News that most would rather not hear

July 1, 2011
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According to officials at Spectrum Health, the 2012 fiscal year will see the system’s total margin slip to 4.8 percent from the 6.1 percent estimated for 2011. But the operating margin for the current year, which began last week, should reach 4.2 percent — double the 2 percent the hospital’s executives expect for 2011.

In pure numbers, the operating margin has been pegged at $172 million and the total margin has been forecast at $197 million for 2012. The higher operating margin will be fueled by an 8 percent increase in prices, which became effective last week. It’s the second consecutive year prices at Spectrum have risen by that percentage.

Alliance for Health President and CEO Lody Zwarensteyn said he was very disappointed to learn that Spectrum raised its rates above the inflation mark. He sees the increase as an economic issue because revenue to employers and wages for employees don’t go up enough to keep pace with medical inflation, which annually has been higher than the Consumer Price Index since the late 1980s.

Zwarensteyn fears that if providers continue to raise prices at the current pace for another decade, they just might find themselves short of paying customers.

“One thing they have to be careful of is killing the goose that laid the golden egg — that is the private side of consumption in health care. You cannot keep piling it on and piling it on and just assume that it is no greater expense. When the service industry takes money from the productive areas, manufacturing and so on, you’re forcing jobs out of the region,” Zwarensteyn said.

“Is it any wonder that Mexico, China and so on start looking very attractive to employers? You can’t fault them for trying to survive. We have health care costs where a premium for a family is exceeding $13,000 a year for an employee. C’mon, that’s a lot of money,” he said.

Zwarensetyn said the increase from Spectrum will raise the cost of insurance coverage for employers and employees when renewal time comes up. He also noted that the price increase was an average of 8 percent rather than an across-the-board hike, which means that some services could go up by more than 8 percent.

“If I have one going up at 16 (percent) and another at zero, that averages out to 8. But if the 16-percenter happens to be something everybody needs and uses, and the zero is something that nobody uses, we’ve still only averaged 8 percent but, in reality, we’ve averaged 16 percent,” he said.

“What good does it do to keep charging more and more and kill off individuals, families and employment? You tell me.”

Operating revenue at Spectrum will approach $4.1 billion this year, or 12.4 percent above the 2011 estimate of $3.6 billion. Operating expenses are expected to rise to $3.9 billion this year, up from $3.5 billion for the previous fiscal year. Much of the growth in expenditures will originate from $154 million worth of new claims coming from Priority Health, the system’s insurer, and $92 million more in salary and benefits. The latter expense represents an increase of almost 3 percent.

Spectrum has a capital budget of $242 million for the year, with $169 million of that going to the hospital group and $53 million to the medical group. Priority Health is on the list for $13 million and the system’s other entities are budgeted to get $7 million. Spectrum officials report capital spending is consistent with their five-year plan and 1.2 times depreciation for 2012.

The system calculates that full-time employment could grow to 15,234 in 2012. If so, that number would be 9.4 percent higher than the 13,920 that were employed full time at Spectrum just two years earlier in 2010. Total system admissions are expected to grow by 5.2 percent. In Grand Rapids, that growth has been projected at 4.7 percent.

The membership for Priority Health has been forecast to rise by 8.1 percent, while revenue is expected to go up by 11.4 percent. The system’s depreciation is likely to be $18 million this year, and Spectrum expects to accumulate another $11 million in bad debt in 2012.

Saint Mary’s Health Care and Metropolitan Hospital also are expected to announce price increases. Early indications are those rates will rise from 4 to 5 percent.

“It’s not Spectrum alone,” said Zwarensteyn. “Spectrum, to their credit, is the only hospital in the Grand Rapids area that actually has a public hearing and makes their stuff known. They should be credited for being public, although the news is news you’d rather not hear.”

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