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Mercy sharpens its focus

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JAMES P. LEUTE
October 19, 2008
— Increasing competition, shrinking reimbursements and an economic downturn punctuated by the pending shutdown of General Motors in Janesville have forced Mercy Health System to sharpen its focus on its core business.

For the 24 communities that the Janesville-based Mercy serves, that means cuts in what Mercy CEO Javon Bea refers to as social services.


Earlier this year, Mercy said it would eliminate its Mercy in Motion transportation service, as well as its adult day care and inpatient hospice care programs.


Mercy’s moves met with an outcry from the people who used the services, as well as those concerned that Mercy was abandoning a defenseless segment of the community.


In a wide-ranging interview earlier this month at his office in Janesville, Bea said he takes no pleasure in the cuts, but he said they are necessary to keep Mercy on solid financial footing.


Mercy’s profits are recycled into it core services, plant and equipment, Bea said. When there is extra money, it is channeled into non-core services such as Mercy in Motion, adult day care, in-house hospice and day trips for senior citizens.


“You won’t find another hospital in the United States of America that owns and operates a homeless center,” he said, referring to the House of Mercy shelter in Janesville for homeless families. “Homelessness is not considered a medical/surgical service. It’s outside the realm.


“You won’t find a lot of the things that we do.”


But Mercy is changing as it faces challenges on many fronts.


A new player in town

SSM Health Care of Wisconsin will soon break ground on a 50-bed hospital that will open in late 2010 on Janesville’s east side. The $140-million project also includes a new physician office complex for Dean Health System.


Mercy Hospital in Janesville is licensed for 240 beds. On any given day, 100 of them are filled, and 30 of those are the responsibility of Dean doctors.


Assuming historical averages, Bea said Mercy Hospital’s census will drop to 70 patients, while 30 will be served at SSM’s new facility, which will be named St. Mary’s Janesville Hospital.


“That’s a major hit for Mercy because we’ll still be maintaining the same type of fixed costs for plant, equipment, etc.,” Bea said. “If you’ve got a 64-slice CT scanner or an MRI, the cost doesn’t decrease because you’ve got 30 less patients a day to use that.”


With expenses constant or even increasing, the anticipated loss of revenue from 30 beds is one of the factors in the decision to cut non-core social services, Bea said.


“I think the people of Janesville are going to wake up five years from now and say that we have less services in town instead of more services for having the second hospital here,” he said. “Mercy has been able—with those 30 extra patients—to get into areas that are outside traditional medical/surgical services.


“These 30 patients gave us the kind of cushion or the wherewithal that we could get into nontraditional medical/surgical services, and that’s not going to be possible.”


If SSM and Dean can afford to provide those services, more power to them, Bea said.


But if they can’t, the services won’t be available, and the community will not be better off, he said.


Shrinking reimbursements

Nationally, freezes and cuts in Medicare/Medicaid reimbursements have hammered many hospitals, which also have been squeezed by other health care payment programs from the public and private sectors.


Mercy’s part of that group, Bea said.


“There’s been a lot of pressure on reimbursements,” he said. “Anyone in health care will tell you that reimbursements are continuing to drop.”


In the meantime, the cost of providing charity and other uncompensated care is growing.


Last year, Mercy provided $33 million in uncompensated care.


That included free health care but also free community services such as EMS training, the House of Mercy, transportation services and a variety of senior services.


While Mercy would like to continue providing the non-core services, Bea said, it must instead focus on its core medical business.


“What’s being projected is an increase in the ranks of the amount of charity care and uninsured, and we see that doing nothing but growing pretty strongly,” said Bea, noting that every 1 percent increase in charity or uncompensated care translates into a $5 million annual cost for Mercy.


The downturn in the U.S. economy is driving more uninsured or under-insured people to hospital emergency rooms in search of primary care, Bea said.


Goodbye, old friend

Mercy and GM have long been partners. The two often have been mentioned in the same breath as the health system surpassed the automaker as the area’s largest employer.


But Mercy will struggle with the planned shutdown of the Janesville plant and the area companies that supply the factory, Bea said.


For the immediate future, GM employees will have health insurance. The scary part, Bea said, will come when the workers’ labor contract and benefits expire in 2011.


Bea has health care industry friends who have been through auto plant closings.


“One told me that the real hit doesn’t come for almost a year after they’ve lost their insurance because they’ve still got cash,” Bea said.


“They were waiting for this big bomb to drop, and it dropped when the labor contract ran out,” Bea said. “They thought it dropped all it could drop, but then it dropped even further a year later as people’s personal funds ran out.”


A new game plan

Mercy faces serious challenges, but Bea said the system will be proactive.


The system will build on what it learned in the seven years it worked to win the 2007 Malcolm Baldrige National Quality Award, the nation’s highest presidential honor for organizational performance excellence.


Some people have criticized Bea and Mercy for the amount of money the system spent to win and celebrate the award and then turn it into a widespread marketing campaign.


While Bea couldn’t provide the exact cost of the award, he said whatever Mercy spent was worth it—and then some.


The Baldrige process, he said, resulted in massive improvements in efficiencies at a far lower cost than outside consultants would have charged.


“Our whole organization over the last seven years has adopted the Baldrige principles and put in the framework to drill down to front level processes of how we do everything,” he said.


“ … What’s allowing us to face these economic challenges is this new way of operating that Baldrige brought us. It’s the greatest return we could have.”


Mercy is examining every one of its 500-plus cost centers for efficiency improvements, Bea said.


Mercy also will ask its vendors—who annually provide more than $75 million in goods and services—to get more competitive on their pricing, he said.


Mercy has lost hundreds of thousands of dollars providing social services such as Mercy in Motion and the adult day care and hospice programs, he said.


“Some people think its pennies, but we actually were spending millions on a lot of these non-core services that we’re going to have to drill down on,” Bea said. “We’re still committed to the House of Mercy, but we need community support on that.”


Mercy has 63 facilities in 24 communities in two states, and that diversity will help it weather the economic storm.


A struggling Rock County economy is and will continue to be Mercy’s biggest challenge, Bea said. Mercy is faring better in Illinois and in Walworth County, where the system plans to expand its hospital in Lake Geneva.


“Right now, if we weren’t doing all the things we’re doing and examining all 500 cost centers with our expansion plans, we’d be terribly in the red,” he said. “I mean hugely.


“The numbers would be staggering, but we’re not planning on being there.”


Bea: Dean Hospital will hurt Janesville

When it comes to the health care industry, Mercy CEO Javon Bea is a pretty smart guy.


But so, too, are the leaders of SSM Health Care of Wisconsin and Dean Health System, the Madison-based partners in a $140-million hospital and clinic planned for Janesville’s east side.


Since those plans surfaced, the Madison and Janesville camps have laid out their positions on why the project is or isn’t necessary.


Bea has said that 30 percent of the 100 patients who fill Mercy Hospital’s beds on any given day will migrate to the new hospital, creating a revenue gap for Mercy that will result in cuts to Mercy’s non-core services


In an interview, Bea was asked to take off his Mercy hat and replace it with one worn by a disinterested health care leader.


“As a businessman, what do you think the SSM/Dean folks see in Janesville that they want to spend hundreds of millions of dollars to go after?” he was asked.


Bea believes SSM had cash that it needed to invest. When the state repeatedly denied the system’s plans to add beds in Illinois, the money was targeted to Janesville, Bea suspects.


“In doing that, they’re just saying there’s so much revenue associated with these 30 patients at Mercy that they’re not going to give that to us anymore,” Bea said. “They’re going to take those 30 patients and the revenue that comes from their doctors and they’re going to put them in their own facility.”


From a financial perspective, SSM will be able to make it work, Bea said, adding that Mercy does the same thing with its six-bed hospital in Walworth. In fact, he said, Mercy plans to make that hospital viable with an expansion to 25 beds.


But from a community perspective, SSM’s plan won’t work, he said.


“(The community is) going to lose these extra-nice-to-have services that we were able to fund because we won’t have that revenue any more but we will have the same fixed costs,” he said.


“They’ll be able to make it work, but they’re not creating bigger. …They’re adding more beds at a time less beds are needed. They’re not bringing specialists here. As I understand it, they’ll continue to send their specialty patients to Madison like they always have.


“The new stuff is OK for Dean, but it’s the beds. Our need for beds has been dropping every year, and the idea of more beds is just ridiculous.”


Trauma center an example of commitment, Bea believes

Difficult economic conditions have prompted Mercy Health System to cut some nonessential services.


But Mercy’s chief executive officer said a $10 million investment in a new trauma center and clinic is a shining example of the system’s commitment to top-notch medical care.


With a new hospital coming, Javon Bea said the community will suffer from cuts in nontraditional services that Mercy once provided.


The community, however, will see more medical/surgical services, he said.


“They’ll see us being the only Level II trauma hospital in the Madison/Janesville/Walworth County area,” he said. “The medical/surgical services will be greater, and we’re going to be assuring that.”


Construction is under way on a 90,000-square-foot addition that will include a two-tier parking deck and a 35,000-square-foot medical office building for cancer services, neurosurgery, urology and trauma services.


The building will be adjacent to the hospital’s emergency room and will be connected by an enclosed walkway.


When construction wraps up next year, Mercy will be the only Level II trauma center in the area. The expansion in emergency services will include round-the-clock trauma surgeons, neurosurgeons, cardiothoracic surgeons, critical care specialists and orthopedic surgeons.


Mercy, along with Meriter and St. Mary’s hospitals in Madison, are now Level III centers.


University Hospital in Madison and Froedtert Hospital in Milwaukee are the only Level I adult centers in the state. They are capable of treating patients with severe burns, transplant needs or re-implantations of amputated limbs.


Bea said Mercy’s center will follow strict trauma protocols that dictate treatment from the scene of an accident all the way through the patient’s care.


Access to trauma treatment is a critical component of a hospital’s designation, he said, adding that the new trauma center will reduce waiting times in the hospital’s emergency room.


And fewer helicopters will leave Janesville with patients on board.


“In fact, more will be coming in,” Bea said.


“The people in this area should take great comfort that they will be in the treatment vicinity of the only Level II trauma center in this entire area.”


In addition to new construction, Mercy has remodeled its outpatient surgery, lab, radiology, birthing center and cafeteria areas.


It also is converting all patient rooms to private rooms.


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Trauma centers are graded based on their levels of expertise and ability to treat severely injured patients. Level I centers treat the most serious cases.


Level I: A facility that has the capability of providing leadership and total care for every aspect of injury, from prevention through rehabilitation. In its central role, the Level I center must have adequate depth of resources and personnel.


Level II: A hospital that provides initial trauma care, regardless of the severity of injury. Depending on geographic location, patient volume, personnel, and resources, the trauma center may not be able to provide the same comprehensive care as a Level I trauma center. Therefore, patients with more complex injuries may have to be transferred.


Level III: Trauma centers that provide prompt assessment, resuscitation, emergency operations and stabilization and arrange for possible transfer to a facility that can provide definitive trauma care.


Some examples in Wisconsin:


Level I: University Hospital, Madison; Froedtert Hospital, Milwaukee; Children's Hospital of Wisconsin, Milwaukee.


Level II: Luther Midelfort Hospital, Eau Claire; Aurora BayCare Medical Center, Green Bay; St. Vincent Hospital, Green Bay; Gundersen Lutheran Medical Center, La Crosse; Saint Joseph's Hospital, Marshfield; Theda Clark Medical Center, Neenah; Mercy Hospital, Janesville (2009).


—Source: American College of Surgeons



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