Costs Prices Squeeze Spectrum

June 21, 2002
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GRAND RAPIDS — The coming year will squeeze Spectrum Health’s finances, as the Grand Rapids-based health system copes with rising costs and an inability to implement a corresponding increase in prices.

Adding to the squeeze are reductions in Medicare and Medicaid payments to hospitals, and a tailing off of further operating efficiencies generated since the 1997 merger of the former Butterworth Hospital and Blodgett Memorial Medical Center that created Spectrum Health.

As a result, the next two fiscal years “are probably going to be pretty tough. They’re not going to be easy,” Chief Financial Officer Mike Freed said.

“It’s getting to the point we can’t get much more in productivity gains, (but) we’re trying to,” Freed said.

For the coming 2003 fiscal year that starts July 1, Spectrum Health has budgeted for a total margin of just 1.3 percent for the entire health system on expected revenues of $1.45 billion and expenses of $1.44 billion. That compares with an expected total margin of 2.3 percent in present FY 2002 and 3.2 percent in 2001, and represents the lowest margin since the Butterworth-Blodgett merger.

The proposed budget, outlined during Spectrum’s annual public meeting held June 6, shows an 11.1 percent growth in expenses, outpacing a projected 10 percent growth in revenues.

The major drivers behind the $132 million in higher revenues are an expected $77 million increase in revenues for Priority Health, a health plan majority-owned by Spectrum, and a 3 percent to 4 percent growth in patient volumes that will generate an additional $34 million.

Pushing expenses up $144 million are an anticipated $40 million increase in supply costs for FY 2003, $37 million in additional wage and benefits costs resulting from a budgeted 3 percent to 4 percent increase, and $59 million in additional health claims at Priority Health.

The reduced margin projected for 2003 is also the result of Spectrum’s ability to raise prices a mere 0.5 percent as of Oct. 1.

Under a federal consent decree that allowed the Butterworth-Blodgett merger, Spectrum Health’s prices may only rise each year through FY 2005 at the average Consumer Price Index for the region, which this year stands at 0.5 percent.

“You’ve really got no place to go on the revenue side,” Freed said. “When you have that much pressure…it makes it very difficult to balance.”

Spectrum, after having its prices frozen for the first three years of the consent decree, raised fees 3.6 percent last October.

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