Bad debt charity care skew North Ottawas financial recovery

August 13, 2010
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North Ottawa Community Health System in Grand Haven is surrounded.

To the north in Muskegon, over the past decade, Mercy Health Partners has consolidated three hospitals into a single entity owned by Trinity Health, a multi-state nonprofit hospital chain.

To the south, the independent Zeeland Community Hospital announced recently that it is considering a merger with Spectrum Health, even as some community members still hope it will decide instead to embrace neighboring Holland Hospital.

And to the east is the West Michigan dominant Spectrum Health.

“Part of our strength is the fact that we have the whole system, and that we’re not a stand-alone hospital here trying to make sure that we have any large percentage of market share to stay afloat,” NOCH President & CEO Shelleye Yaklin said.

“I think that communities are starting to recognize the importance that they hold in deciding what will be offered in their community.”

North Ottawa Community Health System

Acute care beds: 81
Skilled nursing beds: 84
Hospice beds: 8
Hospital admissions: 1,879
Births: 364
Emergency room visits: 15,585
Source: North Ottawa Community Health System, Report to the Community, 2009

Yaklin arrived in Grand Haven in December 2007 from suburban Detroit to lead NOCH, one of three hospitals serving the 260,364 residents of Ottawa County.

She said she found a nonprofit organization that, year-to-year, was dancing on either side of the break-even line and dipping into reserves to pay the bills. She replaced an interim CEO after the previous leader — who had been commuting from his home in Kansas for eight years — left.

“When I got here, the health system was losing — I think the number was over $5 million. If you didn’t count investment income, we’ve had losses here for I can’t tell you how many years,” Yaklin said.

According to the hospital’s IRS filings:

*The tax year that ended in mid-2008 brought a deficit of $1.1 million and depleted net assets by $2 million.

*In the tax year that ended in 2007, the hospital reported losing $2 million on revenue of $50 million and depleting net assets by $4.5 million.

*In the tax year ending in 2006, North Ottawa Community Hospital ran a thin 1.2 percent margin while assets shrunk by $1.8 million.

“Because the hospital had some investments from cash positions that they had had in years past, made some wise investments — we own some properties and things — we were able to have a little bit of a nest egg. From operations, I don’t think we’d ever done a very good job at looking at just what was happening from an operations standpoint,” Yaklin said.

“When you start hitting the multi-million dollar losses, people get a little excited, and rightly so. When I came in, that was the burning issue right there. We’re not growing the top line, the revenue side of things. And our expenses are increasing at an alarming rate. And when you combine those two, that’s disaster.”

The board of directors asked Yaklin to stabilize the drain on reserves and to preserve the health system’s ability to serve the community.

“We had a hospital, we had a nursing home, we had urgent care. We called ourselves a health system, but we really were operating in silos. So for the last two years, we’ve been working diligently to operate like a real health system.”

Yaklin set her team to find ways to reduce expenses. The organization reviewed contracts and purchasing, and consolidated administrative functions such as payroll. Employment shrunk by 44 full-time equivalents, mostly through attrition but also with “less than five” layoffs, she said. The system now employs 761.

She eliminated the open positions of chief operations officer and vice president of operations. Nursing management positions were reorganized, Yaklin said.

“In that first year, we had made unbelievable strides by a couple of million dollars,” Yaklin said.

But 2008, her first year on the job, turned what had been an economic downturn into the Great Recession. North Ottawa’s bad debt and charity care soared along with unemployment, Yaklin said.

CFO Donald Longpre indicated that for the fiscal year that ended in June 2009, encompassing the disastrous fall of 2008, bad debt rose to $3 million from $2.1 million, and charity care topped $1 million for the first time ever in 2009.

“Those were really staggering,” Yaklin said.

Community benefit — including bad debt, charity care, community health education and services, and the shortfall in Medicaid and Medicare payments — totaled $8.3 million in the 2009 fiscal year.

Those issues contributed toward pushing the net loss in fiscal 2009 to $1.5 million. Net assets deflated to $25 million, from $36 million in 2008.

“If you can find the positive in that to say you go from a $5 million operating loss, and if we would have just held normal in charity, we’d have taken it to a $200,000 to $300,000 loss,” Yaklin pointed out.

The audit is underway for the 2010 fiscal year, which ended June 30, and Yaklin said she is anxious to see those numbers.

The health system also includes an 84-bed skilled nursing facility, Heartwood Lodge, 18525 Woodland Ridge Drive in Spring Lake, which ended the 2009 fiscal year in positive territory by $134,123 on revenues of $13.4 million. Another entity, Hospice of North Ottawa, with eight beds located at the nursing home, finished the year with net revenue of $341,621 on total revenues of $3.4 million.

The health system is working toward construction of a second nursing home with 125 beds, expected to be located at the corner of M-45 and U.S. 31.

North Ottawa Community Hospital is located at 1309 Sheldon Road in Grand Haven.

Community hospitals often find themselves competing with their larger brethren to provide basic services, Yaklin added. While those are bread and butter for the smaller organizations, larger hospitals need those types of services to help pay for the more expensive, higher-end work that only they do.

“Community hospitals have fought for every dime of revenue,” Yaklin said.

Because of that, many community hospitals struggle to keep up with both medical and information technology, she said. But Yaklin said she found North Ottawa to be mostly up to date with technology, which is helping to maintain its independence and mission to the Tri-Cities community.

And, for the record: North Ottawa has no immediate plans to merge with any other health care organization, big, small or in-between, Chief Communications Officer Jen VanSkiver said.

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