Senate Joint Resolution (SJR) 464, approved by the 1999 General Assembly, directed the Joint Commission on Health Care (JCHC) to study the financial and operational challenges facing academic health centers ( AHCs) in Virginia. Specifically, SJR 464 directed the Joint Commission on Health Care to examine: (i) key financial and operational issues that impact the short-term and long-term viability of the academic health centers; (ii) the actions taken by the academic health centers to respond to these financial and operational issues; (iii) the financial and operational conditions of the Commonwealth's academic health centers relative to that of academic health centers in other states; and (iv) key policy decisions and other actions that the academic health centers and the Commonwealth can take to ensure the long-term viability of the centers.

Based on our research and analysis during this review, we concluded the following:

• Academic health centers (AHCs) are affected by a number of marketplace changes that have occurred in recent years, including changes in reimbursement methodologies, increased managed care penetration, increasing numbers of uninsured persons, and the Balanced Budget Act (BBA) of 1997.

• The impact of the BBA has been substantial due to significant cuts in provider reimbursement under Medicare. For Virginia's AHCs, the BBA impact is substantial; for example, the University of Virginia (UVA) and the Medical College of Virginia (MCV) estimate the impact of the BBA provisions to be nearly $100 million at each institution over a 5-year period. One of the hospitals affiliated with Eastern Virginia Medical School (EVMS) estimates the impact to be $50-$100 million over the same 5-year period.

• Several AHCs across the country are facing financial crisis, including Allegheny Health System in Western Pa.; University of Pa. Health System; UCSF/Stanford; Massachusetts General Hospital; and Georgetown University.

• The most significant financial issue facing Virginia's three AHCs is the cost of unreimbursed indigent care. In FY 1998, this amounted to $32.6 million for VCU, $14.3 million for EVMS, and $12.8 million for UVA. All three AHCs indicated that full funding of these costs is the most important action the Commonwealth could take to ensure their future financial viability.

• Funding of undergraduate medical education is another critical issue. The State Council of Higher Education for Virginia (SCHEV) adopted a policy that the Commonwealth should pay 50% of the direct cost of education for in-state students and 100% of the indirect costs for all students. MCV indicates that an additional $5.2 million is needed to fund the SCHEV guideline; EVMS indicated that $1.9 million is needed. UVA indicated that, under the current SCHEV guidelines, one could argue that the formula is funded; however, UVA suggested a different funding formula.

• Each of the AHCs also indicated that state funding of medical research is critical. EVMS suggested establishing a pool that all three AHCs could tap into to bring eminent researchers and programs to Virginia. UVA stated that without additional facilities they will have to turn down grants to conduct research.

• Medicaid managed care penetration presents a challenge for the AHCs, particularly MCV. Maintaining Medicaid patient days is critical to the AHCs because it drives the amount of disproportionate share hospital (DSH) funding and enhanced DSH payments which are important funding sources.

The AHCs' greatest concern is being excluded from future Medallion II provider networks. Three potential actions to help ensure the AHCs retain their Medicaid patient base were identified: (i) directing the Department of Medical Assistance Services (DMAS) to include a provision in their Medallion II HMO contracts requiring the HMOs to include the AHCs in their provider networks; (ii) directing "default" enrollee assignments to the HMO with the highest percentage of AHC admissions; and (iii) providing "most favored nation" reimbursement to the AHCs. DMAS expressed serious concerns regarding the impact these potential actions could have on the Medicaid program.

• "Selective contracting" by managed care organizations (MCOs) also was identified as a concern by the AHCs, primarily MCV. Last year's SJR 108 study found that most MCOs "carve out" certain services and do not contract with the AHCs for these services. MCV's concern is that this practice not only reduces patient revenues, but also limits the clinical training that is provided to students. MCOs indicate that they contract with all hospitals in a similar fashion and often have an exclusive contract with a certain hospital or health system to provide specific services.

• MCV recommended that MCOs participating in the state employees' health benefits program be required to include the AHCs as "fully participating" providers in products offered. An alternative would be to require the MCOs to include the AHCs only in those products offered to state employees.

The Department of Personnel and Training voiced two concerns with this proposal: (i) the potential impact on the cost of the program, and (ii) the potential that some MCOs will be less inclined to participate in the program. MCOs expressed concern that such a requirement would affect their ability to form cost-effective networks. Other providers also expressed concern that such an approach gives a competitive advantage to the AHCs, and limits their ability to be included in these same networks.

• In addition to the concerns regarding unreimbursed indigent care and undergraduate medical education, the AHCs were asked to identify other key financial and operational issues affecting their future viability. EVMS noted the following: ( i) the impact of the BBA, (ii) lack of enhanced DSH payments for its affiliated hospitals; (iii) the cost of providing air ambulance service in Hampton Roads; and (iv) the need for enhanced AHC research.

• UVA identified the following specific issues: (i) adequacy of state funding for medical research; (ii) the need for UVA to retain and invest the interest on its daily cash balances; (iii) the ability to opt-out of VRS benefits for AHC employees; and (iv) the need to provide flexibility in salary administration for certain medical school employees rather than mandated across-the-board salary increases.

• VCU identified the following critical issues: (i) the potential of being left out of managed care networks serving state health programs; (ii) the need for additional autonomy from processing financial transactions through the state system, mandated salary increases and certain benefit programs; and (iii) the need to streamline the reimbursement and approval process for acquiring equipment through the Higher Education Equipment Trust Fund.

As part of the research for SJR 464, each AHC was asked to prepare a response to a series of questions from JCHC staff. The AHCs provided detailed information regarding their operations, financial viability, and other aspects of their institutions that was used extensively in preparing this report. It is also noted that, as part of the research for this review, Commission members, other interested legislators, and JCHC staff conducted site visits to all three academic health centers in the Commonwealth.

A number of policy options were offered for consideration by the Joint Commission on Health Care regarding the issues discussed in this report. These policy options are listed on pages 43-45.

Our review process on this topic included an initial staff briefing which comprises the body of this report. This was followed by a public comment period during which time interested parties forwarded written comments to us regarding the report. The public comments provide additional insight into the various issues covered in this report.