TRANSACTIONS OF THE AMERICAN CLINICAL AND CLIMATOLOGICAL ASSOCIATION, VOL. 107, 1995

FUNDING FOR THE COLLEGES OF MEDICINE:INTEGRATED DELIVERY SYSTEMS TO THE RESCUE

DONALD C. HARRISON and JOHN J. HUTTON and (by invitation)J. RANDOLPH HILLARD

CINCINNATI, OHIO

IntroductionIn 1995 colleges of medicine, as part of academic health centers, face

major threats of decreases in funding from all their traditional sources.In the past four decades, academic health centers have built them-selves into national and regional resources based upon multiple fund-ing streams. The growth in the budgets of their colleges of medicinehas been phenomenal, with increases in revenues from $889 million in1960 to a projected figure of more than $25 billion in 1995 (1). Theselarge revenues are from multiple sources but largely come from re-search and patient care revenues; however, they are necessary for thesurvival of the academic health centers as we know them (2-3).Support of undergraduate medical education is only a small part of

the overall costs of colleges of medicine. Thus, it is not surprising thatonly a small fraction of the total college revenues comes from tuition,at both public and private colleges, or subsidies, as is the case withstate-supported colleges of medicine (4). However, the true costs ofundergraduate medical education are not known, but are now underintense study (5,6). In the past, it has been assumed that much of theeducational costs have been borne by a cost shifting (5). In the 1960'sand '70's research revenues paid for faculty and resources that pro-vided much of the teaching in colleges of medicine. Numerous ration-ales were developed to justify this form of cost shifting. In the 1980'sand '90's, the funding of faculty and other costs of undergraduateeducation and unfunded research became more dependent on surplusrevenues from clinical care provided by faculty practice plans and withthe transfer of revenues from hospitals. Cost shifting of these funds topay the educational costs has permitted the massive growth of themedical faculty, especially in clinical departments.While research funds have continued to increase, and the NIH

expenditures in 1995 will exceed $12 billion, they have not kept pace

Address for reprints: Office of the Senior Vice President and Provost for Health Affairs,University of Cincinnati Medical Center, P.O. Box 670663, Cincinnati, Ohio 45267-0663.

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with research inflation. General research inflation index costs are twoto three times that ofthe growth in the CPI. These costs have increasedrapidly in the past 15 years. This has been largely due to increasedcompensation for researchers and staffand the costs necessary to meetextensive regulations governing research. Many of these, such as ra-diation safety, animal care, OSHA regulations, etc., not only expandthe cost of research, but expand the cost of even making applications.In addition, the demand for research funds has increased markedly asthe number of biomedical scientists in basic science and clinical de-partments has increased. Thus, cost shifting from research for educa-tion programs has become virtually impossible.During the past five years, a marked increase in managed care and

the capitated payments for medical services threaten the clinical in-comes and hospital viability of academic health centers (7). Thesechanges threaten cost shifting to support medical education in collegesofmedicine (8). The basic principle offunding health care expendituresunder managed care is to pay only for the cost of services provided topatients. HMO's seek the lowest cost and highest value for each ex-penditure in very competitive environments. In the case of investor-owned maintenance organizations and for-profit hospitals, the mostimportant element is the bottom-line profits. Academic health centersare increasingly omitted from managed care plans because of theirhigh cost and their organizational structures, which make the negoti-ation of cost-competitive contracts difficult. Thus, managed care plansthreaten both the financial stability of academic health centers, col-leges of medicine and the availability of patients for teaching clerk-ships, residency programs and clinical research (9, 10).These changes in research funding and the impact of managed care

on academic medical centers and colleges of medicine, at a time whenthere is inadequate funding for educational activities, pose a gravethreat for these national resources (10-11).

Responses by Colleges of Medicine to the Funding ThreatsBecause many academic health centers and colleges of medicine are

dependent upon clinical revenues for more than 60% of their totalbudgets, several models of response have developed to preserve theirfinancial viability (1). Colleges ofmedicine and their teaching hospitalshave taken three specific approaches (10).

First, a "do it alone" strategy. In these instances, an academic healthcenter attempts to create an integrated delivery system for a region,entirely encompassing its own facilities and staff. Second, academic

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health centers and their colleges of medicine join with communityhospitals and programs, either by hospital mergers or creating alli-ances with larger physician organizations, to create an integrateddelivery system for a region or a community. Over 400 such integrateddelivery systems have formed or are in the process of being formed.These integrated delivery systems, in some instances, encompass acollege of medicine. Third, the college of medicine may be separatedentirely from its university teaching hospital and the university hos-pital be sold to a for-profit company. These three models are thegeneral strategies being utilized by colleges of medicine to respond tothe threat of their core clinical funding.We at the University of Cincinnati College of Medicine have taken

the initiative using the second model to create The Health Alliance ofGreater Cincinnati (10). This followed a period from 1988 to 1993 inwhich we took the first approach of trying to "do it alone."

The Cincinnati ApproachAfter a year of strategic planning, in 1988 we undertook the creation

of our own integrated delivery system in a "do it alone" strategy (10).To accomplish this, we consolidated the department-based practicesinto the University of Cincinnati Medical Associates. This organizationbuilt a clinical practice building, established satellites in three subur-ban communities where physicians practice, and created an informa-tion system known as the Practice Management Information System,to encompass the data of all ofthe departmental practices. This systemprovided for central registration, scheduling, central billing, and majormanaged care modules. As a separate incorporated entity, we createdour own health maintenance organization, which had moderate suc-cess, growing to 53,000 members in a period of four years. However,since it was viewed competitively by other managed care companies inGreater Cincinnati, it resulted in their shifting contracts away fromour academic practice group and University Hospital, thereby puttingconsiderable pressure for patient volume on the University. In addi-tion, our very own HMO extracted major discounts from UniversityHospital and the University of Cincinnati Medical Associates, makingitself unpopular with both provider organizations. Since the organiza-tion appeared to be stymied in a growth beyond 53,000, and because itwas undercapitalized and plagued by high administrative costs, ourHMO was sold to Blue Cross Blue Shield of Ohio in 1993.An additional part of our "go it alone" strategy was to purchase

primary care practices, to create relationships with federally-

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mandated community networked clinics, and to create a network ofrural hospitals. We also gave more emphasis to primary care and mademajor reductions in the expense of University Hospital by downsizingour work force and reengineering our support services. Practice guide-lines, benchmarking, and major mechanisms to increase the value ofservices were instituted. Despite all of these steps, it was clear by 1993that we would not be able to develop a program to cover between750,000 and 1,000,000 lives which would be necessary to meet theeducational and research missions of the college and support thepractice of our specialists in clinical programs.

Therefore, in 1993 we searched for partners to develop a community-based integrated delivery system. In December, 1993, the UniversityHospital, a public entity, joined with The Christ Hospital, our majorcompetitor, and subsequently with the St. Luke Hospitals of NorthernKentucky to create The Health Alliance of Greater Cincinnati. In 1995,the two Jewish Hospitals of Cincinnati also joined the Alliance, whichnow represented 40% of the hospital beds in Greater Cincinnati. Asecond step involved bringing the physicians together in a linkednetwork of physician organizations. This process is ongoing, and theprimary care physicians are now being networked into a single orga-nization across the Alliance. Specialists are being linked through anindependent practice association. While the organization of physiciansis still somewhat chaotic, a governance structure has been put in place,and all physicians participating have permitted the Alliance to estab-lish capitated managed care contracts for the organization.

In order to operate effectively, the Alliance has brought together allbudget, all revenue, all expenses, all debt, and all hospital manage-ment into a new non-profit corporation. The Alliance combines allassets of its members except the ownership of its physical plants andequipment. Prior to the Alliance, each hospital was a not-for-profitentity with its own board of trustees. The University of CincinnatiBoard of Trustees governed the University Hospital, utilizing a Med-ical Center Committee. The Health Alliance of Greater Cincinnati hasa board of 20 voting members, four from each hospital, three repre-sentative physicians, one member at large and four ex-officio members,including the Dean of the College of Medicine, the CEO of the Alliance,the director of the physician organization, and the Senior Vice Presi-dent and Provost for Health Affairs. This corporate entity is responsi-ble for the operation of all hospitals. The Alliance is in the process ofcreating a patient-care information system which will function as asingle unit. The primary goal of the Alliance and its physician organi-zation is to create a health system to cover at least 1 million lives in

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Southern Ohio, Southern Indiana, and Northern Kentucky in thecapitated environment, which is developing.

Preserving the Educational Programs of the College ofMedicineThe need to preserve both a base ofpatients and a source offunds for

medical education and research was of major concern to us as weembarked on The Alliance strategy. For our purposes, we consideredundergraduate, graduate and continuing medical education to be im-portant. Major concern for reducing the clinical income to supportmedical education and research was raised early in our planning. Inthe initial discussions leading to a decision to form The Alliance,emphasis was continually placed on the importance of educatinghealth professionals. All initial discussions included the Dean of theCollege of Medicine and the Senior Vice President for Health Affairs.Our consultants strongly promoted medical education as a reason forother community hospitals to join The Alliance. We developed therationale for the College of Medicine to bring tangible assets to theAlliance (10).The following approaches were taken by the Dean of the College of

Medicine and the Senior Vice President for Health Affairs as thenegotiations progressed.

First, in all mission statements and in all of the goals and objectivesof The Alliance, medical education was made a core part of the discus-sion. Formal presentations were made to Board members and manag-ers participating in the negotiations, and careful analyses of educa-tional costs were begun by our College of Medicine. This process ofassessment continues.

Second, it was continually emphasized that medical education andthe College ofMedicine provided a unique and important advantage forThe Alliance as compared to other alliances in our area. The College ofMedicine provided the venue for training more primary care physi-cians in our area, where less than 20 percent of all practicing physi-cians are primary care physicians. It also provided a mechanism toretrain physicians to practice in the new environment ofmanaged care.The value of the Practice Management Information System data sys-tem of University of Cincinnati Medical Associates was an asset to theAlliance and its physician organization. This would be the core tocreate a management service organization.

Third, consultants supported the unique value of a college of medi-cine in The Alliance. Our consultant was APM.

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Strong support for this concept was developed, although the busi-nessmen questioned whether The Alliance could be successful in com-peting with other alliances when it had an added burden to supportmedical education. In the end, unanimous support was achieved forThe Alliance to include the College of Medicine.

Support for Medical Education in the Health Alliance ofGreater CincinnatiThe responsibilities of the College of Medicine within The Alliance

were well defined, as were the mechanisms for funding these respon-sibilities. A periodic review mechanism was also established. Throughthe Dean, The College of Medicine is responsible for undergraduatemedical education, graduate medical education, and continuing medi-cal education for the institutions in The Alliance. The governance ofUniversity Hospital was transferred to The Alliance, and the facultygroup practice was linked to The Alliance and the physician organiza-tion. This process is still evolving.We knew that this transition would create considerable uncer-

tainty and that the finances of the College of Medicine and thedepartmental budgets would undergo significant pressure because ofthe need for major cost reductions. Also, several specialty depart-ments would need to be downsized. As there were sizeable cashreserves to be combined from each of the hospitals, a decision wasmade to set aside a $60 million educational transition fund to sup-port these transitional changes as The Alliance and the physicianorganization became a reality. The principle and the interest fromthis set-aside fund could be used at the discretion of the Dean of theCollege of Medicine to support these transitional changes. This set-aside strategy was facilitated by University Hospitals bringing morecash to The Alliance than did the other hospitals and was used toequalize the contribution of others.For ongoing support, it was agreed that an assessment of up to 1.5

percent annually of the total revenue of The Alliance (nearly $900million annually), and upon any managed care contracts which TheAlliance brought to the physician group, would be levied to create aneducational fund. The Dean of the College of Medicine would providean annual budget for these funds. The CFO of the Alliance and theDean would revise the budget, agree upon it and present it to theFinance Committee for approval annually. These funds could not bereduced below the 1.5 percent level, except:

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1. If The Alliance failed for three successive quarters to achieve finan-cial viability, as measured by five indices which were established asmarkers of business success. If this occurred, the Dean would thenhave to take funds from the $60 million transition fund. Oncefinancial viability was again achieved by The Alliance, these fundswould be replaced.

2. After three years, the policy of this assessment for medical educa-tion would be reexamined, utilizing both the experience over threeyears and outside consultants to assess the sufficiency of suchfunding.

3. The Dean of the College of Medicine and the Senor Vice Presidentfor Health Affairs were instructed to develop a plan for appropri-ately sizing the residency training in The Alliance by June 30, 1996.As the revenue of the hospitals joined in The Health Alliance of

Greater Cincinnati is presently greater than $900 million annually,and will be further enhanced by income in physician practices, thismechanism could provide up to $13.5 million annually to supportundergraduate medical education if the Alliance is successful in themarketplace. Graduate medical education (GME) will be budgetedseparately and funded by GME through Medicare and Medicaid as ithas been in the past. The responsibility for graduate medical educationwas shifted from solely the University Hospital to The Alliance. As thephysician organization develops and its contract revenues increase,additional funds to support medical education could develop.Contingency plans are being established for funding the over 500

residents as we are faced with major reductions in graduate medicaleducation support and a need to downsize specialty residencies. Aspecial task force will complete an analysis by June 30, 1996. This willresult in a reduction in numbers and a more rational distribution ofphysician trainees to meet the needs of The Alliance and the Cincin-nati community.As the Alliance has become more established, and the competitive

atmosphere of Cincinnati's health care market has intensified, ques-tions have been raised about the viability of these assessments. Theboard has requested a cost accounting of the college's education activ-ities and more justification that expenditures will aid the Alliance.This opens the way for standards of cost effectiveness to be applied toour educational activities as they have to health care delivery. Thisopens the academic veil behind which our cost shifting for medicaleducation has occurred during the past 40 years. We will be requiredto account for our missions of education, research and patient careindependently. This will be exceedingly difficult, and we question

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whether or not this will be possible because of the overlap of thesemissions. However, it is certain that a new era has dawned on us.Challenges include the presence of large numbers of tenured faculty,an overabundance of faculty subspecialties, and a faculty union whichslows the pace of change.

Advantages and Disadvantages of the Alliance StrategyThe advantages of the Alliance to the University to date are: the

number of managed care patients who can potentially use UniversityHospital has increased from 85,000 to over 300,000; UCMA and Uni-versity Hospital have gained market share; we have won severalmanaged care contracts formerly unavailable; primary care physiciansare eager to join our network with a gain of more than 40 in the oneyear (we no longer purchase PCP practices); the risk of residencyprograms is now with the Alliance; and there is a broader base ofpatients for teaching and clinical research. There is also the potentialfor educational support for the College of Medicine, although shaky.The disadvantages of the Alliance are: a major loss of autonomy for

University Hospital and the faculty practice group; the diffusion ofUniversity expertise in data systems; guidelines for group practicemanagemnet and cost effectiveness across the Alliance; and the diffi-culties of bringing together the chaotic organization of University andcommunity physicians.

The Future for the College of MedicineThe question of funding undergraduate and postgraduate medical

education in the United States needs a major reconsideration and willno doubt be the center of a political debate (12). There is an absoluteneed for quantitative data now as a basis for the program changeswhich will occur. There are to be several options for support. Theseinclude a tax on all health care premiums to support the healtheducation program in the United States, a national resource whichprovided the best trained health professionals of any country in theworld. Such a tax would be on all providers and all insurers. Thisapproach has much to support it since the academic health centers area national resource; however, it has not been well received, in general,by either insurers or the buyers ofhealth care services, and present taxcode mitigates against it. In addition, it will be a challenge in acost-efficient health system to provide the patients needed for educat-ing the physicians of the future, the ambulatory and hospital sites fortraining them, and financial resources for their education. However, it

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is clear that major teaching hospitals have costs not borne by non-teaching hospitals, and these cannot be reduced to zero. Some federalor state subsidy must be provided to support clinical education andclinical research or academic centers will ultimately die. Based on ourexperience to date in convincing community leaders in Cincinnati tosupport our medical education mission, we remain cautiously optimis-tic that a federal/state/local partnership will evolve, be stable, andpreserve academic health centers, albeit in smaller and more efficientforms.

REFERENCES1. Association of American Medical Colleges. AAMC Data Book. Tables D2 and D3,

January 1995.2. Iglehart JK. Rapid changes for academic medical centers (Part Two). N Engl J Med

1995;332:407-411.3. Iglehart JK. Rapid changes for academic medical centers (Part One). N Engl J Med

1995;331:1391-1395.4. Iglehart JK. The American health care system introduction. N Engl J Med

1992;326:962-967.5. Ginzberg E, Ostow M, Dutka AB. The Economics ofMedical Education. Josiah Macy,

Jr. Foundation, 1995.6. Valberg LS, Gonyea MA, Sinclair DC, Wade J. Planning the future academic medical

centre: conceptual framework and financial design. Canadian Medical Association,1994.

7. Rogers MC, Snyderman R, Rogers EL. Cultural and organizational implications ofacademic managed-care networks. N Engl J Med 1994;331:1374-1377.

8. Blumenthal D, Meyer GS. The future of the academic medical center under healthcare reform. N Engl J Med 1993;329:1812-1814.

9. Rogers MC. How will health care delivery systems for the academic health centerchange in an era of reform? In: Snyderman R, Rogers MC eds. Proceedings of the1994 Duke Private Sector Conference: the Academic Health Center and Health CareReform. Durham, NC: Duke University Press, 1995.

10. Harrison DC. Network development. Presented at the University Hospital Consor-tium meeting. San Diego, California, January 5, 1995.

11. Kassirer JP. Academic medical centers under siege. N Engl J Med 1994;331:1370-1371.

12. Bulger RJ. Responding to incentives in academic health centers. Health Af(Millwood) 1992; 11(4):261-262.

DISCUSSIONJames Cerda, Gainesville I want to congratulate Cincinnati for forging ahead and

pressing on. One of the biggest problems that I see personally in being involved in thesame effort to a lesser degree in a smaller city such as Gainesville, is changing physi-cian's attitudes. I wonder whether you could share with us some of your thoughts interms ofwhat you are doing, particularly in the community academic health center typeof business?

Harrison I didn't stress it enough, but involving the physicians from the very

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beginning in this and not just your university physicians, but also the leadership ofyourcommunity hospitals is important. They formed a working group to try to pull thephysician organization together and brought representatives together and literally hadmeetings sometimes twice a week for several hours at night. There was then thistremendous effort to always take that back to the medical staff. There have been moremedical staff meetings over this last 18 months in these organizations than probably intheir last 10 years of history. It is so tremendously important to do that. We have alsocreated communication letters on a regular basis that go out to physicians trying to tellthem where we are in this. All of this is helpful, but it doesn't solve all the problems thatare ongoing with it.James Allen, Charleston Donald, I am going to ask you to expand on one area of

your talk that you mentioned only briefly. This relates to the interest of your Board ofTrustees in altering your system of education and research. Sitting now at an adminis-trative level on the private side, I believe we are trying hard to change all aspects ofwhatwe do: the performance ofour physicians, the way we deliver care, the way we charge forcare, the cost of that care. On the other hand we have a perception that you on theacademic side are making changes only to support the status quo in your education andresearch systems. We are aware of current AAMC initiatives to look into alterations ineducational process and you did mention your interest in that. You did mention yourinstitution's interest in such changes, but they did not appear in your current statusassessment. What is the status of that effort? What are you doing to make youreducation and research purposes more focused and more efficient?

Harrison I don't have a complete answer to that, but one thing we started in ourschool was to start a course on training the physicians, giving an educational componentto what managed care was going to be like in the future. We have a required course nowfor everyone to sort offigure out ifwe can teach how practice is going to change. Actually,it has been picked up by the newspapers in Cleveland. The Plain Dealer picks it uppretty well, but it never got picked up by our newspapers in Cincinnati, the fact that wehad such a course. Jim, I think the other important thing is that the finance committeeof this now larger organization is really looking at how many people we have in teachingvarious courses, how many specialists we have in the medical center. They are asking usto make major changes and I believe that change will come. Opening up this process ofwhat we do in the Academe will happen as one moves more and more into this kind ofcommunity. I don't have any specifics of how to do that, but I believe it will happen.

Stuart Bondurant, New York Don, having had the pleasure of visiting you nineyears ago when this was all getting started, and having watched over the years as youand John have made these things happen, I want to observe that your experience hasbeen a real contributor to the thinking of a lot of people in the country. You have beena pioneer in bringing these things off, but for that broader significance of what you allhave done, I just wonder if you would say that one of the stresses which is still in thesystem and which you didn't have time to mention, is that between the university andthe system. I wonder if you would comment on that because it has been troublesome ina lot of other places and particularly with reference (this is related now to Jim Allen'squestion) to the assurance of academic integrity by the governance of the system that isdevoted to more and broader purposes.

Harrison Stu, we thank you for all the help you gave us early on in the time we weregetting started with all this. I didn't have time to talk a lot about that, but at ouruniversity, we pulled purchasing away from the university. Until then, 60% of alluniversity purchasing was university hospital, and we now have consolidated that. Wehad to make a d6tente with the university and, in fact, we are paying a ransom for aperiod of time. We took a number of those employees with us, but we have a special

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committee set up of people from the alliance and the university, financial and otherwise,that is working on this process. We are just laying each one of them out, like separatingthe information systems and all of that. This relationship with your parent universitywill be a terrific problem. I see us continuing to buy some services from the university,but they will have to really be cost-effective when compared with where we can get themelsewhere, for us to be competitive. The university hospital cannot be, in fact, 20-30%more costly than the other hospitals in the system. That will lead to instability andultimately the dissolution of this kind of relationship. We are really having to work onthat. We have some state requirements in Ohio in terms ofbenefits costs which drive ourcosts about 35% higher than the benefits costs elsewhere. That is going to mean we aregoing to have to change where the university sits in the state system as well. In fact, Igo home to work on that one tomorrow. That is true of all three state-owned hospitals inOhio. Last week the Deans and Vice Presidents of those organizations had a meeting inColumbus to talk about that; so it is going to be a big issue for us.

Stein, Rochester, NY Many in the room are trying to put such a system together.Two questions: it wasn't quite clear to me what the relationship of the CEO of theintegrated system is to you, the Dean, the university, and how the Board is chosen. Weare finding that to be very interesting and very important in the whole thing. Secondly,I noted that you have had six or seven successful contracts. How do you deal with the costof graduate medical education, etc. in trying to be competitive with the rest of the folksthat are out there?

Harrison The answer to the first question is that John and I are both on that Board.The Board is chosen in this case from 16 members to be chosen from the 4 hospitals thatstarted this. There will be 3 physicians from at large, one university-based, one com-munity-based, and one primary care-based. There will be an at large member. We arenoticing now, after two years of working, that many of these Board members arebeginning to think like alliance and not of the hospital they represent. I personallywanted a Board of all community people and not representatives from the other hospi-tals. That just would not fly. I pushed hard for that, our consultants pushed hard for it,but it would not fly. In time we are seeing that they work that way. John Hutton and Imeet with the CEO ofthe system and the physician on a regular basis. I didn't have timeto talk about how we operate, but we have a management council that is operating this.Both John and I are on that and we attend those meetings and participate fully. Fromthat standpoint we still have a big input. I'm Vice-Chairman of that Board and I becomeChairman of it this next year in May for a three-year period. Hopefully as Chairman ofit, by the time I leave we will have shaped it so it has major academic input andinfluence.

Nicholas Fortuin, Baltimore I wonder ifyou could elaborate on the concept ofwhatyou called "right sizing" which I think is a euphemism for down sizing. You mentionedthe large size of the faculty and then thrown into that mix would have to be a certaindisadvantage with regard to efficiency which academic faculty have in competition. Thatmust be one of the hardest parts of your job: how to get that mix right. Do you have anycomments about how you do that or what you are in the process of doing in that regard.

Harrison Give me about two more years and John Hutton or I will make a presen-tation on that at this meeting. I just don't know quite how we are going to go about that.Thank you.