- As the healthcare market continues its shift to value-based payment models, certain characteristics of academic medical centers that differentiate them from other types of providers and contribute to credit quality will also hinder their ability to change, a new Moody’s Investor Service report warns.
- The value-added expense of affiliation with a medical school and university, research capacity and high-end clinical care may be harder to defend to insurers looking for more cost-effective care delivery.
- To soften the impact of these challenges, AMCs may need to partner with community hospitals to build out local physician networks and diversify revenue streams, the report says, but such initiatives will also increase credit risk.
While financial pressures aren’t the only reason for pursuing new arrangements, they are a consideration in today’s value-based healthcare environment. Partnerships may help, but if payers lean hard, the industry could become increasingly difficult for AMCs.
Because they offer higher-end services, inpatient demand for AMCs will continue to outpace non-AMCs, even attracting patients from outside their immediate locale, Moody’s says. But that gap will shrink as both AMCs and non-AMCs transition more care to outpatient settings.
The more complex care AMCs provide requires them to spend more on medicines, medical devices and other supplies as a share of total revenues, the report also notes. Medicare case mix indexes also tend to be higher for AMCs than for non-AMCs — roughly 2 versus 1.6 in 2017 — suggesting a greater number of high-cost cases.
Beyond costs of caring for patients, AMCs face additional expenses related to teaching and research obligations, Moody’s says. For example, some AMCs such as Duke University Health System make sizeable payments to the schools that own or affiliate with them. AMCs that operate medical schools may face tight margins as well.
At the same time, in the past several years AMCs have had somewhat better operating cash flow margins than non-AMCs, but non-AMCs have slightly more cash on hand, according to Moody’s. “We anticipate that these trends will likely continue in an environment where full-risk value-based reimbursement models will take hold only gradually and AMCs can still leverage their unique characteristics,” the report says.
Moody’s gives only two AMCs a positive outlook: Shands Teaching Hospital and Clinics, Inc., in Florida, and University Hospitals Health System Inc. in Ohio.
Nine AMCs received negative outlooks, including University of Pittsburgh Medical Center, The University of Chicago Medical Center, Vanderbilt Medical Center in Tennessee and Thomas Jefferson University Hospital in Philadelphia. The remaining 32 in the analysis are deemed to be stable.
To offset all of these challenges and maintain a solid credit rating, AMCs could expand their physician networks by partnering with or acquiring community hospitals, the report says.
They could also look for opportunities to diversify their revenue streams and take advantage of federal purchasing programs like the 340B drug program and specialty pharmacy benefits, which can help to bolster operating income, the report adds. “For example, Fairview [Health Services in Minnesota] will continue to have material reliance on its highly profitable pharmacy division, which accounted for about 20% of its fiscal 2017 revenues,” the report says.