Unlocking the potential of academic and community health system partnerships

| Article
Alex Harris Pooja Kumar, MD Saum Sutaria, MD
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. These arrangements can be difficult to structure, but eight lessons can help AMCs avoid pitfalls and maximize the odds of success.

Academic medical centers face numerous challenges today. Clinical margins are shrink-ing. Payors are creating networks favoring lower-cost providers. Community health  systems are increasingly offering high-end services that threaten patient inflows. Edu-cation 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 look-ing 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.1 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.2  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 pro-vides 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 struc-ture. In addition, we discuss eight lessons AMCs should heed to ensure the best chance of success. Greater detail on the rationale for AMC–community health system partnerships is presented in the sidebar on p. 8 of the attached PDF.

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 (e.g., inpatient only), 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, McKinsey’s Smarter Scale Equation work has demonstrated that value creation can also result from economies of scope, structure, or skill.3 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 (e.g., neurosurgery, cardiothoracic surgery), 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). And example of this is MD Anderson and Cleveland Clinic's service line affiliations focused in oncology and cardiovascular services, respectively.

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.4 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 coinvest 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.5 Both sides profit from the revenues generated by employed physicians, hospitals, and other facilities.

Another example is HCA’s investment in Tulane University Hospital in New Orleans.6 This arrangement bolstered the AMC’s financial security, while HCA gained prestige, market presence, and tertiary referral service.

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  1. Among the successful mergers are those undertaken by Johns Hopkins Health System and Partners Healthcare. Examples of unsuccessful mergers include those undertaken by Henry Ford-Beaumont, Hershey Medical Center-Geisinger, WellStar-Emory, and Jefferson-Main Line Health.
  2. McKinsey press search. Also, Levin Associates. Hospital Acquisition Report, 2015.  April 2015.
  3. Malani R, Sherwood A, Sutaria S. The smarter scale equation. The Post-reform Health System: Meeting the Challenges Ahead. McKinsey & Company. May 2013.
  4. Delaware Valley ACO website. Who we are. dvaco.org/about/.
  5. Williams L. Bold new alliance among Houston’s leading health care providers to  transform care delivery in  the region. Baylor College  of Medicine press release. January 7, 2014.
  6. Tulane Medical Center website. About Tulane Medical Center. tulanehealthcare.com.