Reinventing Health Care: Duke's Model

The old system

Doctors and hospitals set their own fees for the services they provided. Health-insurance companies would simply pay these fees, funneling big profits to doctors and hospitals. Academic medical centers like Duke used this money to subsidize advanced research and medical schools and to care for uninsured patients. The problem: with nothing to limit medical fees, costs doubled every five years.

The big squeeze

To stop these spiraling costs, employers joined managed-care organizations (like HMOs) and began to set their own prices for medical services. Doctors and hospitals must accept these fees or risk losing patients. Hospitals have lost money. At Duke the crisis has spread to the research lab and the medical school. People wonder if the academic medical center--the source of many important scientific breakthroughs--can survive. Meanwhile, managed-care companies, having picked up the easiest profits early on, have begun to see their own costs rise.

Duke's solution

Fearful that declining revenues will soon force deep cuts in research and medical education, Duke has moved aggressively to build a new model by:

1 Cutting costs more than $30 million a year; reducing its staff by 1,000, largely by attrition.

2 Buying a whole range of health-care companies, which will allow it to deliver "cradle to grave" service in a 32-county region in North Carolina and Virginia. With more patients and a dominant position in a regional market Duke can drive harder bargains with HMOs.

3 Establishing an HMO, WellPath, with N.Y. Life, which puts Duke again in the position of setting the fees it will receive in an intensely competitive environment.

4 Remaining nonprofit. As such, the Duke University Health System's 4% return is plowed back into the medical center rather than being paid out in dividends to shareholders.