Medical providers spent more last year

October 1, 2011
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While the nation’s consumers and corporations held back spending last year, local medical providers spent more in 2010 than in the two previous years.

According to the project list of the Alliance for Health’s Certificate of Need program, the total capital outlay for the area’s health care entities last year was $397 million. That was up from the $239 million and the $261 million spent in 2009 and 2008, respectively. 

Although last year’s spending was healthy — and possibly a sign that the local economy was improving — the amount fell far short of the more than $600 million the providers spent in the pre-recession years of 2006 and 2007.

Alliance President and CEO Lody Zwarensteyn said only some of the increased capital outlay was due to a better economy.

“In part, but it’s been harder for some people to get credit. A lot of providers — but not all — in seeing the downturn in the economy, figured if they didn’t have to spend, they wouldn’t because if they spent, it would drive up their internal costs. A lot of hospitals and others don’t want to do that to their customers. Some don’t care, but a lot of them were being very cautious,” he said.

“Some, like the stuff on the hill at Spectrum, was planned years ago, and they just finished it out. Now, in fact, you don’t see construction activity anymore because they did it already.”

What has been spent has been good for the local economy, but only to a point. Zwarensteyn said much of the outlay was good for the construction field, as the recent building activity helped keep some contractors and their subs fairly busy during the recession. However, if a provider is only spending on items that will result in cost burdens falling on the local population, then that could have an adverse effect on a community, especially for residents who are going through tough economic times.

“If you spend in a way that raises the costs and the charges for them, that’s bad. That’s killing the goose that laid the golden egg. On the other hand, if it’s something you have to do, that’s one thing. And there is that notion that if you can spend for attractive things that will bring new business to our area, that would be good because you get more volume and spread your unit costs over more customers, and your costs go down,” said Zwarensteyn.

“That’s what we’d like to see. But right now the service selection is such that we’re not doing things that are unique that would necessarily bring lots of people to West Michigan.”

Spectrum Health is hoping that DeVos Children’s Hospital becomes that kind of economic magnet, but one downside to that scenario is that a number of children who will come here will be covered by Medicaid.

“It’s a notoriously poor payer. So in that case, you’re bringing in losing business, economically,” said Zwarensteyn. “From the payer-mix point of view, most hospital experts will tell you that obstetrics and pediatrics are not moneymakers because of the heavy involvement of Medicaid.”

What about capital outlays for heart and cancer facilities? Most experts agree that those are moneymakers, but because they are potentially lucrative fields that can draw new business to a local economy, the competition for those dollars is intense, and that can make it difficult for a local provider to distinguish itself from others.

“If you drive to Kalamazoo, you’re going to see their cancer and heart centers are world renowned, according to their billboards. Go through Flint and you’ll see a world-class cancer center. Go to Goshen, Ind., and you will see the world-class cancer center billboards. Everybody has a world-class center,” said Zwarensteyn.

“Now we did develop the heart transplant capabilities here, but if you’re only performing transplants on local folks, you’re not necessarily bringing people in. When we endorsed that project, I put in language to the effect that it could be a reputational thing — that it could enhance our reputation to help bring in business. But that’s promise, not performance,” he added.

Some of the spending that has been endorsed is what the alliance and the state call non-substantive, meaning the project to be reviewed isn’t a major consideration. A request to replace an aging imager falls into that category, and Michigan law provides a shorter review process for those types of requests than a new construction project.

Still, some of those non-substantive projects require a serious capital outlay, such as the $302 million Heartland Health Care plans to spend on its seven nursing homes in Ionia, Grand Rapids, Whitehall, Wyoming and Holland. Heartland will spend those dollars over a period of 30 years through a curious, but legal, leasing agreement it created for its facilities.

The company took its existing homes, which reportedly have been fully depreciated, and sold them to itself by forming separate real estate and operations firms for each facility. Heartland sold each home’s assets to its respective real estate firm, which then leased each home to its respective operations firm.

The alliance pointed out that Medicaid funds much of the nursing home care in this country, and under Medicaid regulations, leases are eligible for reimbursement, and that means taxpayers will make those repayments.

“By doing the sale and lease-back, the homes now enter a whole new phase of reimbursement. For the taxpayers of Michigan, a total, which I believe is $302 million for these leases, which are pass-throughs for homes that are fully depreciated that shouldn’t really have any capital. It’s not that they’re investing in these homes,” said Zwarensteyn.

Much of the money that has fueled the capital outlays has come from providers taking depreciation charges over the years and then stashing that money away, which has opened the door to borrowing at what now are low interest rates.

Decades ago, the alliance set up the Kent Hospital Finance Authority, an organization that allows hospitals to use the county’s triple-A credit rating to buy money often at below-market costs. According to KHFC records, local hospitals had nearly $894 million in outstanding debt service at the end of last year. This year, Spectrum Health and Metro Hospital are going to the bond market through the finance authority for roughly $250 million and $27 million, respectively.

“At the time we set (KHFA) up, we wanted to make sure the hospitals had access to capital that they would have had to compete with roads and schools and so on. But now the question is, have we made it too easy for them to spend and to drive up their capital costs, which then get turned into additional charges to their patients?” said Zwarensteyn.

Moody’s Investors Service recently issued its annual hospital report. It concluded that the current economy is creating a dismal financial forecast for nonprofit providers, which make up about half of the nation’s hospitals. The report said patients are deferring care due to a high unemployment figure and a lack of confidence in the recovery. On top of that, payments from Medicare and Medicaid are expected to decline, as Congress tackles the federal debt this fall, and commercial payers are likely to pay less.

At the same time, the cost to borrow money may rise relatively soon. Inflation has entered into the financial equation the past two months, as the price for many basic consumer goods has risen because consumer spending has fallen over those 60 days. If inflation becomes a concern, then interest rates are likely to go up in the near future.

Right now, however, Zwarensteyn said capital outlays this year through the alliance’s CON program have been healthy. “Thus far, it’s getting to be a pretty good size,” he said. “In terms of total projects, we’re up right now from prior years, but there aren’t a lot of things that will help the construction industry out.”

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