US Academic Medical Centres 'Struggling' says McKinsey

McKinsey report reveals cost inflation is forcing AMCs to find operational efficiencies, or face cutting back on crucial training & education programmes

A McKinsey report says cost inflation and operational complexity are combining to leave US academic medical centres (AMCs) struggling to secure their long-term financial health.

The report – ‘Ensuring the financial sustainability of academic medical centres’ – says that, although most AMCs have grown substantially in the past five years, they “face many challenges in today’s fast-moving healthcare environment”.

Among these are:

  • Reimbursements rising at a lower rate than costs
  • A growing healthcare market meaning there is more care options for patients 
  • Increasing use of alternative care-delivery sites
  • Rising costs due to inflation
  • Chronic workforce shortages.

McKinsey says that of the 45 AMCs analysed, it found the median operating margin fell from 3.7% in 2017 to 1.5% in 2022. Rising expenses outpacing revenue growth is chiefly to blame, it says. 

McKInsey: AMCs need further $150mn in margins

The report points out that the average AMC with $7bn in revenue needs to generate an extra $150 million in margin just to return to pre-pandemic performance levels. 

AMCs play a critical role in US healthcare. Not only do they drive clinical innovation, but they also help train the next generation of clinicians and “provide high-quality care for complex patient populations in an educational setting”, the report says. 

There are an estimated 220 US hospitals that are classified as an AMC, with a further 1,300 considered to be teaching hospitals. 

In the summer of 2023 McKinsey surveyed 100 AMC leaders to learn about the financial challenges they face, and their response to mounting pressure to improve performance.

It says that although all 100 leaders report that their organisations have performance-based operational initiatives underway, most believe they need to go much further. 

Most (83%) of respondents identify clinician change-management as a important area for improvement, citing length of stay, physician productivity and operating-room utilisation as key metrics. 

Two-thirds of respondents expect the challenging conditions to persist.

McKinsey says financial pressure could have severe consequences for AMCs, saying 31% of respondents expect to have to cut funding for education and research over the coming next three years, “even though these functions are core to their missions”. 

McKinsey says that because of this, “enhancing operational efficiency is paramount for AMCs”. 

AMCs highlight operational areas to optimise

Other areas identified by AMC leaders as important to improved revenues include:

Workforce optimisation. Three-quarters (75%) report they are looking to optimise the number of workers employed in non-clinical roles, including human resources, finance and revenue management. 

Operational efficiency, including decreasing length of stay, increasing operating-room utilisation, improving patient engagement and boosting physician productivity

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

It adds that some AMCs’ performance transformation programs are already yielding positive results, with margin increases of between 5-8% over three years through a combination of cost savings and revenue growth. 

Cost-saving measures, it says, include improved efficiency and effectiveness of shared services such as IT and HR, and reduced spending on supplies and pharmacy services, through vendor consolidation.

Report co-author and McKinsey Partner John Schulz MD, says that AMCs whose transformation programs “meaningfully improved performance” share 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
  • A focus on culture and clinician change management

“Successful transformation efforts have also led to improved patient outcomes and enhanced the patient and workforce experience,” says Schultz, who leads McKinsey’s work on improving health-system clinical operations, focusing on innovative care delivery models, AI, advanced analytics, digital solutions, and transformational change.

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