The Scale Imperative for Academic Medical Centers: Part 1—Approach

Abstract

The rapidly changing healthcare environment is driving strategic reshuffling and competitive responses that will permanently alter the operational landscape for all healthcare organizations. Community-based healthcare providers across the country in particular are rapidly moving to large, vertically integrated healthcare systems. As these organizations grow and develop, they are becoming closed systems of care and developing tertiary and quaternary care capabilities. In addition, these providers are reducing, and eventually eliminating all but a trickle of, the flow of specialized referrals to academic medical centers (AMCs). At the same time, the focus of available research funding is shifting from basic research toward clinical, translational, population health, and comparative effectiveness platforms. These reductions in funding and the loss of referrals threaten the sustainability of AMCs' research and teaching missions.SUCCEEDING IN THE NEW ENVIRONMENTIn our work with AMCs, we have identified five strategic imperatives for their success in the healthcare delivery landscape of the future:1. Sufficient scale and scope: Organizations must scale up or focus to survive in the future. For most, scaling up will involve inorganic growth through mergers, acquisitions, and new partnerships. In major metropolitan areas, a limited number of consolidated organizations will emerge, probably with annual revenues in excess of $2 billion.2. Cost competitive: Being cost competitive has never mattered before, but with the new underlying financial pressures emerging, all organizations will need to continually reduce costs for the foreseeable future, by about 3-5% annually. Competition for patients will also increasingly be based on ability to provide value (quality + service + cost).3. Demonstrated quality: Quality is part of the value challenge and is increasingly important considering the impact of pay-for-value reimbursement from the federal government and the initiation of quality incentive-based contracts by certain payers. As quality measurement improves, the reimbursement focus will shift toward outcomes and away from the current structure and process measures.4. Exceptional service: Also part of the value challenge, a focus on exceptional service has caused nearly all organizations to materially raise their game over the past 10 years. Since healthcare is fundamentally a service business, rigor in this area will continue to be a key aspect of competitive success in the future.5. Real integration: Success with the last three challenges, in particular, will necessitate not just having all the players or parts of a system of care, but knitting them together in a truly integrated manner across the continuum.While some AMCs have moved rapidly to build scale, many others have not, and AMCs as a whole have been slower than their community-based and for-profit competitors to scale up (Peterson, 2014). Thus, of the five strategic imperatives, we limit our discussion to the first imperative for AMCs, scale and scope.What Level of Scale Do AMCs Require?From a market conditions/dynamics perspective, the most important factor in determining scale is the current and likely future degree of provider consolidation in the market. A highly consolidated market may disadvantage independent organizations, while a fragmented market should not. In terms of the population base required, smaller and less highly developed AMCs usually need a population of 1 to 2 million persons, and larger, more highly developed centers require upwards of 3 million persons to support some of their subspecialized capabilities (Finarelli, 2009). Many pediatric subspecialties, as well as areas such as transplantation and bum care, require very large populations to support the financial and clinical viability of services.As the market consolidates and organizes into increasingly closed systems of care, unique services, carve-outs, and ad hoc informal referrals for tertiary and quaternary care will become far less prevalent. …