Academic Medical Centers — Strategies, Mergers, Goals and Affiliations

The world of academic medical centers (AMCs) is quickly changing.

This article briefly discusses (1) core visions and goals for academic medical centers, (2) strategies and potential positions to aspire to, (3) various observations and thoughts and (4) models for affiliation. We have also attached as Exhibit A a list of 22 systems and a thumbnail of some of the strategies certain AMCs have engaged in thus far.

Initial Questions. We ask CEOs and leadership to begin with four key questions:

1. Do you have a core plan or goal?
2. How committed are you and your board to that goal and plan?
3. Can you afford to implement the goal?
4. Do you desire to be a surviving party in your mission?

I. Core Goals and Concepts. We look at the goals and concepts from a perspective similar to the Maslow's hierarchy of needs.

1. The initial goal is financial survival. Hospitals and health systems affiliated with medical schools face some of the highest costs across all healthcare institutions. They also face increased funding challenges and many are located in urban areas with challenging results. AMCs often end up treating a disproportionate share of Medicaid or under- and uninsured patients for emergency, Level 1 trauma and psychiatric emergencies. Approximately 60 percent of AMCs' business on a national basis comes from Medicaid and Medicare. The most foundational question for any AMC leader today is whether their AMC can survive in its current form. A number of AMCs have come to the conclusion that they cannot survive or thrive in their current form, and many of them have been acquired.
2. Does the medical center aspire for greatness or leadership in a certain area? Is there an area that the AMC desires to be an absolute leader in? A core strategy beyond mere survival is to aim to be an absolute regional or national leader in a specific area — that is, an AMC that stands out in x or y specialty. Rush University Medical Center in Chicago (ranked No. 6 nationally in orthopedics by U.S. News & World Report), for example, is a top-notch leader in orthopedics and spine. Tufts Medical Center in Boston has one of the top heart transplant centers in the country and does more heart transplants in Massachusetts than any other hospital. The ability to be an absolute leader in a specific area is a significant differentiator among AMCs, particularly those that are not regionally dominant, and also helps provide an academic medical center a reason for being that helps them stand out and remain critical to the community.
3. Does the AMC aspire to have a dominant regional or local market position? A dominant market position allows an AMC to invest in quality across a certain scale, invest in leadership and maintain solid pricing. It can allow an AMC to maintain a great teaching institution and serve payers and patients well. A dominant market position — somewhat like Baylor Scott & White Health in Texas (49 hospitals), UPMC in Pittsburgh (ranked No. 13 nationally by U.S. News & World Report — 21 hospitals), BJC HealthCare in St. Louis (Barnes Jewish Hospital/Washington University ranked No. 10 nationally by U.S. News & World Report), Yale-New Haven (Conn.) Health System (ranked as top-performing hospitals in eight of 16 specialties by U.S. News & World Report) and North Shore-LIJ (now Northwell — 21 hospitals) in the New York metro area each have — allows an AMC to avoid being a commodity participant and allows it to be in a spot where it is needed by payers. This way, it is harder for payers to go around the medical center and its system for care.
4. Can the AMC become a true leading international brand name? Institutions like Mayo Clinic (ranked No. 2 nationally by U.S. News & World Report), Cleveland Clinic (ranked No. 5), NewYork-Presbyterian Hospital (ranked No. 7 nationally by U.S. News & World Report), Stanford Health Care (ranked No. 15 nationally by U.S. News & World Report) and Massachusetts General Hospital (ranked No. 1 nationally by U.S. News & World Report) have essentially become international brands. Stanford Health Care is now building a $5 billion dollar campus and tends to signal that it intends to be one of the few true international brands. A few of those brands exploit their names in different ways than others. To be an international brand, one often needs to start with being great at home (i.e., hold a dominant local position as discussed in 3 above), and then be a leader in clinical innovation, research and patient care. The AMC might need to be a dominant regional system to begin an international branding

II. 9 Questions on Strategy

1. Can you use the academic medical center as the base to develop an international brand and name? Some AMCs establish a brand name through clinical specialization, research and patient care. For example, MD Anderson has long focused on one clinical area and devoted its entire bandwidth to consistently deliver superior results around that arena. Others, like Mayo Clinic, John Hopkins (ranked No. 3 nationally by U.S. News & World Report) or Cleveland Clinic, have clinical excellence as their bedrock but also expand their global footprint through international, commercial and advisory relationships in addition to patient care. A select few, such as Mayo Clinic and Cleveland Clinic, have expanded at a national level and international level and developed true international brands. Here, one needs to query whether a system has the resources and platform and desire to attempt to become a truly international brand.
2. Can you use the academic medical center to develop a dominant local, regional or national local system? UPMC, North Shore Long Island Jewish (Northwell) (21 hospitals), BJC and Baylor Scott & White are great examples of systems that have used acquisitions or mergers to develop a dominant local or regional system. This can make becoming too localized a strategy difficult.
3. Will the center expand through ownership, affiliation or a mix of both? Here, some AMCs try to develop alliances with other systems without owning or becoming owned by the other system. Other systems attempt to develop systems through acquiring or combining fully with other systems. Baylor Scott & White Health completed a full merger between Baylor Health Care System and Scott & White Healthcare (now with 49 hospitals). University of Rochester Medical Center, in contrast, has pursued a mix of acquisitions and alliances.
4. Does the academic medical center desire to be a hub-and-spoke model or a multi-hospital system? A hub-and-spoke model includes an AMC and several community hospitals that are clearly of a different stature than the AMC and serve as "feeders" to the main hub. A multi-facility model includes several high-level facilities, and it is not so clear that one is the lead facility and the others are community hospitals. These hospitals may neighbor one another in a contiguous market. Many systems, however, are in some ways multi-hospital and at the same time can be hub-and-spoke. NewYork-Presbyterian and Northwestern Memorial Hospital (ranked No. 11 nationally by U.S. News & World Report) have some community hospitals and tend to also be multi-facility. Northwestern has acquired hospitals in Chicago's northern and western suburbs. Its 22-story medical center in Chicago's affluent Streeterville neighborhood remains its hub. However, the other hospitals are also prominent, and Northwestern is investing in them. NYP is a mix, as it has some clear community hospitals in the suburbs and several elite institutions in the city. Yale-New Haven is closer to a traditional hub-and-spoke model.
5. Does the academic medical center want to remain a standalone facility? For example, University of Chicago Medicine (ranked No. 25 for gastroenterology & GI surgery and No. 34 in cancer nationally by U.S. News & World Report) has largely remained a standalone facility, and University of Illinois Hospital & Health Sciences System has as well. In Nashville, Tenn., Vanderbilt University Medical Center (ranked No. 1 in Tennessee by U.S. News & World Report) has largely remained a standalone facility. While the AMC has an affiliated children's hospital, cancer center, rehabilitation hospital and clinic, it has not expanded to community hospitals or satellite locations for general acute care.
6. Can the academic medical center define a reason for being? Does the AMC have one medical specialty, research area or an educational reputation that cements it as greater than all other competing institutions in the area? This is something that must be reexamined and invested in frequently. Over time, even the best missions or differentiators can lose their edge. An AMC can gradually become disconnected from a community's needs or less superior in an area. Its reason for being then becomes less discernible. Here, AMCs are often advised to double down on their strengths.
7. Should the AMC sell to or join a third party? In the past decade, some universities looked at their AMCs and decided it would be hard to survive and provide the quality they wanted as a standalone facility. In Chicago, LoyolaUniversity sold its medical center to Novi, Mich.-based Trinity Health. In 2015, The University of Arizona board of regents unanimously approved a $1 billion deal between Phoenix-based Banner Health and University of Arizona Health Network in Tucson. As a result, Banner acquired the university's two hospitals and now has an affiliation with its medical school.
8. Should the AMC be a leader or developer of a statewide or regional alliance? University of Iowa Health Care created the University of Iowa Health Alliance in 2012 with three other health systems. As the state's only comprehensive AMC, University of Iowa Health Care serves as the backbone for the three independent organizations to better coordinate care, increase quality and lower costs. The alliance may be a strategic way to gain scale at a lower cost and less risk than through acquisition. University of Nebraska has pursued a similar strategy.
9. Can it use licensing agreements and other branding initiatives to expand the use of its name like Mayo Clinic, Cleveland Clinic and Duke University Health System have done? There are great questions as to whether the strategic use of one's name really furthers its mission. However, this strategy has become increasingly popular among some of the big systems and can provide cash flow and spread the use of their name. Mayo Clinic is the textbook example of this. Launched in 2012, the Mayo Clinic Care Network capitalizes on the Mayo reputation for high-quality care and includes providers across the country. Hospitals in the network, if approved to join and with paying a fee, have access to Mayo specialists, get to keep their independence and get to utilize the Mayo name. Cleveland Clinic has entered into similar relationships. Duke has leveraged itself through the Duke LifePoint relationship.

In looking at the goals and strategies, please note that these are not exclusive. A party can develop a multi-hospital system and try and develop an international brand. The party always wants to maintain financial survival while pursing these other goals.

III. Observations and Thoughts. Here are several thoughts and observations related to academic medical centers and where they stand today.

1. Academic medical centers are far less standalone facilities than they used to be. There are still several AMCs that one can truly define as standalone medical centers.
2. There are nearly 100-plus hospital mergers per year. Of those, approximately 20 percent involve major academic medical centers or top teaching hospitals.
3. Many of the very best hospitals in the United States are based around AMCs. It leads to the belief that many can still survive by focusing on an elite part of the market or specific areas. However, the future remains unclear.
4. A Deloitte study titled "Academic Medical Centers - Joining Forces with Community Providers for Broad Benefits and Positive Outcomes" shows that generally, academic medical centers involved in mergers and acquisitions have ended up with a better case mix, better EBIDTA and lower expenses per case. Thus, the prognosis so far from merger and acquisitions has been relatively positive.
5. Most AMCs should have a clear plan for the future.

IV. Models of Affiliation. There are several different models of affiliation. These include the following, from a lower level of affiliation to a high-end level of affiliation.

1. Single purpose entity. Parties can develop a single purpose entity that focuses on supplies, management services or other services.
2. ACOS or MCEs. A variation of a single purpose entity would be the joining in of an accountable care organization or managed care entity with other systems, but not sharing governance with the other group beyond that entity.
3. Some level of corporate overlap. Another option is to develop an affiliation where there is some level of clinical integration, some level of board overlap and some level of integration at the corporate level — but not a full merger of the groups.
4. Same Obligated Groups, JOA, etc. This model involves a joint operating agreement that has a shared corporate parent, which really means the organizations are part of the same corporate group. However, entities within the JOA may have some independence and the JOA may have a finite term.
5. Corporate acquisition. A full merger. Here, the AMCs fully combine and are fully integrated.
6. Many AMCs execute full mergers and other affiliations. In fact, it is common for an AMC to execute both strategies. However, typically one would have a primary or dominant plan or strategy. Certain questions that are raised when you look at the strategies and models are:
7. Related questions on affiliation:
   1. Can the AMC survive without engaging in such merger or affiliation strategies?
   2. Can the AMC afford to be an acquirer/buyer? Does it have the funds? Is the AMC in a position that it can afford to make some good acquisitions and some bad acquisitions?
   3. Are some of the affiliations a prelude to a future merger? Might the AMC affiliate with the hope that, at some point, it will turn into something deeper?
   4. Will the AMC make different decisions on alignment based on how close it is to its core or dominant market? If it is part of the core market, it might be more likely to want to acquire it. If it is in a more distant market, it might be more interested in some sort of alignment strategy.
   5. What is the situation with key payers? For example, in the local payer market, does it need to have a dominant system so as to not become a commodity with payers?

Exhibit A

Examples:

1. Baylor Scott & White Health (Dallas) — Merger of two systems; multi-hospital; hub-and spoke-model; regional strength/dominance
2. Beth Israel Deaconess Medical Center (Boston) — Hub-and-spoke model; acquired community hospital; part of CareGroup
3. BJC Healthcare (St. Louis) — Multi-hospital; great/regional strength and brand; local acquisitions, mergers and affiliations
4. Cleveland Clinic — International brand and increased regional strength
5. Dartmouth-Hitchcock Medical Center (Lebanon, N.H.) — Hub-and-spoke model, great regional strength; great brand
6. Duke and Duke Lifepoint (Brentwood, Tenn.) — Great brand and regional strength (JV with Duke University Health System and LifePoint Health in which Duke owns a small amount); (national licensing, semi coordinated national effort but Duke only owns a small percent)
7. Indiana University Health (Indianapolis) — Hub-and-spoke model; community brand (full merger/combination)
8. Johns Hopkins Hospital (Baltimore) — International brand; local strength
9. Loyola University Health System (Chicago) — Merged with Trinity Health (Livonia, Mich.)
10. Massachusetts General Hospital (Boston) — Largest teaching hospital at Harvard Medical School; international brand (multi-hospital); great regional strength
11. Mayo Clinic (Rochester, Minn.)— A few states; hub-and-spoke model; mega-international/commercial brand; regional strength; franchise licensing
12. NorthShore – LIJ (Great Neck, N.Y.) — Regional strength/dominance; hub-and-spoke model; alliances with Barnabas Health and HackensackUniversityMedicalCenter
13. Northwestern Memorial Hospital (Chicago) — Standalone then hub-and-spoke model, but serious spokes; Cadence and Lake Forest (mix of multi-facility no hub-and-spoke)
14. NewYork-Presbyterian/Weill Cornell Medical Center (New York City) — Regional strength to international brand; multi-facility; several great hospitals
15. Rush University Medical Center (Chicago) — Two owned hospitals and some alliances/affiliations; top level greatness in a few key areas
16. Stanford (Calif.) Health Care — Local hub-and-spoke; emerging alliances; international brand; possibly the Mayo of the West; $5 billion dollar project
17. Texas Medical Center (Houston) — 21 hospitals; two medical schools; MD Anderson Cancer Center; Baylor College of Medicine
18. Tufts Medical Center (Boston) — Wellforce; two hospitals; large physician group; top heart transplant program
19. University of Chicago Medical Center — Standalone AMC; other affiliations, such as Sinai Health System for adult trauma center; NorthShore University Medical Center Residency Program (examining acquisition)
20. University of Maryland Medical Center (Baltimore) — Hub-and-spoke model; acquired St. Joseph Medical Center
21. University of Nebraska (Omaha) — Substantial state-wide alliances
22. University of Rochester (N.Y.) Medical Center — Multi-facility; acquisitions and collaborations; regional system