Unlocking the Potential of Academic and Community Health System Partnerships
Faced with increasing challenges to their business model, many academic medical centers (AMCs) are seeking new sources of financial and competitive advantage, including partnerships with community health systems.
October 2012 | by Robert Emmerich
Academic medical centers face numerous challenges today. Clinical margins are shrinking. Payors are creating networks favoring lower-cost providers. Community health systems are increasingly offering high-end services that threaten patient inflows. Education and research funding has declined. As a result, many AMCs are struggling to sustain the activities that have historically enabled them to fulfill their tripartite mission. To preserve these activities, AMCs are looking for new ways to improve their clinical margins. At the same time, they are seeking opportunities to improve outcomes and the patient experience in response to rising consumerism and value-based care trends.
Many AMCs have viewed increased scale as a way to pursue both goals. Although some AMCs have merged successfully with community health systems, there have also been a number of high-profile deals that went sour. An increasing number of AMCs, including MD Anderson and the Cleveland Clinic, have chosen instead to pursue non-M&A partnerships as a way to access some of the value drivers of scale without the complexities of full integration. In many cases, these partnerships have enabled the community health systems to attract new patients and allowed the AMCs to extend or protect their referral networks.
The flexibility that partnership permits provides important advantages for many AMCs, given the restrictions often imposed by their governance and ownership structures. It also allows the community health systems to avoid the added costs of an academic enterprise. Even these deals are not without risk, however. Some AMC–community health system partnerships were unsuccessful because the aspirations were too ambitious or the goals and value drivers were not clearly defined in advance. In other cases, the AMCs over-estimated the advantages they were bringing to their partners. With careful planning, these pitfalls can be avoided.
In this article, we describe the ways through which an AMC–community health system partnership can create value, the options for partnership structuring, and how the choice of value drivers should influence the structure. In addition, we discuss eight lessons AMCs should heed to ensure the best chance of success.
How Value Can Be Created
A partnership makes sense only when both sides can envision value creation above what either side could produce on its own. The value creation potential must also exceed the deal’s resource requirements and coordination costs, as well as the management and governance complexities that arise when a structural relationship with another entity is established. For each partner, the value ultimately created depends on the value drivers being pursued and the project’s scope, level of integration (e.g., joint venture versus affiliation), and transaction terms, including investment and resource commitments.
The traditional business case for scale relies primarily on economies that improve the cost base. However, our Smarter Scale Equation work has demonstrated that value creation can also result from economies of scope, structure, or skill. Simply put, well-constructed health system partnerships can create value in a variety of ways, including patient volume growth, per-case revenue growth, margin enhancement, and margin from new businesses. Many of today’s AMC–community health system partnerships focus primarily on economies of scope. The AMC gains access to new geographies and customer segments. The community health system can offer high-end services it might not be able to provide on its own, and can market itself using its partner’s brand.
However, economies of skill may come into play if the health system gains access to the AMC’s clinical protocols or other drivers of clinical differentiation. The growth orientation of this partnership model usually has a clear potential upside for both partners, and the need for complex management requirements may be minimal, depending on the nature of the partnership (e.g., co-branding versus joint venture). An example of this is MD Anderson and Cleveland Clinic's service line affiliations focused in oncology and cardiovascular services.
In other arrangements, the partners may achieve economies of structure if care integration increases their attractiveness to payors or employers, which could help bring new patients to the systems. In Pennsylvania, for example, Main Line Health and Jefferson University Hospitals have built a large account able care organization with a multi-provider collaboration that serves over 100,000 beneficiaries and manages public and private performance-based contracts. In some cases, an AMC-community health system partnership may be designed to achieve economies of scope, structure, and skill. In this type of arrangement, the AMC and community health system co-invest to build new or sustain existing, mutually beneficial delivery networks. In Houston, for example, Baylor and St. Luke’s (which is owned by Catholic Health Initiatives) are partnering to invest—sharing risk and reward—in a teaching hospital that would not have been as attractive an endeavor if either party had built it alone. Both sides profit from the revenues generated by employed physicians, hospitals, and other facilities.