Failing Academic Healthcare Systems: Are Mergers the Answer?

studentsChallenges at many academic medical centers aren’t news.  At a time of declining reimbursement and patient migration to lower cost community alternatives, many academic systems are trying to figure out how to position themselves.

In light of these challenges, I read with great interest news of a recent deal between Banner Health (a large and well-run not for profit network in the southwest) and the University of Arizona Health Network (the health delivery arm of Arizona’s largest public university).  The proposal, announced a few weeks ago, is ostensibly a merger:  Banner will inject capital into the UAHN system and presumably apply its know-how and discipline to the UAHN operations. The press release notes:

[The merger will] bolster fiscal sustainability, eliminating persistent shortfalls and low operating margins currently experienced by UAHN. In addition to solving the immediate financial needs, the proposed agreement will: Eliminate the debt burdening UAHN (currently projected to be $146 million), provide resources for improved hospital infrastructure…Create a $300 million endowment…

Now, this is an interesting development.  Private operators of academic hospitals are nothing new: since 2002, Tenet has owned Drexel’s teaching hospital in Philadelphia and it also owns Detroit Medical Center among others.  What’s interesting here are the players: a public university and a not-for-profit, experienced healthcare operator coming together.

One perspective is that this merger is simply a “get-bigger” type deal where Banner and UAHN come together to dominate the Arizona market and command a payment premium, while also improving the community hospital/ tertiary center referral system in preparation for accountable care.

But, I can also see another interesting possibility:  is this deal an early example of a public university getting out of the hospital and clinical delivery business to focus on research and teaching?  The advantages to having experienced Banner executives run clinical operations are obvious.

Becker’s Hospital Review notes that many academic players are scrambling to shed costs.

The nation’s leading academic medical centers are working aggressively toward this imperative. [The CEO of University of Michigan Health System] says UMHS plans to reduce its operating costs by $200-$250 million, on a $3.2 billion annual budget. In September 2013, the Cleveland Clinic announced it would cut $360 million from its $6 billion annual budget through layoffs and other cost-cutting efforts. Vanderbilt University Medical Center in Nashville, Tenn., also announced a plan to cut $250 million from its $3.3 billion budget by the end of its fiscal 2015, as part of its “Evolve to Excel” initiative.

Many academic organizations lack the operational discipline to make hard decisions and this might be where bringing on a non-academic partner to make the hard calls might be appealing. The University of Michigan Health System CEO Dr. Pescovitz notes:

“Today and into the future, we face more formidable competitors when it comes to cost, quality, service and technology. Why? Because they can do it cheaper and faster. AMCs have higher cost structures, incapacitating bureaucracies and two critical components of our enterprise that we subsidize [research and teaching]. We are unable to be singularly focused, and we’re not as nimble or flexible.”


An interesting footnote to the Arizona deal is that it was preceded by a calamitous electronic medical record implementation with large cost overruns on top of a decline in Medicaid reimbursement. In other words, a high cost, low reimbursement squeeze.   EHR Intelligence blog writes:

According to a report in the Arizona Daily Star, UA Health has recorded $28.5 million in debt due in large part to its adoption of the Epic EHR, a decision estimated to have cost the health system $115 million but now includes $32 million in unbudgeted costs during the first two and half quarters of its fiscal year ending June 30….delays in go-live and the need for additional training and support are responsible for the extra costs with the EHR system launch falling two months behind schedule and not occurring until November 2013. Moreover, disruptions to clinical workflows and patient visits were not remedied until February 2014.  “This is the biggest operational change this organization has ever undertaken,” former consultant and UA Health CIO Dan Critchley told Arizona Daily Star. “We’re in what we call support mode now.”
It’s going to be interesting to see how other struggling (but essential) tertiary centers weather this perfect storm, and if Banner can overcome the academic inertia at the University of Arizona health system.  Is this deal a harbinger of other academic/ not for profit mergers?

One comment

  1. Pingback: Healthcare Mergers are the End of the Beginning: Some Lessons From the US Airline Business | Considering American Healthcare

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