Spectrum Margins Pinched

June 13, 2008
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GRAND RAPIDS — A tough investment environment and below-cost government reimbursements are putting the squeeze on margins at Spectrum Health, the CFO said earlier this month.

CFO Mike Freed reported at the health system’s annual public meeting that, with unrealized investment losses and gains now accounted for differently in the financial statement, the margin for the 2008 fiscal year ending June 30 is expected to be 1.1 percent, or $28.47 million, on revenues of $2.6 billion. Projections for 2009 put the system-wide margin at 3.4 percent, or $93.8 million, on revenues of $2.76 billion.

Prices for services at Butterworth and Blodgett hospitals will jump by 8 percent as of July 1, Freed said. Priority Health premiums are expected to go up by an average of 7 percent on commercial products, a price hike Freed said is being depressed by employers’ exodus for high-deductible products.

Priority Health, the health care provider owned by Spectrum Health, contributes about half of the system’s annual revenues, Freed said.

Membership for Priority Health, which stood at 473,549 as of March 31, is expected to grow by 2.9 percent in 2009, he said. “That’s quite a bit more modest than we have seen in recent years,” he added.

That growth would follow a 13.4 percent membership drop between March 2007 and March 2008. About 6 percent of that decline was attributed to a planned reduction of self-funded employers following the acquisition of Care Choices; the rest was attributed to declines in the large-employer market, according to a third-quarter financial statement.

Priority Health was one of 43 health benefit providers for General Motors’ hourly employees — including several thousand at the GM plant in Wyoming — that were dropped as a result of the contract negotiations that shifted the responsibility for health care from Detroit’s automakers to the United Auto Workers. Another 12,000 to 13,000 members were lost when Priority Health decided to drop a prescription drug program for people eligible for both Medicare and Medicaid.

Freed was upbeat about the growth potential of Priority Health, which he said holds a 7 percent market share statewide. In West Michigan, Priority Health and Blue Cross Blue Shield of Michigan, which has about three-quarters of the statewide market, are the largest insurers.

“A lot of employers are getting introduced to us who’d never heard of us before,” Freed said of the push to the east. “We’re kind of Apple to the large insurer’s Microsoft. We’re bringing a lot of interesting products tailor-made for small business and medium business —which has always been our sweet spot over here in western Michigan — that others may have never seen before.”

Unrealized investment losses were pegged at $59.9 million for 2008, Freed said. Projections for 2009 put a positive spin back on investments, with a gain of $36.9 million, buoying the bottom line.

Admissions are expected to grow by 5.1 percent, Freed said. Expenses would grow by 7.7 percent, or by nearly $200 million, to more than $2.7 billion. The area’s largest employer, the health system expects to add 390 employees, bringing it to 12,066.

Freed said the 2009 budget includes $129.1 million in shortfall in Medicare and Medicaid payments, up from an estimated $82.9 million in 2008. He said the system sees 89 cents for every $1 it spends to care for a Medicare patient, and 59 cents for Medicaid patients.

“We expect next year our reimbursement rates for Medicare to go down effective Oct. 1, and will have, obviously, a negative impact on our revenues for next year,” he added. “The burden of that inevitably gets borne by everybody who is insured.”

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