Variables Cloud Spectrums Rates

June 13, 2003
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GRAND RAPIDS —Spectrum Health’s future care charges hinge on further state Medicaid reimbursement reductions and the ability to make up indigent care losses through higher volumes or shifting the burden to private payers.

As it prepares to enter the final year of operating under a price cap — part of a 1997 consent decree that allowed its creation — Spectrum Health cannot say what kind of price adjustments may occur in the future because so many variables affect its finances.

“At this point I can’t tell what we’ll do because we don’t know what we’ll do,” Chief Financial Officer Mike Freed said. “This is very much up in the air.”

Spectrum already loses some $30 million annually in providing care to Medicaid recipients. With lawmakers in Lansing weighing further cuts of $100 million in the Medicaid budget, that loss could grow by $10 million to $12 million, Freed said.

Most aggravating to Freed is that Spectrum Health receives disproportionately lower Medicaid payments than hospitals in southeast Michigan.

“Why does the population of West Michigan have to assume a higher level of pain?” Freed said. “It’s a real burden and it’s a real burden our business community is facing in a tough economic time if we can’t find parity with the other side of the state.”

To make up for the Medicaid loss, Spectrum will have to keep looking at shifting the Medicaid costs onto private payers, an issue that was at the heart of last summer’s highly public disagreement with Blue Cross Blue Shield of Michigan over reimbursement payments.

“If the state cuts further into Medicaid, then that’s going to promote more cost-shifting,” Freed said.

For now, Spectrum Health is nearing the end of the 2003 fiscal year on June 30 with a projected margin of just 0.3 percent, the smallest since the merger of the former Butterworth and Blodgett hospitals, or $4.8 million on operating income of $1.53 billion.

Driving the margin down from 2.1 percent in the prior fiscal year, or $28.1 million on revenues of $1.37 billion, was the $18.5 million loss at Spectrum’s main hospital campuses in Grand Rapids, and far smaller losses at the Reed City campus, the Continuing Care division and other operations.

The proposed budget for Spectrum’s 2004 fiscal year, presented during the health system’s recent annual meeting, carries of margin of just 1.8 percent, or $34.1 million on projected revenues of $1.83 billion. The 2004 budget includes an anticipated $8 million loss at the Grand Rapids hospitals, with the overall improvement in financial performance coming from better returns on investments and improved performance at affiliates.

Still, those kinds of margins are simply not enough to sustain the investments Spectrum Health needs to constantly make in maintaining facilities and technology, as well as meeting rising operating and labor costs, Freed said. The health system’s goal is to return to a 4.7 percent annual margin by 2007.

“We have to have a more significant margin,” Freed said.

How Spectrum Health achieves that is the question.

The coming 2004 fiscal year that starts July 1 is the final year in which the health system operates under a four-year cap that keeps annual price increases to the consumer price index in the Midwest. Under that guideline, Spectrum has built an average 2.8 percent price increase, effective Oct. 1, into the 2004 budget.

Prior to the price cap, and under terms of the 1997 consent decree, Spectrum Health’s prices were frozen for three years.

The freeze and subsequent cap have limited Spectrum’s ability to adjust prices accordingly to keep up with rising operating costs, Freed said. At the same time, Spectrum has felt the brunt of shrinking Medicaid reimbursement rates.

What will happen to Spectrum’s prices, which compare quite favorably to its counterparts throughout he state, once the price cap expires is beginning to cause some concern, said Lody Zwarensteyn, president of the Alliance for Health in Grand Rapids.

“Be aware, people are very nervous about what happens when the merger commitment ends,” Zwarensteyn said.

Playing into future price adjustments are Medicaid payments and the willingness of the business community in Grand Rapids to steer business to Spectrum Health, which touts its good value to the consumer through a mixture of comparatively low prices and high quality medical care.

If employers, through their health plans, steer employees to Spectrum, it would help to mitigate prices increases, Freed said.

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