Eyeing UVA’s lunch
Last June, Martha Jefferson finalized its merger with Sentara Healthcare, becoming the 11th hospital in a regional network previously focused in the Tidewater and northern Virginia. Martha Jefferson’s president and CEO, Jim Haden, said his hospital was relatively flush when its board sought the partnership. It wasn’t a decision made in distress—more like a preemptive strike against a coming crisis.
“We said, ‘We should be looking for partnerships when we’re doing really well, because we’re more likely to get an arrangement that you wouldn’t get if you were doing poorly,’” he said. And there’s reason to believe the next few years will deliver serious blows to the bottom line for hospitals everywhere.
Fifty percent of most hospitals’ business is reliant on Medicare, Haden said. But even as costs are mounting, the federal government is reducing Medicare reimbursements. The aim is to force health care providers into greater efficiency, but Haden said that, as others have pointed out, “one person’s waste is another person’s job.”
Disruption and change are inevitable in the next four or five years, he said. “You don’t have to be a genius to read the tea leaves and know that things are going to change like they haven’t changed in 40 or 50 years.”
UVA has acknowledged the same issue in its own budget documents in recent years. “One of the Medical Center’s largest challenges is the unwillingness of government payers to increase their payments commensurate with the increases in medical delivery costs,” the 2012-13 budget summary reads. UVA’s solution to keeping the revenue stream up, according to the same document, is increasing volume. More beds, more patients, more money coming in.
But Martha Jefferson chose consolidation. Haden said the Sentara merger is already helping with cost control, simply because of economies of scale. “I can tell you, already in some of our purchasing arrangements, it’s been wonderful,” he said. But even more important have been tried-and-tested quality care initiatives picked up from the new corporate parent that have helped the hospital improve its readmission rates and other measures of success. Being part of a larger network where others are constantly experimenting, improving, and sharing what works makes a difference. “It’s not just one hospital struggling to do better,” Haden said.
And while it’s still primarily a community hospital with a focus on primary care, Martha Jefferson has taken steps to establish itself as a referral center, too—a center where doctors send their patients for specialized treatment. In this area, that kind of tertiary care used to be the sole territory of UVA Medical Center.
“We do things today that we couldn’t do before—neurosurgery, in vitro fertilization,” Haden said. “We have a lot of things we weren’t doing five, six, seven years ago.”
Haden is quick to point out that Martha Jefferson’s academic neighbor down the road has a broader mission that includes education and research, and is still the only place in the region for a lot of treatments. “They do things that community hospitals like ourselves couldn’t do,” he said.
But VCU’s Luke said the competitors could be on track for a kind of arms race to capture referrals from the surrounding community. “Big hospitals are the black holes at the center of the restructuring of the health care system,” he said.
UVA’s regional health system was delivered a blow in its efforts to build a regional network not long ago, when Augusta Health in Fishersville severed partnerships with the Medical Center. Augusta’s cardiology program was expanding, and UVA made a bid for part ownership in 2010. But the offer was rejected, and UVA’s doctors’ privileges at the hospital were cut. Six months later, in January 2011, Augusta also pulled the plug on a more than decade-old radiation oncology partnership with the Medical Center.
If it comes down to a fight for control of the network of smaller hospitals and clinics in the region, said Luke, a corporate regional provider has a serious edge over an academic medical center like UVA when it comes to leadership and dollars. “Sentara has much more strategic ability to do that, so they are a true threat now,” Luke said.
Can Charlottesville support two black holes? Unlikely, said Luke, “but that doesn’t mean that Sentara cannot eat the lunch of UVA.”
Margin math
So what do the numbers say? Financially and structurally, academic medical centers like UVA’s are complicated beasts. According to PricewaterhouseCoopers’ report, 85 percent of revenues at typical American AMCs comes from clinical operations, with grants and contracts supplying 12 percent, and tuition, gifts, and endowments making up only about 3 percent. The big pot of clinical revenue doesn’t only support the practice of medicine, though; it also pays for education and research, meaning a shakeup in the clinical revenue stream can threaten an academic medical center’s entire tripartite mission.
The University of Virginia Medical Center spends more than $1 billion a year, accounting for not quite half of UVA’s entire budget. The Medical Center budget is growing—not just on its own, but also in relation to the rest of the University’s overall budget. In 2010-11, the Medical Center accounted for 41 percent of UVA’s spending; in 2012-13, that number is expected to be 46 percent.
As it planned its 2011-12 budget, UVA Medical Center was coming off two years of unprecedented growth in its operating margin—the amount it cleared relative to total revenues. That margin had been declining slowly but steadily over much of the previous decade, but it shot up from 4 percent in the 2008-09 budget year to north of 8 percent in 2010-11, significantly higher than the 5.5 percent nationwide industry aggregate calculated by an American Hospital Association Annual Survey for the same year.
But the Medical Center wasn’t able to keep up the trend. From 2010-11 to 2011-12, the its budget ballooned as half a dozen new treatment centers or major expansions, including the opening of the Emily Couric Cancer Center and the implementation of the hospital system’s new electronic medical record. The expansions fueled what was supposed to be evenly matched growth in costs and revenue of about 10 percent.
But expenses grew more than predicted—about 12 percent—and revenue fell short, growing less than 8 percent. As they crafted the 2012-13 budget—then-new Chief Operating Officer Michael Strine’s first—the University’s financial leaders were looking at a Medical Center that had quickly gained a much larger footprint and was still growing, but was facing the potential of a shrinking profit margin.
When the current University budget was released May 22, it projected growth of more than 4 percent, almost solely attributable to further Medical Center expansion. But the space between projected hospital revenues and expenses was again expected to shrink, narrowing the operating margin even more, to below 5 percent.
Less than a month later, President Teresa Sullivan was told to step down or be fired.