Munson Medical Facility

Aug. 1, 2010

A most delicate Operation: Munson Stitches a Deal with Spectrum
By Anne Stanton
Last week, the Northern Michigan Regional Health System in Petoskey
ended affiliation talks with Spectrum Health, saying it didn’t want to
lose local control of its health services.
So what does that mean for Munson Healthcare, which is also trying to
negotiate an affiliation?
Ironically, the idea of joining forces with Spectrum was born, in
part, because the Petoskey hospital was considering a merger. The
thinking at Munson was, why not join Spectrum instead of competing
with the Grand Rapids powerhouse? What better way to save advertising
dollars and get immediate and undeniable clout in terms of bargaining
with insurance companies, pharmaceutical companies, and medical
suppliers? Spectrum could also help Munson raise more than $340
million to build a new 100-bed hospital wing and cancer center.
Spectrum, with an AA bond rating, could make the task easier and
cheaper.
The announcement of talks with Spectrum last winter came as a surprise
to many, who view Munson as a financially healthy institution—cranes
towering over the hospital seem to be constantly at work. Yet Munson’s
leaders are looking ahead to leaner days. With the new federal health
care reform bill, Munson expects to lose $90 million in Medicare and
Medicaid reimbursement cuts over the next 10 years.
Those cuts, and rising costs, are why hospitals everywhere are talking
about collaboration, not competition, explained Ed Ness, who recently
took the helm as Munson Healthcare’s president and CEO.
While some in the community applaud collaboration, they are adamantly
opposed to a merger, which would mean loss of control and autonomy—the
very reason that Northern Michigan in Petoskey pulled out of talks.
Ness said Munson is not discussing either an acquisition or a merger.
“The question facing the Munson Healthcare Board right now is, how do
we ensure Munson is a top quality organization 10 to 15 years from
now, and can we do that on our own? To prepare for the future, the
Munson Healthcare Board is considering all options which includes a
partnership, joint venture or staying independent. Nothing has been
decided at this point.”
On these two pages, Express will examine the pros and cons of working
with Spectrum.

PRO VOICES
Munson’s survival may be at stake

The sands are shifting under the old way of doing medicine, and with
the new landscape must come change.
So say those who passionately support a Munson/Spectrum partnership.
Historically, physicians  have banded together by specialty to run a
private business. The more patients they see, the more money they
make. These same doctors don’t always feel they get sufficient
reimbursement for their services, so they might purchase diagnostic or
lab equipment to provide even more services to help pay for overhead.
Yet many of these private practices refuse to take people who have no
insurance or must rely on Medicare or Medicaid, forcing them to the
door of the hospital emergency room, which, by law, can’t turn
patients away.
In effect, the private practicing doctors have sequestered the highest
paying patients, leaving the hospitals the task of caring for those
least able to pay. And that’s one reason why hospitals, especially in
urban areas, are suffering financially.
For northern Michigan hospitals, the bigger problems are rising
medical costs and cuts in Medicare and Medicare reimbursements.
Private insurers, as well, aren’t keeping up with health care costs,
said David Friar, a hospitalist, who sits on the Munson Medical Center
board and is one of Munson’s 307 corporate members, who might be asked
to vote on a merger sometime in the future.
“Cheboygan is basically bankrupt. Mercy Hospital in Grayling is losing
money by the millions. Otsego Memorial in Gaylord is barely in the
black. Northern Michigan hospital in Petoskey is also financially
hurting, which is why it was talking to Spectrum in the first place,”
he said.
“How long can these little hospitals survive? Munson is very strong
for a Northern Michigan hospital, but health care margins are growing
smaller and smaller, the cost of providing health care continues to
skyrocket, and equipment and technology are becoming more expensive.
We’re also spending thousands to maintain medical records,” Friar
said.
“As the costs continue to skyrocket, reimbursement continues to
plummet. When you march the two lines out, there comes a point in the
future that we no longer survive. Munson is a lot better off than the
smaller hospitals. We are a bigger boat, but it would be nice to be a
part of an even bigger boat and, hopefully, have some protection
against the rough financial seas that are coming.”

MERGER ADVANTAGES
There are a lot of factors to what equates to success: the doctors
have to make a living, patients need quality care, and the hospital
needs to stay in the black.
And Friar thinks that can all happen with Spectrum in the picture.
With $4 billion in net revenues, it’s eight times the size of Munson,
with about $500 million in net revenues, according to Rick Breon,
Spectrum’s CEO.
A merger brings many advantages beyond capital, such as digital
sharing of patient information, which is important to Northern
Michigan residents who travel to Spectrum for specialty care, Friar
said.
Spectrum possesses more bargaining power when it comes to paying for
supplies and pharmaceuticals, as well as striking deals with insurance
companies, such as Blue Cross/Blue Shield of Michigan. And that power
would only increase with a Munson partnership.
As part of a bigger hospital system, Munson would carry much greater
political clout in Lansing, helping to level the playing field with
Detroit hospitals. And that’s important since 62 percent of Munson’s
revenue comes from the government, Ness said.
Finally,  Spectrum and Munson are extremely good at containing
costs—both are in the lowest quartile of health cost delivery when
compared to the country’s hospitals.  And that translates into greater
success for Priority Health in which they both have ownership stakes.
Yet low costs raises the issue of whether patient care suffers. Not in
this case. In June, Spectrum was rated in the country’s top 10
hospitals by a national health-rating firm based on its clinical
quality and efficiency.  Compared to other health care systems, those
in the top 10 had 13.2 percent fewer medical complications and 12.3
percent fewer deaths, according to The Thomson Reuters 100 Top
Hospitals program, which gave Spectrum its Health Systems Benchmarks
honor.

SHARING IDEAS
Munson, of course, is no slouch, having been named as a “Top 100
Hospital” 12 times by Thomson Reuters.
With the two hospitals  devoted to quality patient care, a partnership
would provide opportunities for cross-innovation, Friar said.
“One of the amazing outcomes is Spectrum’s hand-washing initiative (a
public health measure). They’ve done a great job, the best in the
nation. There’s lots of stuff we could share with others,”  Friar
said.
So are we talking about all the benefits of what appears to be an
emerging monopoly?
“Essentially yes. Monopolies aren’t always bad,” Friar said.
“Sometimes they bring lots of good things, like cheaper care.

NEW TRENDS
There are two other factors that make a Spectrum join-up an attractive
proposition.
First, medical students are taking on staggering debt and are looking
to find salaried positions with hospitals. With at least $200,000 in
student loan baggage, they are hardly in the position to start their
own medical practice or to buy into one.
Secondly, 71 million Americans—or 27% of total patients—are on
Medicare and Medicaid, according to a report from the Center on Budget
and Policy Priorities. The government reimburses hospitals at a higher
rate than a private practice doctor.
These two factors combined are driving hospitals to employ a greater
number of physicians. Munson has danced in and out of employing
physicians with limited success because it essentially requires the
hospital to subsidize the physicians’ salaries. Spectrum, however, has
appeared to have found a formula that works. Its wholly owned
subsidiary, Spectrum Health Medical Group, employs about 500
physicians in a wide range of sub-specialties.
The doctors are being paid median salaries using national standards
(but not excessive), and they can focus on what they like to do best,
i.e., practice medicine. They’re also left with time to spend with
their families, most private practice owners have to do the work at
night. They also don’t carry the financial risk as a business owner,
and they leave the headaches of cost containment to the hospital
management, said a Spectrum-employed doctor, who wished not to be
named.

TEAM APPROACH
Moreover, this approach of hospital-employed staff lends itself to the
highly successful physician team approach used at Mayo Medical Center,
where a patient sees one team of doctors at a time, rather than having
to bounce from one to another. Spectrum has already gone that way in
its team-treatment of cancer patients, and wants to emulate the
approach in other disciplines, the Spectrum doctor explained.
“We could learn that employment model from Spectrum—how do you do that
successfully?” Friar said. “The concept of the private independent
physician with his or her own business is not the way medical students
are coming out. Frankly the way health care is being driven is
everyone works for the hospital and one payment is made to the
hospital.”
Petoskey’s withdrawal from talks with Spectrum doesn’t change the
equation, he said.
“My answer is, it’s the same with or without Northern Michigan
hospital. I think a partnership offers a lot of opportunity to go into
to the future with strength, as opposed to waiting for what the future
comes up with for us.”


Anti-Merger Voices
Some fear losing local control of health care

By Anne Stanton

Control of Munson’s future. Opponents to a Spectrum partnership say
it’s the ultimate issue.
“Who will control Munson? Munson is more than a community hospital.
It’s the regional center for all of Northern Michigan. There are
people all over Northern Michigan that rely on Munson and they worry
who’s controlling it,” said Ralph Cerny, the former president of
Munson Medical Center.

NOT CONSULTED
The pushback from some of the community’s most influential and
powerful leaders when the Spectrum talks were first announced last
winter was strong and quick, leading to the resignation of Doug Deck,
CEO of Munson Healthcare, in May.  Community leaders were angry that
they weren’t contacted before proceeding with talks, said Sid Lammers,
a Traverse City business owner who just stepped down as president of
the Traverse City Rotary Club.
That’s because the community has supported Munson with tens of
millions of dollars of donations in the past for capital projects. If
Munson needed more capital to build the proposed hospital wing and
cancer center, it should have come to community leaders first, he
said.
“Munson has done a very good job of making us feel inclusive in the
past, that this is our hospital. They’ve had tremendous support from
the community and then they made the determination behind closed
doors, instead of coming to us, and saying, ‘We need this. We realize
it’s a lot of money. We don’t think you can do it, so we are
investigating mergers.’ That’s where their mistake was; now they are
going slower and easier.”
Now Ed Ness is at the helm of Munson and is seeking input from
community groups,  hosting  “Lunches with Ed.”
“I’ve eaten a lot of chicken sandwiches in the last few weeks,” he joked.
Cerny, Calcutt, T. Michael Jackson, Lammers, John Rockwood, former
Munson Healthcare CEO, and many others in the community have expressed
concern publicly and privately that a partnership with Munson, as
first discussed, looked more like an acquisition.
Harry “Scrub” Calcutt III sent out a letter in February expressing
skepticism about Munson’s use of the word “partnership.”
“Of course, representatives of both Spectrum and Munson assure us that
all that is good about Munson will remain untouched, merely augmented
by advantages of a close association with Spectrum. All ‘partnerships’
begin with such assurances. And most end as mergers, with the larger
partner—in this case, Spectrum—absorbing the smaller into its existing
corporate culture.”
The dissidents have mostly remained quiet while Munson continues to
negotiate with Spectrum with an intent to ease their concerns about
ownership and control.

LOSS OF MEMBERSHIP
A merger with Spectrum would require that the corporate membership
would have to vote itself out of existence, something Cerny
passionately opposes.
“The legal term is corporate membership substitution, which would mean
the corporate membership votes itself out and Spectrum would
substitute in for the 307 corporate members,” Cerny said.
 About half of corporate members come from the community, while the
other half sit on boards of Munson’s various boards, such as the
boards of Munson Medical Center and Paul Oliver Memorial Hospital in
Frankfort.
If the 307-member corporate board votes itself out of existence, the
community would no longer be able to make decisions about Munson,
Cerny said.
That’s because these corporate members vote each year on the folks who
have been nominated to Munson’s Healthcare Board, Cerny said.
“Basically, the board needs to understand this other point of view,
the issues that are important to the community that they may not be
giving full consideration to, and I hope it will influence them to do
what Petoskey just did—to break off the discussions or to change the
nature of the deal, such as a joint venture on capital projects,”
Cerny said. I’m not sure, but I believe they’re considering
continued on page 14
alternatives to the Spectrum merger.
Cerny agrees that Spectrum can offer advantages to Munson, but that’s
fully possible without an act of corporate substitution. Munson is
already in a purchasing collective with other hospitals and could join
up with Spectrum to make it even more powerful.

FIRED PHYSICIANS?
When it comes to the emerging trend of hospital-employed physicians,
the fact is that the majority of physicians at Spectrum remain in
private practice. Spectrum doesn’t have a corner on employing
physicians and Munson could figure it out, Cerny said.
A bigger concern is whether a partnership would mean the displacement
of physicians and administrators who already work in Northern
Michigan. What if it’s far cheaper for a Grand Rapids radiologist to
read X-rays than a Traverse City radiology firm? After all, X-rays are
now being read at night by a group in New Zealand. What if these Grand
Rapids doctors decide they want to move to beautiful Traverse City,
and the partnership makes it easier to do so?
And what about administrative jobs, usually the first to go in a merger?
 Ness told the Express that management and administration is a local
responsibility and would remain so, regardless of the direction that
Munson takes in the future.
Then there are Munson’s vendors. What if Spectrum, with its buying
power, moves more of its suppliers into the Munson system? Ness said
that Munson, which is already in a purchasing cooperative, would
continue to purchase from its local vendors.

MORE JOBS
Ness and Rick Breon, the CEO for Spectrum, say that growth will mean
more jobs, not less. “A new 100-bed tower will require nurses,
physicians, and support staff that we don’t have now.”
Despite these reassurances, fear is pervasive among those who believe
job loss is inevitable with a merger.
There’s the final question of capital. Could Munson afford to build a
new hospital wing and cancer center without Spectrum?
“That’s the 64-dollar question,” Cerny said. “Can Munson afford to do
what it wants to do on its own without giving the whole organization
over to Spectrum? There’s been a lot of speculation about what happens
if they do go to Spectrum. Maybe the donated dollars will dry up.
People will say, ‘Let Spectrum do it. I won’t support another fund
drive.’ My hope is that Munson tries to make it happen. To say to the
community members, ‘Many of you wanted us to remain independent. So,
please, help us with the capital needs.’”
In response to concerns, the Munson Healthcare board has also sought
advice from a consultant on how best to share financial and
professional resources while maintaining autonomy.  Ness said he
appreciates that the community is so engaged with Munson and
acknowledged that the board understands the community’s desire to
maintain local control.
“Community involvement is the reason the hospital is so successful,
and I think it’s a good thing. I would agree and the board would agree
that retaining sufficient local control to maintain and build on this
great hospital is essential.”
Ness said a non-negotiable item in the talks is that local donations
remain local.
“Gifts have always been allocated at the discretion of the donor and
that will not change, regardless of the direction we take in the
future,”he said.
Breon of Spectrum said he’s not anxious about the delay in a decision;
he recognizes these issues take time to figure out.
“The only concern is you get deal fatigue. If these go on too long,
there are so many other things going on, it takes a tremendous time
and effort on both our parts. They had a CEO change in the middle of
the process, which is unusual.”