The charge increase, spread among more than 20,000 billing codes, will enable Spectrum Health to boost its operating margin to a level that better accommodates growing patient volumes and covers an estimated $70 million in uncompensated care, an amount that’s up from $15 million in 1997 and includes $40 million in current-year losses in care for Medicaid and Medicare recipients.
In the present 2004 fiscal year that expires June 30, Spectrum Health is on track to post an operating margin of 2.2 percent, or $40.7 million, on operating revenues of $1.86 billion.
Administrators say that’s not enough of a margin for Spectrum Health to continue investing in upgrades, meet growing volumes and become, as CEO Rick Breon put it, “the nation’s highest quality and most successful health-care enterprise by 2010.”
“We cannot continue to have that kind of margin and continue growing,” Chief Financial Officer Mike Freed said during the nonprofit health system’s annual meeting on June 3.
“This is not sustainable,” Freed said. “We want to continue to meet the needs this community has for health care.”
The proposed FY2005 budget, even with the increases in charges at the health system’s three Grand Rapids hospitals, would only raise the operating margin to 3.2 percent, or $71 million — a rate that’s well below the 6.3 percent average operating margin of similar-sized health systems that also hold an Aa bond rating, Freed said.
Spectrum Health, free as of Oct. 1 from the limitations of a price cap that was part of a 1997 deal that allowed the health system’s creation, could generate a larger margin and better financial performance through a larger increase in hospital charges, Freed said. But in analyzing financial data, Spectrum Health administrators identified a revenue target and “what we need to make” in a margin in order to meet growing patient volumes and capital needs in FY 2005.
“The kind of a price increase it would necessitate to get to that (higher) level — we were sensitive to not do it this year,” Freed said.
The 2005 budget projects revenues of $2.12 billion, a 15.4 percent increase over FY2004 that’s attributable largely to growth in the health system’s managed-care company, Priority Health.
Included in the budget is $153 million in capital improvements, $101 million of which will occur at Butterworth, Blodgett and DeVos Children’s hospitals in Grand Rapids. Spectrum Health will spend another $19 million on capital improvements at Hackley Hospital in Muskegon.
Under a 1997 consent decree that allowed the merger of the former Butterworth and Blodgett hospitals to form Spectrum Health, the health system froze charges for three years and has lived for four years under a price cap tied to the Midwest Consumer Price Index.
In that time, Spectrum Health’s charges increased an average of 1.5 percent annually over seven years while operating costs, driven by a combination of forces, escalated at a higher rate, Freed said.
Future increases in hospital charges depend on a myriad of factors, he said.
Even with the average 12 percent increase, Spectrum Health remains a strong value when compared to other large health systems in Michigan, Freed said. The health system offered pricing data at the annual meeting showing its 2004 charges are well below what its peers charged in 2002 for cardiovascular surgery, cardiology, oncology and orthopedics.
Yet despite favorable pricing, Spectrum Health has not picked up any market share since 1997 in Grand Rapids or throughout its entire 13-county service area.
Freed hopes that employers will examine Spectrum Health’s overall pricing, medical outcomes and the resulting perceived value and try to steer business its way.
“We’re hoping we can win the customers and employers if we demonstrate the value in choosing us,” Freed said. “Employers have a lot of hard decisions to make. We hope they’ll take that value to heart and purchase (health care) just like they do anything else.”