Ensuring the financial sustainability of academic medical centers

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Academic medical centers (AMCs) 1 play a critical role in US healthcare by fueling clinical innovation, training the next generation of clinicians, and providing high-quality care for complex patient populations in an educational setting. Most AMCs have grown substantially in the past five years. According to our analysis of the financial statements of 45 leading AMCs, median operating revenue increased from $4.4 billion to $6.9 billion (57 percent) from 2017 to 2022, while national health expenditures for hospital care increased by only 26 percent during this period.2

This high growth, however, has come with a sizable increase in operational complexity. AMCs face many challenges in today’s fast-moving healthcare environment, including reimbursements rising at a lower rate than costs, more care options for patients given new market participants, increasing use of alternative care delivery sites, rising costs due to inflation, and chronic workforce shortages.

As a consequence of these challenges, the financial performance of AMCs has declined. For the 45 AMCs analyzed, median operating margin fell from 3.7 percent in 2017 to 1.5 percent in 2022 as rising expenses outpaced revenue growth (Exhibit 1). The average AMC with $7 billion in revenue would need to generate an incremental $150 million or so in margin just to return to prepandemic performance levels. For the 35 percent of AMCs with negative operating margins in 2022, the deficit is likely even larger.

Despite continued revenue growth, academic medical centers saw margins fall to 1.5 percent in 2022.

We surveyed 100 AMC leaders in the summer of 2023 to understand the implications of their fiscal challenges and learn about their responses to mounting pressure to improve performance.3 All 100 leaders reported that their organizations have performance-based operational initiatives under way; however, 88 percent believe they have substantial opportunities to go further. In particular, 83 percent of respondents identified untapped opportunities in areas involving a high degree of clinician change management, such as length of stay, physician productivity, and operating-room utilization. Additionally, most respondents expect their challenges to persist. Sixty-six percent expect margins to remain the same or decline over the next year, and less than half (48 percent) expect to see higher margins in three years.

This financial pressure could have severe consequences for AMCs. For example, 31 percent of respondents anticipate a need to decrease funding for education and research in the next three years, even though these functions are core to their missions. In this environment, enhancing operational efficiency is paramount for AMCs. This article identifies several areas of focus that could help AMCs improve operational efficiency and enable reinvestments in their missions.

Operational areas for improvement

Our survey results reveal that AMC leaders recognize the need for improvement and have identified efficiency as a near-term area of focus, while also acknowledging a wide range of other opportunities. Specifically, they point to potential for improvement in areas in which clinician engagement is required.

Surveyed AMCs shared that they are taking a number of actions to ensure financial sustainability and maintain support for their missions, which encompass excellence in care delivery, education, and research.

Workforce optimization. Seventy-five percent of survey respondents reported they are striving to optimize the number of workers they employ in nonclinical roles (for example, in human resources, finance, and revenue cycle management). One-third of respondents reported they are working to ensure they have the right number of clinical staff across sites. At the same time, systems are focusing on efforts to enhance workforce satisfaction and well-being to strengthen attraction and retention.

Operational efficiency beyond labor. Our survey reveals that AMC leaders are pursuing operational improvements across a wide range of functional areas (Exhibit 2). Nearly all respondents (97 percent) are pursuing improvement initiatives in at least ten of the 20 performance areas assessed. Clinical operations—for example, decreasing length of stay, increasing operating-room utilization, improving patient engagement and experience, and boosting physician productivity—and revenue yield management (with a focus on revenue cycle management and payer contracting) topped the list of targeted performance areas.

Patient length of stay and revenue cycle management are the top performance areas that leaders of AMCs are continuing to pursue.

Improvement in clinical operations. Survey respondents believe they have substantial opportunities to improve the efficiency of their clinical operations (Exhibit 3). Specifically, they identified patient length of stay and physician productivity, with an emphasis on physician satisfaction, as the two areas with the greatest potential for improved performance. Interestingly, more respondents chose these two clinical opportunities over other options even though they are already pursuing them (unsuccessfully), which demonstrates the difficulty of achieving these clinical performance goals.

Two-fifths of respondents to our academic medical center survey see length of patient stay as the top untapped margin improvement opportunity.

Despite substantial opportunity and some prior success in areas prioritized for improvement, few AMCs are expanding these efforts. Less than a quarter of respondents said they are increasing their focus on achieving goals in the top areas they identified. For 70 percent of respondents, the top reasons for not pursuing performance efforts included insufficient leadership time to drive change and the degree of physician change management required.

Survey respondents believe they have substantial opportunities to improve the efficiency of their clinical operations.

For some AMCs, performance transformation programs are yielding positive results

Notwithstanding the current fiscal reality and the survey results, AMC leaders have cause for optimism. In recent years we have seen some AMCs—ranging in size from relatively small (less than $2 billion in revenue) to quite large (more than $10 billion)—successfully pursue large-scale performance improvement programs with a holistic and structured approach. These efforts include initiatives in areas in which they have historically struggled to achieve their goals and where extensive clinical change management was needed.

On average, these AMCs have realized margin increases of 5 to 8 percent over three years through a combination of cost savings and revenue growth, according to McKinsey analysis. Cost-saving actions have included optimizing the number of nonclinical and clinical staff based on patient volumes, enhancing the efficiency and effectiveness of shared services such as IT and HR, and reducing spending on supplies and pharmacy services through vendor consolidation and improved utilization management.

Simultaneously, they have successfully pursued a variety of opportunities for revenue growth:

  • growth operations (for example, attracting more patients with a digital front door and strengthening care coordination for referrals)
  • physician capacity and productivity (for example, increasing physician capacity to serve more patients by reducing the administrative burden and optimizing use of clinical support staff)
  • clinical operations (such as reducing length of stay and improving operating-room throughput)
  • revenue yield (for instance, optimizing documentation and coding, and renegotiating contracts with payers)

In our experience, AMCs whose transformation programs meaningfully improved performance shared several common characteristics: a CEO willing to set a high aspiration, a leadership team aligned on pursuing a holistic set of actions, a structured approach to identifying and implementing opportunities, and a focus on culture and clinician change management throughout. Successful transformation efforts have also led to improved patient outcomes and enhanced the patient and workforce experience.

Case examples of AMC clinical-performance improvement

AMCs have demonstrated the potential to meaningfully improve in clinical operational areas.

Length of stay

An AMC with more than 700 beds ranked in the bottom half of its peer group for patient length of stay despite robust analytics, substantial leadership investment over several years, and dozens of ongoing initiatives. Hospital leaders generally understood the bottlenecks in patient throughput and what needed to change, but they had been unable to implement these changes for a variety of reasons—including lack of alignment among clinical leaders, insufficient business case development to justify increased investments in resources, and suboptimal prioritization of initiatives.

The AMC embarked on a structured yearlong effort to improve length-of-stay management—starting with an analytical approach to determine the relative value of each factor influencing length of stay—and prioritized the highest-value opportunities. Leaders initially generated momentum by implementing a handful of “quick wins” that required minimal behavioral change from clinicians. These changes included expanding capacity for weekend services, creating a team to assist with complex patients who have longer stays, and announcing their intent to expand care-coordination resources. In parallel, they devised plans to optimize clinical workflows and address more challenging opportunities, including setting expectations with clinicians for consult turnaround times, co-locating care teams to enhance the efficiency of multidisciplinary care and communication, and expanding post-acute capacity. They also sought to enhance the performance management infrastructure—for example, by adding the ability to track length of stay in real time for patients still in the hospital and by setting weekly unit-level goals.

As a result of the changes, the AMC reduced average patient length of stay by 13 percent, enabling a 10 percent increase in admissions. Notably, it achieved these results while also improving clinician satisfaction. For example, co-location of care teams helped reduce the time required for rounds by nearly an hour for certain resident teams who no longer needed to work across multiple floors and buildings to see all their patients (each with a separate set of nurses).

Physician productivity

At an AMC with more than 1,500 physicians in its faculty practice, new patients waited more than four weeks for an initial appointment across most specialties, and physician productivity fell below the 50th percentile when benchmarked against peers. Leaders recognized the need for improvement and had previously set a goal to reach the 75th-percentile productivity benchmark, but prior attempts to standardize clinical expectations had been met with resistance from physician leaders. For example, the AMC created standard policies for clinic template management and invested in technology solutions to support those policies, but only a few departments successfully rolled them out; others resisted the change.

As part of a structured, multiyear transformation program across the health system, leaders took a new clinician-led approach to improve outpatient operations. Rather than simply asking physicians to work harder to improve productivity and access, they sought to improve the clinical-care model to ensure that all team members could work at the top of their licenses (perform work that requires the full extent of their education and training) with the ultimate goal of expanding access for patients. Each department prioritized a handful of initiatives to boost physician efficiency (for instance, adding clinical support staff or using virtual scribes) and created business cases explaining the benefits of their changes to the system. Departments also developed implementation plans with clear timelines, owners, and metrics to monitor progress. In parallel, leaders set consistent expectations for use of clinic templates, reinforced full-time-equivalent allocation policies to ensure physicians were dedicating sufficient time to clinical work, and linked hiring of additional clinical support staff to adherence with groupwide standards.

As a result, the AMC increased faculty physician productivity by approximately 25 percent over a two-year period and reached the 75th-percentile benchmark. In addition, access to care improved within the community. To sustain the change, leaders instituted an effective governance and accountability structure, including implementing new, user-friendly performance management dashboards to provide transparency across the organization.

Clinician change management as a critical enabler

Clinician change management is crucial to success in holistic performance transformations. It is also a muscle that most AMCs need to strengthen to improve and sustain their financial health for the future. We often hear from AMC leaders about the difficulty of effectively engaging clinicians and realizing value from performance improvement efforts that require changes to clinical workflows, including reducing length of stay, consolidating surgical-supply vendors,4How health systems can effectively engage clinicians on procurement,” McKinsey, April 13, 2023. improving operating room throughput, and expanding patient access to outpatient services.

We have identified seven elements that are associated with successful clinician change management programs.

A patient-centric rationale. The case for change matters. We often see executives focus on the potential financial value associated with reducing length of stay or increasing physician productivity; however, this reasoning can ring hollow for clinicians and team members. In comparison, leaders who emphasize improving capacity and care access within their communities have more success aligning clinicians and other stakeholders on the overall goal, even though the underlying tactics and potential financial impact remain the same. For example, the AMC that increased physician productivity by 25 percent focused its efforts on reducing patient wait times rather than on improving physician productivity.

Clinician-led initiatives. Individual physicians, nurses, and other clinicians are optimally situated to identify improvement opportunities and to help design and implement sustainable solutions to address them. Too often, administrators lead efforts and direct clinicians (with or without their input) on what and how to change. Successful AMCs have found that enlisting clinicians to lead or co-lead specific initiatives increases the odds of success and energizes other clinical staff affected by the change, thus speeding up implementation time and helping sustain the change. For example, a work group led by physician leaders helped define new goals for inpatient-consult turnaround times as a way to help reduce length of stay. All department chairs approved the change and made it a new policy.

An analytical approach to identifying opportunities. Improving clinical operations is highly complex and multifactorial. For example, many AMCs have dozens of initiatives designed to decrease length of stay for inpatients. However, in most cases, much of the potential impact is driven by a select few, which differ from one facility to another across the system. For example, expanding weekend capacity for ancillary services may reduce length of stay by 5 percent at one hospital but less than 1 percent at another. Instead of pursuing every opportunity at all facilities, leaders at each facility could identify the five to ten initiatives that would most effectively reduce length of stay and dedicate their time to ensuring those are successfully implemented. Taking time up front to conduct a rigorous diagnostic of factors influencing length of stay at each facility can help save substantial time throughout implementation and increase the likelihood of success.

Care model redesign to make everyday life easier for clinicians. Physicians, nurses, and care team members have intense, stressful jobs providing high-quality care for ailing patients and their families, particularly at AMCs, given the prevalence of complex cases. Moreover, they are also often tasked by leaders with additional operational responsibilities and goals to achieve. Simply asking clinicians to be more productive or reduce length of stay is neither helpful nor effective. Instead, successful AMCs achieve their operational objectives while also making the everyday lives of clinicians easier. For example, as noted in the physician productivity case study, one AMC redesigned inpatient units to co-locate care teams so that attending physicians would have their respective patients located on one unit, saving physicians time spent walking across units, floors, and potentially buildings to see their patients or speak with nurses who are staffed to a specific unit. A willingness to redesign care models and invest in change is crucial.

Willingness to invest. In most cases, care teams lack the resources they need to operate at peak efficiency. Investing in new technology solutions, clinical support staff, equipment, and facilities could help clinicians consistently work at the top of their licenses. These investments can have a positive ROI while also improving patient care and the experience for patients and employees. Too often, leaders shy away from making meaningful investments in these areas or invest based on opinions rather than facts. Instead, they could develop business cases during the initiative development phase for investments and use them to set priorities based on need and potential value of impact. For example, one AMC invested substantially in clinical support staff to improve physician productivity and realized a net margin increase because of growth in patient volumes supported by expanded physician capacity.

An effective governance and accountability structure. Operational change in clinical settings is complex and involves multiple stakeholders. Establishing a structured approach to governance and accountability is necessary to facilitate decision making, remove barriers, and hold leaders accountable; data transparency is a key enabler.

For example, to improve outpatient access and physician productivity, as noted in the case study above, one AMC asked clinical departments to develop a series of initiatives to achieve their goals. Each initiative was tracked in a central system—with clear actions, timelines, owners, and metrics to monitor performance—that was accessible by leaders across the health system to promote joint accountability.

Alignment of incentives. AMCs struggle with clinician engagement in part because incentives are misaligned. Incentives to encourage clinical excellence can take many forms, including recognition among peers, performance transparency, department-level investments, annual reviews, increased research funding, and compensation. However, academic faculty are often promoted on the basis of their research contributions, not their clinical or operational excellence.5 Some AMCs tie a portion of compensation to physicians’ clinical productivity, but it is often a fraction of their overall compensation, which is largely fixed. Less than half of AMC respondents surveyed (41 percent) offer financial incentives to individual physicians. Slightly more (49 percent) reported success offering financial incentives to clinicians at the department or service line level. Other survey respondents reported effectively engaging stakeholders across disciplines by offering shared performance incentives for clinical and nonclinical staff tied to overall facility or system goals.

Although financial incentives are one option for motivating change, they are not required for success and may be impractical for some operational-improvement areas, such as reducing length of stay, which depends on many factors beyond the control of a single physician. In fact, 77 percent of AMC leaders surveyed said performance transparency (with comparisons among peers) was among the most effective strategies for influencing physician behavior; several respondents noted physicians do not want to fall into the bottom half of their peer group.

AMCs play a vital role in healthcare delivery, education, and discovery, and improving their operational effectiveness is crucially important to the healthcare system overall. By taking a holistic and structured approach to performance transformation, AMC leaders can ensure financial sustainability for generations to come, and continue to improve care access, quality, and outcomes.

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