In 1991, Holy Family Memorial Medical Center in Manitowoc, Wis., refused to contract with a local business coalition that had offered to direct its 10,500 employees to the hospital in exchange for a 25% price discount.
Holy Family couldn't accept the coalition's analysis that its prices were 25% higher than two similar-sized hospitals in Green Bay, Wis., more than 30 miles to the northwest, said Paul Taddy, chairman of the Lakeshore Healthcare Coalition.
"They didn't think they needed to sign a contract with us because they thought our employees would go to their hospital anyway," said Mr. Taddy, vice president of human resources for Paragon Industries, a Two Rivers, Wis.-based manufacturing company.
Holy Family's merger with Manitowoc Memorial Hospital is the first of several hospital mergers MODERN HEALTHCARE will examine in coming months.
Spurned by the most comprehensive hospital in Manitowoc County, the 300-member business coalition contracted with nearby 53-bed Two Rivers Community Hospital to become its preferred provider.
"Without Two Rivers, Holy Family could charge whatever they want and refuse to discount prices to us," Mr. Taddy said.
Holy Family and Two Rivers are the only acute-care facilities in Manitowoc County, a rural area with a population of 80,000 some 90 miles north of Milwaukee. The seven nearest comparable hospitals in the state are more than 30 miles away in Green Bay, Sheboygan and Appleton.
While Two Rivers Hospital had the coalition contract, Holy Family lost an average of four patients per day, or 1,460 a year, said David Semple, Holy Family's president and chief executive officer. That amounted to 4% of its annual patients, he said.
Stung by losing more patients than it had expected, Holy Family reconsidered its position and underbid Two Rivers' prices by 10% in 1993 to win the coalition contract, Mr. Taddy said.
Mr. Semple said Holy Family was able to make a lower bid that year because it had been able to reduce its expenses through merger savings.
The 214-bed facility originally had refused to discount its charges 25% because it needed the higher revenues to cover the costs of its 1991 merger with one of its two competitors, Manitowoc Memorial, Mr. Semple said. Its counteroffer, which was rejected, was to discount charges by 7% and to freeze prices during the two-year contract, he said.
"We have a contractual commitment (with the coalition) to be below the average prices of (hospitals) in northeast Wisconsin," he said.
Over the past three years, with the business coalition ever watchful and with intensified competition from Two Rivers, Holy Family has kept that promise. State data for Holy Family show that while prices rose in the second and third years after the merger, the rate of price increases was about two percentage points lower than pre-merger averages.
Data reported to the state Office of Health Care Information indicate Holy Family increased its prices a total of 9.5% from 1992 to 1994 (See chart, p. 44). The price increases are based on average charge data reported by the hospitals to the state.
The median price increase for the other hospitals in the northeast region of Wisconsin was 17% during that three-year period, the state said. Two Rivers increased its prices a total of 17.6% from 1992 to 1994, the state said.
In 1993, Holy Family raised its prices 4.9%, compared with an 8.8% increase for Two Rivers, the state said. The median price increase in 1993 was 5.5% for the 14-hospital region and 6% statewide.
Still, on average, Two Rivers was less expensive than Holy Family in 1993, according to the Wisconsin Cost Containment Commission. Based on
risk-adjusted charges, Holy Family scored a regional charge index of 115, compared with 94 for Two Rivers, the state said.
The index indicates the amount of collected charges Holy Family received from payers was 15% greater than the average of the region, while Two Rivers was 6% lower.
Holy Family's Mr. Semple, who questioned the comparative index, said the price gap between the two hospitals has narrowed in 1994.
Increased competition.Within two weeks after losing its contract in June 1993, Two Rivers signed an affiliation agreement with Aurora Health Care, a six-hospital system based in Milwaukee. During the past year, Aurora and Holy Family have been engaged in a market war for patients and control of the county's five primary physician group practices.
Aurora has acquired a 10-member group practice in Manitowoc County, and Holy Family has acquired two groups with a total of about nine physicians. Both are actively seeking the remaining two groups, which account for the rest of the county's 24 primary-care physicians, Mr. Semple said.
The two hospital groups also have engaged in dueling advertising campaigns designed to win patients and sway public opinion. At stake for the victor is the business coalition contract, which will be rebid in early 1995.
"Two Rivers' affiliation with Aurora guarantees that competition will keep healthcare prices down," Mr. Taddy said. "(Holy Family isn't) the only game around."
Still, Mr. Taddy worries that competition will increase healthcare costs to businesses.
James Van Lanen, a Two Rivers businessman and supporter of Two Rivers Hospital, agreed. But, he added, "Holy Family's prices increased with competition. They would have gone up much more without competition."
Steven Spencer, Two Rivers' president and CEO, said the hospital's affiliation with Aurora guarantees area patients and businesses will have a choice.
"We believe competition will bring about cost-effective and higher-quality care," Mr. Spencer said. "We want modern technology, but we don't want things we don't need. We aren't going to have a medical arms race here."
Mr. Semple said the community will benefit from short-term competition but will experience steady price increases to pay for duplicative services created by the competition.
"Aurora and the two other Milwaukee networks are looking out to rural communities to purchase primary-care practices," he said. "They want to feed those patients from rural to urban hospitals. We don't believe that is appropriate."
Mr. Spencer denied that Aurora wants to ship patients out of the county to more expensive hospitals in Milwaukee. "We are a community hospital. That's why we are in business. (Mr. Semple) wants a monopoly," he said.
Merger effects.Like other newly merged hospitals, Holy Family's expenses dramatically increased during the merger year. In the following two years, however, Holy Family became more efficient, according to HCIA, a Baltimore-based healthcare information company.
On a combined basis, Holy Family's expenses per adjusted admission rose 15% to $4,526 in 1991 from $3,938 in 1990, HCIA said. In the second and third years of the merger, however, expenses increased a total of just 8.3%, HCIA said.
While many hospital executives believe competition increases healthcare costs, the Holy Family merger seems to have provided incentives for both hospitals in Manitowoc County to become more efficient and profitable-without increasing prices above pre-merger rates.
Before the merger, from 1989 to 1991, Two Rivers increased prices 32%; after the Holy Family merger, Two Rivers raised prices 17.6% from 1992 to 1994.
By cutting administrative and patient-care expenses, Two Rivers also became more efficient. In 1993, Two Rivers' overhead expenses decreased 8% from 1991 to 30.5% of total operating expenses, HCIA said.
With improved efficiency, Two Rivers was able to increase its operating margin to 3.4% in 1993 from 1.2% in 1990, according to HCIA.
Holy Family also increased its operating margins 56% to 6.7% in 1993 from 4.3% in 1992. Margins rose, in part, because of a 21% decrease in overhead expense from 1990 to 28.8% of total operating expenses. Nationally, HCIA said, hospitals in 1993 averaged 35% overhead expense, which measures the cost of general services and capital.
Much of the efficiency gain at Holy Family can be attributed to the decision to close Manitowoc Memorial 11 days after the merger, Mr. Semple said. The additional volume at Holy Family helped spread fixed costs.
Holy Family also was able to reduce its full-time-equivalent employees to 658 from 707 through selective layoffs and attrition.
More big savings in staffing costs have come through "flex-staffing," which allows administrators to use census figures to determine the optimal number of nurses and support staff required for each shift.
"Sometimes we send people home without pay, sometimes we call them in," Mr. Semple said. "Employees understand the direct relationship between patient volume and how many (employees) we can afford to keep."
While Holy Family achieved efficiency gains after merger, Michael Corry, chairman of the state cost-containment commission, said hospitals that merge don't automatically become more efficient. "Without competition, regulation and oversight by purchasing groups, there would be no incentive for hospitals that merge to hold down prices," Mr. Corry said.
Mr. Semple acknowledged that Holy Family made its public commitment to reduce price increases primarily because the community had an active business coalition that monitors price data collected by the state.
"The business community kept pressure on us to keep that promise," he said.