Spectrum Facing Payment Cuts

June 6, 2007
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GRAND RAPIDS—Spectrum Health anticipates higher prices, a smaller margin and a shortfall of $110 million in Medicare and Medicaid funding for fiscal 2008, CFO Michael Freed reported Tuesday.

Speaking at Spectrum Health's annual public meeting, Freed said Spectrum Health Grand Rapids, which includes the system's hospitals, expects payments from insurance companies and government programs to rise 4.4 percent overall. That increase is fueled by a 7.25 percent average price hike set to go into effect July 1.

Freed attributed nearly 4 percent of that price hike to charging payers more to cover the gap between Spectrum's costs and payments from the government programs for the elderly and the poor.

"One of the big concerns that we have next year is our Medicare and Medicaid losses will grow to $110 million," Freed said. "Keep in mind that at the time of the merger, these losses were zero. So this $110 million tax on West Michigan has developed in the last 10 years."

Consolidated income, at $2.7 billion, is expected to grow 16.4 percent, thanks to growth in membership at Spectrum-owned Priority Health, which is expanding into Southeast Michigan; an average 6.5 percent increase in insurance prices; and the hospital price hikes.

Expenses across the board, estimated at $2.6 billion, include $268 million in additional claims from Priority Health's bigger membership base; $64 million in salary and benefit increases; $53 million in additional supplies; and $12 million in miscellaneous spending, such as bad debt, depreciation and interest. Expenses are expected to be 17.7 percent higher in 2008 than in 2007.

The total system margin is expected to slip from 4.8 percent, as estimated for the 2007 fiscal year ending June 30, to 3.4 percent for 2008. Freed noted that is below the upper quartile margin for similar U.S. health systems as set by Moody's and Standard & Poor's, which currently is 7.5 percent.

Ten years after ButterworthHospital and BlodgettMemorialMedicalCenter merged to form Spectrum Health, three conditions remain in force from the consent decree: the margin threshold; $6 million set aside for the underserved; and an open budget and pricing process. A meeting is set for Thursday at Spectrum Health Healthier Communities,

320 Michigan St. NE
, to examine the budget for the underserved.

"This our tenth year, and I think the health care landscape in Grand Rapids and West Michigan has changed quite a bit in these last 10 years, to say the least, I think for the better," Spectrum Health CEO Richard Breon said.   

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