Article

Challenges of Becoming a Regional Referral

System: The University of Kentucky as a
CaseStudy
Robert L. Edwards, MBA, Richard P. Lofgren, MD, MPH, Mark D. Birdwhistell, MPA,
James W. Zembrodt, MBA, and Michael Karpf, MD

Abstract
The U.S. health care system must change
because of unsustainable costs and limited
access to care. Health care legislation and
the recognition that health care costs
must be curbed have accelerated the
change process. How should academic
medical centers (AMCs) respond? Teaching
hospitals are a heterogeneous group,
and the leaders of each must understand
their institutions goals and the necessary
resources to achieve them.
Clinical leaders and staff at one AMC, the
University of Kentucky (UK), committed
to transforming the AMC into a regional

Editors Note: A commentary by R. Azziz appears

on pages 208211.

he health care system in the United

States must change because costs are
rising at an unsustainable rate and
access to care continues to be limited.1,2
The implementation of the major
components of the Patient Protection and
Affordable Care Act and the emerging
consensus that the cost of health care

Mr. Edwards is director, Strategic Initiatives, UK

HealthCare, Lexington, Kentucky.
Dr. Lofgren is senior vice president and chief
clinical officer, UHC, Chicago, Illinois.
Mr. Birdwhistell is vice president, Administration
and External Affairs, UK HealthCare, Lexington,
Kentucky.
Mr. Zembrodt is director, Strategic Planning
and Decision Support, UK HealthCare, Lexington,
Kentucky.
Dr. Karpf is executive vice president, Health Affairs,
University of Kentucky, Lexington, Kentucky.
Correspondence should be addressed to Dr. Karpf,
Office of the Executive Vice President for Health
Affairs, 900 South Limestone, 317 Wethington
Building, Lexington, KY 40536-0200; telephone:
(859) 323-5126; e-mail: mkarpf@email.uky.edu.
Acad Med. 2014;89:224229.
First published online December 19, 2013
doi: 10.1097/ACM.0000000000000114

224

referral center. To achieve this goal, UK

leaders integrated the clinical enterprise,
focused recruitment on advanced
subspecialists, and initiated productive
relationships with other providers.
Attracting adequate numbers of
destination patients with complex illnesses
required UK to have a market space
of five to seven million people. The
resources required to effect such progress
have been daunting. Relationships with
providers and payers have been necessary
to forge a network. These relationships
have been challenging to establish and
manage and have evolved over time.

Most AMCs are not-for-profit public

good entities that nevertheless exist in
an industry driven by competition in
quality and cost, and therefore scale
and access to capital are paramount.
AMC leaders must understand their
institutions as both part of an industry
and as a public good in order to adapt
to the changing health care system.
Although the experience of any
particular AMC is inherently unique,
UKs journey provides a useful case
study in establishing institutional goals,
outlining a strategy, and identifying
required resources.

must be addressed have accelerated the

pace of change. The central force shaping
the direction of these changes is clearly
emerging: value. The health care system
will be value based, and providers will
be expected to deliver cost-effective,
high-quality outcomes. To transition to
this value-based system, most experts
agree that the system must move from the
current fee-for-service reimbursement
model to another approach that shifts
risk to providers.3,4

competition for market space in order to

support their clinical programs. Finally, a
limited number of AMCs are positioned
as national providers and will have to
attract patients from across the country
and beyond. AMCs in the last two
categories are usually research-intensive
institutions. The perceived role of each
AMC will inform its strategic initiatives
and, consequently, define its resource
needs. AMC leaders, including those
of large regional referral centers, must
explicitly set their goals and determine
whether their ambitions for their
institutions are feasible.

How should academic medical centers

(AMCs) respond? AMCs (defined here
as the college of medicine [COM],
the faculty practice plan, ambulatory
services, and the hospital) constitute
a heterogeneous group. Some are
predominantly safety net providers, and
these must prepare for the expansion
of Medicaid and premium-supported
insurance coverage by protecting their
patient base. Others are predominately
community providers, and their major
concern throughout health care reform
will relate to potentially increased
demand for general and specialty care.
Still other AMCs aspire to be regional
providers that emphasize subspecialty
destination services (i.e., advanced
clinical services for complex patients),
and these will likely face increased

One AMC, the University of Kentucky

(UK), has tried over the last decade to
establish itself as a research-intensive
AMC that serves as a regional referral
center for destination services.5
The journey has been difficult and
expensiveand is not yet complete. We
propose that the lessons and insights we
have gained from UKs experience might
aid other AMC leaders undertaking
the similar processes of setting goals,
defining resource needs, and developing
and implementing feasible strategies.
In this article, we review UKs past
experiences, define its current state,
and anticipate challenges for the future.
We present UKs story as a case study

Academic Medicine, Vol. 89, No. 2 / February 2014

Article

of one AMCs journey in developing a

comprehensive response to the changing
health care landscape. Specifically, UKs
strategy of becoming a regional referral
center, which emphasizes subspecialty
clinical services and numbers of patient
discharges, ostensibly runs counter to a
currently favored hospital strategy based
on population health and outpatient
care. However, central to UKs strategy is
helping partnering community providers
develop expertise in population health
to serve their respective communities;
in this way, UK partners with other
providers to appropriately serve a much
larger population.
The Past

In 2001, UK leaders set out to advance the

institutions role as a research-intensive,
public university. They recognized that
progress within the universitys health
services sector (all six health colleges
and the clinical enterprise)and in
particular, the AMC (specifically, in
the case of UK, the COM, the faculty
practice plan, the ambulatory services,
and the affiliated hospital)were critical
in fulfilling this aspiration. At the time,
however, the clinical enterprise was failing
to effectively compete in the local and
regional health care markets. The success
of the AMC as a clinical provider and the
success of the academic programs at the
COM wereand remaininextricably
linked. The loss of critical faculty led to
a decrease in clinical volume that in turn
compromised the institutions academic
mission. To forge a unified strategy, the
university president created the role
of executive vice president for health
affairs (or EVPHA [M.K.]) to coordinate
the activities and finances of the COM,
the affiliate teaching hospital, and faculty
practice plan.6,7
The EVPHA revamped UKs
organizational and operational model
and developed a single corporate
support group to serve the hospital, the
COM, the faculty practice plans, and
the ambulatory services. For example,
the EVPHA established a single chief
financial officer role and centralized
budgeting. Additionally, UK leaders
developed a common vision and strategy
by coordinating four simultaneous
planning processesfinancial, strategic,
facilities, and academicwhich, in turn,
enhanced the clinical brand.7

Academic Medicine, Vol. 89, No. 2 / February 2014

Financial planning
The financial planning process was the
most significant and challenging, but also
the most transformative. First, UK leaders
needed to define the financial resources
necessary to achieve the goals set for UK,
and then they needed to determine the
feasibility of generating these resources.
The institutions leaders determined
that UK would need to invest more than
$800 million over 8 to 10 years to expand
clinical programs, recruit faculty, acquire
new technology, and build facilities.
Generating such extraordinary resources
would be possible only if every party in the
institution shared a coordinated strategy to
work toward significantly greater inpatient
volumes and to increase the overall
revenues and operating margins in order
to support a substantial bond issuance.
Strong margins and a substantial bond
issuance were necessary to fund capital
construction, program development, key
recruits, and technology.
Strategic planning
Through the strategic planning process,
UK leaders identified three key initiatives.
First, clinical efforts on campus needed
to focus on advanced subspecialty care
and destination clinical services such as
Level 1 trauma, full-service subspecialty
pediatrics, advanced cancer care, and
solid organ transplantation. UKs
motto became We need to assure all
Kentuckians thatno matter how ill they
are or how complex their needsthey
can get care in Kentucky and not have to
worry about whether their insurance will
allow them to go out of state. Second,
UK focused on developing mutually
beneficial relationships with community
providers, working to keep care local as
much as possible and to transfer patients
to UK only when clinically appropriate.
Finally, UK leaders recognized that UKs
success depended on an unwavering
emphasis on efficiency, outstanding
quality, uncompromised safety, and
patient satisfaction.
Facilities and academic planning
Through the facilities planning process,
UK leaders evaluated every clinical
building and recognized that the core
facilitythe Albert B. Chandler Hospital,
which dates back to 1960would not
accommodate an increase in patients with
complex medical problems. Therefore,
UKs leaders initiated a building project
to serve both present and anticipated

needs. Academic leaders at UK defined

future administrative, teaching, and
research facilities needs and located sites
for those vital endeavors. The institution
created a facility plan with a 50-year
horizon to use space judicially and
maximize flexibility moving forward.
Brand
The need to redefine and enhance the UK
brand was also of critical importance.
UKs clinical brand had deteriorated as
the clinical enterprise had become the
medical provider of last resort rather than
the preferred provider. UK adopted the
trademark UK HealthCare, representing
excellence in advanced subspecialty care,
for all clinical services. Construction of
the new hospital facility provided the
opportunity to physically demonstrate
the new brand, creating an empathic
building that is comfortable for patients
and visitors and reflects Kentuckys
communities through its architecture,
landscaping, art, and music. The building
came to signify UK HealthCare as a
regional asset, serving Kentucky and
beyond and capable of competing with
the best AMCs in the country.
The Present

Scale and finances

To date, UK has had a number of
successes and has identified significant
challenges. Discharges have grown from
approximately 19,000 in fiscal year (FY)
2004 to a projected 36,653 in FY 2014
(Figure1). Local market share has grown
from 28% in FY 2003 to 48% in FY 2013.
More important, UK has repositioned
itself in both size and scope as an AMC. In
2004, UK was a 25th percentile teaching
in clinical size. Now, UK is approximately
a 75th percentile teaching (Figure2) with
the size, scope, and depth to legitimately
aspire to be a regional referral center.
The growth has had a positive impact
on the hospitals operating margin. A
significant portion of the increase in
patient volume has come from patients
covered by Medicare and commercial
insurance. The increased volume,
combined with the growth in case
mix index (CMI), has enabled UK to
justify higher reimbursement rates from
commercial insurance companies in
order to support the advanced specialty
services that are vital to the communities
that UK serves.

225

Article

Figure 1 UK HealthCare inpatient discharges from fiscal year (FY) 2003 through FY 2014. The
number of discharges for 2014 is a projection.

Partnerships
Historically, UK strategies focused on
traditional geographic service areas
encompassing the eastern half of
Kentucky (Figure3). UK HealthCares
primary geographic service area (Fayette
County) included a population of
approximately 300,000. The secondary
geographic service area consisted of the
16 neighboring counties, which had a
population of approximately 450,000.
About 40% of admissions were patients
with a very high CMI, referred from UKs
tertiary market of 46 counties with a
population of 1.2 million. Together, these
created a total market of approximately
two million people.

To become a regional referral center,

UK leaders recognized the need for a
potential market of five to seven million
peoplewell beyond its initial market of
two million. They then identified a target
geographic service region encompassing
approximately 7.5 million people
(Figure4) and developed appropriate
targets for volume of cases in these
destination clinical services (Table1).
In particular, it became clear that the
previous focus on just the eastern half of
Kentucky was insufficient.
Destination clinical services, such as
treatment for brain tumors and solid
organ and bone marrow transplantation,

Figure 2 UK HealthCare inpatient discharges (20042012) compared with other teaching

hospitals as reported by the Association of American Medical Colleges Council of Teaching
Hospitals quarterly survey of hospital operations and financial performance. The shaded area
includes Good Samaritan Hospital, which was acquired in 2007. Q indicates quarter.

226

are low-incidence events. As

governmental and commercial payers
continue to set volume and outcome
standards for Centers of Excellence in
these types of complex cases, only a
limited number of destination referral
centers will be able to reach adequate
patient volumes (as exemplified by
the heart transplant volume standard
of a minimum of 10 cases per year
as set by the Centers for Medicare
and Medicaid Services). UKs target
population base of five to seven million
can support a destination referral
facility, but this reach infringes on other
academic referral centers. Anticipating
competition from other AMCs, UK
leaders understand that UK must
continue to focus on and invest in these
destination services.
Challenges for the Future

The U.S. health care system is at an

inflection point. The underlying
expectation is that, in response to health
care reform, a greater emphasis will be
on preventive care and most notably a
focus on population health. In turn, care
will be more efficient as providers take
responsibility for a population of patients
across the continuum of care. However,
different populations often require
different systems of care.
Nationally, 5% of the populace consumes
nearly 50% of all health care resources,8,9
and there will continue to be very sick
patients requiring highly specialized
and expensive care. Referral-type AMCs
have been designed to address this
specific community of patients. UK and
other AMCs have made considerable
investments in specialized services to
adequately meet the needs of these
patients with complex illnesses. These
services require a sufficient volume
of patients with relatively uncommon
conditions for AMCs to be able to retain
and support specialized staff, optimize
the use of the costly capital investments,
and remain financially viable. Further,
multidisciplinary teams must see
sufficient numbers of patients for team
members to maintain their skills. We
therefore pose these questions: In an era
of dynamic health care system change,
what strategies should a referral-type
AMC pursue to sustain its specialized
services? How does an AMC with the goal
of becoming a regional referral center
build and sustain a patient base that can

Academic Medicine, Vol. 89, No. 2 / February 2014

Article

Figure 3 The original UK HealthCare market.

supply sufficient numbers of destination

patients?
Some AMCs have responded by developing
accountable care organizations (ACOs)10;
others may either develop an insurance
product or partner with insurers to offer
insurance products; and still others, such as
UK, are pursuing an incremental approach
to develop broad-based networks based
on mutually beneficial partnerships, and
thenallowing these networks to mature
and evolve.
ACOs
ACOs are in vogue. We believe that
these organizations may have limited
utility for AMCs. Many AMCs have
made enormous investments to be

able to provide care for patients

with complex conditionsa vital
community resource. Maximizing the
use of these expensive infrastructures
will reduce the total cost of a complex
episode of care regardless of payment
methodology. Some ACOs developed
by AMCs involve a modest number
of individuals, which will generate
a limited number of cases requiring
destination services. For example, if
the population base is a potentially
healthy group (e.g., university faculty,
staff, and students), most of the
admissions will be of low acuity and
may crowd out referrals for destination
services. Some institutions are
contemplating building substantially
larger ACOs involving populations in

the hundreds of thousands and even

millions. AMCs trying to replicate
broad, comprehensive systems to serve
a large general population, like the
Kaiser model, will require considerable
time and huge outlays of capital to
build appropriate infrastructure.
Alternatively, UKs approach is to
emphasize UK HealthCare as the
tertiary, quaternary referral center
serving multiple ACOs established
by local providers, all of which have,
primarily, a community focus.
Payer partnerships
Some AMC leaders are considering
developing an AMC-affiliated or -run
insurance plan. Developing the necessary
infrastructure and scale to mitigate any

Figure 4 The redefined market boundaries for UK HealthCare. UK HealthCare is a regional referral center for destination clinical services.

Academic Medicine, Vol. 89, No. 2 / February 2014

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Article

Table 1
Population Base Needed to Support Destination Services Volume Targets

Procedure
Kidney and kidney/
pancreas transplants
Liver transplants

Estimated
incidence per
one million
Kentucky
residents

Aspirational
volume

Population
required
to achieve
aspirational
volume

Population
required
to have 50%
of market
share

34.34

110

3,203,560

6,407,119

16.82

60

3,566,603

7,133,206

Heart transplants

5.30

25

4,716,703

9,433,407

Lung transplants

8.07

25

3,099,548

6,199,096

28.13

150

5,331,760

10,663,520

68.3

250

3,660,322

7,320,640

Adult bone marrow

transplant
Brain cancer admissions

risk resulting from random variation is

resource intensive. Adverse selection is
also a serious concern,11 and if premiums
are not sufficiently risk adjusted, the
financial burden can be substantial for
the AMC. The need for adequate reserves
for an insurance product may also be a
barrier for some AMCs.
We believe that it is more practical to
partner with one or more insurance
companies in restricted networks
to provide destination services to
their enrollees. A natural division of
labor occurs: The organizational and
infrastructure costs associated with the
insurance product, as well as the risk for
the aggregate population, reside with the
insurer, while the AMC provides clinical
care. The AMC and insurance company
can potentially share the benefits of
medical management of complex
patients, or the AMC can accept limited
risk. AMCs with existing referral patterns
and relationships with other providers
can help insurers structure appropriate
geographic, cost-effective networks by
recruiting organizations with which they
have experience.
As UK has executed this strategy,
insurance companies now recognize
the importance of UK HealthCare in
the market. Additionally, insurance
companies are now increasing their
interest in carve-outs, specialty
care networks, and targeted disease
management approaches. UK is also
interested in working with insurance
companies in developing restricted
panels, but to date that has not
been a significant component of the
marketplace.

228

UK has also engaged with large, selfinsured purchasers (i.e., patients) to

discuss serving as a multistate Center of
Excellence in specialized areas of care. UK
can offer these purchasers a higher degree
of service and coordination by developing
concierge services and guaranteed,
appropriate communication among
providers. By optimizing efficiency in
managing complex episodes of care, UK
is also the prudent economic choice.
Many leaders of referral-type AMCs
fear they will be excluded or denied
access to their traditional referral base as
the market consolidates and tiered- or
narrow-network insurance products
emerge. UK HealthCare has attempted to
mitigate this risk by nurturing its referral
base and quantifiably demonstrating the
value of its services in terms of quality,
access, outcomes, and costs. Integrated
health systems and referral networks
will need to excel at rationalizing the
site of care and eliminating unnecessary
variation and waste. We believe that
improving the efficiency in the care of
complex, expensive episodes is the most
important issue affecting the affordability
of health care. Regardless of the ultimate
market forces, AMCs that can provide the
highest-quality, safest, and most efficient
care for complex episodes will not only
survive but thrive.
Provider partnerships
At the present time, UKs approach has
been incremental and built on existing
and targeted provider relationships. From
2003 to 2010, UKs provider relationships
were focused predominantly in Eastern
Kentucky. Initially, affiliate relationships
were with small rural providers. Clinical

leaders worked to earn credibility and a

reputation for partnering in a cooperative
and collaborative manner, bringing
some of the larger providers in Eastern
Kentucky into service-line-oriented
networks. During this time, UK leaders
also worked to develop outreach clinics
for UK specialists to travel to partnering
organizations while also helping these
partners recruit providers in primary
care. The goal was to make the larger
hospitals subreferral centers that would
treat appropriate acuity patients locally
and that would aggregate referrals of
complex patients to UK.
To continue to grow its regional
population base, UK has also worked
to develop relationships in Louisville,
Western Kentucky, West Virginia,
Southern Ohio, and Eastern Tennessee
and has strategically identified the
most appropriate collaborators in these
regions. These targeted partners are
predominantly of substantial size and
can function as subregional hubs to
aggregate complex patients for UK over
a large population base (Figure4). In
this arrangement, care as appropriate
remains local; thus, the regional partners
can continue to grow their patient
volume and easily refer patients to UKs
subspecialty services as needed.
Some of the larger provider partners
also have an interest in participating
in clinical trials, particularly in cancer,
which is possible through the UK
partnership. UK additionally offers
partners the opportunity to participate
in medical student training. UK leaders
hope to develop family medicine
residencies, pharmacy residencies, and/
or other clinical training programs at
facilities whose leaders and clinicians
are interested. These increased training
sites support the development of
primary care providers at local levels
while allowing UKs tertiary hospital to
focus on training specialty providers.
UK has also helped identify primary care,
specialty, and subspecialty trainees who
are from the communities in which UK
has developed collaborative relationships
and who would like to return to their
home regions to practice. In this way, UK
facilitates the capacity of regional hospitals
as they replenish their medical staff with
individuals who understand UKs clinical
programs and clinical capabilities, as well
as the local culture or community.

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Article

To date, UKs relationships with partner

provider organizations have been
contractual but have not included
financially integrated arrangements such
as joint ventures, mergers, or acquisitions.
UK leaders are receptive to the idea of
merging with or acquiring organizations
should greater consolidation become
necessary. The hope is that if
consolidation occurs, it would be a logical
outgrowth of long-term relationships,
minimizing the suspicions, stress, and
cultural challenges that often occur with
mergers or acquisitions. UK leaders
keep partnering provider organizations
knowledgeable as to the concomitant
relationships it develops, assuring
them that the partnering strategies are
designed to help them (the partners)
protect their current patient base as UK
develops and broadens its patient base
for destination services. That is, UK does
not simultaneously court head-to-head
competitors. The institution has also
emphasized to partners that through its
aggregate relationships it could develop, if
necessary, a broad regional network.
Resource requirements
One of the most important insights has
been the immense need for capital. Initial
estimates indicated the need to raise and
spend $800 million over a decade. In
reality, from 2004 to 2012 UK invested
$1.4 billion in facilities, recruitment,
program development, systems, and
equipment. As UK leaders look forward
to maintaining the aspirations set for
the institution, they estimate that in the
next eight years, UK will have to spend
an additional $1.0 billion to sustain and
enhance its gains. Transforming UK into
a major referral AMC and enhancing its
research capabilities will have thus required
more than a $2.5 billion investment over
a 20-year period. Whatever goals AMCs
set for themselves, they should have a clear
understanding ofthe financial resources
required to reach them.

Academic Medicine, Vol. 89, No. 2 / February 2014

In Sum

AMCs will unquestionably have to

change in response to an evolving
health care system.1215 We suspect that
AMCs will attempt a variety of different
strategies and tactics and that these
will be creative and adaptive. It will
be essential that each AMC actively
chooses the type of institution it
aspires to be and that each understand
the resource requirements necessary
to achieve those aspirations. If an
AMC is, for example, a local provider,
it needs to understand how it will
attract and maintain its patient base.
The market and community needs
vary by region and setting (e.g., rural
versus urban), and specific elements
of the strategy may vary as well. If
an AMC aspires to be a regional
provider of destination services, it
must understand (1) whetherthere is
a sufficient market space for it, (2) the
extreme capital needs required, (3) and
the competition.UK has become the
referral center for a large geographic
region in a rural state and beyond. Its
strategy has focused on developing
mutually beneficial relationships
with community providers. Although
most AMCs are not-for-profit public
good entities, they are simultaneously
participants in an industry driven by
competition in quality and cost. Like
in any such industry, scale and capital
access are paramount. The sooner
AMCs understand how they fit and
compete in their market, the better they
will adapt and thrive.
Funding/Support: None reported.
Other disclosures: None reported.
Ethical approval: Reported as not applicable.

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