One of the few hospitals to plead guilty to federal criminal fraud charges announced last week it would merge with a larger western Michigan health system.
The merger of two-hospital United Memorial Health System of Greenville, Mich., and seven-hospital Spectrum Health of Grand Rapids was announced six months after United Memorial pleaded guilty to fraudulent billing. The practice of announcing a merger after cleaning up legal entanglements is not uncommon. The boards of both not-for-profit systems approved the deal in late June and early July and announced the memorandum of understanding July 9.
A United Memorial spokeswoman said Spectrum would become the sole member of United Memorial's parent company, which owns and operates the two hospitals, and that no money would change hands. Spectrum will maintain two local boards, medical staff and some autonomy at United Memorial, which is located about 30 miles northeast of Grand Rapids. But the United Memorial boards will serve in an advisory role, with final decisions subject to Spectrum board approval.
Both systems have had their share of regulatory scrutiny in recent years.
In January, United Memorial agreed to plead guilty to a single count of fraudulently billing health insurers for unnecessary pain-management surgery procedures performed by an anesthesiologist on its staff who later was convicted of healthcare fraud. The hospital agreed to pay a $1 million fine and reimburse Medicare, Medicaid and two private insurers a total of $750,000. The settlement averted a potentially more costly and lengthy criminal trial that could have excluded the hospital from federal insurance programs and led to its eventual closure.
Spectrum fared better in its legal battle.
In 1996, the Federal Trade Commission attempted to block the proposed merger between two Grand Rapids hospitals-332-bed Blodgett Memorial Medical Center and 529-bed Butterworth Hospital-that created Spectrum Health, arguing that it was anticompetitive. The FTC lost in both federal district and appellate courts.
In a 2001 study, the FTC found that the controversial 1997 merger failed to deliver promised cost savings and efficiencies, according to a postmortem on the merger by two former FTC officials. Spectrum disputed the look-back study's findings, arguing that the system has held rate increases to an average of 1.5% annually over the past five years, saved millions of dollars through consolidating contracts and increased the number of contracts with payers from a pre-merger five to more than 20 today.
The common link between both systems is William Gonzalez, the former president and chief executive officer at Spectrum, who engineered the merger that originally formed Spectrum. Gonzalez, who resigned from the company in 2000, had served as an industry healthcare consultant since then but joined United Memorial as interim CEO in October 2002.
United Memorial Chairman Franz Mogdis said that while he tapped Gonzalez's knowledge of Spectrum and United Memorial, the former Spectrum leader did not participate in the merger discussions.
"His role has been almost exclusively as a sounding board in this process," Mogdis said. "I've been able to draw on Bill and his knowledge of Spectrum. We were extremely lucky and couldn't have come up with a better individual than Bill Gonzalez to lead us. He knows both systems."
Mogdis said the legal troubles facing United Memorial played only a minor role in the system's decision to seek a larger and more powerful partner. He said United Memorial, which had lost about $90,000 on nearly $50 million in net revenue in 2001, lost $3.35 million in 2002 on slightly less net revenue and is expected to lose $2.4 million in fiscal 2003, ended July 1. He pointed out that beginning in 2002, United Memorial's second-biggest payer, Blue Cross and Blue Shield of Michigan, changed the system's payment status, costing it an estimated $2.5 million in annual reimbursements.
"To some extent we were influenced by the legal troubles. That didn't help us increase market share or recruit physicians or employees and was a major distraction. But this merger would have occurred regardless," Mogdis explained. "When we began to look at our long-term strategy and the kinds of capital improvements we needed and the kind of investment to support that, we knew we needed to tie into a larger partner. And we already had a relationship with Spectrum."
He said being a part of Spectrum should improve the system's ability to negotiate more favorable managed-care contracts.
He said Montcalm County is one of the fastest-growing areas of Michigan, reporting a nearly 16% population increase from 1990 to 2000, with similar growth predicted over the next two decades.
Spectrum President and CEO Richard Breon said discussions between the two systems began in September 2002, even as settlement discussions were held with the U.S. attorney's office to resolve United Memorial's criminal case.
"We didn't want to get into the middle of a lawsuit," Breon said. "That can be quite distracting and did have an impact on (United Memorial's) financial viability. What we wanted to address in the merger talks was what would happen after the case was resolved. They decided as a group that they wanted an affiliation and we saw the potential."
Breon said he hopes the merger will keep patients from leaving Montcalm County for care.
"We want people to stay there," he said. "We want it to be very successful. UMHS has had some difficulties, but it's a good organization with many good people."
He said both sides need to complete the necessary paperwork and predicted that pending regulatory approvals, the deal would close by Sept. 1.
Spectrum earned $28.2 million in net income on 2002 revenue of $1.37 billion, a 27% drop in profits from 2001's $38.7 million on revenue of $1.2 billion, according to system officials. In 2003, Spectrum expects to earn $5 million in net income on revenue of $1.53 billion.