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Bills could help small hospitals partner with larger systems as pandemic stresses operations

BY Sunday, March 27, 2022 06:08pm

State legislation drafted to streamline North Ottawa Community Health System’s ability to pursue a merger with a larger health system also could affect several other community hospitals across Michigan.

Separate but identical bills proposed in the state House and Senate would eliminate the need for a second public vote to sell or lease a hospital like North Ottawa that was previously transferred from a public authority to a private, nonprofit corporation.

Eight small hospitals in Michigan, including North Ottawa, that were originally formed by public authorities could potentially benefit from the legislation should they opt to pursue a merger, according to Adam Carlson, senior vice president for advocacy for the Michigan Health and Hospital Association, which supports the legislation.

“At the end of the day, it’s all about access to care, and oftentimes that’s what you get with strategic partnerships like what North Ottawa is looking at,” Carlson said. “You really preserve the access to care that is so important. You keep your facility in your community, serving the residents of your community.”

Among a dwindling number of independent health systems in the state, North Ottawa dates back 103 years and at one point was owned by a public authority consisting of six municipalities in northwestern Ottawa County. The health system includes the 81-bed acute care hospital in Grand Haven.

In 1996, more than two-thirds of local voters approved the transfer of North Ottawa to a private, nonprofit corporation. Under existing state law, North Ottawa would have to go through another public vote to merge with another health system.

Senate Bill 944, sponsored by Sen. Roger Victory, R-Hudsonville, and House Bill 5876, sponsored by Rep. Greg Van Woerkem, R-Norton Shores, would do away with the requirement for a second public vote.

North Ottawa President and CEO Shelleye Yaklin urged legislators to enact the legislation to help the health system pursue a partner as smaller community hospitals cope with significantly higher costs from the COVID-19 pandemic, lost revenue from deferred procedures and surgeries, tight reimbursements and staffing shortages that have driven up wages.

“As we look to the future, the thing that is absolutely most important, and something that we are charged with as a community organization, is ensuring that we’ll be there for the long term and providing an opportunity and a path for us to do that more expeditiously is something that is critical to my hospital and likely to others that will soon be facing the same type of challenges and decision-making,” Yaklin said in recent testimony to the Senate Health Policy and Human Services Committee. “It’s important to us to find partnerships with organizations who can continue to support the mission and the work that we already do and sustain that into the future so that we don’t have any break in service and we can continue to take care of growing areas.”

Yaklin did not identify any potential partner for North Ottawa or what the health system is pursuing.

Mutually beneficial partnership

Introduced in early March, the legislation would enable North Ottawa “to partner with a larger health system more expeditiously,” according to a North Ottawa statement provided to MiBiz. It added that the health system “continues to explore any and all opportunities that are poised to advance our ability to provide care in the communities we serve.”

The Grand Haven-based health system in 2018 sold its physician group to Mercy Health, and the two have collaborated clinically through an affiliation.

Kevin DiCola, spokesperson for Mercy Health’s parent corporation, Livonia-based Trinity Health, told MiBiz that it would welcome talks about going further. The clinical affiliation with North Ottawa helped Mercy Health “expand quality care along the lakeshore” and in Ottawa County, DiCola said.

“We’ve had a very mutually beneficial partnership with them for many years,” DiCola said. “We’re always looking to explore opportunities to advance our objectives there, and that would include broadening the partnership between us.”

The Senate Health Policy and Human Services Committee voted unanimously last week to advance S.B. 944 after adding an amendment from Sen. Lana Theis, R-Sturgis, that eliminates taxing authority for hospitals that are no longer held by a public entity after an ownership transfer.

North Ottawa once levied a small property tax locally that it stopped collecting many years ago.

Theis noted that she had worked with Trinity Health on the amendment “every step of the way, making sure they were making me comfortable with it.”

“And we’ve done everything we can to make sure that it is addressing this situation specifically,” Theis said.

The House Health Policy Committee also passed its version of the legislation.

Challenges for small hospitals

The inability to spread costs across a larger operation and generate economies of scale is among the “extremely difficult” financial challenges smaller and often rural hospitals face today, Carlson said. 

These hospitals are too small to earn classification as critical access hospitals — and receive reimbursements accordingly. They also have the same cost issues as larger systems, but without the volume to “meet those thresholds to be able to cover their fixed costs in the same way,” he said.

“It’s a really tough space that they occupy,” Carlson said. “We call them our mid-sized vital hospitals, and North Ottawa falls right in the middle of that category where they don’t have the same type of federal arrangement that critical access hospitals have.”

Many small hospitals today are in some form of discussion with a larger health system about a possible partnership or merger, “especially with the toll COVID has had on our small and mid-sized hospitals,” Carlson said.

“It’s hit them particularly hard with the supply chain costs and increased workforce costs. It’s all squeezing them at the same time,” he said. “Everyone is looking out for the best interests of their community here and making sure that they’re doing everything possible to ensure that their community maintains that access to the health care we know is so important.”

A February report by health care management consulting firm Kaufman, Hall and Associates LLC said the start of 2022 “was devastating for hospitals and health systems nationwide as they were hit full force by the Omicron tidal wave.”

The last COVID-19 case surge led to dramatic declines in hospital operating margins “as many providers temporarily halted nonurgent procedures, the numbers of inpatients requiring longer hospital stays rose, and expenses continued to climb due to widespread staffing and supply chain issues,” according to the report.

The firm’s report noted median operating margins for January 2022 declined nearly 15 percent from January 2021, and 52.7 percent from January 2020, just prior to the pandemic’s onset. 

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