Affiliations Mark Health Care Industry

May 17, 2002
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GRAND RAPIDS — Reach out and engulf somebody might seem to be the health care version of the old Bell Telephone motto. Only last year, it was Muskegon’s Hackley Hospital that reached out to Spectrum Health and became, if not engulfed, then a dwarf partner.

Likewise, Metropolitan Health Corp. of Grand Rapids and Borgess Health Alliance of Kalamazoo, which officially combined their business operations during the first quarter of 2000, are exploring further steps of collaboration.

This changing landscape in the field of hospitals and critical care was enough to gain the involved institutions a nomination as Business Journal Newsmaker of the Year.

Ironically, what goes around apparently comes around.

Last Wednesday marked — with Federal Trade Commission approval — the legal beginning of a partnership between the former Butterworth and Blodgett hospitals, now known as Spectrum Health, which picked up a Newsmaker of the Year Award two years ago.

The subordinate role is a new one for Hackley, which previously played the acquisition game with several smaller health corporations on the shoreline, one of the more recent being the community hospital in New Era.

And it was strictly defense against Hackley’s aggressiveness that earlier led to the merger of Muskegon Mercy Hospital and Muskegon General, the local osteopathic hospital, which now are seeking approval for an expanded obstetrics-gynecology operation.

But if Hackley was the shark along the shoreline, it is very much the minnow in Spectrum’s lake.

Hackley has about 1,800 employees in contrast with nearly 11,000 at Spectrum. The disparity between the two entities’ revenues is equally broad: $89 million at Hackley during 2000; $926 million at Spectrum during the same period.

The primary reason for the affiliation is the same thing that has been driving hospital finance for some years now — economic pressure. Because federal financing, and rationing of federal financing, has played such a huge role in health care, financing is a constant worry for every hospital.

Spectrum and Hackley hope to achieve mutual economies of scale in purchasing as one step in dealing with rising costs on one hand and tightening revenues on the other, as private insurers follow the federal lead in tightening up on reimbursements.

Under consideration is a closer arrangement between Spectrum’s HMO, Priority Health, and Hackley’s reportedly troubled PHP.

And this raises the question about whether the affiliation between the two hospitals will become something closer.

Exactly the same question arises in connection with the affiliation of Grand Rapids’ Metropolitan Hospital with Borgess Medical Center in Kalamazoo.

Both institutions face the same economic pressures that afflict the other health care institutions, but Metro brings an additional problem to the mix: the need to modernize in an aging building.

According to specialists in health care architecture, retrofitting a mid-20th century hospital as a 21st century hospital is virtually impossible. Modern infrastructure, supporting functions and technology that were only dreams 30 years ago, just won’t fit in older structures without hyper-expensive regulatory accommodations.

So Metro, landlocked in a residential area, contemplates the unpalatable alternatives of uprooting a neighborhood of 50 to 60 homes, or building completely fresh on a new site.

Moving brings up another galaxy of questions that the Borgess and Metro boards have discussed at length, though it’s reported that property acquisition and modernization have taken a back seat.

No concrete proposals are on the table, but the parties reportedly are carefully examining the pros and cons and potentials of merging.

Not that bigger necessarily is cheaper. For instance, in early planning stages for its current budget year, Spectrum indicated it was looking at a $25 million shortfall.

It took several major cost-cutting steps: consolidating several medical directorships; the surprise closing of its Villa Elizabeth nursing home; letting some vacant posts remain vacant.

Spectrum also was able to increase revenues in 2000 for the first time since the 1997 Butterworth-Blodgett merger.

The consent decree that accompanied the merger prevented any rate increase prior to July 2000, and on that date Spectrum announced an October rate hike of 3.3 percent to remain even with the consumer price index.

Earlier it had been in the same situation as certain California power companies, being subjected to higher costs (thanks in part to reduced Medicare reimbursements) while being unable to raise its consumer rates.

Something had to give, and in 1999, Spectrum cut $8 million from its staff’s pay in order to try to make up some of the shortfall. The decision led to bitterness that was only partly assuaged in May of 2000, when the firm announced the restoration of some of the 1999 pay cuts.

Spring also brought news that Spectrum earned full three-year accreditation status from the Joint Commission of Healthcare Organizations.

In another aspect of economizing, Spectrum scaled back its plan, announced in April, for a $67 million, nine-story tower that it would center entirely on treatment and surgery for cardiovascular disease.

By October the project’s proposed price had approached $90 million while it had come down to eight stories (and 240,000 square feet of space). And that was the shape of the proposal that the hospital took to the Alliance for Health Evaluation Board in November. Now the project is under the scrutiny of state health officials.

Glitches and aftershocks of the Spectrum merger continued during 2000 but seemingly were increasingly mild. Terry O’Rourke, former CEO of Blodgett, in 1999 suddenly found himself appointed CEO of the merged hospitals when his co-CEO, William Gonzales, former Butterworth CEO, unexpectedly resigned.

This year, however, he was able to retire as planned when Spectrum brought on board a new COO, Richard Breon, an executive experienced in dealing with multiple health care entities. 

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