation will no longer drive the market. As we are seeing in MA, now that rates are transparent, payers are flocking away from the high priced AMC monoliths and toward the lower priced centers with ” as good” or better quality.
    Yes, it is all about money.

  8. rafmar March 2, 2011 at 4:33 am - Reply

    Bob said:

    “…each dollar in research grants requires a 30-40% match to cover all the true costs (including grants management and administrative support).”

    Let’s look at this statement more closely. Who is to say that each dollar in research grants “requires” a 30-40% match? Certainly that’s what the university administrators claim. They would wouldn’t they? The “indirects” are the source of their salaries. It’s a totally circular argument. Ask the scientists if they agree that 30-40% on the dollar is needed. Of course they don’t. Thirty years ago, “indirects” from grants were almost unheard of, as indeed were IRBs. And what did we witness? nothing less than the golden age of American academic medicine.

  9. Michael March 4, 2011 at 6:02 pm - Reply

    Thankfully, health care reform is NOT a done deal here in the United States. Unless we want our standards of care to descend to those seen in countries with socialized medicine, we will wisely step back from these draconian measures taken by the Obama administration.

    Several judges have ruled that the law is unconstitutional, so we cannot make the assumption that the law will remain in place and ever be implemented. The Supreme Court will decide that soon enough.

    I simply say all of this to challenge Bob’s core premise that America is indeed in the post-health care reform era. Let’s all hope that this is not the case!

  10. refurbished55 March 10, 2011 at 8:08 am - Reply

    Great post….

  11. Eric S March 13, 2011 at 2:49 am - Reply

    Great post as always, Bob.

    Change is frankly long overdue in many AMCs, which are shackled by byzantine governance that extinguishes innovation and misaligns incentives. Tradition and inertia are no longer excusable reasons for perpetuating archaic governance structures that have not materially evolved since the Flexner Report.

    The bleeding will be extensive, but it may be the only impetus to get AMC leadership to recognize that they need to revamp their governance or bleed to death.

  12. Brian Asmussen April 5, 2011 at 2:56 am - Reply

    Dr. Wachter,

    Great post and well worth the read. In my opinion – I feel that AMC may actually be one of the best places for an ACO to exist. The reason I say this is that AMC many actually have the means to institute a fully integrated EHR. Many community health systems are either unwilling or unable to fully implement an EHR across the continuum of care – i.e. the PCPs office doesn’t provide notes to the specialist and all the labs, imaging, and other tests live on a paper report in the specialist’s office and never make it back to the PCPs office. AMCs at times are truly able to implement an integrated EHR that can cross the continuum of care from outpatient to inpatient as well as follow the patient on an ongoing basis.

    Having worked at UCSF, I know the fully integrated solution is still coming in the future, but I know Epic and have used it in other AMCs with great success. I know the EHR journey is going to be a long one for UCSF, but I know it will be fruitful in the long run and will help to position UCSF as an ACO.

    I also agree that UCSF will have to continue to work in the PCP shortage or lack of community integration in order to fully meet the requirements as an ACO, but in time this too will be solved. There are so many great minds at UCSF and with collaboration they too will solve this overwhelming conundrum.

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About the Author: Bob Wachter

Robert M. Wachter, MD is Professor and Interim Chairman of the Department of Medicine at the University of California, San Francisco, where he holds the Lynne and Marc Benioff Endowed Chair in Hospital Medicine. He is also Chief of the Division of Hospital Medicine. He has published 250 articles and 6 books in the fields of quality, safety, and health policy. He coined the term hospitalist” in a 1996 New England Journal of Medicine article and is past-president of the Society of Hospital Medicine. He is generally considered the academic leader of the hospitalist movement, the fastest growing specialty in the history of modern medicine. He is also a national leader in the fields of patient safety and healthcare quality. He is editor of AHRQ WebM&M, a case-based patient safety journal on the Web, and AHRQ Patient Safety Network, the leading federal patient safety portal. Together, the sites receive nearly one million unique visits each year. He received one of the 2004 John M. Eisenberg Awards, the nation’s top honor in patient safety and quality. He has been selected as one of the 50 most influential physician-executives in the U.S. by Modern Healthcare magazine for the past eight years, the only academic physician to achieve this distinction; in 2015 he was #1 on the list. He is a former chair of the American Board of Internal Medicine, and has served on the healthcare advisory boards of several companies, including Google. His 2015 book, The Digital Doctor: Hope, Hype, and Harm at the Dawn of Medicine’s Computer Age, was a New York Times science bestseller.


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