Spectrum Health Plans For 2007

June 19, 2006
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GRAND RAPIDS — There’s no denying that health care prices are going up. For Spectrum Health’s Grand Rapids hospitals, fees for service will increase an average of 5.8 percent if a proposed 2007 budget is approved. A 6-percent increase in insurance premiums for Priority Health, the majority of which is owned by Spectrum, will also contribute to a 9-percent overall increase in Spectrum revenue.

But the cost of providing health care is rising, too. Despite the healthy jump to $2.29 billion in gross revenue, Spectrum’s margin is shrinking, due to expenses that will increase to $2.22 billion. The growth of Priority Health means more revenue, but it also will mean an estimated $102 million in increased expenses, primarily from payment to health care providers. Raises, increased insurance premiums and the addition of 400 new employees will tack an additional $42 million on to the cost load. The rest of the projected expenses come from miscellaneous operational activities, depreciation and financing costs.

Spectrum Executive Vice President and CFO Mike Freed said that the increased costs and the need to increase fees result from the exigencies of providing high-quality health care in a competitive economy. The increases are not just a way for Spectrum to pay for its new buildings.

“I know people see — because they’re icons — things like this heart center or cancer center or the children’s hospital and say, ‘That’s where all my premium money’s going.’ I’m saying, ‘Follow me and do the math on it.’ My estimates were that out of $235 in 2005 that it took to insure somebody, on average about $6 of that was going to what I would call hospital depreciation. I’m not saying it’s insignificant, but you have to keep it in perspective a little bit.”

With nearly $300 million in building projects underway on Michigan Street hill, it’s easy to see how patients and business owners would draw the connection between the rise of Spectrum’s new buildings and its rise in rates. Between the Grand Rapids hospitals, Priority Health and Spectrum’s outlying facilities, there is an estimated $187 million in capital spending planned for 2007. Freed said that this is a “unique time” in West Michigan’s health care history.

“What you see going on in terms of capital expenditures in health care organizations in this 10-year window, probably there’s nothing comparable to it since the 1920s, in my opinion. And I would not anticipate that this will go on forever.”

Between aging baby boomers’ increasing demand for health care services and the need to implement advanced information technology systems, the necessity of capital improvements is unprecedented.

“We expect that will be tapering off once we get beyond the children’s hospital here in the next few years. We have that planned for.”

What Freed doesn’t expect to taper off is the disproportional demand that the most unhealthy patients place on the system.

“It’s the high cost of health care that’s really associated with a limited number of people,” Freed said. “It’s the 80-20 rule. You’ve got 20 percent of the people using 83 percent of the health care premium dollar.”

That results in the majority of Spectrum’s 2007 “community benefit” forecast. This $111.5 million figure represents the expense of operating a number of public and community health programs, un-reimbursed care provided to the indigent, and losses on treatment of Medicare and Medicaid patients. Spectrum predicts that those losses will total $90.5 million in 2007 — more than the entire $88 million community benefit figure for 2005, the most recently completed fiscal year.

Freed said that Spectrum recoups about 70 percent of its costs on Medicaid treatment.

“Most community hospitals, you’d probably see that maybe 3 percent of their business is Medicaid. In our case, it’s 15 (percent). And a lot of that, of course, is that we have children here in the children’s hospital and a lot of them are covered by Medicaid. And the number of people insured by Medicaid in the state of Michigan has grown dramatically since 2000, and most of them are children.”

Medicare reimburses at a slightly higher rate, but still results in a loss for the system. Freed said that since the system loses money on these patients, yet still maintains a healthy operating margin, those losses are obviously being made up elsewhere.

“We work hard to try to keep costs down, but to the extent that the Medicare and Medicaid losses are getting more heavily shifted to us, it ends up driving up, not our costs, but a kind of tax that gets thrown on to our costs when we price it to the business community,” he said.

As more Medicare and Medicaid patients result in bigger losses, prices must rise, which leads to higher expenses for insurers, which means increased premiums, ultimately leading to difficult choices for business owners.

“People don’t want to pay for other people’s unhealthy lifestyle choices,” Freed said. “We’re concerned that employers are going to solve this problem themselves by saying, ‘We’re just going to pay a fixed amount for health care. You employees, figure out the rest on your own.’”

Lightening that pressure on the business community, and the local economy in general, is another motivation for Spectrum to control price increases. Freed said that, as the area’s largest employer and largest health care provider, Spectrum has an obligation to keep itself competitive. Its competitiveness reflects on the overall attractiveness of West Michigan as a place to do business.

“In the end, what we’re benchmarking are two key things. We want to be in the lowest quartile for health insurance rates in our company, as compared to the country. And we want to be in the lowest quartile for hospital costs,” he said. “Because if somebody is going to look to relocate a business, we want them to see that the hospital costs that Spectrum has are low, and that the insurance rates reflect that.”

Again, the focus returns to “the 80-20 rule.” Or, more to the point, the 98-2 rule. Freed said that half of the population uses just 2 percent of the medical services. The other half of the population uses 98 percent. Spectrum and Priority Health have been implementing health maintenance and wellness initiatives to get the “high utilizers” to act more like the healthy half of the population.

“You should be able to predict — based upon certain demographics, or health history, or lifestyle choices — right now who are going to become those people five years from now that are going to be high utilizers. How do we change that right now before we get there? That’s what we’re trying right now, desperately, to work on.”

Their success in doing so could make a big impact on the long-term cost of health care in West Michigan.

Spectrum’s proposed budget is now open for public scrutiny and comment. Members of the finance advisory committee will report the findings of the public comment period to the board, which will then vote to adopt the budget as written, or to implement any necessary amendments.     

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