Funding for academic medicine: Condition critical

I recently spent a lovely Sunday on call and enjoyed every minute of it. I scrubbed with a junior resident on a cesarean delivery, covered multiple vaginal deliveries, made rounds on the high-risk service, and cared for 3 patients in the intensive care unit. Because I am technologically challenged, I was forced to spend half my free time entering notes, orders, and billing information into our electronic health record (EHR). The remainder of the time was spent teaching. I was in my element and for just a brief interval, I could focus on the best part of academic medicine-taking care of patients, training the next generation of providers, and raising questions that could form the basis of great research projects. 

The next day it was back to reality, trying to help adapt our medical school and academic medical center (AMC) to the shifting perils of health care reform. 

The old model of funding academic medicine

For most of my career, academic medicine thrived on liberal federal government funding of direct and indirect graduate medical education, ever-rising student tuition, and generous National Institutes of Health (NIH) research support. For private medical schools, philanthropy and endowments also helped pay the bills. For public medical schools, these latter sources of revenue were less robust but the gap was filled in part by strong state support for medical education.

While these disparate revenue sources were important, the true secret to the success of the US AMC enterprise was the ability to use clinical revenue to cross-subsidize the academic mission. Thus, AMCs were able to charge a high premium to commercial payers to help fund their inadequately compensated missions of training and research. Clinical revenue from faculty practices-and to a lesser extent, affiliated hospitals-now provides more than half of US medical school revenues.¹ By comparison, research grants provide less than a third of a medical school’s revenue, state government support accounts for less than 10%, endowments about 5%, and tuition less than 5%. Now this mighty edifice built on the artifice of ever-rising prices is teetering.

Sources of the current academic medicine funding crisis

Virtually every source of AMC and medical school revenue is now under pressure. Even in the halcyon days of NIH funding, research grants never really paid the bills. For every dollar of direct federal research funding, institutions have to come up with an additional 30 to 40 cents to cover the true costs of performing these studies.² Years of stagnant NIH funding have dropped NIH pay lines (the percent of grant applications funded) to record lows. For example, the Eunice Kennedy Shriver National Institute of Child Health and Human Development, which funds pediatric and obstetric research, has seen a fall in its pay line from 15.2% in 2010 to 9% this year.³

Adjusted for inflation, NIH funding peaked in 2003 and the number of annual grants funded has been falling steadily ever since, from 37,401 that year to an estimated 34,252 this year.⁴ And the recent federal budget sequester has cut NIH funding a further 5% ($1.55 billion).⁵ This has not only reduced the number of grants funded but the value of those awards. At Ohio State University we actually saw a net increase in the number of R01 and equivalent grants funded this past year but a 4% reduction in their monetary value.

Because of the enormous competition for admission to US medical schools and the relatively high incomes possible after graduation, the cost of tuition at US medical schools has been unrestrained for decades. Not surprisingly, the compound annual rate of medical education debt rose at twice the rate of inflation between 1978 and 2010.⁶ Even at public medical schools with lower tuition, the median level of indebtedness for graduating seniors is nearing $160,000.⁶ This unseemly debt burden has attracted the attention of lawmakers and consumer groups. Coupled with increased competition from the growing number of new allopathic and osteopathic medical schools as well as the increased class size of many current schools, the price curve seems to have finally been bent. At Ohio State, given our land-grant tradition, we are particularly sensitive to this issue and have tried to maintain a relatively low tuition for Ohio residents. However, even our cost presents a formidable financial challenge to both inner-city and rural Ohio families.

Government support of medical education is also under pressure. State support for public medical schools has been reduced across the country in the wake of growing budget deficits and declining tax bases. In Ohio, overall state funding for public medical schools has fallen 17.9% over the past 10 years. There is also a very real threat of substantial (10% to 45%) reductions in Medicare indirect medical education (IME) payments. Academic medical centers will be particularly hard hit by an up to 75% reduction in federal disproportionate share hospital (DSH) payments as mandated by the Accountable Care Act (ACA).⁷

Medicare reimbursements to AMCs for clinical care will decline due to so-called market basket reductions (0.75%), productivity adjustments (1.75%), value-based purchasing adjustments (2%), and hospital-acquired condition and readmission penalties (4%).⁷ Then there are the 2% sequester cuts and meaningful-use penalties for inadequate EHR functionality, which could add another 5% cut. Finally, many states have reduced Medicaid reimbursements (often those states that have also refused federal dollars to expand Medicaid coverage to citizens with incomes less than 138% of the federal poverty line). Such cuts fall disproportionately on AMCs because Medicaid will account for up to 37% of their revenues by 2020.⁷

Then there is the ACA-associated impact on revenue. That includes a shift from commercial payers to Medicaid, and from commercial payers to relatively low reimbursing federal and state health insurance exchanges. Mid-size and large companies are seeking to cap health care costs by flocking to a defined contribution rather than a defined benefit model by opting for private exchanges, in which companies make cash contributions to savings accounts from which employees purchase insur­ance products themselves, usually at lower cost for lesser coverage.

Alternatively, such companies may terminate their insurance coverage altogether and direct employees to government-sponsored exchanges. In either case, commercial payers will be increasingly pressured to lower premiums by seeking lower reimbursements and narrower provider panels, to the selective detriment of AMCs.

Bundled payments and capitation will ultimately drive reimbursement down further, and AMCs, with their intrinsically high cost, are particularly vulnerable to being squeezed out of such plans. According to the accounting firm PricewaterhouseCoopers (PwC), 78% of consumers surveyed are unwilling to pay more to be treated at an AMC.⁷ Moreover, while many AMCs have enjoyed high rankings from reputation-dominated surveys such as that of U.S. News & World Report, new Joint Commission and Center for Medicare and Medicaid Services (CMS) surveys require detailed outcome reports and patient satisfaction data, and many of the so-called top AMC hospitals are not faring well. Indeed, only 5% of major AMCs were listed by the Joint Commission 2010 Top Performers on Key Quality Measures report.⁷ Overall, PwC predicts that AMCs will lose 10% of their clinical revenues as a result of the ACA.

Solutions to the crisis

There is a palpable sense of angst at medical schools and AMCs across the country. The old way of doing business clearly is no longer working and the failure to adapt could lead to potentially catastrophic financial collapse in the next 5 years. So what needs to be done? In my opinion, options include:

1)    Growing philanthropy. Giving has rebounded since the end of the Great Recession. However, while important, it is very unlikely that such giving can make up for the shortfall in NIH grant and clinical income. At Ohio State we have focused on increasing alumni giving for medical student scholarships. In the words of the immortal Buckeye football coach Woody Hayes, "You can never pay back, so you should always try to pay forward."⁸

2)    Focusing on commercialization. Turning research into patents and patents into companies that generate equity and an income stream for medical schools and their universities has become a major focus of a number of medical schools. Duke University has created a Center for Entrepreneurship and Research Commercialization to spur biotech commercialization,⁹ whereas University of California, Davis has created a Medical Technology Commercialization Clinic to train scientists to convert high-impact research into new treatments and products.¹⁰

This past April we announced formation of the Ohio State College of Medicine Innovation, DEsign, and Application (IDEA) Studio, which focuses on identifying important gaps and critical problems in health care and addressing them through the convergence of technology development and design thinking. We also offer frequent seminars on patent disclosure and company formation. In the past 2 years we have more than doubled the number of annual faculty patent disclosures and initiated multiple biotech and informatics startups.

3)    Experimenting with new models of care. In the short run, many AMCs have focused on reducing costs. However, this strategy has its limits as patient satisfaction and thus market share may begin to fall. Thus, a number of AMCs have begun to experiment with radical new models of care delivery. Physician leaders of Partners HealthCare (which includes the Brigham and Women’s Hospital and Massachusetts General Hospital) recently described their initiatives to meet the challenges of Massachusetts Health Care reform, upon which much of “Obamacare” is modeled.¹¹

While this state-based reform has greatly reduced the number of uninsured patients, it has also increased costs, prompting legislative action. In response, Partners has cut costs, expanded its primary-care network, controlled access to and spending by specialists, and participated in risk-based contracts with commercial payors and with CMS as a Pioneer Accountable Care Organization to cover more than 400,000 patients. They have focused on population health and coordinated care of patients with complex chronic disease. These patients share in savings and are at risk for excess costs.

We have taken a similar approach at Ohio State, creating an integrated healthcare system in which physician practices and hospitals are all part of the university. We have also begun to use our comprehensive EHR to identify patients at high risk of readmission and to model bundled payments. Our focus on patient safety, satisfaction, and outcomes has been near obsessive and recently led to a 2013 University HealthSystem Consortium (UHC) Quality Leadership Award, which is given to the top 10 or 101 AMCs for demonstrated superior performance in delivering high-quality patient care.

The billion-dollar question is: Can large AMCs be nimble enough to compete with large community health systems that do not have to bear the costs of a large research and educational enterprise? My suspicion is that ultimately scale will be crucial in this calculus. I expect to see large-scale mergers coupled with some downsizing of educational and research missions.

Take-home message

As I write this editorial, I have just returned from covering our high-risk clinic, where I found myself asking for the cost-benefit justification of just about every test and treatment ordered. The problem is that most of our patients were incredibly complicated cases, involving not one condition but combinations of complex diseases (eg, myasthenia gravis plus severe antiphospholipid antibody syndrome, or complex seizure disorder plus depression). Such patients are at the heart of an AMC’s teaching and research mission but represent enormous loss leaders from a financial perspective.

The challenge ahead for US AMCs and medical schools is daunting and the outcome in doubt. It is clear we are in an increasingly critical condition, but with bold, creative, innovative approaches, I believe we are poised for a recovery.

References

1. Miller JC, Andersson GE, Cohen M, et al. Perspective: follow the money: the implications of medical schools' funds flow models. Acad Med. 2012;87(12):1746-1751.

2. Dzau VJ, Cho A, Ellaissi W, et al. Transforming academic health centers for an uncertain future. N Engl J Med. 2013;369(11):991-993.

3. Albert Einstein College of Medicine. NIH paylines and success rates. www.einstein.yu.edu/administration/grant-support/nih-paylines.aspx. Accessed October 22, 2013.

4. Federation of American Societies for Experimental Biology. Number of research project grants. www.faseb.org/pdfviewer.aspx?loadthis=http%3A%2F%2Fopa1.faseb.org%2Fagendas%2Fpdfs%2FNIHFundingFigure2.pdf. Accessed October 22, 2013.

5. McCarthy M. Sequester to force $1.5 bn cut in NIH budget. BMJ. 2013;346:f3707.

6. Youngclaus J, Fresne J. Key indicator in academic medicine: education costs and student indebtedness at U.S. medical schools. Acad Med. 2012;87(2):242-243.

7. PWC. The future of academic medical centers: strategies to avoid a margin meltdown.

www.pwc.com/us/en/health-industries/publications/the-future-of-academic-medical-centers.jhtml. Accessed October 22, 2013.

8. The Ohio State University. Pay it forward. www.osu.edu/features/2013/pay-it-forward.html. Accessed October 22, 2013.

9. CERC: Center for Entrepreneurship and Research Commercialization at Duke. http://cerc.duke.edu. Accessed October 22, 2013.

10. UC Health. Med tech commercialization. http://health.universityofcalifornia.edu/2010/03/25/med-tech-commercialization. Accessed October 22, 2013.

11. Nabel EG, Ferris TG, Slavin PL. Balancing AMCs' missions and health care costs--mission impossible? N Engl J Med. 2013;369(11):994-996.