The University of California’s five academic medical centers need to pick up the pace in their working together as a system to improve quality and reduce costs.

That’s the message UC Health Senior Vice President John Stobo delivered to UC Regents at their May 15 meeting in Sacramento.

With reimbursement for clinical services under enormous downward pressure, decreasing the costs associated with providing those services is critical, Stobo said. Without action, UC medical center expenses are projected to exceed revenues in 2017. That would have a significant effect on UC Health: The financial success of UC medical centers helps sustain UC Health’s three-part mission of clinical care, research and education, including pivotal support to UC’s medical schools.

“While each medical center needs to do what it can individually to contain costs, only by working together and leveraging the scale we have as a system can we collectively contain costs to adjust to the decreases in revenue,” Stobo said. “It’s time for us to look at a new model.”

A new model

Dr. John Stobo

Dr. John Stobo, senior vice president, UC Health

Hospitals traditionally have relied on volume-based growth for profitability — that is, they were paid more for doing more, Stobo said. With health care reform, the focus is shifting to value. The hospitals that do best on quality, prevention and collaboration are the ones that will succeed in the future. UC has done well under that first model, but it needs to move quickly to position itself for this new reality.

“I’m convinced that we need to move from a volume-based to a value-based model in which we’re not the sum of five individual medical campuses, but we act as an integrated health system,” Stobo said.

UC’s five academic medical centers — Davis, Irvine, UCLA, San Diego and San Francisco — already have started on that path through joint contracting, group purchasing and quality improvement projects.

In March, UC announced a “Leveraging Scale for Value” project to reduce costs at UC hospitals. In 2010, UC created a Center for Health Quality and Innovation to support innovations at UC medical center campuses and hospitals that seek to achieve the “triple aim” of better patient care and better population health while better controlling costs of care. The center, which held its third colloquium May 2, has funded about 50 grant and fellow projects from throughout UC Health and convened systemwide collaborations from fetal treatment to heart surgery.

Staying ahead

Regents praised UC’s efforts to be proactive and deal with the issue before it becomes a crisis.

“It’s gratifying to see that you are ahead of the curve,” Regent Sherry Lansing said. “The culture has changed, and we will maintain the quality and profitability.”

UC’s five academic medical centers had combined revenue of $7.5 billion in 2013. Add in the impact of UC’s 17 health professional schools, and UC Health accounts for nearly half of UC’s overall budget.

UC medical center revenue has increased steadily in the past five years, rising from $5 billion in 2008, but that pace is not expected to continue amid declining reimbursements for clinical services. Meanwhile, costs are rising at an unsustainable rate, putting more pressure on UC Health to act so it can continue to meet its three-part mission, Stobo said.

Much is at stake. UC’s academic medical centers play a critical role in the community, providing $444 million of charity care, 50 percent of California’s transplant surgeries and 25 percent of the state’s extensive burn care. UC’s medical centers also are vital to UC’s research efforts and provide significant support to other UC entities such as its medical schools — more than $900 million in 2013.

“It’s a big challenge,” Stobo said.

Leveraging scale

The Leveraging Scale for Value project will be overseen by a UC Health Shared Services Management Council made up of the five UC medical center CEOs, three medical school deans, two chancellors, one regent, three external expert advisers and Stobo.

The project initially aims to save in the range of $100 million to $150 million a year by collaborating on supply chain, revenue cycle and clinical laboratories. Along with maximizing efficiencies in those three initiatives, UC Health will need to address additional areas such as information technology and human resources to take $900 million out of its costs by 2020, Stobo said.

Gov. Jerry Brown said he viewed those cost strategies “with trepidation,” pointing to the challenges the state is facing with increased Medi-Cal enrollment.

Stobo noted that other large health systems have had success in leveraging their scale to reduce costs, and so too must UC Health.

“We’re serious about this issue of making sure our expenses don’t outstrip our revenues,” Stobo said. “The incentive is, if you don’t change, you go away.”