HomeMy WebLinkAbout08/01/1995 B A K E R S F I E L D
Jacquie Sullivan, Chair
Patricia J. DeMond
Mark Salvaggio
Staff: John W. Stinson
AGENDA
PERSONNEL COMMITTEE
Tuesday, August 1, 1995
4:00 p.m.
City Manager's Conference Room
1501 Truxtun Avenue, Suite 201
Bakersfield, CA
1. ROLL CALL
2. APPROVAL OF MAY 25, 1995 MINUTES
3 PRESENTATIONS
4. PUBLIC STATEMENTS
5. DEFERRED BUSINESS
6. NEW BUSINESS
A. HEALTH CARE CONSULTANT SERVICES
B. MEMORIAL HOSPITAL/MERCY HOSPITAL MERGER
7. ADJOURNMENT
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NOTICE OF SPECIAL MEETING
OF THE
PERSONNEL COMMITTEE
OF THE COUNCIL
OF THE CITY OF BAKERSFIELD
NOTICE IS HEREBY GIVEN that the Personnel Committee of the City Council will hold
a Special Meeting for the purpose of a Committee Meeting on Tuesday, August 1, 1995, at
4:00 p.m., in the City Manager's Conference Room, Second Floor, City Hall, Suite 201,
1501 Truxtun Avenue, Bakersfield, CA, to consider:
1. ROLL CALL
2. APPROVAL OF MAY 25, 1995 MINUTES
3. PRESENTATIONS
4. PUBLIC STATEMENTS
5. DEFERRED BUSINESS
6. NEW BUSINESS
A. HEALTH CARE CONSULTANT SERVICES
B. MEMORIAL HOSPITAL/MERCY HOSPITAL MERGER
7. ADJOURNMENT
John W. Stinson, Assistant City Manager
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g A K E R S F I E L D
Alan Tandy, City Manager '~ Galen Chow, Chair
Staff: John W. Stinson Patricia d. DeMond
Mark Salvaggio
AGENDA SUMMARY REPORT
PERSONNEL COMMITTEE
Thursday, May 25, 1995
4:15 p.m.
City Manager's Conference Room
City Hall, Suite 201
1501 Truxtun Avenue
Bakersfield, CA 93301
I 1. ROLL CALL
Call to Order 4:20 p.m.
Present: Councilmembers Galen Chow, Chair; Patricia J. DeMond;
and Mark Salvaggio
2. APPROVAL OF FEBRUARY 7, 1995 MINUTES
Approved as submitted.
3. PRESENTATIONS
None
4. PUBLIC STATEMENTS
None
AGENDA SUMMARY REPORT
PERSONNEL COMMITTEE
Thursday, May 25, 1995
Page -2-
5. DEFERRED BUSINESS
None
6. NEW BUSINESS
A. WORKERS' COMPENSATION ADMINISTRATOR REQUEST FOR
PROPOSAL
The Committee met today and discussed the use of an outside administrator to
perform workers' compensation administration services. Alan Tandy provided an
update.
In January 1995, the City Council requested that staff evaluate the cost
effectiveness of utilizing a third-party administrator for workers' compensation
claims administration. Requests for proposals for workers' compensation services
were sent to several firms. By the due date of February 17, 1995, the City had
received responses from:
1) Ross and Castillo 3) Fimbres Adjusters Inc.
2) AIMS 4) California Safety and Claims
In February 1995, oral interviews were ~onducted. The oral board assessed the
potential providers' knowledge and interpretation on several technical workers'
compensation issues, scenario examples, cost of service, time frames and
qualifications of personnel.
Based on the interviews, it is the unanimous opinion of the oral panel that Ross
and Castillo is the most qualified of the respondents. In addition to being the
lowest bidder at $97,000 for the initial year, they are the only firm which will
provide an office in Bakersfield.
Due to the retirement of the City's Insurance Coordinator and anticipated savings
in claims due to enhanced administration, staff recommends the transition to a
third-party administrator.
The proposed selection of Ross and Castillo was reviewed by the Personnel
Committee who support the staff recommendation. The Agreement will go to the
AGENDA SUMMARY REPORT
PERSONNEL COMMITTEE
Thursday, May 25, 1995
Page -3-
full Council on June 14 and the Committee recommends approval of the
Agreement with Ross and Castillo to perform workers' compensation
administration services.
7. ADJOURNMENT
The meeting was adjourned at 4:45 p.m.
Staff present: City Manager Alan Tandy; Assistant City Manager John W. Stinson;
Deputy City Attorney Michael AIIford; and Risk Manager Scott Manzer.
Others present: Dr. Willard Christiansen; and representatives of Ross & Castillo.
cc: Honorable Mayor and City Council
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ADMINISTRATIVE
REPORT
TO: Honorable Mayor and Councilmembers APPROVED
FROM: John W. Stinson, Assistant City Manager DEPARTMENT HEAD
DATE: July 7, 1995 CITY ATTORNEY
CITY MANAGER
/
SUBJECT: Agreement with Godwins Booke and Dickenson for Health Care Consultant Services.
RECOMMENDATION:
Staff recommends referral to Personnel Committee.
BACKGROUND: Since 1992 the City has used the firm of Godwins Booke and Dickenson as the Health
Care Consultant to perform a review of the City's health plans and make recommendations and provide
guidance regarding implementing changes and negotiating the renewal of contracts with health care
providers. The consultant's agreement for 1994-95 totaled $43,900, which included renewals of health
plans and analysis of the retiree medical plan. As directed by the City Council, this past year staff in the
Benefits section of Human Resources have assumed some of the duties of plan management including
plan reporting and accounting. These tasks are no longer being done by the consultant.
The consultant has submitted a work plan which includes basic annual activities such as: benefits planning,
renewal negotiations, miscellaneous consulting for specialized benefit issues, and meetings with the joint
city/employee insurance committee, Council Personnel Committee, and retiree groups as required.
The Consultant has also provided cost estimates for a number of optional, special projects for
consideration. These include: marketing the current health plans, performing an actuarial evaluation of
retiree medical costs, and the evaluation of other alternatives such as SISK, PERS, and analysis of self
funding our health plans.
After reviewing the proposed work plan with the consultant, Herb Kaighan, staff is recommending the
Council approve a contract including the basic activities presented by the consultant which total an amount
up to $29,000 plus up to $1,000 for travel and lodging expenses. This will provide for consulting through
February 1996.
July 11, 1995, 4:06pm
ADMINISTRATIVE REPORT Page 2 ~
The City Council has indicated in the past that periodically the health plans should be marketed. Both
the Fee For Service and the HMO plans were last marketed in 1992. The health care consultant is
recommending that the health plans not be marketed at this time. Staff concurs with this recommendation
based on the recent changes made to the plans to contain costs and the potential disruption caused to
employees by vendor changes. The consultant would continue to aggressively negotiate with the current
vendor to minimize increases in our rates. However, the City Council could choose to include the
marketing for the Health Plans for an additional $43,000.
Staff is not recommending the approval of any of the other special projects presented by the consultant
at this time. It may be necessary to conduct an actuarial evaluation of the retiree medical program in the
future due to accounting requirements. However, since the retiree medical issue is in the process of
significant legal review, staff recommends deferral until required. The Council may choose to have the
consultant perform reviews of the SISK and PERS plans, however, we understand that changes to either
of those systems would require significant changes to benefits and the structure of contribution by
employees and retirees. These appear to be more long term options for possible consideration. The
consultant has recently performed an analysis regarding self-funding, and conditions have not changed
significantly to warrant another review of this option at this time.
Staff recommends referral to the Personnel Committee to discuss and review the proposed work plan and
staff recommendations.
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July Il. 1995, 4:06pm
AGREEMENT NO.
CONSULTANT'S AGREEMENT
T~IS AGREEMENT is made and entered into on July 19, 1995, by
and between the CITY OF BAKERSFIELD, a municipal corporation,
referred to herein as "City" and GODWINS BOOKE AND DICKENSON,
referred to herein as "Consultant.,,
~ E C I T A L S
W~EREAS, Consultant is experienced and well qualified to
analyze and assist City in connection with health care services;
and
W~EREAS, the City does not have expertise currently on staff
to analyze, recommend and implement a multi-year strategy to
control health costs for active employees and retirees; and
W~EREAS, Consultant is aware that information may come into
Consultant,s possession which may impact the City's legal
position in the event such information was released to outside
parties; and
W~EREAS, City now desires to employ Consultant:
a. Analyze data, and present alternatives to the
City's present health care system, assist in current plan
management, marketing health plans, and special projects
including analysis of retiree health plans;
b. Facilitate discussion of alternatives; and
c. Make recommendations respecting the possible
alternatives.
NOW, T~EREFORE, incorporating the foregoing recitals herein,
City and Consultant mutually agree as follows:
1. SCOPE OF WOR~. The scope of work is generally
described in the "Consulting Activities 1995/96," dated July 7,
1995. Said Benefit Agenda is attached hereto as Exhibit "A" as
though fully set forth herein. '
Consultant,s written reports in support of the
tasks as set forth in Exhibit "A" shall be in a mutually agreed
format and shall include a "sUmmary,, report to City by such date
and dates as shall be agreed upon between City and Consultant.
Consultant's services shall include all procedures
and work necessary to properly and professionally complete the
task Consultant hereby undertakes to perform, whether
specifically included in the "scope of work" or not.
2. BEGINNING DATE/RENEWAL TERMS. Consultant's
engagement shall begin on August 1, 1995, and shall terminate on
February 29, 1996.
3. COOPERATION. Upon request, City and its officers
and employees shall provide necessary information not available
to Consultant from other sources to Consultant as required to
perform the services described herein and in accordance with the
scope of work set forth above.
4. COMPENSATION. Consultant attaches, as Exhibit "B"
(incorporated herein by reference) a list setting forth the job
title and function of the persons it proposes to do the work
described in paragraph 1 ("Scope of Work") herein above. Exhibit
"B" also sets forth the hourly rate of compensation City shall
pay to Consultant for the services of each job title listed.
City shall pay for the work described in paragraph
1 ("Scope of Work") pursuant to Exhibit "A"; provided, however,
the total amount payable by City hereunder shall not exceed
$29,000.00.
Should City act to terminate this contract, as
permitted herein, City shall pay no fee other than the
compensation listed in this paragraph unless otherwise agreed to
in writing by the City and Consultant.
Consultant shall provide a detailed and itemized
billing, setting forth the work done and the time spent by
Consultant,s personnel during the preceding billing period.
The compensation set forth in this paragraph shall
be the total compensation for the services provided by
Consultant, including all out-of-pocket costs incurred by
Consultant. City shall pay no fee other than the compensation
listed in this paragraph unless otherwise agreed in writing by
City and Consultant.
City agrees, however, it will reimburse Consultant
for actual costs of meals and lodging up to a maximum of $1,000
during the first contract year.
5. PAYMENT PROCEDURE. Consultant shall tender to
City an itemized invoice (on a monthly basis) for services
rendered. City shall pay such invoice after City approves the
work and within forty-five days after City approves Consultant,s
itemized invoice. An invoice will be deemed "approved" if, within
2
ten working days after City receives the invoice, City has not
informed Consultant of any disputed amount. City shall pay any
"non-disputed,
amount within forty-five days after City receives
the invoice. City and Consultant'shall, within a reasonable time
after City "disputes,, any amount, negotiate in good faith to
resolve the matter; thereafter, either City shall pay the
"disputed,, amount, or Consultant shall cancel the amount.
6. TITLE TO DOCUMENTS. All documents, plans, and
drawings, maps, photographs, writings (as writings are defined by
California Evidence Code section 250), and other papers, or
copies thereof prepared by Consultant pursuant to or in
connection with the terms of this Agreement, shall, upon
preparation, become the exclusive property of City.
7. CONFIDENTIALITY. During the term of this
agreement, Consultant will be dealing with information of a legal
and confidential nature, and such information could severely
damage City in the event any of said information was disclosed to
outside parties. Consultant will not disclose to anyone,
directly or indirectly, either during the term. of this agreement
or at any time thereafter, any such information or use such
information other than as necessary in the course of services
provided to the City under this agreement. All documents that
Consultant prepares and confidential information that might be
given to Consultant in the course of providing services under
this Agreement are the exclusive property of the City and shall
remain in the City's possession. Under no circumstances shall
any such information or documents be removed from the City
without the City's written consent first being obtained.
8. NEWS RELEASES/INTERVIEWS. All consultant and
subconsultant/subcontractor news releases, media interviews,
testimony at hearings and public comment shall be prohibited
unless expressly authorized in writing by the City's Contract
Administrator.
9. WAIVER OF DEFAULT. The failure of any party to
enforce against another a provision of this Agreement shall not
constitute a waiver of that party's right to enforce such a
provision at a later time, and shall not serve to vary the terms
of this Agreement.
10. FORUM. Any lawsuit pertaining to any matter
arising under, or growing out of, this contract shall be
instituted in Kern County, California. This Agreement is to be
interpreted and performed in accordance with the laws of the
State of California.
ll. NOTICES. All notices relative to this Agreement
shall be given in writing and shall be sent by certified or
registered mail and be effective upon depositing in the United
3
States mail. The parties shall be addressed as follows, or at
any other address designated by notice:
CITY: CITY OF BAKERSFIELD
CITY HALL
1501 Truxtun Avenue
Bakersfield, California 93301
CONSULTANT: GODWINS BOOKE AND DICKENSON
10 Universal City Plaza, Suite 2250
Universal City, CA 91608-1002
Attn: Mr. Herbert V. Kaighan
Vice President
12. ASSIGNMENT. Consultant acknowledges that one of
the considerations persuading City to execute this Agreement is
the skill and reputation possessed by Consultant. City is
relying upon such skill and reputation to insure that Consultant
performs the covenants on Consultant's part hereunder to be
performed. With this in mind, Consultant may not assign or
delegate this Agreement, nor any interest or obligation herein,
in whole or in part, voluntarily or involuntarily, by operation
of law or otherwise, without City's previous consent in writing,
which consent, however, shall not be unreasonably or arbitrarily
refused or withheld; provided, however, that despite any such
assignment or delegation that Consultant shall remain responsible
for the faithful performance of each and every term, covenant and
condition of the Agreement; and provided further that no assignee
or delegatee shall have the right to make any further assignment
or delegation of any kind affecting this Agreement without first
obtaining City's written consent as aforesaid.
13. BINDING EFFECT. The rights and obligations of
this Agreement shall inure to the benefit of, and be binding
upon, the parties to the contract and their heirs,
administrators, executors, personal representatives, successors
and assigns.
14. EX]{IBITS. In the event of a conflict between the
terms, conditions or operations set forth herein and those in
exhibits attached hereto, .the terms, conditions, or
specifications set forth herein shall prevail. All exhibits to
which reference is made in this Agreement are deemed incorporated
in this Agreement, whether or not actually attached.
15. ATTORNEYS' FEES. In any action arising from or
related to the terms of this Agreement, the prevailing party
shall be entitled to recover its attorneys' fees and court costs
and other nonreimbursable litigation expenses, such as expert
witness fees and investigation expenses, whether or not such
action proceeds to judgment.
~6. MERGER AND MODIFICATION. This contract sets forth
the entire Agreement between the parties and supersedes all other
oral or written representations. This contract may be modified
only in a writing approved by the City Council and signed by all
the parties.
~7. ~ORPORATE AUTHORITY. Each individual executing
this Agreement represents and warrants that they are duly
authorized to execute and deliver this Agreement on behalf of the
corporation or organization named herein and that this Agreement
is binding upon said corporation or organization in accordance
with its terms.
~8. ~ERMINATION. This Agreement may be terminated by
any party upon thirty (30) days' written notice to all other
parties. In the event of termination, Consultant shall be paid
for the work completed to the satisfaction of City up to the date
of notice of termination. Upon termination, Consultant shall
deliver all materials relative to this Agreement to the City.
19. COMPLIANCE WITH ALL LAW~. Consultant shall, at
Consultant,s sole cost, comply with all of the requirements of
Municipal, State, and Federal authorities now in force, or which
may hereafter be in force, pertaining to this Agreement, and
shall faithfully observe in all activities relating to or growing
out of this Agreement all Municipal ordinances and State and
Federal statutes, rules or regulations now in force or which may
hereafter be in force.
20. INDEPENDENT CONTRACTOR. This Agreement calls for
the performance of the services of Consultant as an independent
contract, and Consultant will not be considered an employee of
the City for any purpose and is not entitled to any of the
benefits provided by City to its employees. This Agreement shall
not be construed as forming a partnership or any other
association with Consultant other than that of an independent
contractor. Consultant shall have no authority beyond that given
in this Agreement to act on behalf of City as an agent nor to
bind City to any obligation not expressly authorized herein.
With respect to Consultant,s status as an
independent contractor, City shall have no right to direct
Consultant in the means or methods of doing the work called for
hereunder. City's interest is in the results, that is, the final
work product of Contractor, not the technique or method
contractor uses to create such final work product.
21. INSURANCE. In addition to any other form of
insurance or bond required under the terms of this Agreement, the
Consultant shall procure and maintain for the duration of this
Agreement the following types and limits of insurance, otherwise
referred to as "basic insurance requirements,,:
5
a. Professional liability insurance, providing
coverage on an occurrence basis for errors and
omissions with limits of not less than one million
dollars ($1,000,000) per occurrence;
b. Automobile liability insurance, providing coverage
on an occurrence basis for bodily injury,
including death, of one or more persons, property
damage and personal injury, with limits of not
less than one million dollars ($1,000,000) per
occurrence;
c. Broad form commercial general liability insurance,
providing coverage on an occurrence basis for
bodily injury, including death, of one or more
persons, property damage and personal injury, with
limits of not less than one million dollars
($1,000,000) per occurrence; and
d. Workers, compensation insurance with statutory
limits and employer's liability insurance with
limits of not less than one million dollars
($1,000,000) per accident.
Insurance is to be placed with insurers with a Bests'
rating of no less than A:VII. This requirement may be waived at
the City's sole discretion.
Except for professional liability, all policies
required of the Consultant hereunder shall be primary insurance
as respects the City, its mayor, council, officers, agents,
employees and volunteers and any insurance or self-insurance
maintained by the City, its mayor, council, officers, agents,
employees and volunteers shall be excess of the Consultant's
insurance and shall not contribute with it.
The automobile liability policies shall provide
coverage for owned, non-owned and hired autos.
The liability policies shall provide contractual
liability coverage for the terms of this Agreement.
Except for professional liability, the liability
policies shall contain an additional insured endorsement in favor
of the City, its mayor, council, officers, agents employees and
volunteers. '
The workers' compensation policy shall contain a waiver
of subrogation endorsement in favor of the City, its mayor,
council, officers, agents, employees and volunteers.
Ail policies shall contain the following endorsement:
An endorsement providing the City with thirty (30) days written
notice of cancellation or material change in policy language or
terms. All policies shall provide that there shall be continuing
liability thereon, notwithstanding any recovery on any policy.
The insurance required under this Agreement shall be
maintain until all work required to be performed under.the terms
of this Agreement is completed to the City's satisfaction.
The Consultant shall furnish the City Risk Manager with
a certificate of insurance evidencing the insurance required
under this Agreement. The City may withhold payments to
Consultant if certificates of insurance and endorsements required
in this Agreement have not been provided.
Consultant shall be responsible for any deductibles or
self-insured retentions under all required insurance policies.
Insurance in lesser amounts, or lack of certain types of
insurance otherwise required by this Agreement of Consultant,
must be declared to and approved in writing by the City.
However, unless otherwise approved by the City, if any
part of the work under this Agreement is subcontracted, the
"basic insurance requirements,, set forth hereinabove shall be
provided by or on behalf of all subcontractors even if the City
has approved lesser insurance requirements for Consultant.
Consultant shall be responsible for determining and guaranteeing
all subcontractors are insured as set forth in this paragraph.
22. INDEMNITY. Consultant shall indemnify, defend,
and hold harmless City, its officers, agents and employees
against any and all liability, claims, actions, causes of action
or demands whatsoever against them, or any of them, for injury to
or death of persons or damage to property or contractual
liability arising out of, connected with, or caused by
Consultant, Consultant,s employees, agents, subcontractors, or
independent contractors or companies in the performance of, or in
any way arising from, the terms and provisions of this Agreement
whether or not caused in part by a party indemnified hereunder.
23. EXECUTION. Subject to consultant providing proof
of insurance, this Agreement is effective upon execut'ion. It is
the product of negotiation, and therefore, shall not be construed
against any party.
24. CONTP~ACT ADMINISTRATOR. The Contract
Administrator for the City is:
o John W. Stinson, Assistant City Manager
o City of Bakersfield
o 1501 Truxtun Avenue
o Bakersfield, CA 93301
o Telephone (805) 326-3751
Consultant,s "project manager" shall be:
o Herbert V. Kaighan
o Vice President
o c/o Godwins Book and Dickenson
o 10 Universal City Plaza, Suite 2250
o Universal City, CA 91608-1002
o Telephone (818) 506-4300
The Contract Administrator and the Project Manager
shall be the primary contact persons for City and Consultant. It
is expressly understood that only the City's counsel may approve
modifications to the contract, which modifications must be in
writing.
25. ACCOUNTING RECORDS. Consultant shall maintain
accurate accounting records and other written documentation
pertaining to the costs incurred in performance of this
Agreement. Such records and documentation shall be kept at
Consultant,s office during the period of this Agreement, and
after the term of this Agreement for a period of three years from
the date of the final payment under this Agreement, and shall be
made available to City representatives upon request at any time
during regular business hours.
26. CONFLICT OF INTEREST. Consultant stipulates that
corporately or individually, the firm, its employees and
subconsultants have no financial interest in either the success
or failure of any project which is dependent on the results of
the studies prepared under this Agreement. Every vendor the
Consultant uses in the course of this contract shall submit a
letter to the City stating that the Consultant has received no
remuneration from said vendor.
8
2?. TAX NUMBERS.
Consultant,s Federal Tax ID Number is 770182453
Consultant is a corporation? Yes No
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed, the day and year first-above written.
"CITY"
CITY OF BAKERSFIELD
By.
BOB PRICE, Mayor
APPROVED AS TO FORM:
JUDY K. SKOUSEN
City Attorney
By.
COUNTERSIGNED:
By
GREGORY J. KLIMKO
Finance Director "CONSULTANT,,
By.
Title
APPROVED AS TO CONTENT
By
JOHN W. STINSON
Assistant City Manager
Attachments:
Exhibit A
Exhibit B
7/12/95
rg:agreement\godwin95
GODWINS BOOKE & DICKENSON
10 Universal Ci~' Plaza, Suite 2250
Universal City, CA 91608-1002
(818) 506-4300 FAX (818) 509-3341
(800) '443-9516
July 7, 1995
Mr. John W. Stinson
Assistant City Manager
City of Bakersfield
1501 Truxtun Avenue
Bakersfield, CA 93301
Re: Consulting Activities - 1995/1996
Dear John:
Based on our discussion, enclosed is an Exhibit which lists the Basic Annual Activities and
other potential Benefit Activities, and related fees for the period August 1 1995 through
February 29, 1996. '
I look forward to meeting with you to confirm the plan of activities and the time line.
Sincerely,
~erb~ghan
Senior Vice President
HVK:aw
Enclosure
,': "2. -':q'.
EXHIBIT "A"
An ~}~O~ Company
CITY OF BAKERSFIELD
August 1, 1995 through February 29, 1996
I. Basic Annual Activities Fee
· Update Benefits Summary Manual No charge
· Benefits planning $ 1,500
· Renewal negotiations $ 15,000
· Ad hoc consulting $ 3,500
· Meetings (30 hours)
TOTAL $ 29,000
2. Travel and Lodging $ 1,000
3. Special Projects (to be determined by City of Bakersfield)
· Market Health Plans
HMO
$ 15,000
Fee for Service (including TPA) $ 19,000
Prescription Drug Carve Out $ 9,500_
TOTAL $ 43,500
· Retiree Medical
Actuarial evaluation $ 25,000
· Evaluation of Other Alternatives
SISK - preliminary review $ 500
PERS - preliminary review $ 750
PERS - in-depth analysis $ 5,000
Funding alternatives analysis (self-funding/minimum premium) $ 12,0(XI
hkcbak.209
EXHIBIT "B"
Houdy
Job Title Billing Rate
Senior Vice President $310
Vice President $275
Principal $230
Consultant $170
senior Benefits Analyst $140
Benefits Analyst $125
Account Manager $125
Administration Clerk $ 75
7/12/95
(~ODWINS BOOKE o
c~ DICKENSON
!0 Umversal City, Plaza, Suite 2250
Universal City, CA 91608-1002
(818) 506-4300 Fax (818) 509-3341
(800) 443-9516
July 25, 1995
Mr. John Stinson
Assistant City Manager
City of Bakersfield
1501 Truxton Avenue
Bakersfield, CA 93301
Re: Basic Activities
Dear John:
Enclosed is a short description of the "Basic" activities listed in my July 7, 1995 letter.
Please call Thursday so we can discuss it.
Sincerely,
Herbert V. Kaighan
Senior Vice President ~-,~
HVK:jw
An~O~Comp~y
BAKERSFIELD
Benefits Planning
Meet with the Insurance Committee to review each benefit program to determine
the activity required prior to the renewal effective date
Renewal Negotiations
· Receive all renewal proposals from each vendor (Blue Cross FFS, HMO, &
Dental; MESC-vision; HBI-Dental; K&R-Dental; PSI-Mental Health)
· Evaluate the renewal rate requested in light of experience and/or
competitive practice. This includes an analysis of:
Claims
Trend Projections
Reserves for Incurred Claims
Retention/Administrative Charges
Pooling Charges
· Evaluate any Plan design changes required as part of renewal
· Review each Funding Agreement and amendment resulting from final
renewal negotiations or benefit modifications
Ad Hoc Consulting
· Research and answer questions concerning a variety of issues; e.g.,
eligibility, COBRA administration, claims problems, etc.
· Assist in interpretation of experience reports and year-end financial report
· Research and discussion resolving retiree issues
Meetings
Assistant City Manager -- agenda planning
· Personnel Committee ..... activities review and approval (design & funding)
· Finance Committee ....... financial aspects of activities
· Insurance Committee ..... discussion of issues & consensus on action items
· City Council ................. final review and approval of recommendations
JOHN R. PULSKAMP. M.D.. INC.
3940 SAN DIMA$ STREET
BAKERSFIELD. CALIFORNIA 93301
Telephone (805) 324-4957
FAX (805) 324-5528
July 6, 1995
Mayor Robert Price
Ken Peterson, Supervisor
Mr. Ray Dezember
Mr. Ray Watson, Sr.
Mr. George Martin
Mr. Roy Weygand
RE: Hospital Merger of Mercy and
Memorial
Gentlemen:
The most important event in the history of Memorial Hospital is about to
occur. The hospital is being captured and totally controlled by Mercy
Hospital (Catholic Health Care West), via an "Affiliation Agreement",
'which is the administrations, euphemistic term for a merger, or takeover.
The citizens of Kern County have a huge vested interest in these
hospitals, since they have donated many millions of dollars over the
years to ensure top quality, state-of-the-art facilities to care for them
and their families when they become patients.
The two hospital administrations have been less than forthright, up front
and honest with their benefactors, medical staffs, employees and
supporters. They seem to be hiding, conveniently, behind the cloak of
confidentiality that is inherent in the merger process under the auspices
of the U. S. Federal Trade Commission and the State Attorney General's
office.
Not only the public, but even the members of Memorial Health Systems,
Inc. are presently denied access to the draft Affiliation Agreement, and
to the membership roster of Memorial Health Systems, Inc., which is the
sole corporate member of Bakersfield Memorial Hospital. A thorough
review of the draft Affiliation Agreement is essential for concerned
citizens to understand the ramifications of this merger.
Several unanswered questions come to mind concerning this projected
merger:
1. How many citizens of Kern County realize the gravity of
this merger, in which Mercy Health Care Bakersfield
becomes the substitute sole corporate me~%ber of Memorial
Hospital?
2. Is it understood that by having sole corporate
membership in Memorial Hospital, Mercy Health Care
Bakersfield has total control of Memorial and dictates
Memorial Hospital's policies, budgeting, certain capital
expenditures, strategic planning, and the makeup of the
hospital's Board of Directors?
3. Do the 1100 "members" of Memorial Health Systems, Inc.
(somewhat akin to shareholders in a for-profit
corporation) really appreciate the fact that with this
merger they are relinquishing their rights and vested
interests in Memorial Hospital in giving these members'
(shareholders,) rights in toro to Mercy Health Care
Bakersfield (Catholic Health Care West)?
4. Mr. Carr, Memorial Hospital Administrator, has stated in
print (see enclosures) that substantial anticipated
savings from this merger will be yearly passed on to the
community. Is the community interested in knowing just
how such savings might come about and just how these
might be passed on to the people? Might not the public
pay more for health insurance premiums after such a
merger?
5. How many local citizens will lose their jobs from
curtailment of services?
6. How will the public be inconvenienced by closure of
duplicative ancillary services, such as obstetrics,
urgent care, x-ray and laboratory facilities?
7. How do Mercy and Memorial Hospital Administrators plan
to mitigate the negative effects of closures and layoffs
to minimize the hardships they will have caused the
community??
8. Have Mercy and Memorial Administrations obtained an
environmental impact study to define and quantitate the
dislocations, misery, financial hardship and other
negative fallout that such a merger will bring to the
human element of our environment? Aren't humans almost
as important as kangaroo rats, kit foxes, and snail
darters??
9. Have the captive physicians, who are hospital based at
Memorial Hospital, been made aware of the difficulties
they may encounter when purchasing new equipment for
their departments? Will they have to obtain permission
from Mercy Health Care West?
Truth is crying out to be heard. The citizens of Kern County deserve to
be informed of all of the negative, as well as the possible positive,
effects that a merger will bring upon them. Public debate of data from
full disclosure by the two administrators will bring out the truth.
I am calling upon you gentleman, all highly respected city fathers and
civic leaders, to fulfill your moral duty to the citizens of our
community and organize an open public forum and initiate free discussion
of the pros and cons of the merger. If, after a full open hearing, the
citizens and members of Memorial Health Systems, Inc. favor the merger,
so be it. They will have been informed of the facts, and based upon
that, will be in a position to make an intelligent choice with which they
can live comfortably.
Please contact me if I can be of any further assistance, offer more
information, or answer any of your questions.
Thank you.
Sincerely,
JRP/jcm
ADDENDUM: Enclosed are copies of letters from Mr. Carr, including a
written ballot addressed to the members of Memorial Health Systems, Inc.,
which give a rough idea of some of the complexities inherent in this
takeover.
JRP/jcm
GMemorial Health Systems, Inc. /
~akersfieid Memorial ~-~'
Hospital
May 25, 1995
for 8~v~al Heal~
Central
Haiti In~ilute
Dear Memorial Health Systems Member:
Enclosed you will find a ballot describing a transaction between the Bakersfield
Memorial Hospital and Mercy Healthcare Bakersfield. This transaction will allow
Bakersfield Memorial Hospital to become affiliated with Mercy Healthcare Bakersfield
through what is legally termed a Community Affiliation. This Community Affiliation
~resents major advantages to bo~a~ersfield Memorial Hospital and Mercy Healthcare.-'
Bakersfield. The Board of Directors of Memorial Health Systems requests that you vote to
~PPROVE this transamion.
The affiliation would allow both organizations to experience considerable cost
savings in several areas of operation that are duplicated in each facility. The
substantial anticipated savings per year will be passed on to the comm~ity. The
affiliation will also allow Bakersfield Memorial Hospital, a free-standing individual
facility, access to the state-wide programs available to Mercy through Catholic
Healthcare West. These too would result in large cost savings. In order to accomplish
these savings and efficiencies, it is necessary that you vote to transfer sole corporate ~
membership of Bakersfield Memorial Hospital from Memorial Health Systems to Mercy
Healthcare Bakersfield. By doing this, you will allow the affiliation to take place and
- for our local health system to become more efficient.
· Memorial Health Systems;, Inc., will continue to function as sole corporate member
of the Bakersfield Memorial Health Foundation and BMH Services. As an MHS member, you
will continue to receive Memorial Health Systems Annual Reports, elect Directors to the
Memorial Health Systems Board and to vote on the membership issues as necessary.
The Community Affiliation model requires that certain reserved powers be granted
by Bakersfield Memorial Hospital to Mercy Healthcare Bakersfield and Catholic Healthcare
West. These reserved powers include budgeting, certain capital expenditures, corporate
changes, development of mission statement, strategic planning, appointment of auditors
and changes in the articles and bylaws of the corporation. These items will require
approval of Mercy Healthcare Bakersfield and Catholic Healthcare West. Bakersfield
Memorial Hospital would, however, continue to operate under the same name, would not be
required to reflect Catholic sponsorship, would retain its Board of Directors, management
and employees, and would retain all current assets of the hospital. A current draft of
esident's office at Bakersfield Memorial Hospital. g
Pre Affiliation Agreement is available for review durin normal business hours in the
420 '~4th qtrc~:~t · pf'~ Rnv 1 nnc~ . ~., .................... (over)
The future provision of health care in our community is paramount in the
discussions held between Bakersfield Memorial Hospi_ta! and Mercy Healthcare Bakersfield.
The Board of Directors of Memorial Health Systems an~l-I~a~,~s:[i~id Memorial Hospital
strongly believe that the affiliation between these two fine community institutions is
desirable and necessary to promote better health care for our community and strongly
request that you vote to APPROVE this transaction. Please mail your ballot in the
enclosed self-addressed envelope as soon as possible. The ballots must be received at the
office of Memorial Health Systems, Inc. no later than 10:00 a.m. on Monday, June 19, 1995,
in order to be counted.
Thank you very much for your timely attention to this matter.
Sincerely,
Board of Directors
Memorial Health Systems, inc.
WRITFEN BALLOT WITHOUT MEETING
OF THE MEMBERS OF
MEMORIAL HEALTH SYSTEMS, INC.
Memorial Health Systems, Inc., a California nonprofit public benefit
corporation ("MHSI"), and Bakersfield Memorial Hospital, a California nonprofit
public benefit corporation ("BMH"), are in the process of negotiating a transaction
pursuant to which BMH would become affiliated with Mercy Healthcare
Bakersfield, a California nonprofit public benefit corporation ("Mercy"), and,
therefore, become part of the Catholic Healthcare West ("CHW") health care
system. BMH and MHSI believe that this affiliation will be of significant benefit
to BMH and Mercy since they will be able to provide services to patients in the
Bakersfield area on a more efficient basis through an integrated health care
delivery system. BMH will remain separately incorporated as a California
nonprofit public benefit corporation. In order to accomplish the affiliation, Mercy
will become the sole corporate member of BMH. Therefore, the assets of MH$I
would be transferred to BMH and MHSI would terminate its membership in BMH.
The MHSI ass~is-which are transferred to BMH would continue to be used by
BMH in furtherance of its exempt purposes. No assets of BMH or MH$I would
be transferred to Mercy as part of the affiliation.
Article V of the Articles of Incorporation of BMH currently provide that
MHSI shall be the sole member of BMH. In addition, Article II, Section 1 of the
Bylaws of BMH currently provide that MHSI shall be the sole member of BMH.
In the event that the transaction is consummated and MHSI's membership ill BMH
is terminated and Mercy becomes the sole member of BMH, it will be necessary
to amend Article V of the Articles of Incorporation by having the President and
Secretary of BMH prepare, execute and fil~---~it-K-~e~~ b~' the California .......
Secretary of State a Certificate of amendment of Articles of Incorporation. It also
will be necessary to amend Article II, Section 1 of the Bylaws of BMH to reflect
such change.
CHW and Mercy would retain certain reserved powers which would require
BMH to obtain consent from CHW and/or Mercy prior to taking certain specified
actions. Further, BMH will be required to observe the Ethical and Religious
Directives for Catholic Health Care Facilities as they apply to non-Catholic
hospitals. However, BMH'will continue to operate under the same name, will not
be required to reflect Catholic sponsorship and will not be required to display
religious artifacts or symbols of Catholic sponsorship.
(OVER)
BMH will have the right to nominate four of 17 members (which number
will ultimately be reduced to 15) of the Mercy Board, and Mercy will have the
right to nominate three of 12 members of the BMH Board.
The parties have not yet executed definitive documents in connection with
the proposed transaction.
As a condition of the closing of the transaction, MHSI is required to obtain
the approval of its members to (i) the proposed transaction, (ii) the transfer of the
MHSI assets to BMH, and (iii) the amendment of the MHSI Articles of
Incorporation and Bylaws in connection with the transaction.
Accordingly, the undersigned, being a Member of MHSI, which is the Sole
Member of BMH, does hereby approve or disapprove, as indicated below, the'
proposed actions described above with respect to MHSI and BMH:
Approve: ~
THIS BALLOT MUST BE RECEIVED AT TItE OFFICES OF MI-ISI
NO LATER THAN 10:00 A.M. ON MONDAY, JUNE 19, 1995, IN ORDER
TO BE COUNTED.
DATE: May25, 1995
Mercy Healthcare Bakersfield
A Division of Catholic Healthcare West
July 7, 1995
Mayor Bob Price
City of Bakersfield
1501 Truxtun Avenue
Bakersfield, CA 93301
Dear Mayor Price:
I am aware that you have received a letter dated July 7, 1995 from Dr. John Byfield regarding
the Mercy Healthcare Bakersfield and Bakersfield Memorial affiliation process. I would like.
to address some of the inaccuracies outlined in Dr. Byfield's letter.
· Both Mercy and Memorial have historically demonstrated their concern for care of the
poor by the amount of charity care which is provided annually. For Mercy Bakersfield,
this has ranged between $4 and $5 million per year of direct charity benefits which
includes our Southeast Project activities, Mercy Housing, and charity patient care.
· Specific to Catholic Healthcare West, attached is information from the 1994 Annual
Report which is provided to members of our Medical Executive Committee, members of
our Boards of Directors, and others. The chart below clearly demonstrates that Catholic
Healthcare West, as a not-for-profit system of healthcare institutions, has a very strong
track record committed to fostering the healing ministry and promoting health and
wholeness for the sick, the poor, and the disadvantaged.
Year Benefits to Benefits to Total Net Income Margin
Poor Broader Revenue
Community
1993 $100.7 $62.6 $1.70 billion $44.7 2.655
million million million*
1994 $110.9 $70.7 $1.76 billion $53.3 3.055
million million million*
1993 included a $9.2 million extraordinary loss on early extinguishment of debt. 1994
included $47.2 million extraordinary loss on early extinguishment of debt.
Mercy llospital Mercy ~outhwest llospltal Friends of Mert-y Mercy' Child Care Services Mercy Hotlle Health Services
2215 Truxtun Avenue 400 Old River Road 2103 Truxtun 2301 Ashe Road 551 Shallley Court
Bakersfield. CA 93301 Bakersfield, CA 93311 Bakemfield, CA 93301 Bakersfield, CA 93309 Bake~fielcL CA
July 7, 1995
Page 2
· In addition, Mercy Healthcare Bakersfield, has for several years completed an annual
Social Accountability Budget, which will become a requirement of all California hospitals
effective in 1996. These budgets detail our community service. Thus, the information
Dr. Byfield has stated that CHW has returned "around $500,000 a year to its charitable
programs in California and Arizona' is vastly erroneous.
· The Bakersfield Memorial Hospital Board of Directors, comprised of community
members and physicians, has made a decision to pursue a partnership with Mercy
Healthcare Bakersfield. As has been communicated with the media and community at
large, Mercy and Memorial share an overlap of approximately 85 percent of its medical
staff, and have other similarities, such as the same clinical information system.
Interestingly, Mercy does not share the same clinical information system with any of its
other CHW hospitals. Bakersfield Memorial has chosen to remain non-profit as the
organization was founded, as is Mercy Healthcare Bakersfield. For that reason, they
have declined to pursue for-profit chains which take money out of this community and
into the hands of shareholders. There are no shareholders who benefit in any way'
financially from Mercy and Memorial, leaving our net revenues available for charity care
and community service.
· Mercy Healthcare Bakersfield and Bakersfield Memorial both have certain for-profit
activities within the scope of our services. We do pay property taxes, sales taxes, and
all other income taxes on those activities. For 1994, Mercy paid in excess of $400,000
in property and sales taxes.
· The issue of "religious constraints' by Catholic Healthcare West is also a matter that has
been addressed publicly. Bakersfield Memorial Hospital will continue to operate as a
community, non-religious organization. The only constraint, which the Board of
Directors and medical staff leadership have understood and agreed, is that they would not
perform abortions. There are no other religious issues that impact Bakersfield Memorial
through this affiliation.
· The fact that the public has not been apprised of details of the affiliation is also
inaccurate. On November 30, 1994, we held an initial joint press conference. There
have subsequently been four articles in The Bakersfield Californian and two Californian
editorials. In addition, I wrote 'Another View" to the paper because of the lack of
information that was being provided by the Californian to the public (see attached), and
we have been granted a meeting with the Editorial Board. We have been concerned that
The Bakersfield Californian has not provided background information on why this
affiliation is being considered, and what is happening in healthcare in general as well as
in the local community. I am also enclosing a recent article in the Los Angeles Times
that I think accurately depicts some of the problems that hospitals are facing.
· With the prospect of $475 billion being cut over the next seven years' for Medicare and
Medicaid (which is nearly two and one half times what hospitals had in reduction of
reimbursement in the last five years), we in the healthcare industry know that we must
July 7, 1995
Page 3
find effective ways of saving costs, avoiding duplication of services, and preserving many
jobs and quality of care. This is a tremendous challenge which both of our local Boards
of Directors have considered thoroughly to reach this important decision.
* Specific to Nsubstanfial job losses," although we do not foresee any major layoffs due to
this affiliation, we do foresee further restructuring and a continual reduction in jobs.
Through the affiliation we believe we can conduct a well-planned, rational approa~ to
consolidate, and thereby assure the survival of, programs that serve the needs of the
community. We know that there are millions of dollars of savings annually in both
operating and capital expenditures made possible by the affiliation, which we intend to
pass on to the consumer in the form of lower prices for our healthcare services. We
expect the affiliation to enhance our ability to pursue increased contracting on a eapitated
basis, as a greater breadth of services will be available within the affiliated system. The
major purchasers of healthcare who work with both Mercy and Memorial have expressed
their support for the affiliation. They have specifically advised us that the consolidation
poses no competitive threat. Rather, they agreed that the affiliation creates an.
opportunity to decrease costs, increase quality, and improve healthcare delivery for the
people of Kern County.
We recognize there are a few people against this affiliation, some of whom have less visible
agendas beneath their public comments. Dr. Byfield, for example, has a lawsuit pending against
Mercy, which he filed after we opened a radiation therapy service which competes with one he
owns.
If you have any specific concerns or issues, both Larry Can' and I would welcome your
questions.
Sincerely,
Bernard J. Herman
President
BJH:jc
Attachment
Mercy Board of Directors
Kern County Board of Supervisors
MANAGEMENT DISCUSSION AND ANALYSIS
~~he ~ of CHW's hca/th care mln!stry CObT INCREASES
requires that it achieve su/ficient levels of net me
to meet important strategic goals. These iadude :~ ~o.m~
iz~estment in the development of reffiomal i~te~'=~_
detivery systems, programs and facililies to enhance
the health _~m,~_ of the communities we serve. $~x s.~
Ventm'a opened a $120 m~!on replacement factTlity in
Oxnard, California. Addil/onally, Mercy Healthcare
Baker~ieid opened a new $60 m~'illon medical catalan, o~
Mercy Southwest Hospital. These new/ac/Zities
restflted in addi~/ona~ capital and start-up olm~/ng
cones which w~'e not offset by additional revenues, CAPrrALIZATIOh' & LIQUIDITY
However, in l~l. a~ projected, we returned to a $
lamitab/lity level commensurate ~ that of I~'L
C:HW has 1o~ be~ committed t~ holdi~ do==
the co,ts of health car~ Ia both 1~3 and 1/;oA,
our mae in coats was held below the medical
c~la~em d the Consumer Prkz Index.
Health care confinue~ to'be a calaitalqnten~/~
iadu~,~, requ/rmg careful eraluat/on of ca~tal
fm'mmoa and the appmpria~ level of debt. CHW's
equalamount ddebtand to mamtain liquidity in the m C~ m ~ .-
form of cash a~d marketable ~'ou'ifies at le~t
equ/va~t to ~ of debt. in the three yeara ended
~ 1~. our leverage averaa~d belo~ 50~ li~i- CO~POSE~crS Or N~:'r Isco~£
d/ty ma I~e~entage of debt remained stro~ at ~)~. Br. roR~ E'XrRAORmNmnC Irr.~
120
I/~4 ,'--',,cried $181 m,'mon in the form o/care to the
As governmems search for additional tax revenue
source~ smae have suggested tax-exempt health care
orgamzations provide less commuaity benefit than o
their tax exempt/oas are worth. This is aot the ca~e
w/th CHW; our uaspoasored community benefit
exl~e'~ae is e~uivalent to a 64% eifective tax rate.
W'~thr~x~'dnetincomeofo~rb'100mmlonin L994, NET INCOME BEFORF UNSPONSORED
CHWcominuesto demonslr~ financial strength with COMMUNrrY BENEFIT EXP£NSE FOR 19~4
a r~mrn on equi~ in excess of 10~.
SOCIAL ACCOUNTABILITY
1994 Commuaity Beaefit ~ year ~aw a marked dec.nsc in losa ~un~n~ees
~ for
refo~ C~ con~u~
S~d~ ~.~ ~ ~ ~~ ~o~ ~.o
~~t ~ ~ U~n~ ~~ Benefi~ for ~e Broader Co~u~
~ S~de m~ ~ ~p~~
For ~ a~~
~e of ~e Poor
~e ~ of
~ ~ ~ SIlO ~ ~ ~ ~m~ S~
~~e~--~~_~~me~~~~m
· e b~
~r ~ of M~d
~ ~D~ ~o~ ~~ *
~P~ ~o
· Sc lo~'s ~o~
~r M~
~ off~ h~ ~ ~r 1o~
~ ~°~ ~r ~~ ~~t ~U~a~~m~
~d ~le
o~ ao~or~t o~oas
· ~,~~oaA~u~ ~o~~ ~oa~~~em~~
Wi~ even ~vernment-financec~ he~
Like Medicare ~ M~.~ s~ ~u~
~S ~~S T~S - 6/3/95 ~-c~ p~. h~ ~ ~y,
~ive a ~~ ~o~ of ~ m~me f~
~n~c~ n~o~ ~fo~ pa~en~ g~ ~ h~.
~nder ~e old ~m. h~i~ p~ ~hich
Chan g T es Many =
n p r "os-' a's on Critical
o~nally had ~ ~ ~e~ ~ ~e ho~i~
indm~ ~g. it went m 1~ ~d ~en
But the momentm ~t~ md by ~e 1~ fewer
md tew~ ~ w~ n~ ~ m iu ~ mon~.
~1 ~om have ~ for~ to cl~ or ~~ _at me ~e Ume. m~r advme~ m ~.
t~hmqu~ ~d home ~ a~e~ ~ve ~ p~vent-
By ~UG~S P. ~U~ rd say. 'How long ~ve you ~o~ ~ many h~i~m. ~ ~y. ~ey ~ point
r~ ~F~ wacom ~e f~fly?' ~d ~ey wo~d ~U me ~ p~venUon ~d we~ pm~ ~t ~ve
· e7 knew ~e f~y ~d ~ [ such ~ve ~ u a d~e m ~o~g.relac~
~t ~m~ like a w~ke the l~t wo~d do it.~t like ~aL" ~n~
~7 in ~he life of ~ey's old ~o Rothm~ ~d o~er ~ at Wi~ ~en~ ~mg mov~ in ~d out of
Mon~ Memo~ ~o~l~. ~e ~t ~alI ho~t~ ~e going t~ugh f~ter ~ ev~--~d ~e doU~ for ~ c~e
~y of i~ ~a~fo~aUon into a ~me~ing of a c~t~e sh~k ~e d~p~ng ~ong ~ ~em--m~ ~ ho~]-
24-ho~ urgent c~e ~d re~b~J- ~7s. ~ ~ply ~ot ~ve. ~d 1~ ind~ndem
~uon center. ~e~ world went ~c~g~ for h~l~ face ~ ~c~ fut,.
R~ S~m~. p~dent of Cenfinela ~o~t~
~e d~to~ were ~ylng g~by d~des. Buc now it ~ being s~en M~ Center m ~ew~ com~ ~e ~g~
not j~ ~ a h~t~. but ~ an e~ up by h~nc n~ of
in m~cine b~ on info~ty c~os~. ~pi~ ~ ~e h~t~ ~d~ ~ what
~d fi~t-~e reta~o~ps. ~o~t~ a~ ~e nation ~e ~p~n~ ~ ~e ~ b~. ~ n~rh~
"We hated to turn anyone being ~ught ~d ~1~ c~ or ~e~ ~ gobb~ ~ by ~g~ ~ ~d ~e~
away." lamented Dr. Bernard ~~ in ~g f~on. ~el~~me~gmmme~.~
Rothman. a soft-~oken. ~y- ~e ~t of ~e ~-~ "Unfo~W. ~e ~d-~one m~ center
~ ~g~n. "A d~ wo~d ~ revolu~on ~d i~ f~ on ~t. going m go ~t ~y." he p~c~ '~e~7
for a ~fient ~out money ~d ~o~n~ ~d ~u~-~v- ~v~ ~ ~g ~m ~m~y."
~y. 'We have a ~. S~. ~e ~ en e~ency. ~ono~y ~ven ~ ~ ~ s~ng
a h~ ~ ~ ~ ~t do A~ ~en~ ~g h~ ~fient ~. ~y m ~e ~a ~ ~.
you ~y. ~ie? Wo~d ~ou ~ it?' el~ H~p~ ~ ~ Driven by a f~ on ~e ~t~ ~e.
~u~ne ~~ ~d defiv~ ~ve t~
Caa~au~ f~m ~ ~ck-t~d ov~ht ~ys. ~n of
~ ~tw~n ~ ~d ~. two-~ ~ ~ 24 ho~
comm~t7 h~i~ ~ke ~o ~ondo. acco~g ~ ~e A new ~udy by t~h~ at UC ~
owhe ~ ~e c~g~ ~g f~ ~ .... ~g n~ M ~ who ~er b~ ~ge
~ ~u~ C~o~ whe~ h~t~ ~ve ~tat~ ~ ~. ~ ~y ~a~le ~fion
b~n clog at ~ even mo~ acc~ ~ht m ~
~ce. Since ]~l. ~ h~i~ m ~e ~.
he p~l~ a~ ~ ~. A~ So~.
county ~u~e~ ~o~a ~on have c~ a ~ au~ of ~e ~y ~d ~r of n~na~
of about one ev~ ~ w~ . ei~ ~ at ~e ~v~ty.
Ange~ ~ ~oU~ ~d ~e ~r Pe~en~ ~e~a~n ~d ~c ev~n ~ m
racist7 in ~d~ P~k s~d empty. ~d ~ of ~d~" ~ ~ ~t ~ it ~ 24 ~ ~ ~ for
othe~ ~ ~mg conve~ in~ ~c~c h~i~ aew~ ~ ~ ~ of ~c~ ~ly ~~
~. ~ in ~e ~ M ~o ~ondo ~i~. ~o~ ~ may ~ ~g it ~fl~t ~ ~ ~p~ .
At m~y of ~e gene~ acute-c~ ho~i~ ~t ~ ~c~ ~m~ ~ ~ ~~. who
s~ytng open. ~n~ ~e ~ing se~ off and fl~ ~"~meof~emo~n't~dy~."
shut do~ ~e ~e~ ~e not enough ~en~ m ~e ~t ~ a ~ m ~e n~ of babi~ coming
~nt k~ping ~e w~ s~f~ ~ck ~ h~i~ for ~.~
T~m ~ to ~. vacancy ~t~ m ho~i~ w~ ~e ~ a ~ n~ ~d
at relatively ~ble ~eve~. ~ ~% ~ ~% ~ ~ for ~e ~ N~ ~d~v~ ~ ~d a
~e b~ ~ways f~l. But now. fewer ~ ~ ~e compl~t ~e ~o~y h~ ~ ~t ~en~ ~e
ho~i~ ~ tn ~u~ C~fo~a ~e ~c~t~ at being ~1~ ~ ~ a we~ ~te ~t ~ey ~not
' ~y one ~me. s~nd by ~e~lv~ "It ~ m ~ ~t y~
Tacto~ con~bu~ng ~ ~e empty ~ ~ ~y. out of a h~i~ but now you leave on a ~her."
C~ief ~ong ~em ~ fin~ incen~v~ ~ by ~e ~
~e manag~-~e ind~ ~t tew~d phy~ :~d ~d new mo~ ~ ~ugh ~volv~ng
and ho~J~ for k~ptng ~e~ patten~ out of h~J~ ~t~ ~ ~ fMt ~t ~ey often ~n't ~ve time
or sen~ng them home m the sho~est time ~ble. le~ ~ b~t-f~ in ~e p~o~ few ho~ ~tw~n
Tor d~ad~, patienu and d~ c~l~ ~e sho~ on de~ve~ ~d ~e. "~t-f~ng ~'t ~me-
~o~ c~e. ~eip~ by gove~ment ~d pnva~ ~g ~t ~m~ natty ~ eve~one. ~me~mes
ins~nce pro~ ~at b~ payment on in~d~ ~ time m get ~e ~m ~d ~e ~y going. We
~ervtces r~eiv~ A pa~ent wo~d ch~e a d~r. ~e s~ing b~-f~g ~ ~mg do~." she
doctor and pauent would ch~e a ho~t~. ~d ~e Wi~n ~e ind~.~t a~t eye,one ~
ho~i~ would b~ ~e pa~ent's he~ i~ce ~e~ ~ ~ ~y empty ~ and ~t ~e shak~ut
company for chugs. ~der way ~ot ~ ~e~
Now. ~th an ~imat~ two-t~ of ~ privately "We ~ ~ ~ a ~e ~ke~ce ~volution."
%'ith ~0 hosoital~ .m the state and ~ in ~e
~c whe~ ~ey ~ ~ ~ve but how ~y mU ·
~ ~ o~n ~ve y~ f~m now. ~
'We p~bably have ~ce ~e n~r of h~i~ I I ~d ~ ~_~ ~f f~
~t we n~" ~d Te~ ~, prudent of ~w b~.
~e~. a l~ge B~k.~ comfy ~to~ ~o
One of ~n~e~'s ho~i~, ~-~ ~ng ~ch ~d ~Uc ~~ W~--~fly m~
· ~ ~e ~d of com~on ~der way m ~e
~ u h~i~ s~ggle m ~ve ~e p~ ~e ~g at l~ ~ ~ tt ~ .
· e ~-~ ~volu~o~ ~ ~n~
~ch Memo~ ~ Cen~ ~d ~1-~ SL ~ ~e~ Netwo~
~ ~, ~ ~ five ~ ~
~h ~ ~e h~t~ ~ 1~ ~ ~ ~. p~mp~ ~m ~e
~n Y~e~n. a ~k~ for ~ng ~h ~e~ ~P~
~y. '~ one of ~e h~t~ went out of b~, [ ~ome ~y ~ ~ ~e ~ h~t~ f~ ~e
~'t ~ it wo~d ~ on ~e ~ ~' Pm ~' ~A ~ ~ w~ ~ ~e ~ ~gel~
~ f~, ~ one a ~ a w~te ~. ~, ~ey ~,
~ s~g do~ ~d r~ng ~ ene~ m ~ey ~ty B~ ~ ~ of ~e
~enu ~d o~ p~ SC ~ ~ devel~g ~d~dmt ~i~ ~t ~ f~ ~ ~1~ tU o~,
~Uent ~d m-home ~ p~. ~ty R~i~I~
~t~ m concen~g on ~ag~-~ b~ One p~ f~ ~ ~ ~e ~n ~ ~o
~o~ ~ ~ ~ a ~on~ network ~ o~ ~o~ ~ ~e ~ ~ ~ ~y ~ who
~r h~i~, ~ ~ C~-Si~ ~ Cen~r P~
~"e~ 1~ ~ ~o~ ~d ~d ~ ~ ~e ~ ~ ~~~ ~a ~ for
~ ~c~ a ~Uon ~d ~e eiimi~n ~ ~ a ~ ~ ~ ~ ~e ~ ~ ~e
~ ~Uo~ Mem~ ~ ~~ ~Oy, new ~y ~ ~ ~ .
~o~ ~nS ~ ~ ~ ~e ~1~-~ a m~
~bie~
~g ac~ out ~t ~e ~
~ Tel~
~t*s a bl~ ~ now," ~~ C~ ~e
~i~*s S~m~. who ~ f~ ~ ~ able ~ ~ ~
~e~ ~y h~ ~ ~H ~s~n. money. ~e ~
~o~ ~ ~, w~ ~n~ ~t ~-
~g ~ 1~ ~ ~~y iow ~g lev~ of
None~. h~i~ ~e Cen~ ~ ~ ~ ~ ~ w~ ~ ~v~ ~-~
f~er ~d fewer. ~ f~ ~e H~ ~ ~
~e~ ~o~ ~ p~c~g a d~e of 15~ ~ '~e
~ in. ~e n~ ~ h~i~ ~ ~e n~ flve. y~ ~ld ~ ~ ~ ~ ~ ~e ~ ~ f~y
UmH~'s ~hom ~ ~ ~ p~c- ~ v~ ~t ~ ~ ~ 1~. ~ one
~. He ~d ~at ~ce ~e ~ ~ ~e y~. ~m~ ~ m
fo~ ~ h~i~ ~ve app~ ~ ~ buy ~- ~ ~. ~ ~. ~ ~o ~o
· ~ h~i~. ~g ~t ~ey ~ ~ lon~ ~e iC ve~ ~ he k ~ ~ ~ at ~ey. ~t ~e
~w~e. U~ ~ nego~g ~e ~e of one ~ ad~t
o~ ~ Mom~ H~ m U~ a move ~t "~ ~e old ~ ~ ~ m ny ff y~ ~ a ~w
~d ~te a new ~we~o~ on ~e W~d~ ~ent a ~y. yo~ p~ ~ ~g ~~y
0um~t p~ ~d ~0~o~ ~ ~ ~ of ve~" he ~ ~ ~ ~. it's ~ ~on
new en~nm~C ~ ~ ~e m~ngly h~ m have 10~n~~a~y.~ --
~t~nceofh~i~ on ~g~-~n~e~ . A~ ~d he ~ ~ o1~ ~ ov~ a
A~ut ~ of ~e h~i~ in ~e~ ~ ~e~t~~hege~m~~w
~ have at le~ one ~-~ ~n~ ~m- ~.
~ m ~ in 1~. a~g m a new ~udy by ~e ~em
~ d~ndence on m~-~ ~n~c~ ~ n for n~y
~uble-~ ~o~ ~t ~ hel~ ~e h~i~ ~ a w~
fonuna~ enough m ~ ~ he~ p~. but h~ ~e ~keC
~er ~t~ ~t ~ve 1~ ~g ~wer ov~ mge~. ~ey ~w ~ ~ i~ ~d ~ey ~t ~e~
pnc~
~ ~e~ 1~ m ~ ~ o~er's
~e l~er h~i~. p~ly c~n
~en~ ~d
~t~r ~on~ m unde~ut ~e md~nd,~ ~ "We f~ n~ p~ ~t we ~d ~e ~ty
Dr. Bemarcl Rothman, pacing belongings in Rio Honclo Memorial Hosl~rtai operating room, alcove, laments
the encl of an era of medical practice basecl on first-name relationships anti personal cam.
Too Many Beds
Over the last four years, 37
A~ any g~ven r.L-ne in Southern California. only about half the. hospir,~Ls have closed/n the
avalable hospital beds are in use, e~perts say. Managed care S~-cotmty Sour. hera California
pohc/es that require shorter stays and medica~ advances that havearea, excluding San Diego
ehminated some stays are prompUng closures: on average, one County.
hospital closes about every six weeks. OCher~ that stay open are
downstzmg stgrUficanfly, in some cases by closUtg emergency · Hospit,~ open m 1991:292
rooms or sea/rog off enUre floors. · Hospitab open m 1995:255
One area of Long Beach offers a clear illuscraUon of [he In addition, at least 55 ocher
problem: Three large acute-care hospitals, representing 1,669 hosp~t,~ls have been converted
beds, are located witl-un five m/les of each ocher. During 1994, ~o more ~m*ted uses or have
the/r beds were full less than h~l~ the tJme. ~,ach hospital has signEicanfly cut back their
announced layoffs or service reductions in recent months, serv/ces.
~ ~ I { .,,.,[ ~ M~ H~l~tal. 2201 A[lant/c Ave.
: ' ~~,,,~ ,, ~ce~ ~: 816
{ e ~' ~~~ .&verase~cup~cyra~e,
1~: 48.4%
({ ·
~ ~ Hill ~ m ~ce~ ~: 551
Friday June 9. [995
&
' ~ '~m' ..;,.,:?, .:...:
Mercy Hospital and Memm, ial Hospital soon will be partnm, s. .~m
At'f a o bede: serves cornmurdty
possibility of an nmm, t/m la~ summer. A number
~ several reasons for it:
cmnpaUide; me bea~ care m~-~es of ~ two
about: ae cost of health care,
tm, e earned a reputarim ~or promdt~
wh/c.b now represen~ 1,l care .... '~----;
permmt of the na~on's gross , am/, Mercy m part of a largm', mull:l-gala
national produc~, sysUm~ aUowmg access to impormg
· The dramatic growth of prog~m,, to Bakersfield
managed care bea/th plans A/ter eompledmg a '~_ of
r'eim~ursemenC wbi~ ~
the ~ of unan.c/pared costs ~ an~ .,m.._Uan ~-.~
hos~tala, approvaLm from
and both hospttaJ's govemmmal agendM
· The need for hesp~tal~ What wR1 the affiUat/on mean to the Elaket~leM
Herman . respond ruth the lowest
possible prices and the ability ~? Them will be no outward chang~ By
· The consoUdat/on of provider~ in order to decL~ono about he~ital poUcies and dtz'ec, Um. The
achieve economies o~ scale and t ea'pond to nlaaaged a~liatioa ~ bring abo~ flare.iai ~~ got'
care.
· The development of integrated he.a/th care bo~ organ/zatlens thnt mxne w/th ecmomy of
prev/der~, fac/I/t/es and/~uraflce coverage -- to _ma~. e~, ~nr~ge to medical and financial ruourees,
/reprove effic/enc7 and better control the proc~, aria .a.1~rance of cont/nu/~ Cl~UUty bealfll
These evenT, t are happerfiflg mo~t rapidly/n services.
consolidate/.i accelera~/ng na~onmde" and that prov/ded to 7~e C,,i//,'raf'~lO,3 reporffl~ 2Jtaf~ over
between 19~0 and 19S0, the nLLmber of bo.~itaL1/fl these montkl. Un/ortuna~y, there 8ppeml to be an
Calfforn/a dropped nearly I2 percent due to attempt to mock th/,1/mOorYant strat~e
The n,-~her of inpat/ents/.1 decl/n/flg, more and unnamed sources who have nevee had the
people are covered by fixed-rate contracts, and courtesy to aak offic/a/,1 of e/the*
gover.ment and pri te mb. nent raw eer
decrea.1/ng.' ~gith the prospect of a $488 bill/on c~uuauy tng/IMn our employees ruth the
reduct/on in Me(i/care and MedcaJd over the next of a major layoff, wh/ch bas never beeu dL1ctl,18ed
seven year~ to balance the federal budget, the or cons/dered by e/ther of the hosp/ta~ L1
Lmpac~ on hospital re/mbur~nent will be brutal /rrespOrL1/ble.
Cleariy, Amer/ca's hc~itah are deeply Evolved :..__E~ch o/. our community-ha.led boanla of
in the process of change. While Americans can curecmrs nas studied this strategic afmfn~lno and
supported it fully in the best interests of thLs
enjoy the best system of health care in the world -- commtmity. We are confident that together we can
and hospitals fight to maintain that high quality of better meet the health ear~ needs and e~g eonem, no
care -- it iz recognized Ltmt costs must be brought of the residents of Kern Connty.
under control
- Bermu.d J. Herman Is presldenf ~f Mercy'
The prop(]Md a. ffilintion is a logical afl.lwer to H~t, hc:~'~ Bat/~.M/e/d. ~o~lei. P'ISw
t.hiz challenge. We expect millions of dollars om- ,..'~- m r'_~ltf,,...~o. ,..~o~..~_,
July 7, 1995
Mayor Bob Price
1501 Truxtun Avenue
Bakersfield, CA 93301
Dear Mayor Price:
As you are aware Mercy Healthcare and Memorial Hospital have
submitted documents to the Federal Trade Co~,,ission (FTC)
requesting permission for a merger. While termed an "Affiliation,,
this merger will result in a single corporate owner of the combined
hospitals, Mercy Healthcare Bakersfield. This union would bring
under one administrative umbrella three of the four hospitals in
Bakersfield caring for the non-indigent. The FTC is aware of the'
monopolistic aspects of this merger and has delayed it pending
further inquiry.
Last week it was announced that an "overwhelming,, number of the
members of the Memorial Health Systems, Inc. (MHSI) approved this
"Affiliation,,. In point of fact only around 25% of eligible voters
did indeed vote and the ballot was not constructed to satisfy the
bylaws of MHSI. Nevertheless I am informed that the hospital
administration will go forward with the merger.
The public has not been apprised of any of the details of this
merger nor has any public forum been held concerning it's
usefulness or, indeed, it's benefits - if any - to the citizens of
Bakersfield. Exactly the opposite has happened. A concerted
attempt has been made to deflect public in-put by both hospital
administrations. Nevertheless, the FTC has received sufficient
information that they have elected to proceed with a far more
careful evaluation than was initially planned.
I believe that the major effects of this merger will be an
elevation of medical costs in Kern County as HMO's, IPA's, etc.
face a monopolistic hospital structure. While such a monopoly is
extremely undesirable in and of itself it also will place ~ of
the three hospitals within the religious constraints of Catholic
Healthcare West (CA"W) and all four major hospitals within one form
of religious constraint or another.
Since Mercy Bakersfield will be in the driver, s seat we can also
anticipate substantial job losses and eventual reduction in
available healthcare facilities. The people of Bakersfield and
Kern County are being treated in a shabby and patronizing manner.
The citizens have no idea of what is actually taking place nor how
they will be personally affected by this take-over.
Catholic Healthcare West is an incredibly profitable hospital
chain· Their revenues (profits) in 1994 exceeded one hundred
million dollars. To that can be added the three million dollars
contributed to Mercy Bakersfield by our citizens last year· In
return the entire chain of Catholic Healthcare West has returned
ar~ five hundred thousand dollars per year to its (charitable)
programs in California and Arizona· This represents a return of
about 0.5% of profits. Why the citizens of Bakersfield should now
further increase the profitability of this behemoth by perraitting
a monopoly beggars the imagination.
If the Memorial Hospital administration feels that the
~u~side help to maintain their ~-~ ......... y need
oDli~ated to ~ ~ ....... ~a~ ~U~LDIIi~y then ~h~, ~
c~n - ~- :_ ' t''~ ?~=n&y cO maxe the best ~-~s~ ~ .... ~"'~ ~=
i~' 5u x~ my opinion after conversa-~ .... 5~--~= u=~a =nat they
· · ~..u wx=n persons outside of
~[s~db~h~t~s~dmor~tO~st~_ma)~r p.u~.lic ~ospital chains
· une obligation oz the Boards of
Directors and the leading citizens
of Bakersfield to gain
benefits for the community as possible from any change ~Snmany
the
hospital structure. At this time neither Mercy Hospital, Mercy'
Southwest, nor Memorial pay taxes to the City of Bakersfield. The
potential for such taxes (which w_~ be paid by a private hospital
chain) would be lost forever by this merger. Moreover, an outside
hospital chain would be obligated to
. contribute a substantial
amount of money "up-front-, many millions of dollars, if they
"bought" Memorial Hospital. Bak r ' wi
m ni f r v r i hi m r r i 1 wh.
I am asking you to support the formation of an open forum for
disclosure of all aspects of this merger. The citizens of
Bakersfield have a right to decide if this merger is in their best
interest. The progress of this merger has been too long cloaked in
secrecy that benefits only the hospital administrations.
I am calling upon you to help me to bring this matter to the Public
so that all citizens can determine to what extent they support or
do not support this merger. The secrecy that the FTC itself
attaches to these mergers is required by statute. The hospital
administrations have attempted to use the legal strictures that
bind the FTC to suppress local debate. The FTC welcomes input but
is not allowed to solicit input. Only senior civic leaders such as
yourselves can accomplish opening these matters up. I most
earnestly and respectfully request that you join together to help
the citizens of Kern County get a fair deal.
A list of recipients of this letter is appended.
Time is of the essence.
John E. yfield, M. .
Ray Dezember
Board of Directors
Wells Fargo Bank
6606 Mt. Hood Drive
Bakersfield, CA 93309
Joel Heinrichs
Chief Administrative Officer
County of Kern
1115 Truxtun Avenue, 5th Floor
Bakersfield, CA 93301
George Martin
General Managing Partner
Borton, Petrini & Conran
1600 Truxtun Avenue
Bakersfield, CA 93301
Supervisor Ken Peterson
District 4
1115 Truxtun Avenue, 5th Floor
Bakersfield, CA 93301
Mayor Bob Price
City of Bakersfield
1501 TruxtunAvenue
Bakersfield, CA 93301
Alan Tandy
City Manager
1501 Truxtun Avenue
Bakersfield, CA 93301
Ray Watson
General Manager
KGET TV Channel 17
2831 Eye Street
Bakersfield, CA 93301
Roy Weygand
President
Kern County Taxpayers Association
1415 18th Street, Suite 407
Bakersfield, CA 93301
JOHN R. PULSKAMP, M.D.. INC.
3940 SAN DIMAS STREET
BAKERSFIELD. CALIFORNIA 93301
Telephone (805) 324-4957
FAX (805) 324-5528
ORTHOPEDIC SURGERY
August 1, 1995
Personal & Confidential
Mr. Mark Salvaggio
Council Member, Ward 7
1501 Truxtun Ave.
Bakersfield CA 93301
Dear Mr. Salvaggio:
Re: Mercy/Memorial Hospital Merger
Enclosed are reprints of articles appearing in the health care industry's trade
journal, MODERN HEALTH CARE, which I think you will find enlightening.
Exerpts from studies by a variety of professors and researchers are highlighted
in the enclosed reprints.
A few snippets of some of their pertinent findings are as follows:
· "While the mergers ended the local "medical arms race'! between
formerly competing hospitals, some of the mergers
unintentionally triggered a regional medical arms race.,,~
· "While many executives sold their mergers as a way to reduce
price increases, the study found that the hospitals increased
charges about 2% per year following mergers.,,2
· "Despite slowing average expense increases, prices per patient
continued to rise for the merged hospitals, HCIA said. Price
increases were higher after the mergers than before the
hospitals consolidated.,,3
· "The findings also suggest that many hospitals merged to
eliminate competitors in their markets.-4
· "The findings support two studies sponsored in 1990 and 1992
by MODERN HEALTH CA/~E that found that merged hospitals
improved their profitability primarily by reducing expenses
and raising their prices.-s
· "Hospitals that merge to become the solo, or dominant, acute
care provider in small or rural markets tout savings to the
community as one of the main benefits of consolidation, but
managed care and business coalition executives tell a
different story. They contend that negotiating price
discounts with a hospital becomes more difficult after a
merger.,,6
· "Mergers often are announced with promises of savings that
draw support from the business community"... "Such savings may
be possible, but they are the exception, not the rule, MODERN
HEALTH CARE's research shows.''7
· "Hospitals that merge into dominant providers want to place
themselves in stronger negotiating positions to reduce managed
care's ability to force discounting prices, experts said. The
merged hospitals also want to create a monopoly to prevent
their staff physicians from using a competing hospital as a
bargaining chip.',8
· "A 1992 University of Michigan study found that in three of
four small market cases, hospital prices increased at a higher
rate after merger, and the merged hospitals were less willing
to discount prices to local businesses.,,9
· "In its most recent analysis, HCIA found that seven merged
hospitals steadily increased their total ancillary markup
ratios after merger. Six of them increased their markup ratio
at a higher rate in the two years after merger than the two
years before consolidation.,,~0
· "Hospital systems here (Roanoke, Virginia) have an attitude
that they can control the market because they know it is too
far for people to travel to those other hospitals.,,~
It appears to this observer that, based on these findings, the post-merger
projected savings and price reductions to the consumers alluded to by Mr. Carr
and Mr. Herman may be just pipe dreams, or propaganda to expedite the merger.
If you have any questions, please call me.
S in~r~ly,
JR P/jcm .j~'"' John R. Pulskamp, M.D. //~~
Enc.
BIBLIOGRAPHY
i. Robert Carter & Associates, Cleveland, Ohio, by Ann Knoll, Vice
President and General Manager, MODERN HEALTH CARE, February 3, 1992.
2. "Why Hospitals Merge" in MODERN HEALTH CARE, March 19, 1990.
3. HEALTH CARE INVESTMENT ANALYSTS, Baltimore, Maryland, by Steven
Renn, Managing Director, MODERN HEALTH CARE, February 3, 1992.
4. The American Hospital Association's "Hospital Research and Education
Trust", MODERN HEALTH CARE, November 15, 1993.
5. Ibid.
6. Jay Greene, MODERN HEALTH CARE, December 5, 1994.
7. Ibid.
8. MODERN HEALTH CARE, February 3, 1992, and MODERN HEALTH CARE,
December 5, 1994.
9. Author Jack Wheeler, Chair of the Department of Health
Administration, University of Michigan, and Howard Zuckerman,
Professor of Health Care, Arizona State University, 1992.
10. Health Care Investment Analysts, Baltimore, Maryland, ~
C__~, December 5, 1994.
11. Lisa Craft, Executive Director of Blue Ridge Health Care Coalition,
Roanoke, Virginia, MODERN HEALTH CARE, December 5, 1994.
i t's likely 1994 will go down in hospitals before and after mergers referral centers to capture more
healthcare kistory as the year ,~ince ed~cars s prospec=ve pacing Medicare dollars and patients (Feb.
dozens o/hospitals claimed they system was int~'oduced in 1983 (March 3, 1992, p. 36).
were merging to form integra~i 19, 1990, p. 24). Wh/le the merged hospitals ended
delivery systems. The study found that merged their local 'medical arm~ r~:e,' a
Only time will tell whether the~ haspit~l~ didn~ pass on efficiency ~ regional ra~ h~t~l ~ for terrify
hospital~ can work together, and with to consumers in the form o£1ower care with hospital~ az far az 50 miles
physicians and other providers, tn prices. In fact, on average, the 18 away, the ~udy foun&
truly develop networks that can deliver merged hospitals increased their price~ In this report, Ma~z~
a full spectrum of healthcare services a total of 9~ two year~ at~r a merger, l:Iz~mc~ di~o~red another rea~n
at a reasonable price, compared with a 1% price hike the year ho~ita~ in ~ ~unltiz~
This article explores the poet-merger before the merger, increased price~ at hi_~,,~, rate~ ~ a
behavior of small-market hospitals and The po~t-merger price increases merger:. Nobody ~ppad for~ard to
its effect on compe~ng hospitals, came even after adjusting for stop them.
managed-care payers and business inflation and severity of illness--and Az merged hospitals increazed
group~. An upcoming story will explore after experiencing efficiency gains, market concen~rat~o~ they
whether hospitals need greater--or the study said.
commanded greater market power and
less--ant/t~-uzt protection to merge. Az a result, hospitals increased were less inclined to deal with
And,/n future issue~, MODZ~U~ profits at higher rates in areas where bnsmesses or payers seeking
H~.~c~ will present case studies of they had greater market dizco~nt~.
other merged hospi~ls concentration, according to a 1993 Withan~ man. god care, bnsineszez in
While more academic re. arch is American Hospital Association study smaller communitie~ reaved ~lowly to
needed on merged hospitals, several (Nov. 15, 1993, p. 4). organize inta coalitian= that could
facts are known about the/r In a 1992 study, Mon~ toilet'S/rely purcha~ healthcare
post-merger behavior. In 1990, Hs~a.~c~ found that one reason service~ at redm~i prices. Only when
Baltimore-b~e~i Health Care hospitals in email markets raised bt~.~ grou~ joim~l force~ and
Invesunent An~lyst~ conducted for prices was ~o purchase expensive demanded pric~ c~nc~ion~ d~d
Mov~ Hr.~r~c.~ ~he first study technology, expand into tertiary merged hospitals agree to reduce price~
exploring the financia~ imphca~on~ o£ ~ervices and become re gional and p~ along ~aving~.
Moclem Healt~car~zem~r S, ~9~
H ospitals that merge to become hospitals during that period, and about first and managed care working to catch
the acde or daminant oneiAird of the mergers were in small or up,' Mr. Luke said. 'Hospital~ will have
scuts'care l:~vider in small or rur~ markets, the AHA r~id. · the upper hand for a while, just like
rural markets tout sa~ings to A drop in pat/ent days per thousand managed care d/d in the larger markets.
the community as one of the main residents--from 700 to about 3,50---and Hospitals are consolidating withaut
But managed-care and business by businesses have increased the pace of shots until businesses demand change.'
coalition executives tell a different story, hospital mergers and encouraged the Merge~ I~nefl~. Through mergers,
They cont~d negotiating price discounts formation of integrated delivery eye. ms, hospitals set out to accomplish three
with a hospital becomes mom difficult especially since 1993. According to primary goals.
al~r merger. Hospitals that are unwilling blov£~ H~TaC~ es~irn,tes, more First, they seek to reduce donli,~ve
to pazz on merger savings must be than 100 hospital mergers and administrative and support
pressured to the bargai~ng table by the acquisitions have been announced this With lower overhead ~ ]3atient.care
collective clout of busin~..., they said. year. costa, previou~ studies conducted by
~ consolidation of(two) hospitals Mergers often are MODEI~I HEAl.THC. ARE and
into a one-horse town has negative announced with promises ' the AHA have found that
implications on pricing ct' care because of savings that draw meat hospitals have
t.here is ~ inceal;~ve to co.tract with support; Em the ~ 'Hospitals e~.t
payers that deliver managed-care lives," coromunity. For example,
~dJonat~mruc~ vicepr~dent for o~ci~ at the o~dy two will have the
managed c~e of Green Bay, Wm.-based hospitals in Port Huron, p. 24; Nov. 15. 1993,
Employers Health Insurance. Mich., unveiled a merger upper hand P'
Without pressure to reduce prices eariier thJa year with a However, many
from aggreseive business coalitions or pledgeto savemore titan for a while
their profits by hiking
ma. - puyers,'me ersi. m on .vey. (in smaller pricee at a faster rate in
small markets increa.e market power ~ ~ that the first three years all, er
and are anQ-comperitive," said Roice part of the saving~ from markets).' they merged,
Luke, a healthcare professor at the planned merger, which Hr.~d,THGu~'~ 1992
Virginia Commonwealth University, has drawn the atZenQon of ~0iC~ Luke merger stud)' found (Feb.
Richmond. 'It increases a hospitars the Federal Trade 3, 1992, p. 36).
ability to refuse to discount serVices." Commisaon's antitrust For example, 14
Mr. Luke, an expert on regional investigators, will help merged hospitals
healthcare system development, said it reduce employers' healthcare coals, increased their prices an average of
could take three to five years for Such savings may be possible, but they 9.9~ in the three years after merger,
businesses in small markets to are the exception not the rule, Mooga~ compared with an 8.6% average annual
orgamze into coalitions to counter the Hr.s~Tac.~u:'a reeearoh show~, price increase in the throe year~ before
new hospital monopoly. 'When they Because managed care is merger, the 1992 study concluded.
realize their healthcare costs aren't predominanQy an urban phenomenon, Hospitals else want to purchase new
decreasing, they begin to wonder state legislation is needed to encourage technology and expand into
where their money is going," he said. managed-care penetration in rural tertiary-level services. Executives
Bernard Tresnowski, who retired area.,, Mr. Luke said. At least seven maintain these invsetment, increase
Nov. 30 as president of the national states--including California, Florida quality of care delivered to patients.
Blue Cross and Blue Shield and Minnesota--have approved reform As larger providers, these hospitals
Association, agreed that sole provider measures to encourage managed-care can be reclassified as'rttral referral
hospitals need external pressure to cut contracting, centers" under Medicare to receive
costs and pass on savings to patieatz ~ key now is for the buyer higher reimbursement rates.
and businesses after their mergers, community--government, busines~ Hospitals that merge into dominant
'It's healthy far the business coalitions and HMOs--to slimulate providers want to place themselves in
community to put pressure on small- managed care,' I~. Luke said. ~ stronger negotiating pozitions to
market haspitals,' Mr. Tresnowski gaid. needs to be discipline in markets impased reduce managed cure's ability to force
"At Blue Cross, we'd prefer to develop by managed care. Otherwise, merged discounting of prices, experts said.
partnerships with hospitals, but it's a hospitals gain too much market power.' The merged heapitals al~ want to
long prtx:ess that's more difficult in rural Mr. Luke said history shows that create a monopoly to prevent their ateff
areas where there is just one hospitaL' high managed-care enrollment has physicians from using a competing
I~rgar manta. From 1980 to 1992, the stimulated consolidations in larger hospital as a bargaining chip. Physicians
healthcare indu.Va-y averaged about. 16 metropolitan markets such as Los often play one hospital offanother in
hospital me. rge~ each yezr, according to Angeles and Minneapolis-St. Paul. disputes ta gain new services that can
r. he Ame.,6can Hospital A. ssoda~on. More In smaller markets 'ifs evolving in just Lncr~ their incomes while clem~asi~ a
than 400 hospitals merged into 210 the opposite way, with hospitals merging hospital's profits, experts said.
M<xlern Heallhcare/Decern0er 5. ~ 994
39
Higher latices. A 199~ University of imp~ed peet-merger admission ~ ~ 249 beds in.eased ~e~ m~kup
Mic~ s~dy fo~d ~t in ~ of ~ ~ n~ d ~ ~ ratios O. 13 points ~ 2.33 in 1992 ~m
fo~ sm~l-~ket ~, h~pi~l ~'~ ~ ~ ~ 2.20 in 1991, HC~ said. From 1988
p~s mcr~ at a Mg~r ~ ~r ~e ~ee o~er me~ed hospi~ ~e ~ 1989, hospice ~creased markup
m~er, ~d ~e ~rged h~pi~ Sa~ He~th Sys~m, ~n~n, ratios 0.16 points ~ 1.93, it s~d.
w~ less ~IH~ ~ ~o~t p~s ~ Io~; Bmmenn He~, ~ffi~ of newly m~d sm~-
1~ busings. BlemiSh, HL; ~d Uni~ Me~ m~ket hospi~s at~ by HCIA
~ ~y ~d~ ~ ~ of ~ ~n~r, Moline, IlL ~ ~e me~ be pre~n~ ~ ~t~ 2su~ of
~ ~em by ~ ~ ~ ~ ~ ~o study Mve ~en includ~ in p~ous ~ ~ ~ ~ ~ H~
Y~ ~ ~- ~ ~, ~ Moo~ H~ stu~es. F~ M~ ~,
h~' av~ ~ ~ ~ A ~ ~ ~ ~ of ~ ~ ~u~ a ~b~
~oy~ ~d ~ ~ ~ HC~ a
To ~ ~p~n for
'Hospitals
U~e ~ ~aq~ ~ ~ Memo~ ~d
(that merge)~Udat~g
~E~c~ ~ ~d
are slow .o,.r~.,~eb~
we~ d~p~ve ~ ~ ~i~y
o, tO take
~]ow ~e~o~ ave~ee,
~on ~ h~pi~ ~ven~ HCIA
.,. advantage
Fa~fa p~aident ~d
0f sa ings.'
e~y w~ ~ of ~ ~ '~ is a
_ 1~ bu~ess ~Qon
~1~ ~ ~ a h~ ~ _ q~c~y ~d how
~ ~ ~ 1~ ~ve i~ ~ f~ ~ ne~tiatio~,"
~d~ ~o~.' ~ Holy F~y w~'able ~ ~hieve
~e ~o~ In i~ most ~nt ~ys~, HC~ effiden~ ~v~ ~om its 1~1
w~ ~t ~ fo~d tMt seven me~ed hoapi~s me~r. But the hospi~ a~t~ly
mmp~ve s~a~y ~ased ~eir ~ ~c~ ~ its newly ga~ed m~ket clout
Mr. Fu~s raQ~ en~l~ ~e m~kup ratios ~r me.er. Sk of re~ a eon~ offer f~m
~he~ ~ ~em inc~ed ~e~ m~kup raQo at a 3~me~r b~ess ~oup in the
~ ~ ~d~. ~gh~ ra~ m ~e ~o ye~s a~r y~ ~r ~ me~r.
~e study ~ndud~ that me~ers merger ~an ~e two ye~a ~f~e ~. ~mple ~d Holy Fa~y
'es~b~sh ~e ~nQ~ for pdce ~hdafion, HC~ ~& ~ ~ di~t
~ductiona ~ pu~h~~ but don't ~o~ ~ merged hospi~ ~so ~ it n~ the ~venue ~ ~ver
~an~ such ~ ou~me, ~d Jack m~a~d ~eir m~kup ~Q~ a~ve me~r ~
~ler, ch~ of ~e dep~ent naQon~ ave~es during tho~ ye~, co~o~da~ o~tio~.
ofhe~ adminb~ation at ~e it s~d. "Ifa m~ed ~ty ~ys it
U~ve~ity of Mi~ig~. Mr. ~ee]er ~cffia~ fees are ~nside~d by fo~ ye~ ~ e~M~ red~d~cies,
w~ ~-author of ~e study ~th many expe~ ~ M ~dden ~s" my ~spon~ is, 'I~ ~ve you
How~ Zucke~. now a hearse ~ petien~ beca~ they ~n't as monks,' "Mr. ~esno~ ~d.
p~fe~r at Mzona S~te U~versi~. really syllable ~ the public as are ~' ~ ~ ~ ~ Holy
"A lot dependz on ~e ~ ~ ~e mom and su~e~ ~s, which c~ M F~ ~ ~t ~ ~ mv~
~d, p~u~ ~m ou~ide ~s easily comp~ed from hospit~ ~ s~ ~t ~ ~ ~v~
and ~e de~ee ~ w~ch pro.dare ~ hospi~, by ~ ~y~
e~igh~ed." he said. For example, 157-bed Lower ~ p~ ~
~e ~ (~) H~ S~ Florida Keys Health System. Key But, he ~,
o~ ~ ~ f~ ~ ~i~ ~ ~e West, increased its markup ratio they won't mnt~ ~th us. ~e~
s~y, ~ ~ ~aiQve 0.33 poin~ to 2.70 in 1993 from 2.37 ~ oth~ ~so~s ~e av~ble
~~ ~. ~ ~ in 1991, the ye~ a~er its 1990 ~e ~ of patient."
pn~ ~ low~ ~ ~d merger. HCIA said. Before merger, ~ve ~ ~ ~ ~ by
~p~ uQli~Qo~ ~ ~ ~ a Lower Flodda had increased its b~ ~ or
~1-~ ~ ~t ~ ~ ~ markup ratio 0.06 points to 1.61 in ~ ~ o~
1~ me.er of ~W H~pi~ ~d 1989 from 1.55 in 1988. (To a~ive at
~a H~ p~~
pre-merger markup ratios, HCIA p~de p~ mm~on ~d
~ ~ me.r, ~e C~ ~ow~ consolidated data from the two ~ ~
J~ ~ ~~s ~5%~ a meting hospitals.)
"It's a c~ic st~
P~ a~ of 1~. It ~ Nationally, hospitals with 100 to some~s ~ enco~g~ by I~
40
M~em Hea~em~g 5, ~9~
businesz group~ that are thwarted in
Competition keeps
con~ac~," Mr. Fuchs ~d.
In ~anoke. Va.. ~e Blue ~e
He~th~ Co~ition was unsu~e~ful
heat onWismarket
~ two ho~pi~ o~ed by
~ok~ C~lion He~th in ~I. Holy F~y M~ M~ refuse ~ discount pri~s to ua,' Mr.
Sys~m ~d ~s-G~e Hespi~ in Cen~r ~ M~ ~, ~ ~ Teddy said.
n~by S~em, Va., owned by
~n~= ~ a 1~ ~
~uisville, Ky.-ba~d ~lumbi~CA ~t ~ off~ ~ ~ i~ 10~ ' ~y F~y ~d ~ ~
Healthc~ ~. emNo~ m ~ ~ ~ ~ f~ ~, a ~ ~ ~ a ~p~
Des~ra~ ~ slow fisi~ he~re a ~% p~ ~ ~,~ ~me ~ ~ ~
cos~, the 5~mem~r business Holy F~ily ~uldn't a~ept the ~wa~. ~ ~ven ~
co~ifion inked John D~re He&~ co~ition's an~ys~ ~at i~ pfi~s were ~ ~i~ ~ ~ ~
Care ~ ~ea~ ~ ~O p~uct and 25% higher th~ ~o s~-sized ~ ~ 30 ~ away ~ G~n ~y,
negofia~ ~n~ ~ ~e h~pi~s, hospi~ in Grin Bay, W~., mo~ ~e~ ~
Ia May, John Dee~, a ~tion~ th~ 30 miles ~ the no~w~ ~d ~ile ~o Rive~ Hospi~ h~ the
ma~ged~e company ~at Paul Teddy, c~ of~e ~tion con~a~, Holy F~]y l~t
s~zes in me~-siz~ m~ke~ ~keshore Heal~e C~n. average of fo~ ~fisn~ ~r ~y, or
~g~ he.flaring ~ C~lion for '~hey didn't think they needed to 1,460 a ye~, s~d Dasd ~mpl~, Holy
acu~ and ph~i~an se~ces. It sign a con~ract with us becauss they F~il~s president ~d ~efex~five
cut a de~ in Oc~r. John ~e~ now ~hought our employees would go ~ officer. ~at a~ ~ 4% of
is eam~g b~ine~s and ~eir their hospi~l anyway," said Mr. ~nu~ ~fien~, he smd.
employes for a J~. 1, 1995, stoup,
m~ke~ m~er ~ ~anoke. ~ Holy F~y ~
Blue ~i~e mem~r busings will i~ ~ ~d ~id ~ ~ven'
r~eive a prefe~d ~ from John ~ by 1~ ~ 1~ ~ ~
D~re, s~d ~sa Cr~, Blue ~dge's ~ . ~n~ ~. T~ ~
ex~ve d~r. ~e ~mpani~ m Mr. ~mple ~d Holy F~y
· e ~i~on have 30,0~ employees in ~[e ~ ~e a lower bid ~ ye~
the ~noke m~ket, whi~ h~ a ~ it ~d ~n ~le m ~u~
~p~ation ~300,~. ~eo 8ay e~ ~ me~r ~.
"(Ca.lion was} much more ~t ~e 21~ faulty o~ly had
~ negotiam ~ ~Ch a~r merger," ref~ m ~unt i~ ch~es 25%
Ms. ~ s~d. "C~tion w~ ~ ~ it n~ed ~e ~gher revenues
consol ~d dic~ ~l the ~s, but ~ cover ~e ~s~ ofi~ 1991 me~r
since we bro~ht John Deere ism the ~ one ofi~ two ~m~,
market, the rela.~ons~p h~ M~w~ Memo~, Mr. Semple s~d.
impmvedf I~ ~mffer, which w~ rej~
Tom M~eld, president of C~ion was m ~ount charges by 7% and
H~th Plans, a su~&~ of C~lion ~eeze p~s d~ng the tw~y~
He~ Sys~m, s~d ~e problem ~th con~c~ he ~d.
negotiating a ~ntra~ ~th ~e ~e have a ~o~ ~i~ant
~on w~ that it was unwiOi~ ~ (~h ~he ~on) ~ ~ ~low the
~aran~ volume in exchange for average p~ces of(hoepi~} in
· ~oun~. no~he~t W~onsm,~ he
"Ifwe are going ~ ~ve ~un~, we Teddy, ~ce presiden~ ofhuman b~ ~on ever wa~
w~t ~nefit diffe~n~, or s~er~e resources for Paragon Ind~es, a ~ in~ ~m~oo ~m
(of pa~ien~ ~ Ca.lion hospi~s~f Mr. Two Rive~. W~s.-based ~ve~, Holy F~y h~ kept
M~eld s~d. "We have done that for a manufacturing company, pm~. S~ da~ for Holy
numar ofemployeo here." Holy Familfs mer~r ~ show ~t w~e ~ ~ m
~e ~ntrac~ ~th Jo~ D~re Mani~w~ Memohal H~pi~ is ~e s~nd ~d ~ ye~ ~r ~e me,r,
in~udes in~n~ves for enroiIees ~ use first ofsever~ hospi~l me~e~ ~e ~ ~ph~ ~ w~ ~ut two
C~lion's hospi~ls, Mr. P~le ~d. ~ovs~ H~TH~ ~ excise in pe~n~e ~in~ low~ ~
HMO subsc~bers can ch~ o~her ~ coming months.
~ p~me~er aver~.
hospi~ls, but ~ey will ~ r~ui~ ~ Spumed by ~e most ~mp~hensive
Da~ re~ ~ the ~ ~
pay unsnarled copa~en~, he s~d. hospit~ in Mani~w~ Cowry, ~e He~ C~e ~o~on m&~
Neve~eless, Ms. Cr~ said, 200-mem~r busine~ co~i~on F~ly m~ i~ phis a ~ of
business in ~e ~on felt C~lion conrrac~d ~th ne~y 53-~d ~o 9.5% ~m 1~2 ~ 1~ (~ ~ p.
was savi~ money though the merger ~vers Community Hospi~ ~ ~come ~). ~e p~ ~ ~e ~
but was un~l~ng ~ pass it on ~ i~ prefe~ed p~der.
ave~ c~ ~ ~ by ~e
busines~s ~hou~ ~c~ing "Without Two Rivers, Holy Family h~pi~s m ~e
employees ~oice of pro.der, could charge wha~ver ~hey want and ~ m~ p~ ~ for
"~Hospi~l sysco) he~ have an
M~em He~l~r~em~r 5.
attitude that they can control the But that didn't mean Augusta enter the market with lower prices.
market because they know it is too far executives were any more willing to But, he added, 'wa never promised
for people to travel to those other discount their charges to local discounts. It's stupid. We tallr, ed about
hospitals,' Me. Cra/'c sa/d. employers.
/ncreasing access, qual/ty and
Some 50 miles to the north in "We are philosophically opposed to satisfaction (from the merger). We've
Fishersville, Va., Augusta Medical just giving dlscounte~' sa/d Richard done that. ]/'we gave discounts, we
Center last summer opened the doors Graham, Augusta's president and might not surv/ve.'
ora new 255-bed hospital. Augusta CEO. 'If we gave one to DuPont just However, HCIA sa/d Augusta's
Medical, which was formed by the 1988 because they are the largest company post-merger operating margins range.
link of Community Hospital, in the area, it wouldn~ be fair to some 9% to 12% from 1989 to 1993. For
Waynesboro, Va., and ICh~'s was
of the mailer employers.' its size, Augusta is one of the most
Daughters' Hospital, Staunten, Va., Mr. Graham said the hospital is profitable hospitals in Vh'ginia, state
also r~duced its costs thruugh the concerned about employer backlash officials sai~
merger, according to HCL~ and the possibility competitors might Continued on p. 48
offer hospitah in the northeast regina d' agreement with Aurora Health Care, businessman and supporter of Two
Wismmm was 17% during that a six-hospital system based in Riven Hospital, agreed. But, he
thr~-ys~ pariai, the stats saki Tw~ Milwaukee. During the past Year, . added, "Holy Family's prices
Rive~ ~ its prkes a total d' Aurora and Holy Family have been increased with competition. They
17.6% f~gn 1992 to 1994, the ~tatz ~ engaged in a market war for patients would have gone up much more
Ia 1993, Holy Family raised its and control of the county's five without competition."
prices 4.9%, compared with an 8.8% primary physicien group practices. Stoven Spencer, Two Riverg president
increase for Two Rivers, the state Aur~a has acqu/red a 10-member and CF.Z), said the h~'s ~
said. The median price increase in group pract/ce in Mani~woc County, and with Jamm~ guarantees ares pe~ients
1993 was 5.5% for the 14-hospital Holy Fam~y has acqu/red two groups ami bus/nezzes wi/l have a choice.
region and 6% statewide, with a total of ~out nine physic/ans. "We bel/eve competition will br/ng
Still, on average, Two Rivers was Both are actively seeking the remain/rig about cost-effective and higher-quality
less expensive than Holy Family in two group~ which aemunt for the rest ~f care," Mr. Spencer said. 'We want
1993, according to the Wisconsin Cost the county's 24 prL, nary~are physicians, modern technology, but we don~ want
Containment Commission. Based on Mr. Scruple sa/d.
things we don't need. We aren~ going
to have a medical arms race here."
Mr. Scruple s~id the community will
benefit from short-term competition
but will experience steady price
increases to pay for duplicative
services created by the competition.
Pre- Post- "Aurora and the two other
merger merger Milwaukee networks are leaking out ta
i Ho~iiai 19~J 1990 1991 total 1992 1993 1994 total ~ communities to purchase
H01y Family 5.5% 7~5% 72% 202% 0.0% 4.9% 4.6% 9.5% prunary-care practices," he said.
' -- "They want to feed those patients
Two Rivev~ 15.0 8.0 9.0 32.0 0.0 8.8 8.8 17.6 from rural to urban hospitals. We don't
believe that/s appropriate."
P~ioa' 8.0 9.0 9~ 2~.0 ?.0 6.0 4.5 1L5 Mr. Spencer denied that Aurora
~ ~'--,~-, ~ ~t ~ cas ~ 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
risk-e~usted charges. Holy Family The two hospital groups also have business. (Mr. Scruple) wants a
scored a regional charge index of 115, engaged in dueling advertising monopoly," he said.
compared with 94 for Two Rivers, the campaigns designed to win patients Mer~r a~fWztL Like other newly
state said. and sway public opinion. At stake for merged hospitals, Holy Family's
The index indica~e~ the amount of tho victor is the business coalition expenses ~cally increa~d
coll,~_~cl charges ~ Family received contract, which will be rebid in early during the merger year. In the
from I~yers was 15% greater than tbs 1995. foUowing two years, however, Holy
average of the region, while Two Rivers "Two Rivers' affiUafion with Aurora Family became more efficient,
was 6% lower.
guarantees that competition will keep according to HCIA, a Baltimore-based
Holy Family's Mr. Scruple, who healthcare prices down," Mr. Teddy healthcare information company.
questioned the comparative index, said s~Jd. "(Holy Family isn't) the only On a combined basis, Holy Family's
the price gap between the two game around." expenses per adjusted admission
hospit~s bas narrowed in 1994. Still, Mr. Teddy worries that rose 15% to $4,526 in 1991 from
Incrm~ecl competition. With~ two competition will increase healthcare $3,938 in 1990, HCIA said. In the
weeks at, er losing i~s contract in June costs ~o businesses, second and third years of the merger,
~99L~, Two Rivers signed an affili~[ion James Van Lanen, a Two Rivers however, expenses increased a total
Moaem Id~all~care/Omc~ml0mr 5, 1994
Mel-gel's Continued from p. 44 "medical arms races" between Culpeper and Lynchburg have lower
To pressure Augusta into negotiating competitors, palient costs than other areas in the
discounts, more than a dozen ofthe Mr. Halseth said a hospital monopoly state, he said.
largest businesses in Augusta County ehminatea unnecessary be~s and 'From state data, we know that this
recently created the Waynesboro duplicative services that add region of V'u'ginia has the lowest
Healthcare Coalition. .unnecessary costs. The medical center prices in the state,' Mr. Halseth said.
'DuPont's idea was, since we are is located about 25 roles east of "I believe you lose more from lots of
such a large employer and the hospital Fishersville and is working with competitors in a given market in terms
is saving money on its merger, let's get Augusta to develop specific tertiary of price."
a discount,' said Stoven Mosor, M.D., a services sad may Mr. Halseth and other hospital
healthcare professor at Mary Baldwin include the- adrnlnlstrators agree~hst uvings '"
College, Staunton. hmpital in its sometimes are difficult to achieve,
'I'hat got the attention of the regional primarily because of polltic~ll pressure
hospital, but up to this point Augusta managed-care from hospital constituencies.
does not give discounts to employers, plan, he said. 'Hospitals (that merge) are slow to
only insurers. Other major employers "'l'he more take advantage of savtnl~,- said Holy
also were told no,' said Dr. Meser, who competition you Family's Mr. Semple. "Everybody has
also is on Augusta's community ' have, the higher a pet program, a board member or a
advisory committee. 'I expect it will prices go up," Mr. physician, and they will fight against
take a year or so for the hospital to do Halseth said. dosing services."
business with the coalition." Mr. ?m~noweld "With less Yr. Semple said some hospitals that
tioepimls' ~l~w. Most hospital competition, merge in Small markets find it diffi~,,It
executives involved in mergers, like prices go up al; a slower rate.' to reduce staff to efficient levels or to
Mr. Graham, contend that elimination He said he based his observation on rl__nse one of the hospital facilities.
of competition saves patients money. 20 years' experience and his evaluation "It's a reflection ora lack of
Michael Halseth, executive director of markets in northern Virginia that discipline in management and the
of 683-bed University of Virginia only have one hospital.'
board," Mr. Semple said. 'Hospitals
Medical Center in Charlottesville, said Mr. Halseth said hospitals in need to be watched and held to their
a monopolistic merger can end costly Virginia towns such as Haxrisonburg, promises." ·
FREE INFORMATION FOR READERS OF MODERN HEALIltCA~E
)cc~om ...................................................... ~ Cow 129 H~t~ St~i~ Insatm .............................. 43MWa 202
/d[md Phan~acy Mareoemmt ................................... 43SE= 200 ~ Data Sciencas .......................................... 19.21.23 108
AmeflSouwJ ............................................................... 43SWa 201
ARAMARK ........................................................................ Z 101 110.112
AIL ............................................................................ 32 119
In~ I~k2ogy I~I~ Inc ...................... 27 114 ·
6c~o Oi~ghostics .................................................... 45 125 Mi~l~ Aut~Io8 Sy1~$ ................................. 35 122
6u~o~}r~ We~ome ............. : .................................. 24-2~ 113 M~line IndustMs ................................................... 22
Norm N~ion~ L~m Imu~ .................... 28 116
CCH Inco~teg ............................................................. 1§ 107 Nyc0med .......................................................... 12-13
Ciba Pha~cauCimls .................. 17-18 ~ 105
C~k~p No~h An~nc~. Inc ............................................ 28 115
Clinical Dn~n~ .......................................................... 29 117 OLst~a Kimbefty Quark. Care ...................................... 51 126
Owe~ Health:ar,. Inc ........................................ 2nd Cover 111.
0iscover I~.lll Se~v<aa .................................................... 41 124 ~ico Insurance Company ............................................. 9 103
0uPo~ DLagrlo~tics I fT~l§in~ ....................................... 3~-37 I~ l~1~ilips M~diCal Systems .............................................. 11 104
Elscint, InC. .......................................................................... 5 100 Radktogy AeSourcls Inc ........................................... 32 120
So~wa~ 2OOO 31 --
F'<le~ l~estmen~s .......................................................... 47 127 Soecl:rum Haalthcare Se~;':: -'- ------:::::--:-':::: 14 106
Fisc~r Marigold ................................................................... 8 102
Fuji Me<~l Sy$1ems USA, I~C ............................. ~ Co/Ir 130 Team Radiolo~/ ............................................................ 46 126
Telera~iotol~ Asso~ ............................................... 20 ' 108
GreysloM Communilies .................................................... 30 118 VALIC ......................................................................... 33 121
Thil Indlx ii pn~dde(t a~ a~l ad~itl~onal ~. 'llle purr ~ n~l ~ IL~billty I01' eno( (x G.T---~_-.
48
Modern Healthcare/l~. 5.
~p~c~iuced with pe~immion o£ colx~igh% o~n~. Yu~th~ ~epvoduction p~ohi~ito~.
The costs of
hospital mergers
Expense of consolidating operations is an eye-opener; new construction
and technology spending also cut into those promises of big savings
By Jay Greene
Mo~ hospital mergers are sold to the cate most mergers were more costly personnel to provide them.
community ss a way to reduce service than expected because of new con-' The ~ of services improved
and staffing duplication, consolidate struction and renovation projects, the hospitals' quality and ~ I:mt
clinical programs, achieve economies To reach their publicly stated goal of it also increased their operating
of scale and increase profits to invest becoming the area's most comprehen- The studies were conducted for
in new services, sire provider, the merged hospitals MODga~ H~atLraCau~ by Cleveland-
But two new studies on hospitals also expanded int~ high-technology kased Robert; Carter & Associates
that merge in small markets also indi. specialty services and hired additional Baltimore-bued Health Care Invest,
ment Analysts.
Merged hospitals used in survey and study viewed executives representing 17
hospitals that merged between 1985
Numberot 1990total and 1990 (See rehted sto~, p. 42).
beds' profit margin ['[C[~'s study ls baaed on consoUdated
lg~ me~n
Mediem. e coat ~epoz~ of 14
Rte[an(Is C.~mmunity HosDilals. Sand,si(V. Ohio' 183 7,71%~ that me/'ge~ betWeel~ 1~ axtd
Hunt Memorial Ho~ollal Distict, Greenville, Texas, 149 4.62 (See ]'eLided stoz'~, p. ~0).
1986 meqen Of the 14 hospit~,l me,gem HCIA
covenant Medical Center, Waterloo, Iowa, 302 3.78 studied, 12 were part, or' t~e Robe~
Community Hospitals of Williams County. B~ran. Ohio' 121 4.21 Caz'[er sm-vey. ~ date weren't
Southern Ohio Medal Center. Portsmouth ' 338 3.90 avaUsble for five hospits~ smweyed.
Southwest Washir~lon Medical Center. Vancouver = 290 3.00 ~ '[~ae me/ged hoap~ were e.~ be-
Allentown {Pa.) Hospital-Lehigh Valley Hospital Center' * 823 3.01 [ed c~lt~ ~ ~ ,~ of their Irea's
Bromenn Healthcare. Bloomington, II17 3:]0 6.§08 acute-care a(in'tiaaico~ ~e co~ ,.~;
UnileO Samardans MeOical Center, O~nville, III ' 343 3.00~ and
Medical Center o! Sout~Arkansas, El Dorado~ 301 7.65 '['be pm'pose of the gud[~ was to
Newto~ {Kan.) Medical Center~ 72 14.72 deterrrdne wflethe~ the ~ met
19~ me,gem ~e expectations of adm~ and
Battle Creek (Mich.) Health System~ 281 2.13 whether those conclusions could be
Augusta Hospital Corp., Waynesboro, Va. ~ 131 7.84 proven empirically.
~though each meqp. r bad its own
Ukiah Valley Medical Cenler` Uki~h, Calif.' 94 t.17 individt~] flavor, ~ I~enet~
St. Thomas More Hospital, C~non City, Colo.' t 05 t 1.1 ~ vatJo~a were made:
1989 mergen · '1~e merge~ were m~e c[i~3adt and
Trinity Medical Center, Brenham, Texas z 73 NA ~e t~ or~gi]ud~ e. xpe~
Golden Triangle Regional Medical Center. Columbus, Miss? 326 1.50~ hostile ~ ~ ~ (/<t~e
South Jersey Hospital System, Bridgetoo, N.J.~ 310 7.00~ gelds of ~ ~md ht;l~'~a ~
1996 merger~ were mere
Lower Rorida Keys Health Systems. Key West ~ 135 NA · Price increues and net revenues
~ ,o~~-a ~ RoUx. C~',~,d.,. H~.,~.~,e .~d HC~A ,~,~o,. per patient continued to rise despite
, :-~o~. o~ ~, ~ c~n~,.,u~,, .-.~,~a,. ,~. lower annual cost increases per patient
3~"~'~'~^*~'~w' after the merger. Those price in-
4 Ac~e-<;a~e beds c,ty: 0c~a ~ol include soec~ ~ ~ r~$in<j home ~eds.
] Bi~gl on ~969 HCIA~/ala. CI~, however, appeared to moder~
~ ~se~ o~ ~o~ c~., ~,~ · ate four years alter the merger. Effi-
Sour~:~nnca~&A~,,,aMod~H~,~.,..,~y~.~o~i~,.~,,~..~7~,o~,,ar~..,,..v~ ciency gains were attributed to the
a.,,~ ~v c~,.~ w~,, effects of downsizing acute-care opera-
............. ti~ns and stabili~ng occupancy rates.
Modem Hea~losre/Fe~ 3. 1992
m
' ': A merger scrutiny
- - ......... in installments
~e ~g of 1~ w~ ~k~ by
* ~e tM me.em eMed ~e 1~ After ~eir merge~, ~x hospi~s a wave of hmpi~ mean ~ ~.
~ m ~" ~tw~ f~ly ~d~ ~c ~m ~ ~ ~o~. ~ ~ue of Monras Hzx[~.
~m~~,md~~ ~d~ ~ ~m ~ ~ mz ~ ~a tw~ ~de~ d~
~~~a~~- ~~a~T~.~
~ ~ ~ ~ mw~ ~ ~- ~ ~clud~ ~y~c ~ (~ happened following ~ome earlier
tio~ ~d~ ~~ ~z ~ h~i~), ~~ (~ ~ he~th~ m~.
~m f~ a ~ ~ ~ ~n~, pi~), ~o~ (two ~p~) ~d ~ ~ode~ eontinue~ re~ on
~p~ ~ ~ m~ ~ ~ ~ n~ m~i~ mr (two merger~ be~n two y~r~
~ ~y ~ ~ ~ ~ ~ b~d h~N~), ~ ~ey fo~ cowr ztory titled Wh~ Hozpital,
~~ ~ ~ ~ ~ ~ In ~ ~v~ of &e ~ h~ M~z (MH, ~ 19, 1~, p. ~),
mw ~ ~n~ ~m~r. ~ ~v~ ~ o~ ~y ~ ~ which found that m~g~ ho~pi~l~
~ ~~ of ~ ~ ~ ~-~ ~ (fo~ h~pi~), ~ wem'~l~
Bw~ ~ ~ ~ ~ ~ ~ (two hm~) ~ mt~t ~ (om
~W~a~~ h~).~~h~ffi~d~ ~ekme~away~u~
~e~~~~ ~~~ b~amw
~w mm~on ~d ~o1~, ~d ~ ~ h~i~ ~ ~ ~ ~e h~pi~ ~ ~ ~ut
~ m~ ~ ~ ve~ one of its a~ ~e8 ~ ~ ~r y~ fo~o~ ~.
~ ~y ~ ~v~ ~ ~ ~ l~g-~ ~, ~ ~ey f~ ~e
~v~ ~ ov~ ~ ~ CE~ ~ ~ ~ ~ ~ p~ve ~ o~ ~d~ ~e stay
~ ~ve ~, ~l~e ~ $10 ~n f~ ~ (~) V~y
~~~ ~~ ~~ ~0 ~ forAu~
~8 ~ ~, ~d A ~ H~i~ ~. ~ Wa~, VL, ~ ~m ~e me~e~ h ~er p~
~ ~t ~ ~~ ~ b~anew~h~ ' ~e 8~ ~ ~ ~es~on:
~~&~ In the Au~s~ merger, the two How
"~me CEOs we~ em~ ~ me~d hospi~, 131-~ ~y
~e ~ey ~d ~e m~r wo~d nye Hospi~ ~ Wa~es~ ~d 10~d
~ ~ m~ey ~d it end~ up ~8~g ~s Daugh~ Hospi~ M
the hospital" more than they pro- ton, ~e l~a~d 12 mfl~ a~.
m~d, Ms. ~oH ~d. "CEOs were ther of the communi~es w~ted
not ~y ~ cut~g e~s."
~v~ of ~e CEOs ~ ~d ~ey
we~ m~ b~ me p~m~ Scope o. clinical
q~ty of ~ i~tufio~. ·
~y(~)~m~e~ Se~lCeS after mergers ~n~~~~
~~ ~ ~ ~ ~ ~ a
l~k
~~,, ~ ~ ~& Ad~ se~ 13 Ro~oke, V~ ~ m~, ~mple~
O~ su~ hospi~ ~ i~1-~ ~m- Elim~edserwces : in July 1990, was the first
m~ty H~i~ of W~!Ha~ Cowry C~soli~t~ ~-~s ~5 no~for-p~fit hospi~ m~ger ever
~ B~, O~o. ~e two h~pi~ h~ SERVICES T~AT WERE A00E0 ch~eng~ by the J~
~en o~m~ng ~det common m~- Magnetic re~nance ~magi~ 6 ~e ~ b~t ~er one p~
~ement s~ 19~ but di~'t me~ Cardiac ~tne~emat~on lao
assets and boards until lg86, ~d Cn~a~aescem ~iauic u~ 3 ~ h~ ~ R~o~
R~ O. B~, p~dent. Ec~r~iooraony 3 Mem~ H~ ~d 81~ ~m-
Mt. B~nic~i ~d the hospi~ CAT smn~r 3 m~ty H~pi~ of ~e V~y.
n~d~ ~ fo~y ~r~ ~ ~me L~mmriosv ~at's ~p~ ~ ~e 18 mon~
elas~ ~ a ~ ~fe~ cen~r, ' ~ since the m~ ~ co~~d
~g ~em e~ble for ~gh~ M~- ~mma nuclear meOicine ~r 2 ~ ~t ~ d~ M a m~
~ ~ M~i~d ~b~en~ Re~ei~itation un~ ~ ~ ~e ~ C~on's two ho~
~e met ~ ~ by me.g,~ ~cu~a~ona~ meo~ine 2 pi~ ~ t~ ~t's ~ h~pi~,
~. B~i ~d. "~ ~venue ~- 0tner
c~e~ed by more than $5~,0~ ~ SERVICES T~T W~E 0ROPPEO n~by ~, V~
ye~. Wi~ mo~e revenue ~d ~u~ ~ns ~itness ~ the predictions ~d results of this
capacity through consolidation, we Emer0encyse~ces 2 issue's analytical look at hospital
we~ able Lo slow up ~s: incre~e~ I~oa~iem ano o~oa~ient surgery f me~ ~ s~~e~.
~d put o~ e~o~ ~ ~p~ving qu~- Rehabilitation umt i ~ ~e h~i~ ~ve ~d~
the~ se~, ~g ph~
ity. ~t's ~g c~.' Ra~io~og~
Camac ~me~er~zation *ao ~ unde~o~g co~on pmje~.
~ ~ ~ ~, a ~
~ ~~ ~, ~ty All imaging 1
f~ ~ w~ O~, ~ ~ ~: ~ c..~ ~ ~a., ~ ~ ~fi~ ~ ~e way ~ t~
But ~ ~me ~e ~'s s~n~ ~.~,,~.,,~:~ out? Read next week's Mooga~
l~em Healthcare/Fel~uary 3, 1992 37
hospital to dose. Partly becau~ of high bu2ding costs Battle' Creek spent an extra $9.5
As a compromise to complete the and the addition of technologically ad- million on new construction and tech-
1988 merger, the hospitals proposed ~ services, 8ome CEOs believe it nology, which included the addition of
building a new hospital in Fishersville, may t,~ke seven to 10 years to g~n all of an MRI, cardiac catheterization hb
a town located between the two rival a merges benefits, Ma Knoll ~ and several tertinry-c~re services.
cities. The new $70 m~lllon hospital is Building a common corporate cul- But_even bigger expenses are on the
expected to open in 1994. ture between the two institutions' way. Battle Creek recently approved a
A less castly option would have been work forces, physic~ms and trustees plan to spend $50 million to $60 million
to renovate Y, Jng~s Daughters at a cost may take less time, perhaps five to to consolidate acu~ ogerafions in
of $~ milton, but operational savings seven years, she ~id. one. facjllty, convert .the second to.
wouldn't have been as 13.~e, so the 'Most merger talks don2'io~olve the iong-term care, build a new ambui~-
board approved the new hospital, age of buildings, tory-care center and buy · new infor-
"l'here was an undenlt~ding in the experience of em- marion system, ~[r. Abbott said.
community that the merger would lead ployees, the range Like most mergers, the seed to
to a single hospital," said Wayne of services," she spend as much as $60 million for Cal)i-
Davis, a spokesman for Augusta. said. 'l'ney look at tal expansion waan't addressed during
'People supported the merger for that access, beds and merger discussions. ~ data wasn't
reeson. But the board d~dn't officially physici.~ There available at the time," Mr. Abbott
vote on the new hospital until 1989." isn't enough due said. "We expect to save $2 mi~on a
In Waterloo, Iowa, 302-bed Cove- diligence (about year tlxrough operational eff3cienoles."
nant Medical Center spent $27 million the costs). The HCIA ~tudy. Wh~e the coMolidations ~
in 1989 to renovate St. Francis Hospi- necessary capital were costly, Health Care Investment
tal after the 1986 merge~ with Schoitz Mr. Abbott to remnfigure the Analysts found that eliminating acute.
Hospital (MH, March 19, 1990, p. 26). ins~ is about care beds and stabilizing occupancy
The original plan was to keep both 180 degrees oppo~te wh~t they think, rates were the primary reason, that
hospitals open and save ~0 million in It's overwhelmingly expemive. No one the hospitals became mm.e efficient.
expansion projects independently expects it to cost that much." ~he beet news is that the mergers
planned by the two facRities. Despite financial planning and stu- seem to be a vehicle fro' elimina~ng un-'
As a result of the renovations at St. dies of community benefits, the 1988 needed beds in the commtu~ty," said
Francis, Covenant's net capital cost merger of 288-bed Battle Creek Steven Renu, HCIA's man~dng direc-
savings were $13 million, far le~ than (Mich.) Health System wa~ more ex- tot. ~ key thread th~ runs throu~
originally anticipated. But the hospital pensive than expected, said Stephen the mergers involved cen~)lidation or
expec~ to save several m~on dollars Abbott, president and CEO. down, zing. The hospitals are better able
per year by closing Schoitx. 'We needed to make ~ c~pit~l ex- to maW. h their de. ltv~ Ioy~Jn with the
...... so that we could become efficient to re- Mr. Renn said the ~ of the 14
i.,Hospitals 'Weme , stub'ed v, ed consld bly.
· problems before~md md the ~gh~ co~ ~ the contrary 'We ~.'t have a very homogeneons
after l~e merger) az 3n inve~.ment to- group,' he ~id_ ~uome had greater sue-
Numl]e~ 0! Most of the hcepitals were able to
:~EFOR~ MERGER nuai postmerger increase of 6.36%
Volunteer resisl~nce 11 Number pi '
Communi~., o~!e=!~ons 9 rB$pofldlflt$
8ea~ r~nce 2 ~ ·
: To reduce oucmcatlon pt programs
LOW emolove.= morale 14
Cu~ure =ashes 14
To improve Imaac~ performance 13 Number of
Managemen: clashes 11
To add tacdd~e~, serwces 9 respondent=
Reducing duplicallon in staffing 8
Consohdal~ng s~n'~ces 8 To improve cast1 gosJli~ 8 One hospltN c~o~ "':.'~:'~3'
To ~ncrease mad<el shore 6 A~ ho~i~S ~ ope~~ .14
Consoliclating clinical programs 7
Partly m wages _ To avoid closure 6 Employee layoffs 6 :
TO imdro',/e debt dos~lson 6 No layoffs or allrition 11
Naming new ent~ 4
To increase medJc3J staff size 5 PhyslctaA resig~ 1
Peer hospital objections
To increase syslem s:ze 5 No phlAiclaA ~ 16
Trouble consoliUating boards 2 To appease ~ business leaUers 2 Administrators res4gned 12
Antitrust inveshgahon 2
To el~mmme competition 1 Administrators stayed S
ans~e~ No~e: Some hoe~l~ cee4x~Oecl
O~o~c I~' C~'n~'~a Walson Graot~c Ic~ Cy~h~a Wallon Gtapt~: b~ Cytlfnm J
38 MOdern Healtl3care~February 3. 1992
fi'om a premerger annual average of
7.0~% (See chart on thi~ page). How theHCIA data were calculated
Cutting expense growth was pri-
marily accomplished by taking beds Health Care Investment Analysts ex. outpstient vokmman4 w~ standa~,~
out of service, improving occupancy stained 28 general acute-care hospitals to eoatrol for differanees in ca,z-mix
rates, closing or converting facilities that merg~i into 14 facilities between
and reducing administrative costs 19~sod 1988. ~S' ~ ~ using ~
through hyoffs and departmental eon- Financial' measures for the lndivtd- After these adjustments, annual
solidation, Mr. Renn said. ual hospitals tha~ peroenta~ change~ froln the pre~ous
By year four of the merger, the hos- I a t e r m · r g e d year were calculated for each mea-
pitals were able as a group to dramati, were restated on
~u~, ~ t~ ~ptioa of tl~ me~d
cally cut annual expense increases to a consolidated ' facilities total profit' marg~" which
2.12%, compared with a 6.5% increase .basis. As a re- were~as theh' actual values.
the year al~er the merger, HCIA said. suit, premerger . The annual percen~ changes that
The national average expense in. measm~ of occu- ' were caJculated were grouped
creaze for all U.S. hospitals was 6.27% pancy, revenues, ' ' lng .to the number of year~ before or
from 19~to 1990, HCIAaaid. expenses and after the merger, and an unweighted
"Ifhospitals spent money to impiemant staffing for the
.mean of the mereed ho~tslg rates of
new aeawices and purcha~ high-techncl- individual hoapi- diange was caL-,uiated.
ogy equipment (as the CEO survey tale were calcu; 'Mf.R~m . Finally, annual ratee of change
showed), you would expect expenses lated on a com- tween 19~5 and 1990 were computed
would be highs, fL-hr a~er the mer~r bined, we~hted-averagebam, for the ~me measures for all U.& h~-
than later on,' Mr. Renn said. 'But capi- For all years, ~wenues, expemesand.: pitals, ~rom which unweighted means
taleostsdon'thittheincatne~t ~a~meaaures:als°weread~lSted'~ .werecalctllated.-.~teoen]F~m ·
right away. Capital doUars are amortized .
overthe~ffeaftheaa~t. Only(affection) tional averages. The average annual One question antitrust regulatore
of the expense ia in the next year.~ price increase for all hospitals was usually investigate in a merger is
Pri~ ~tse. Despite slowing average 9.38% from 1985 to 1990, HCIA said. whether hospitals would use their
expense increaae~, pricos per patient The largest price hikos w~re in the market power to increaze prices.
continued to rise for the merged hospi- year after the merger. Prices increased "It's hard to generalize that in-
tala, HCIA said. an average of 11.27% and net revenum cresol prices are a result of increased
Price increases were higher ~ the per patient jumped 7.33%, both of which market share,' Mr. Rerm said. '"there
mergers than before the h~pitaia como- wer~ higher than any of the tlu~e years ia a good chance that some of the fi-
lidated. Before the merger, h~pitala in- before the merger. But by the fourth nancially troubled hospitals might
cr~ ~_ prices an average af 8.33% a~- year of the merger, price incre~z were have closed without the merger. The
nually. ~ th~ merger, annual price held to an annual 7.94%, the ~ost in- market share (and price) increases
~ averaged 9.42%. crea~e in the study period since two would have happened anyway."
But the merged hospitals' price in- year~ before the merger and ie~ than Six CEOs ~ one importar~ reason
crease~ appear to be in line with ha- premerger average, HCIA ~ for the merger was to increase market
Small market hospital mergers 1985 to 1988
Study indicates hospitals increased price~, reduced annual coz~ tncreas~, improved occupancy ntte~ ami cut capacit~ to
improve '
profit margins. (All categories excep~ profit margins are % annual change.)
Charge Revenue Cost per Employees Total profit
Discharges ~ Occupancy ~ per case J per case ~ case ~ pit day! margill
3 years before mefler -6.17 % -3.94 % 6,97 % 5.48 % 5.94 % 1.76 % 4.10 %
2 years before merger -5.10 -3.31 7.52 5 11 5.31 5.56 2.97
1 year before merger -4,11 -4.06 9.04 5,55 8.43 5.41 2.49
Year of merger -4.86 -3.94 9.79 6.39 8.56 6.68 1.30
Pre-merger average change -5.06 -3.81 8.33 5.63 7.06 4.85 2.72
I year after merger -6.40 -0.83 11,27 7.33 650 -1.88 2.,55
2 years after merger -3.51 038 8,34 4.6~ 6.66 2.76 2.11
3 years after merger -2.62 0.03 10 '13 6.94 5.85 0.68 3.68
4 years after merger -1.96 0r?0 7,94 4.72 2.12 0.16 5.52
Posl-merger average change -3.52 0,07 9,42 5.92 5.36 0.43 3.47
All U.S. hospitals~ -3.59 -1.02 9,38 6.36 6.27 0.86 3.51
mix a~.J~t~ r~t rwwd~ pm' Icku&l~l ckr, cf~r9w, rr~Jam o~ ~w~kkll hOS4~81% cha~ ffT)m p~e~AO~l y~lr.
Modem Heallhcam/Fel~ 3, 1992
How the Robert Carter survey was conducted
Robert Carter & Associates surveyed four on the merger process, 14 on op-
share, Ms. Knoll saki. But only one of 36 hospitals that merged into 17 insti- erational changes made after the
those CEOs saki the merger was under- tutions ~rom 1985 to 1990. merger, 18 on financial changes or
taken to e~q~inate a competitor, she saki. Interviews were conducted with 16 outcomes of the merger, 16 on rea-
Most CEOs said'their hospitals' annual administrators sons for the merger, 12 on individuals
charge increases were no more than 6%. and one Lrustee in
or groups with which the organize-
The hospitals tried either to match price November and tion may have had difficulties be-
hikes to the national consumer price December 1991. cause of the merger, 13 on issues that
index or to keep them ~ess than those of The managers may have caused problems for the
other hospitals in the state, she said. were identified as
merger, four on expectations and
Rut Ms. Knoll said most of the hos- those who had strategies and whether the goals
pitals surveyed had no price sensitiv- been involved in were achieved, tw° on the impact the
ity because managed care wasn't pres- the merger pro- merger had on managed care and one
ent in the marketplace to divert cesa or who were on total costs ofthe merger.
patients to lower-cest facilities, hL~ed shortly after Respondents were permitted to edi-
"It appears to be totally up to the dis- the merger. Only Ms. Kno// torialize and provide any additional de-
cretion of the ~ and management," one hospital de- ~ile_ they chose. That inform~ion was
~he said. ~Sorne of the CEOs said their dined to participate. Two of the hospi- provided to MODZRI4 I'Ig~tl.?~lC.~aZ but
boards have a philosophy of not generat- tel mergers involved three parmers, not included in statistical summaries
lng more than a 5% margin. More than Eighty-four questions were asked: --Ann Knoll
th~ wouldn~ be considered as keeping ·
with the not-for-profit
However, post- ally, the two hospitals finally compro-
merger total profit rnised on a merger of equals, he said. apart unless they ac'ted quickly.
margins have ira- "It was believed that consummating "More than haft of the mergers were
proved steadily, the deal was so difficult that any'Jfing results of failed previous attempts," she
Before their merg. that followed would be easier," he said. said. ~l~he emphasis on the discussions
ers, hospitals ~l'har wasn't the case. It was harder.' was how to construct the deal (with
averaged a P.27% While financial results were important, equality) so each board could save
annual total profit CEOs were more interested in discussing They were just anxious to get the ~
margin. ARer the the human side of the merger, especially done and scared to death that it would be
mergers, total in bow t. he hospitals dealt with the diffi- thwarted again. They wanted to sign the
profit margin culties of making adjustments following pape~ and worry about the rest iater.-
Mr. Brunicardi averaged 3.47%. merger approval, Ms. Knoll said. Ms. Knoll said most hospitals failed
Total profit ~ impact of a hospital on its eom- in previous merger attempts because of
margins have increased from 2.11% in munity and employees is great," Ms. community and medical st~ff oppomfion.
yesr two to 3.68% in year three to 5.52% Knoll said. "One CEO repeatedly tried to "The boards and administration
in year four, HCIA said. convince his public (in an effor~ to close worked very hard to make tl~ merger
The national average for annual one of the rnerged hospitals) that one hed happen,, she said. ,Becauze of the num.
total profit margin was 3.51% during and one doctor did not equate to the bet of mergers nationally, the communi-
the study period from1985 to1990. Mayo Clinic. CEOs tried to convince t~es and medical staffs felt it' others were
Before the mergers, staffing growth their community that they did not need doing it, it must be a prudent ide~"
remained at about the same levels, de- the other hospital. Despite facing signifi- To win community and medical staff
spite a 5.06% annual average decrease cant financial pressures and even closure, support, however, some of the CEOs
in discharges, HCIA s~id. the community wouldn't give it up."
The year after the mergers, however, She said most CEOs said that if they
employees per patient decreased 1.88%; i~d to gu through anather merger, they
it was the only year during the study wo~dd work far harder and longer in edu-
period that a reduction in staffing oc- caring the community about why the
turnS. That same year, the occupancy merger was needed and what could be
~ decrease stabilized at 0.83%, indi- r~stic~ly expected. ~I~ey would tell
caring the hospitals laid off employees to them inunedi~te benefits would not be
operate more efficiently, Mr. Renn said. forthcoming but that (the merger) is nec-
Would ttm¥ do it again? Most of the ec~ry for the long run," she said.
administrators interviewed said the Each hospital's merger discussions
mergers met their expectations. But also were colored by socioeconomic
mos~ CEOS indicated they would hesitate factors. For example, many religious
be.f~re doing it again because of the pain hospitals were founded to treat pa-
and confusion surrounding the merger, tients with similar religious beliefs.
"One CEO said he }md been involved "Over the years, these hospitals be-
in four mergers and expected the merger tieved their brand of medicine was the
process to be easier because of his exp~ best," she said. "Very different cultures
rience and tougher skin. He sa~d i~ wasn't developed at these hospiuds. To erase
any easier," P_~. Knoll said. ch~t through a merger is very tr'axm~ic
In Battle Creek, the two former corn- and involves a great deal of sensitivity."
)ecitors ~ discussed a merger on and Ms. KnoLl attributed a general lack of Onebenef~tofanOh~ohav,ita/~u~
off for 10 years but couldn't agree on the premerger financial planning, wkich led the pu~vJu~e ofth~ $1~9~0
~errns, Mx. Abbott s~id. Because of the to surprises from higher-than-expected ~y,na~U~, wh/ch ~
growing acceptance of mergers nation- merger co~s, to She fears of boards and sa/d/t oth~.nvue ~,~ ,M not ham affan~d.
MoOem Healtl~ar~/~:eDtuary 3. 1992
said the hospitals promised to add ser-
vices and improve quality, which in
turn increased costs.
From a practical standpoint, compe-
tition, the lack of regional healthcare
planning and each hospital's tradition
would make it extremely difficult for
the facilities to overhaul their delivery
system on their own, Ms. Knoll said.
Mr. Abbott of Battle Creek said
hospitals could make short-term
changee to reduce costs, but long-term
improvements have to be achieved
through remov',d of excess beds.
'"There ia too much capacity in the
system," Mr. Abbott said. '"Too many
communities have two to three hospi-
tals when only one is needed. Mergers
are the only way available to r~duce
capacity. Without healthcare reform,
survival instincts are too great for in-
stitutions to do anything else." ·
Financial and market
share data
Number
respondenls
IncreasecI patient charges 12
Reduced patient charges 2
Too soon to tell 1
No change 2
ReouceO COSTS 10
Increasea cos?? 8
Increased net revenues 12
DecreaseO net revenues 1
Don't i(now 4
Too soon to tel! 1
Increaseo oDe,ahn? ~'arg,ns 13'
D0nl knov' 4
'[00 SOOn 1o '.6,, 1
Ioc~__~d_ total margin Bt
Decreaseo total margin 1
Don'! know 7
NO change 1
Lost market sh,~re 1
Don't knov: 9
Too soon to re;.
Increasea pahent admissions
Fewer pa!mm admissions 1
Don't know 13
Too soon to IelJ
Modem Healthcare/February 3. 1992
R~produced with per. is. ion of cupgright (~ner. Further reproduction prohibited.
DO Health Care Investment Analysts, Balti-
more (See related story, p. 28, for meth-
odology and chart~
· It's the fa~t study to me~sure per-
formance before and at, er h~pital merg-
ers s~ce Medicare's p~spective pricing
mergers
Increased mark,t et~ar.. In a sub-
group of 20 hospitals that merged into
10 facilities in 1987, the study also
found that hoopitals with the largest
able to increase their market shares
at their competitors' expense in the
year after a merger.
Six market leader hospitals also
dY spi ' , were able to increase their net patient
New stu questions ho ta! industry reve..
S and markup rates more than
Of b efits the study group because they com-
C[ tiDZ tO corl l rr ers ma.ded greater market power
could control pricing more effectively,
'° By Jay Greene the study found.
Intwo 19ff7 mergers, the merged hos-
pitals ~ the community's sole pro-
Most hospitals that merged between help reduce healthcare cc~s to eonsum- vider, thus eliminating competition.
1985 and~ 1987 improved their profit- ers. While mergers rosy help reduce the Overall, the 18 merged hospitals
ability by reducing expenses, increas- merged hospitals' own expenses, most were able to reduce expenses 1% to
mg gro~ and net patient revenues and hospitals increased their chzrges after 2% annually primarily because per bed
boosting ap. ciliary services markup merg~g, the study found.
"'-rates, a new study said. '~dmission increases enabled them to
The study, which reviewed 36 hospi- spread their fixed costs over more pa-
These finding~ seem to contradict the t~ that merged ~nto 18 in.~itutions, was tients, the study found.
hospir~'l indusrxy's claim that mergers conducted for Mo~ Hr,^L?~c~ by The hospitals also increased their
" HospRal mergers by location Hospital mergers by bed size
1995-1987 ' 1985-1987 '
Urban Rural 0-99 100-249 250-399 400 and higher
24 urban hospitals merged between 1985 and 1987
12 rural hospitals merged between 1985 and 1987 Beds
~oure.~: mare car, resonant s~ar~m 5 hospitals with bed sizes of up to 99 merged between 1985
and 1987
17 hospitals with bed $1ze~ between 100 and 249 merged
between 1985 and 1987
8 hospitals with bed sizes between 250 and ~99 mtn, ged
: I~tween 1985 and 1987
6 hospitals with bed sizes of 400 and higher merged
between 1985 and 1987
24
Moc~em Hea~ttw. are/Marc.~ 19,
Merging hospitals should tout
improved quality, services instead
of elusive savings, experts say
Incraasing market share and ~iimirmt- fessor at Ohio State University, Co-
ing competitors to improve patient lumbus, agreed.
volume and profitability are primary "The greater a hospital's market
re2aons why hospitals merge, share, the greater leverage it has in
But some hospital administrators prices," Mr. Cleverly said. %Vhen two
Mr. Kazemeh Mr. Renn a~d boards of trustees promote merg- of the largest hospitals in a market
ers by highlighting potential savings merge, you really have an increase in
net patient r~venues p~r adjusted ad- to patientz and businesses, market share. It equates to market
mission by 2.1% to $4,404 two years Some savings are possible through power."
after.a me. rger from the merger-year improved patient volumes, layoffs and C~O~ nmlxsml. Several hospital chief
level, of $4,311, the study found. The consolidation of administrative and executive officers involved with recent
effect was. to increase profitability by support services, experts said. mergers said merging was more diffi-
about four percentage points during However, the real key to reducing cult and took longer to accomplish
those two years, the study found, co,ts lies with mergers that result in than they had expected.
"The increased profitability is more a hospital consolidations, conversions Some executives are happy with ira-
function of greater volumes of patients and closures, experts said. proved profitability and staffing
and revenu~ than control of expemesf A merger can act as a catalyst for ciencies gained through a merger.
said SLeven Renn, HCIA's managing change that otherwise would be more Others are satisfied with their in-
director. ~l'he revenue enhancement is difficult to achieve if the hospitals re- creased market clout and anhancad
partly due.t~ controlling market prices." mained independent. Opposition to ability to borrow money.
· Mzrl~r trlal~. Despite operational ira- change primarily comes from boards, But ma~t executive~ said the ho~pi-
provements one year 'after merging, medical staffs and communities that tala merged more to pr~par~ for the
m~t hospitals during the merger year sometimes are unwilling to close or future, which includes incremsing prof-
~xperienced financial downturns, a de- convert hospitals to non-acute-care itability to provide mom outpatient
crease, in ~t~wket share, clashes of corpo- uses, expert~ said. and specialized services, than to pro-
· rate culture_s, decre~i employee mo- "For a board of a money-loMng boa- vide immediate savings that can be
role ana~ productivity and strained pital, it's much more p~litically accept- passed on to consumers.
physician and community relatio~xs, ac- able to say, 'Let's merge' rather than "We tend to underemphasize the
cording to the study and interviews with 'Let's close,'" said Edward Ka~mek, complexity of a merger," said Samuel
~ospital ex~'utives involved in mergers, national director of the Chicago-based Huston, president and CEO of 811-bed
In addition, the newly formed hospi- organizational consuiting division of The Allentown (Pa.) Hospital-Lehigh
tal boards'grappled with difficult stra- Laventhol & Horwath, New York. Valley Hospital Center. "It's pohtical
~egic issues that ~me chose not to ad- ~For a weak institution, it's a face- and very difficult to accomplish. It
dress dun'ng merger negotiations, saving measure. Board members have can't be achieved overnight."
For e:f~mple, to turn around their egos. They don't like to fail," Mr. Ko- ~llmm~m-i~h~ Yale/. The need to
merged fa~ilit/es, many boards reversed zemek said. "To strong hospitals, it's, improve profitability, eliminatz com-
their stated policies and either closed one 'Let's buy off a competitor, cherry- petition and improve mmmg~ment and
facility, converted one to non-acut~eam pick the doctors and increase market governance were the principal reasons
uses or. closed both to build new facilities, share.'" why PAg-bed Allentown It~pital and
the study found. But instead of stressing millions of 492-bed Lehigh Valley Hospital
Reflecting financi',d problems during dollars in elusive savings, hospitals merged in 1987.
~he merger year, total profit margins should tout how the merger will in- "This wasn't the merger of two
dipped to--0.12% in the merger year crease quality and bring new outpa- empty hospitals," Mr. Huston said.
fi-om 2.61%, which was the average total tient or tertiary services to the com- "They are financially strong faeilitie~
margin for. the independent facilities the munity, Mr. Kazemek ~id. that want to provide bett~r services."
year befor~ the merger, the study found. "Sophisticated hospitals don't want The two hospitals had formed Allen-
"Things~ actually get worse (imme- (somebody) coming back later and ask- town-based HealthEa~t as a holding
diatel~) after a merger," said Edward ing where the saving~ are when prices company in 1983. But the two facilities
t4azemek, national director of the Chi- have increased," Mr. Kazemek said. only shared laundry and laboratory
cago-based organizational consulting "There is no doubt that sewing up services and coordinated clinical ser-
division of Laventhol & Horwath, your market and reducing your com- vices, Mr. Huston said.
New York. "People get angry over petitors are the driving forces behind "Both hospitals were autonomous in
layoff~ or operations changes, and pro- many mergers." medical staffs and management," Mr.
ductivity goes down. Doctors leave for William Cleverly, a healthcare pro- Continued on p. £6
: Conti~tued o~ p. ~0
Moclem Healthcare/March ~9, 1900
'Whale mergers do not produce Merged hospitals used in study
c/ass/c sca/e econom/es, they sgss
'do... produ~ $ctoilt~s.' AtlantiCare Medical Center, Lynn, Mass.
U.S. Health Corp. of Southern Ohio, Portsmouth
Continued from p. ~5 1986 mergers
other hospitals, taking their patients." Riverside Medical Center, Minneapolis
Mr. Renn said hospitals incur extraor- Meriter Hospital, Madison, Wis.
dinary expenses during the merger year, Covenant Medical Center, Waterloo, Iowa
whic~ can reduce their pmfitabillty. ~l~he Delnor Community Hospital, St. Charles, I11.
phenomenon is more acute in the case of St. Joseph's Health Network, Mount Clemens, Mich.
f'mancially distressed hospitals that Centra Health, Lynchburg, Va.
merge," he said.
Profit ma~ina ~ One year after a · 1987 mergers
merger, however, the average total Health One Metropolitan Hospitals, Minneapolis
profit margin increased to 1.54% from Medical Center of South Arkansas, El Dorado, Ark.
-0.12%, the study found. It increased Duke University Hospital, Durham, N.C.
again two years after a merger to 3.51%. Lutheran General Hospital, Park Ridge, IlL
The 3.51% profit margin two years United Samaritans Medical Center, Danville, Ill.
after a merger was an improvement The Allentown Hospital-Lehigh Valley Hospital Center, Allentown, Pa.
from the 2.61% margin for the hospi- Newton Medical Center, Newton, Kan.
tals the year before a merger but still Mercy Hospitals and Health Services of Detroit
less than the combined 4.77% margin St. Luke's Hospital, New Bedford, Maas.
for the hospitals two years before a · Trinity Lutheran Hospital, Kansas Gity, Mo.
merger, the study found.
For 1,206 hospitals with 250 or more
beds, total profit margins averaged
4.94% in 1988, compared with 4.43% in
t987~ HCIA ss~d.
B~cause of bed reductions, admis-
sions per bed increased 1% to 36.11
the year after a merger and another
3% to 37.18 two years after a merger,
the study found.
'~he increase in admissions is nots-
hie ~ih light of the 2% annualized de-
cline, in admissions that the typical
U.S. hospital has suffered each year
since 1985," Mr. Renn said.
Merged hospitals also cut expenses
by 1% to $4,556 per adjusted admis- Mr. Burfeind Mr. Huston Mr. Riddell
sion the year after a merger;, they re-
duced expenses by another 1.6% to
$4,4~0 per adjusted admission two years possible layoffs when announcing gross patient revenues per patient by
aRer a merger, the study showed, mergers, hospitals merely postponed 3.5% to $6,085 in the second year after
'~rhile mergers do not produce clas- staff reductions until one year after a a merger, the study found.
sic scale economies, they do, by slowly merger, the study found. One major factor accounting for the
eliminating beds and services, produce During the merger year, average staff increase in gross patient revenues per
savings by better matching supply levels increased to 4.93 FTEs per occu- admission at the merged hospitals was
with demand," Mr. Penn said. pied bed f~m 4.51 FTEs per occupied an increase in the markup rate for an-
The merged hospitals also showed an bed, the study found. However, by the ciliary services, the study found.
increasing emphasis on ambulatory and second year a_ecer a merger, hospitals had Merged hospitals incpea~d tho. ir mark-
outt~ttient services, deriving almost reduced their staff an average of 57 ups to 61% above cmts the year at, er a
percentage points more of their FTEs to 4.52 from 4.9, the study found, merger and to (iS% above costa two years
revenues from non-inpatient set- The average FTEs of merged hospitals after a merger. During the merger year,
vices two yeax~ at'cer a merger than in were about the same for all hospitals the markup averaged 55%.
the year before a merger, with 250 or more beds, which was 4.55 in "This indicates a real change in man-
I~cq~ucm9 staff. Another factor that 1988, HCIA .oaid. agement policy that is supported by
helped hospitals minimize expenses Hospitals in the merger group in- increases in gross patient revenues,"
was'.a reduction in full-time equiva- creased their gross patient revenues said George Pillari, HCIA's president.
lents per bed. per adjusted admission an average of Market I~a~ra far~ ~ Hospitals
While hospitals either state that lay- 5.5% to $5.877 in the year after a that increased profitability the most
offs won't be necessary or downplay merger; hospitals further increased Continued on p. 33
3o
M~lem Healt~cara/Matc~ 19. 1990
Co~tin~dfrorn p. $0 Adjusted for inflation, the
throu~ a m~er were the l~geat ~ S~OW ~~y~ ten. Fa ~o~ patient revenues per
~ost ~we~ul f~ilitiea in their re-
~ ~mi~on in~ 16.3%
's~etiv~ ~rke~, ~ ~ a r~ of me.em m,~ ~ 1~, ~d i~ net ~ent my-
view of 20 hospi~ t~t me~ in~
enu~ ~e~ 10.~ ~ ~1. H~-
10 i~titu~om ~ 1~. Ame~n Hospitfl ~n. da~ ~ow ever, i~ ex~ ~r ~ ndm~
S~ of ~ 10, w~ w~ iden~ ~1 hospi~ ~r~ ~ Ill new ~- sion in~ 4.1% ~ ~,~1 tn 1~.
~ ~ ~ h~, av~ ~ sfitufi~ ~m 1~ ~ 1~, ~ ~ S~H, the hospi~'n o~m~ng profit
8.4% ~ ~ mt ~t mv~u~ ~ ye~ for w~ fi~ ~ nv~ble, matin incre~d to 5.12% in 1988
adm~ion ~ ~,~ om ye~ ~ a ~ ~ h~pi~, 1~ ~ h~p~ ~m 2.~% ~ 1~, ~e ntudy f~.
m~.~mm~~dy ~ m~ ~ f~i~, ~d 69 ~n~itofal~me~of~e
~oup's average of a 1% inem~ to ~ h~pi~ me~ ~ ~ ~t~- two m~u~ty h~pi~ in D~e,
~,~- ~ ~ ~ ~ ~onn. IH., ~ U~ ~~ M~i-
~ ~ ~7% ~ ~,~ f~ ~ ' B~ed on ownership du~ng that eft Center w~ able to inere~e its
~, ~ ~ n ~% ~ ~ eigh~y~ ~, 167 not-for-profit operating m~n to 3.87% in
~,~ for ~e ~ ~ ~up. h~pi~ ~ ~ ~ f~ ~ ~m -2.~ in 1~, HC~ ~&
~e market leader hospi~s were ~v~r~ h~pi~ me~ ~ ~ profit ~ ~ ~
s~, av~g ~ ~, ~ ~ ei~t ~o~; ~ ~, ~ty or ~m -0.~, ~e study fo~.
study ~ ~ ~ av~ of ~I ~ ~ty h~pi~ m~ ~ 12 new ~ ~e ye~ before the merger, the
~ h~p~ ~ 1~ In ~ ~ lities; and eight federal hospitals hospi~~ St. E~ H~
~ ~r ~v~ of ~ of ~- me~ ~ ~ imfi~om, pi~ ~d 1~ L~ew Medi~
ti~ ~ ~ ~ ~ ~ ~y Nation~da, th~ ~ ~ eons- ~~ · ~b~ 7% o~m~
~up's. ~e~ hosp~ ~ w~ 1~ ties where two hospi~ primely ~n and a -2.7~ ~
~ m~fly ~ ~w~~ ~, ~m~ ~th e~h o~er, ~e A~ the ~udy ~w~.
~e study ~. ~d. To bolster revenues, United Sa-
Total pFofit rear,ns increased ~
"' ~ ~e~ i~ ~ ~lln~
5.07% in ~ from 4.14% for ~et se~iee m~kup ~ 126~ from 79%.
leaders, compared with the ~tudy the study found. ~s ~n~bu~ ~ a ~% ~ in
group's increase to 1.54% from The m~i~ cen~s ~iom in- patient revenues per admission
-o.1~, the study fo~d. cm~ by 21.7% ~ 14,1~ in 1~, ~,469 ~ 1~, ~e study fo~.
HOs~I ~xa~l~. For ~ple, ~1- the study found. ~e fa~lity, which U~ ~~' net ~Oent my-
bed Medical Center of S~uth Ar- merged two of the m~ket's la~est enues ~ ~ ~ 15.3%
~, El ~o, ~ ~ ~- h~pi~s, com~ ~ 1~ 0~- ~ ~,~ ~ 1~. However, itn ex-
ket'sh~ by 3.1 pemen~ge ~ ~ chi~ H~pi~, C~den, ~, ~d ~ ~ ~ ~m~on ~ 14.4%
:~.3% one y~ ~r i~ 1~7 ~er, ~d Ma~o~ (~k.) H~i~. ~ ~.~, the ~udy show~.
FREE INFORMATION FOR REAOERS OF MODERN REALTHCqRE
~me~can Hurses' .a~ssoo,,ttio(1, loc ......... 41NEa 117 HeaJth Ca'e Search ..................... 39SEa 114
~F),~ Services loc.,
I-lewlett-Packard ...... 8-9 104
Spectrum Emergency Care Division .......... 31 -- Hill-Ck)m Company, Inc ................... 22-23 110
ARA Serves Inc..
Vending Sen'ices Division .................. 29 _
Interface Systems, loc ...................... 21 109
BellSouth Setv~ces ...................... 16 a-b -- Jason Pharmaceuticals Inc.,
Medifast Division ......................... 27 111
CMl G ro~Jp ................................ 6 102
Konica Medical Corporation ............ ~ck cover 11g
DuPoflt Corporabon ................... 3rd covet 118
Eastman Kodak Comoany. The linc Group, loc ........................ 10 105
Co4~y Pfl~ductiofls Division .............. 35 112 Mm:lical Consultants Imaging Company ... 38 MWa 113
EMSA L mited Partnership ............. 13 106 ·
First Marketing Corporation .................. 15 107 PHICO Insurance Company ................... 7 103
· Spacelabs, loc ............................ 19 108
GE Medical Systems ....................... 37 -- S~"ctrum Emergency Care, loc ................ 2 101
Healthcare Insurance Services, inc. 39 SWa, 41 SEb 115,116 3k4 Health Information Systems ........ 2ncl cover 100
This index is Orovided as an additional .~ervice. The 0ublishef (~os no~ ~_~u.qle IlaJ:Nllty for error or omission.
Modern H .eeltrlcare/Marcfl 19, 1990
.+
ep~odMce~d wft~cJl p(14rglJllJo11 O~r COD~ql~jgJl~ O~-.~.=~es~. ~'~(J~l&" ~'~pl'~l:)dlAc~.Jolq
THE WEEK IN HEAL THCARE
,:cutStudy--Merge?costs, serwces, ,,,."pi"IS emorgonc~ or'SUe" .ur, ho~piLds ]
' '. administrative
increase, profits.
A. new study coz~ducted hy the research 31.4%
affl~ate of the American Hospital Asse- 14.3%
ciation suggests that merged hospiteb
drop acute-care services, lower their carol.i%
costs and Feap higher profits.
The study ~ questions about the Rekaldlitallen 6.7% RokallilltatlOll
15.8%
future market behavior of hospita~ that ~ .o~u ~ ~ Eormm T.~ ~.omU Anoomm
merge .and form networks Mth other
hospitah and providers in anticipation
of national beaJthcare reforn~ Fif~y-four of the 74 transactions were and -0.2%, respectively'.
An AHA researcher said that, tike mergers, under HRE~s definition. The After a complex statistical An*!yeis,
hospitals in the merger study, hospitals other 20 were consolidations, the study found near-perfect corrals-
in networks will become more efficient, The study found that of the 35 merg- tions between market concentration, or
reducing their costs and excess capacity, ers that occurred in urban markets be-. number of hospital competitors in a
However, she said the study has no Cween 1983 and 1988, 69.6% of the sec- market, and hospital costs and profits.
bearing on how hospitals will genersts ondary hospitals involved in mergers HRET researchers found that, as
profits as they become parts of networks stopped providing acute-care services, market concentration increases (fewer
and get paid under a new reimburse- Of the 19 mergers in rural markets, competitors), hospital costs go down.
'ments~erm 52.6% of the secondary hospitals And, as market concentration in-
The AHA's Hospital Research and Ed- stopped providing acute care. creases, profits go up. The study didn't
ucation Trust conducted the three-year The findings add "credence to the provide specific chang~ in coats per
study, which is considered perhaps the idea that there are two distinct types of admission or operating profits.
mo~ comprehensive study of the effects mergers--one type to eliminate com- "Higher HI'II levels (market concen*
of hospital mergers to date. It's also be- petitors and one to expand networks," tration) significantly increase profits,"
'lieved~o be the first federally funded the report said. W~'here the acute mis- the researchers said.
study of hospital market concentration sion of one of the hospitals wes elimi- The findin~oa support two studios
and profitability. The federal Agency for natsd, higher levels of pre-merger com- sponsored in 1990 and 1992 by Mo~
Health Care Policy and Research fi- perition were reported." £RN HEAL?HCA~E that found that
nanced the study with a $,350,000 grant. In a survey conducted as part of the merged hospitals improved their profit-
I'IRE~s findings support the idea that study, 52% of the hospitals involved in ability primarily by reducing expenses
many hospitals merge to reduce e×~s mergers in which one facility dropped and raising their prices (March 19,
capacity in their markets and that such acute-care services described their 1990, p. 24; Feb. 3, 1992, p. 42).
· . mergers don't hurt ac~ss to acute-care markets as kighly competitive. Only The HRET study doesn't explain the
'servicas. The findings support a Novem- 18.2% of the hospitals involved in reasons for higher hospital profits in
bar 1990 report by HHS' inspector gen- mergers in which beth facilities re- markets with fewer ho~1)itals.
eral's office that concluded that mergers rained acute-care services described "I don't think the study provides
· don't h.urt access because many hospi- their markets as highly competitive. 8ond guidance as to what will happen
tale were in operation nearby (Nov. 26, In urban settings, many secondary to hospitals under CCNs (cemmuni-
1990, p. 2). hospitals involved in mergers were tv-care networks)," said Gloria Baz-
The-findings also suggest that many converted to psychiatric facilities and zoli, HRET's director of health sar-
hospit~LIs merge to eliminate compsti- outpatient-care facilities (See chart). In vices research and the etudy's lead re-
tors in their markets, rural settings, many secondary hospi- searcher.
The HRET launched the study in tale involved in mergers were con- The AHA, which has pushed the idea
August .1990 and began releasing verted to psychiatric, long-term-care of "community-care networks," has
partial results of the seven-part, and physical rehabilitation facilities, been lobbying for antitrust relie~ to ea-
· ~193-pZge study last month. However, The study uncovered some equally courage more. hospitals to form inte-
Moo£~u~ H~'.rHCA~E reviewed the noteworthy findings on the relation- grated delivery systems.
c .o~plete study last week and uncov, ship between hospital market concert- In theory, Ms. Bazzoli said, hoepi-
er~d some findings that haven't been tration and hospital costs and profits, tale and other network providers will
~· disclosed. This portion of the study examined become more efficient and use their
... The study examined 74 hospital hospital behavior in 23 metropolitan resources better. Hence, like the hos-
~ mergers that occurred between 1983 statistical areas and 91 submarkets pitals in the merger study, hospitals
: add 1968. HRET researchers then di- within those areas. Data for 1983 find- in networks should have lower costs
vided the mergers into two subcatego- ings came from 831 hospitals; data for and should reduce excess acute-care
~ies: mergers and COnsolidations. Merg- 1988 came from 812 hospitals, capacity.
ers involved one hospital acquiring or In 1983 and 1988, the average costs However, there's no way of knowing
~ taking.control of a secondary hospital, per admission for hospitals in the sam- what effect capitated payments to net-
~ Cormo~dations involved two hospitals pie were $4,126 and $6,635, respoc, works will have on hospital profits de-
corning' together and remaining equal tively. In 1983 and L988, hospitals' ay- spite potentially larger market shares,
partners under a common parent firm. erage operating margins were -0.1% she said.--David Burd~
M(xlem Healtl~cam/NovemOer 15, 1993
Rep~luce~ ~ith l~ton o£ cop~-isht o~m~. Fu~the~ ~p~oduction v~oht~lt~d.
· .. Merging hospitals should tout
improved quality, services instead
of elusive savings, experts say
Inctmsing market share and eliminat- feasor at Ohio State University, Co-
lng eompetiters to improve patient lumbtm, agr~d.
volume and profitability are primary "The greater a hospital's .market
rmsons why hospitals merge, share, the greater leverage it has in
But some hospital administrators prices," Mr. Clevm4y saicl. 'When two
Mr. Kazemek Mr. Renn and boards of trustees promote merg- of the largest hospitaint in a market
ers by highlighting potential savinKs merge, you really have an increase in
.~ · net patient revenues per a~usted ad- to patients and businesses, market sham. It equates to market
mission by 2.1% to $4,404 two years Some savings are possible through power."
after a merger from the merger-year improved patient volumes, layoffs and CEO, m~and. ,Several haspital chief
level of $4,311, the study found. The consolidation of administrative and executive offieers involved with recent
effect was to increase profitability by support services, experts said. mergers said merging was mm~ diffi-
about fora' percentage points during However, the real key to reducing cult and took longer to accomplish
those two years, the study found, costs lies with mergers that result in than they had expected.
'l'ne increased profitability is more a hospital consolidations, conversions Some executives ars happy with ira-
function of. greater volumes of patients and closures, experts said. proved profitability and staffing effi-
and revenu~ than control of expenses," A merger can act as a catalyst for cieneies gained through a merger.
said Steven Renn, HCIA's managing change that otherwise would be more Others are satisfied with their in-
' .director. ~e revenue enhancement is difficult to achieve if the hospitals re- creased market clout and enhuneed
· partly due to controlling marttet prices." mained independent. Opposition to ability ta borrow money.
~ trials. Despite operational ira- change primarily comes ~rom boards, But mast executives ~ the hmp~_
provements one year after merging, medical staffs and communities that ~ merged more to propa~ for the
most hospitals during the merger year sometimes are unwilling to close or future, which includes inereaalng prof-
.. experien.ced financial downturns, a de- convert hospitals to non-acute-care itability to provide moro outpatient
cre~se in market share, clashes of corpo, uses, experts said. and specialized services, than to pro-
rate culCuros, decreased employee mo- "For a board of a money-losing hos- vide immediate savings that can be
tale and productivity and strained pital, it's much more politically accept- passed on to consumers.
physician and community relations, ac- able to say, 'Let's merge' rather than "We tend to underemphasize the
cording to the study and interviews with 'Let's close,'" said Edward Kazemek, complexity of a merger," said Samuel
hospital executives involved in mergers, national director of the Chicago-based Huston, president and CEO of Sll-bed
In addition, the newly formed hospi- organizational consulting division of The Allentown (Pa.) Hospitnt-Lehigh
tal boards grappled with dit'ficult strs- Laventhol & Horwath, New Yorlc Valley Hospital Center. "It's political
tegie issues that some chose not to ad- "For a weak institution, it's a face- n~i very difficult to accomplish. It
dr~ss during merger negotiations, saving measure. Board members have can't be achieved overnight."
For ex~mple, to turn around their egos. They don't like to fail," Mr. I~- ~llanlmm-K~l~h Yab~. The need to
mi~rged facilities, many boards reversed zemek said. ~To strong hoepitais, it's, improve profitability, eliminnte eom-
their state~ l~licies and either dosed one 'Let's buy off a competitor, cherry- petition and improve ~ent and
facility, c~nverted one to non-acute-care pick the doctors and increase market governanee were the principal reasons
uses or closed both to bufld new facilities, share.'" why 249-bed Allentown Hospital nmi
the study found. But instead of stressing millions of 492-bed Lehigh Valley Hospital
Reflecting financial problems during dollars in elusive savings, hospittls merged in 1987.
the mergm' year, total profit margins should tout how the merger will in- "This wasn't the merger of two
dipped to -0.12% in the merger year crease quality and bring new outpa- empty hospitals," Mr. Huston said.
from 2.61%, which was the average total tient or tertiary services to the com- "They are financially strong facilities
n~rgin for the independent facilities the mumty, Mr. Kazemek said. that want to provide better services"
year before the merger, the study found. "Sophisticated hospitals don't want The two hospitals had formed Allen-
'~l~h~ng~actually get worse (imme. (somebody) coming back later and ask- town-based HealthEast as a holding
diately) ~/ter a merger," said Edward lng where the savings are when prices company in 1983. But the two facilities
Kazemek, national director of the Chi- have increased," Mr. K~zemek said. only shared laundry and laboratory
cago-based organizational consulting "There is no doubt that sewing up services and coordinated clinical sm"-
division .,of Laventhol & Horwath, your market and reducing your com- vices, Mr. Hnston said.
New York. "People get angry over petitors are the driving forces behind "Both hospitals were autonomous in
layoffs or'o. perations changes, and pro- many mergers." medical staffs and manngement," Mr.
ductivity goes down. Doctors leave for William Cleverly, a healthcare pro- Co~/n~ed o~ p. 26
Contin~ed ou p. $0
Moc~ern I-~eaR~care/l~arcl~ ~ 9. ~ 990
I~ep~xtucod uith'per~is~iou o; cop~Pigh% o~ne~. Fup%hep PepPoduction p~ohibitod.
CottOnseed from p. ~5 '°]'h[s merger brought together two ~ fo~ auevl~l. One common be.
Huston ~d. '~ey we~ v~ mu~ ve~ d~emnC ~~,,, ~r. Rid- lief is that if st~ggling hospital~
com~ even ~ough they ~ dell ~. "Mom at~n~on w~ ~ ~ me~e, ~ will suave.
the sa~ ~nt company." ~e f~n~ side. It's ~bly im~r- ~ciMiy s~ggHng h~pi~
AHenWwn-Le~gh V~ley ~ ~g ~t ~ ~nd ~ much ~me ~i~g. ~me~ ~e wo~ ~ for a
~7 million ~ly, or 1.3% of i~ n~t culture and v~u~. If m~ you're ~ing ~, ~y ~ a ~ve
patient revenues of $210 million, ~ havep~ble~ ~r." ke~ ~ ~o~ s~
,th~u~ ~lidation of some sup~n Cove~nt M~I~al C.nter. ~e deci- ~ ~ H~,
services and layoffs of seven of the ~on ~ me~ a ~ R~ ~ ~ ~ ~ mm~,
h~pi~l's 14 ~ce p~s~en~, Mr. Hu~ ~c h~pi~ ~d a 217-~ ~u~ty ~ ~y ~p ~ ~
ton ~. hospi~ ~ J~u~ 1~ w~ ~e pg- s~y ~, ~ ~
Admissions ~ ~ng ~ av~ ~ly~ avoid ~0 ~on in e~ One Milwaukee hospital that
of 2.~ annoy, ~ ~ m~ sio~ pl~ by ~ ~ties, ~d me~ ~ 1~ d~ ~ ~
re~m. st ~, he ~d. ~e ~pi~ Raymond Burfeind, president and of mounting losses. St. Anthony's
ex,.to m~n a ~ milton profit for CEO of 362-~d Covenant Medi~l F~ly Medi~ ~n~ w~
fi~i I~ endi~ ~pt. ~, he ~d. ~nmr, Wa~, Io~ thmu~ ~e me,er of two
In 19~, Allen~-Lehigh V~ley However, ~ ~ ~y ~em, the h~, 17~ F~y H~i~
inc~ i~ ch~a by 13%, ~ ~-. two h~pi~ o~ p~ o~y 1~ St. Antony H~p~.
gest jump in ~y ye~, Mr. H~n ~ me~ ~ ~s, he ~d. In ~~ ~, ~.~ L~
's~d. "By the th~ or rough m~g (of ~ ~ H~, ~ Rid~,
'.~o generate ~ ~n~, we ~ve ~ the merged ~ard), the pro~sition I~., ~ ~ ~y~
~ m~ $1," he ~. '~e w~t ~ was raised that the plan was too Au~ H~, C~, ~ 1~.
m~n~nourm~,~ues~rit~ sho~aighted," Mr. Burfeind s~d. ~~~A~w~
then u~ it to rebuild." ~e f~ility
~ mil~on renovation pm~ m~ Lu~ ~ H~~
and ins~ation of a new i~o~tion " ~ ~ d~ ~ ~ $16
sys~m in ~e ne~ two ye~, he ~d. ~e ~ar~d you can't ~rge longer to complete ~d offer fewer
At~ ~d 18 ~ ~
of BosUn, 21~ U~on Hospi~ ~ a l~ bit; a ~rger ~ ~b~ ~m~c ~n~ ~
311-b~ L~ Hospi~ ~th were ex- a to~l ~rger or ~thi~.' ~volv~ ~i~ ~, ~ ~d.
If a ~ f~ty ~ b~t, me~
pe~encing d~lining ~mi~ions and . ~e ~ long ~ 10 y~ ~ mmple~.
rising cost~ when they decided to "If you ~d ~ up ~nt, y~ ~d
merge, s~d Andrew Riddell, pmsi-
~ ~ple ~ d~. ~ey wouldn't
dent ~d CEO of ~-~ A~ "~en we s~ed ~ng a~ut ~v- ~t ~ me~e," ~d ~. Will~,
M~t~ Center, Ly~, M~s. ~g bucks, about spen~ng money at w~ w~ involv~ ~ two ~em
A~er the merger, the hospi~ ~ two f~ilities, we s~ to face f~ fora he ~i~ ~e ~ in 1~.
dedided to consolidate services at ~ut o~ting one f~lity, not two. ~y me~m ~ ~ld ~ m~u~-
L~nn ~ospi~, ~ inner~ity f~ty. We le~ed you c~'t merge a little ~es, ~c~ s~s ~d ~
However, a~ut one dozen of the bit; a merger is a to~l merger or ~ef ~at ~ ~1 ~ ~
hospital's 270 physicians objected, nQ~i~." improvement in finances, market
~ey d~cid~ to leave the h~pi~, ~er some 1~ con,very, the s~, p~u~ty, ~ity ~
~ng ~th th~ ~e~ 2,~ ~u~ board decided last year to close ~e~, ~. ~~d.
~m~ions, ~. Riddell ~d. ~i~ H~pi~ ~ ~nd ~ ~on · ~ ~ ~ ~ ~ ~
In a ~cy ~ve~ ~ ~lp mv~ to expand ~d improve St. Francis ~ ~Y ~ ~ n~
the fi~ci~ fo~unes of the fatty, H~pi~, Mr. B~ei~ ~d. No d~- ~ ~ ~ ~ ~ a ~y
which~t $10 ~llion in the ~t two sion has been made on the use of ~ o~n," ~ ~
~e~tiC~ now pl~ to ~ ~oi~ ~ ~ ~ ~ ~.,
~ts m~i~l-sur~ se~s at U~on It ~ ~ Covert fo~ y~ ~ ~oofl~lo ~. Hospi~ ex~-
Hospi~, w~ch is l~t~ in a mo~ s~ ~e~ ~ ~d other ~n- ~v~ ~lieve fl~ ~ o~m~
~fluenc~a. efi~, Mr. B~eind ~d. "No one ever ~nefi~ ~m me~ ev~m~y
It also is attempting ~ lure ~ the ~v~ it w~d ~e ~is long." ~ ~ev~. Howev~, ~ ~ no
physic~s it lost, Mr. RiddeH ~d. ~ m~ Of money-los~g h~i- da~ ~ conf~ t~s ~ the h~pi~
Lynn H~pi~ ~11 ~ ~ ~ a ~ ~ ~at me~e, m~y ~ des~m~ dus~, e~ ~.
~ ~ha~o~ m~cine f~ty; p~ ~ ~ ~ent volume to suave. ~me ~im have sho~ ~at ~em
c~ for it ~ be ex~d~ ~ ~ ~s in ~t's ~y ~e ~ h~pi~ ~t ~ ~ ~n~ for h~ ~ fewer
October, Mr. Riddeli ~d. ~r ~ o~ m ve~ ~m~titive ~ke~, ~ 1~ ~ ~t me~, but the~
beds will ~ used for ge~at~c pa- ~d ~e~der Wi~, ~or vice ~ fewer ~ f~ h~pi~
tien~, he ~d. p~ident of the Ame~ H~pi~ 150 to 3~ beds. But, for hospi~ls
Mr. Ridde~, w~ ~ wor~g at ~n. ~th mo~ t~ 3~ ~, ~ttle
AClantiCa~ ~t July, ~ ~ employ~ "Me~m ~e ~ for m~y h~- ~ ~ ~ t~u~ a me,er.
of Hospital Management Profes- pi~," he ~d. ~e most compmhe~ve study ci~
sionals, Brentwood, Tenn., which But ~e~ ~e ~y ~ptions by ex~ is "Hospi~ Cost ~y-
began m~a~n~ the hospi~ in D~ a~t the ~nefi~ ~d r~ for h~ s~," by T.G. ~g, A.G. Holt~n
cem~r'l~, pi~ me~e~, ex~ a~. C~r~ ~ p.
26
~r~ Heal~M~ ]9.
~eproduced *ith pePml~ion o~' cop%~lght o~ne~. Fu~%heP ~p~oductlon oPohibi%~l.
· Continued.from p. 26
the two facilities to fulfill prophesies of
and S. Peters, published in Ad~s 'No ort~ know8 what savings. However, many hospitals
in He~tk Economics and Health Set. to expect in a merger,' don't publicly stato elo~urs or conver-
vice~ Research in 1983.
Signifier savings can be realized one executive said. sion plans initially because that an-
only when one of the hospitals either nouncement sometimes can derail
closes or converts to non-acute-care merger by upsetting mzdieal staffs
uses, 9xperts said. and commurdties, Mr. Kazemek s~id.
"No one knows what to expect in a
"It makes sense in cutting out dupli- Terence Meiling, n~tional director for merger," Mr. Williams ~id. ~he new
c~tion of services, lx~,inmarketswbere h~lthc~eatJahnNuv~e~&Co.,aChi, board wiil make decisions the two hos.
demra~d isn't them anymore, a merger cago-basedinvestmentbanidngfirm, pitals couldn't make on their own.
~pnt save the commumty real money Most hospitals that merge even. You've got a whole new dynamic."
u?~ss .one of the haspit~s closes,' said tully close or convert the weaker of --Jalt Crmen~ ·
How the study was conducted
just~l for outpatient volume.
As a result of the adjustments, all
Tlie analysis of 36 general acute- measures of gross revenues, net revenue and expe~ numbers were
care hospitals that merged into 18 revenues and operating expenses expressed in 1988 dollars, which
facilities between 1985 and 1987 was were standardized to a common year permits .analyses of year-to-year
conducted for Moo~.RN H~-A~-?NCAR~. of 1988, using trend factors based on changes.
by Health Care Investment Aha- annual increases in total hospital in- Therefore, the changes in gross
lystz', Baltimore. dustry revenues and expenses and net patient revenues and
The study's primarY objective was derived from HCIA's data bases, operating expenses were indic~ttive
to co.m'p~ire the fil~ancial and operat- Hospitals' revenues and expenses of individual hospital pricing policies
lng perfor~nanee.of hospitals during also were adjusted for geographic and cost management rather than
a five-yea~ phriod--the two fiscal variations in labor costs, using start- external influences, such ~s general
' year~ before the hospitals merged, dard metropolitan statistical area industry inflation.--Ja~t Gr~rM ·
~he fiscal year dhring which the wage indices from the Health Care
· merger occurred and the two fiscal Financing Administration. In addi-
~ years~fter the merger, tion, revenues and expenses were Steven R~nn, mamzgi~t~ director of
Ch.~nge~ were observed in 19 key standardized to control for differ- Healtk Care l~tvestme~t Ar~al~lsts,
indica'tors, including measures of ences in case-mix complexity among 8aR/mo~, a~ thz merger study
h~spital' capacity/~nd utilization, pa- hospitals using each hospital's Medi- and contr/buted to th/z stor~t.
*tient and payer mix, pricing strate-
gies, revenues, expenses, profitabil-
ity, p~oductivity and efficiency. Pm-m~e~ vs.
Mes~ values were computed for the
ob~ervarloas (hospital data yetws) in
e~h 'subgroup for each performance
'Th~.list of merged hospitals was
compiled through HCIA, ~/~ODERH
~J~EALTHCARE and the Americgn Hes- Oc~m,w~, ~ s~.~ ~m~ s~ ~.~
l~'ital Assn., Chicago. The mergers
The study's sample consisted of ~c~em~.,~ ~ ~s~ ~ ~.~m ~.~
four hospitals that merged in 1985,
12 that merged in 1986 and 20 that ~m '
merged in 1987. ~ ~ ~ {zs~.} (~) (L~) (~) 0.~'~
Fourteen, or 39%, of the hospitals v~ ~,~ ~% s~ ¢0.s~! ~.m~ 4.rn~
had 250 or more beds in service,
nwide. Nearly two-thirds
of'the merged hospitals were located
in urban areas, compared with one-
Ail of the hospitals examined were
.private, not-for-profit facilities.
lng from inflation, income statement
28
Modem Heal~hca~efldarctt 19, 1990
CITY OF BAKERSFIELD
Retiree Medical Benefits
November 1994
GODWINS BOOKE & DICKENSON
TABLE OF CONTENTS
Section 1 Commentary ........................................
Section 2 Retiree Medical Claims Experience ........................
(9-1-93 through 8-31-94)
Section 3 Monthly Contributions by City and Retirees:
Current and Options (30 years of service)
Section 4 Cost Impact of Contribution Strategy:
Current and Options 00 years of service) ..............
Section 5 Medicare Risk Contracts
Section 6 Appendix ..........................................
A. Retiree Medical Benefits "White Paper" ................
B. Monthly Contributions by City and Retirees:
Current & Options (25,20 &: 15 rem of service) .........
GoDtpT/vs BOOKE ~ DICKENSON
GOD.NS BOOK£ ~ D~CKENSON ~.
1. COMMENTARY
A City employee can elect to retire at age 50 with a minimum of 15 years of service or as a
disability retiree.
The City currently continues medical (either Blue Cross Fee-For-Service or CalifomiaCare -
HMO) and vision (HMO participants only) coverage to employees and their eligible
dependents when the eligible emploTee retirees.The retiree can add dependents after
retirement (both spouse and/or eligible children).
The retiree has the option of participating in either the Fee-For-Service or the HMO plan.
The City pays a portion of the premium under either election based on the "lower" rate:
1. HMO ~ 3% of the single party rate (HMO has been consistently the "lower"
rate) for retirees under 65 for each year of service up to 30 or 90%.
2. Fee-For-Service = HMO subsidy plus 42% of the Fee-For-Service rate.
Appendix A contains a comprehensive history of the retiree medical premium, the changes in
approach to City contributions and the impact of some alternatives (prepared by City
personnel).
The current (1994) retiree monthly rates are:
Fee-For-Service (No Vision) HMO (Includes Vision) _
Under Age 65 Age 65 & Over ~ ~
Single $199.86 $199.86 $135.28 $ 83.92
Two-Party $394.49 $394.49 $279.67 : $168.42
Family $587.96 $587.96 $393.70 $393.70
GODWh¥S BOOKE ~ DICKENSON
Assuming maximum retirement eligibility 00 years of service) the current monthly City
contributions are:
Fee-For-Service HMO
B.as.e + Subsidy ~ Total
Single $121.75 + $ 78.11 ~ $199.86 $121.75
Two Party $121.75 + $165.69 =- $287.44 $121.75
Family $121.75 + $246.94 =, $368.69 $121.75
And the current monthly retiree contributions are:
Fee-For-Service HMO
Under Age 65 Age 65 & Over ~ ~
Single $ -0- $ -0- $13.53 $ -0-
Two Party $107.05 $107.05 $157.92 $ 46.67
Family $219.17 $219.17 $271.96 $271.95
There is a second subsidy at work in the plan. The current Blue Cross rates for both retiree
medical plans do not support the retirees' medical claims experience. The retiree medical
claims experience is tracked separately but combined with active employees' claims experience
for renewal rate purposes. At least for the last 3 years, rate changes have been applied
uniformly to both the active and the retiree rates.
Section 2, Exhibits la-d, confirms the claims experience for the most recent 12 months (9-1-93
through 8-31-94):
la Compares overall claims experience between actives and retirees for both the
FFS and HMO plans.
2
GOD WIzYT BOOATi' ~- DICKENSOA~
The combined (medical/Rx) paid claims loss ratio for each plan is:
Active Retiree.
FFS 90% 135%
HMO 70% 198%
lb The FFS monthly paid medical claims history reveals fairly consistent claims
volume except for September/October 1993. The elimination of these two
months results is a paid medical claims loss ratio of 100%.
lc & ld The HMO monthly claims history is very consistent.
Therefore, not only is the City subsidizing the retiree FFS rates but the active employee rates
are subsidizing all of the retiree rates.
Section 4, Exhibit 7, illustrates the current costs based on the current contribution strategy.
It is more expensive to the City for retirees to participate in the Fee-For-Service plan.
However, with one exception, it is less expensive for the retiree to participate in the Fee-For-
Service plan. Therefore, each year more retirees are enrolling in the Fee-For-Service plan and
less in the HMO plan.
The number of retirees covered by medical insurance has increased 31% since 1983 (220 to
317). Because of the rate actions since 1990, HMO increases and Fee-For-Service plan decreases
and subsidy have created a shift in relative participation:
Fee-For-Service HMO Total
1989 170 91 261
1990 78 190 268
1991 85 182 267
1992 109 171 280
1993 124 159 283
1994 154 163 317
3
The current participation in each plan is:
Fee for Service lIMO
< 65 65 + < 65 65 +
Single 57 53 41 53
2 Party 35 16 27 39
Family 11 0 1 0
We make the following suggestions:
1. Continue ro provide Vision Care to retirees selecting the HMO. This provides
an additional incentive for retirees to enroll in the most managed care (and
therefore, least expensive) arrangement.
2. Revise eligibility so that only employees with dependents covered at time of
retirement can continue dependent coverage after retirement (even though actual
spouse may change due to death or divorce).
3. Revise City contribution. Cease any special Fee-For-Service plan subsidy and
revise City contribution to one of the following:
Option 1
3.33% of the lower single party rate for retirees (both under age 65 and age 65
and over for each year of service up to 30 or 100%).
,.Option 2
Retiree: 3% per year of service up to 90%
Dependent: 1.5% per year up to 45%.
.Note: Use lower rate under age 65 or age 65 and over rate based on age of
retiree.
4
Option 3
2.67% per year of service up to 80% whether single, two party, or family (80%
is currently used for active employees).
Not.___.~e: Use lower rate under age 65 or age 65 and over rate based on age of
retiree.
Option 4
Option 3 but apply formula to both Fee-For-Service and HMO rate structure
regardless of higher or lower.
Section 3 contains Exhibits 2-6 which illustrate the resulting City and retiree
monthly contributions.
Section 4 includes Exhibits 7-12 which summarize the annual cost impact of
each strategy for the City and for retirees.
4. Implement appropriate age 65 and over rate structure for Fee-For-Service plan.
Based on the current rates (not on renewal rates) Blue Cross has approved
revised rates for age 65 and over participants in the Fee-For-Service plan:
Single $120.00
Two Party $237.00
Family $353.00
These will need to be adjusted to reflect final renewal agreement.
5. Consider whether the retiree claims experience should determine the retiree
rates or should be blended with active claims experience (actives would thus
continue to subsidize retirees).
5
Go~ ~7,~s~ BooK~ &
6. Implement the option of medicare risk contracts, e.g., Secure Horizons, FI-IP,
Health Pledge, etc., which would be available without retiree cost. City could
consider paying all or a portion of the Medicare Part B premium as an incentive
(currently $41.10/person/month).
Section 5 reviews Medicare Risk Contracts. The City's legal counsel is
currently reviewing the history of council resolutions, the collective bargaining
agreements and case law to determine what the parameters are for providing
and/or changing medical benefits for retirees.
6
C~OD!,~'I~V3' BOOKE ~ Dzc~,vso~v
GOD WINS BOOKE Ca DICKENSON
City of Bakersfield Exhibit fa
Medical 'Experience
09/01/93. 08/3f/94
Medical FFS CaliforniaCare FFS CaliforniaCare <65 CaliforniaCam >65
!Premium $ 1,982,916 $ 1,691,226 $ 504,391 $ 141,696 $ 98,138
Claims $ 1,756,553 $ 1,302,558 $ 653,721 $ 229,912 $ 180,215
Loss Ratio 89% 77% 130% 162% 184%
InsuRx FFS CaliforniaCare FFS CaliforniaCare <65 CaliforniaCare >65
Premium $ 149,304 $ 326,961 $ 37,958 $ 26,063 $ 19,068
Claims $ 174,777 $ 166,254 $ 79,545 $ 53,430 $ 100,566
Loss Ratio 117% 51% 210% 205% 527%
City of Bakersfield Exhibit
Medical Experience
Retirees FFS - Under and Over Age 65
Month LivesPremium Claims Loss RatioPremium Claims Loss Ratio
Oct-93 137 $ 37,964 $ 100,018263% $ 2,857 $ 8,388294%
Dec-93 149 $ 41,600 $ 38,015 91% $ 3,131 $ 7,640 244%
Feb-94 153 $ 43,173 $ 38,189 88% $ 3,249 $ 5,668174%1
Apr-94 153 $ 42,814 $ 74,524 174% $ 3,222 $ 10,540327%
Jun-94 154 $ 43,710 $ 39,782 91% $ 3,289 $ 7,144217%
Aug-94 154 $ 43,710 $ 32,502 74% $ 3,289 0%
[~()OAI: (~
City of Bakersfield Exhibit Ic
Medical Experience
Retirees CaliforniaCare - < 65
Lives Premium Claims Loss Ratio Premium Claims; Loss Ratio
0ct-93 77 $ 12,688 $ 13,399 106% $ 1,224 $ 6,109 499%
Dec-93 77 $ 12,598 $ 11,315 90% $ 1,216 $ 4,085 336%
Feb-94 72 $ 11,374 $ 53,348 469% $ 2,651 $ 4777 180%
Apr-94 72 $ 11,374 $ 38,206 336% $ 2,651 $ 6,583 248%
Jun-94 71 $ 11,153 $ 15,941 143% $ 2,600 $ 4,584 176%
Aug-94 70 $ 10,751 $ 15,063 140% $ 2,506 0%'
City of Bakersfield Exhibit fd
Medical Experience
Retirees CaliforniaCare - > 65
Lives Premium Claims Loss Ratio; Premium Claims Loss Ratio
.......... ~,~:t79~ 88 $ 8;171 $ 14,740, 180% $ 788 $ 10,939 1388%
Dec-93 90 $ 8,300 $ 16,477 199% $ 801 $ 8,953 1118%
Feb-94 91 $ 8,470 $ 13,702 162% $ 1,975 $ 9,557 484%
Apr-94 91 $ 8,470 $ 16,867 199% $ 1,975 $ 14,445 731%
Jun-94 92 $ 8,601 $ 18,632 217% $ 2,005 $ 9,394 469%
Aug-94 92 $ 8,601 $ 12,703 148% $ 2,005 O%
GOO~NS Boo/c~ &
CURRENT CONTRIBUTIONS Exhibit 2
.City Contributions (Assuming 30 Years} ·
Fee-For-Service H2vIO
(No Vision) (Includes Vision_)
~ Age 65 & Over ~ 6~
Single $199.86 $199.86 $121.75 $ 83.92
Two-Party $287.44 $287.44 $121.75 $121.75
Family $368.69 $368.69 $121.75 $121.75
Retiree Contributions (Assuming 30 Years)
Fee-For-Service H2vIO
(No Vision) (Includes Vision)
~ Age 65 & Over Un r_~i.~__.Ag_~ ~
Single $ -0- $ -0- $13.53 $ -0-
Two-Party $107.05 $107.05 $157.92 $ 46.67
Family $219.17 $219.17 $271.95 $271.95
~OD Wq,,VS BOOKE ~ DICKEzV~OA,'
OPTION 1 Exhibit
.City_ Contributions (Assuming 30 Years)
Fee-For-Service HMO
(No Vision) (Includes Vision)
Unaer Age 65 Age 65 & Over Un_ml.~t_Ag_e_~ figt.fi.~g._Qm:
Single $135.28 $ 83.92 $135.28 $ 83.92
Two-Paxty $135.28 $135.28 $135,28 $135,28
Family $135.28 $133.28 $135.28 $135.28
.Retiree Contributions (Assuming 30 Years}
Fee-For-Service HMO
(No Vision) On.dudes Vision)
Under Age 65 Age 65 & Over Under_~g~_~ ~
Single $ 64.58 $ 36.08 $ -0- $-0-
Two-Party $259.21 $101.72 $144.39 $ 33.14
Family $452.68 $217.72' $258.42 $258.42
* This represents an anomaly resulting from the current HMO family rate for a
retiree age 65 and over being the same as the family rate for retiree under age
65.
W()DWlz~S BOOKE 0 DICKENSON
OPTION 2 Exhibit 4
City Contributions (As. suming 30 Years)
Fee-For-Service HMO
(No Vision) (includes Vision)
Under Age 65 Age 65 & Over Under Age 65 ~
Single $121.75 $ 75.53 $121.75 $ 75.53
Two-Party $186.73 $113.56 $186.73 $113.56
Family $238.04 $214.93 $238.04 $214.93
Retiree Contributions (Assuming 30 Years)
Fee-For-Service HMO
(No Vision) (Includes Vision)
Under Age. 65 Age 65 & Over Under Age 65 Ap 65 & Over
Single $ 78.11 $ 44.47 $ 13.53 $ 8.39
Two-Party $207.76 $123.44 $ 92.94 $ 54.86
Family $349.92 $138.07' $155.66 $178.77
* This represents an anomaly resulting from the current HMO family rate for a
retiree age 65 and over being the same as the family rate for retiree under age
GOI)W[/VS ]_300KE ~_7 D1CKhSVSON
OPTION 3 Exhibit 5
City Contributions (Assuming 30 Years)
Fee-For-Service HMO
{No Vision) ~lncludes Vision)
~ Age 65 & Over ~ ~
Single $108.22 $ 67.14 $108.22 $ 67.14
Two-Party $223.74 $134.74 $223.74 $134.74
Family $314.96 $314.96 $314.96 $314.96
Retiree Contributions (As~ming 30 Years}
Fee-For-Service HMO
{No Vision.) (Includes Vision}
Under Age 65 Age 65 & Over Under A_Ag~_~ ~
Single $ 91.64 $ 52.86 $ 27.06 $ 16.78
Two-Party $170.75 $102.26 $ 55.93 $ 33.68
Family $273.00 $ 38.04* $ 78.74 $ 78.74
* This represents an anomaly resulting from the current HMO family rate for a
retiree age 65 and over being the same as the family rate for retiree under age
65.
(JCDt~?NS BOOKE & DICKENSON
OPTION 4 Exhibit 6
City_ Contributions (Assuming 30 Years)
Fee-For-Service HMO
(No Vision) {includes Vision)
~ ^~_e 65 & Over ~ ~
Single $159.89 $ 96.00 $108.22 $ 67.14
Two-Party $315.59 $189.60 $223.74 $134.74
Family $470.37 $282.40 $314.96 $314.96
Retiree Contributions (Assuming 30 Years)
Fee-For-Service HMO
(No Vision) {Includes Vision)
~ Age 65 & Over ~ ~
Single $ 39.97 $ 24.00 $ 27.06 $16.78
Two-Party $ 78.90 $ 47.40 $ 55.93 $ 33.68
Family $117.59 $ 70.60* $ 78.74 $ 78.74
* This represents an anomaly resulting from the current HMO family rate for a
retiree age 65 ,and over being the same as the family rate for retiree under age
65.
(]OD W,7~V$ BOOA~ ~ DICK~.wsO~V
GOD WINS BOOKE 0 DICKENSON
Under and Over Age 65
Monthly Rates
City Retiree Total
Single $ 199.86 $ - $ 199.86
2 Party 287.44 107.05 394.49
Family 368.69 219.17 587.96
Monthly Total $ 40,700 $ 7,870 $ 48,571
Annual Total $ 488,396 $ 94,445 $ 582,854
Percent 84% t6% 100°/0
<65 65+
Monthly Rates
City Retiree Total City Retiree Total
~in~le $ 121.75 $ 13.53 $ 135.28 $ 83.92 $ - $ 83.92
2 Party 121.75 157.92 279.67 121.75 46.67 168.42
Family 121.75 271.95 393.70 - - .
Monthly Total $ 8,401 $ 5,091 $ 13,491 $ 9,196 $ 1,820 $ 11,0t6
Annual Total $ 100,809 $ 6t,086 $ 161,895 $ 110,352 $ 21,842 $ t32,194
Percent 62% 38% 100% 83% 17% 100%
' 72°/o211'16115 28%82'92815 100°/o294'089
City Retiree Total
Annual Total $ 699,557 $ 177,373 $ 876,943
Percent 80% 20% 100%
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Single $ 135.28 $ 64.58 $ 199.86 $ 83.92 $ 36.08 $ 120.00
2 Party 135.28 259.21 394.49 135.28 101.72 237.00
Family 135.28 452.68 587.96 135.28 38.04 * 173.32
Monthly To~al $ 13,934 $ 17,733 $ 31,667 $ 6,612 $ 3,540._ $ 10,152
Annual Total $ 167,206 $ 212,795 $ 380,001 $ 79,347 $ 42,477 $ 121,824
Percent 44% 56% 100%I 65% 35% 100%
$ 246,553 l$ 255,272 [ $ 501,825
, 49%I 51%I 100%
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 135.28 $ $ 135.28 $ 83.92 $ - $ 83.92
2 Party 135.28 144.39 279.67 135.28 33.14 168.42
.,Family 135.28 258.42 393.70 135.28 258.42 393.70
Monthly/Total $ 9,334 $ 4,157 $ t3,491 $ 9,724 $ 1,292 $ 11,016
Annual Total $ 112,012 $ 49,883 $ 161,895 $ 116,684 $ 15,510 $ 132,194
Percent 69% 31% 100% 88% 12% 100%l
$ 228,696 I$ 65,393 I $ 294,089
78%[ 22%] 100%
<65 65+
City Retiree Total City Retiree Total
Annual Total $ 279,218 $ 262,678 $ 541,896 $ 196,031 $ 57,987 $ 2~r,4.,0t8
Percent 52% 48% t 00% 77% 23% 100%
City Retiree Total
Annual Total $ 475,249 $ 320,665 $ 795,914
Percent 60% 40% 100%
* This represents an anomaly resulting from the current HMO familv rate for a retiree age 65
[and over being the same as the faro ly rate for retiree under age 6~.
(J'()DIW~x,",$' ]30( )Kt; ce.,-
Monthly Rates <65 65+
Cib/ Retiree Total City Retiree Total
Single $ 121.75 $ 78.11 $ 199.86 $ 75.53 $ 44.47 $ 120.00
2 Party 186.73 207.76 394.49 113.56 123.44 237.00
Family 238.04 349.92 587,96 214.93 38.04 * 252.97
Mo~thlyTotal $ 16,094 $ 15,573 $ 31,667 $ 5,820 $ 4,332 $ 10,152
Annual Total $ 193,125 $ 186,876 $ 380,001 $ 69,841 $ 51,983 $ 121,824
Percent 51%1 49% 100% 57% 43% 100%
$ 262,965 iS 238,859 iS 601,825
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 121.75 $ 13.53 $ 135.28 $ 75.53 $ 8.39 $ 83.92
2 Party 186.73 92.94 279.67 113.56 54.86 168.42
Family 238.04 155.66 393.70 214.93 178.77 393.70
MonthtyTotal $ 10,272 $ 3,220 $ t3,491 $ 8,432 $ 2,584 $ 11,0t6
Annual To~al $ 123,258 $ 38,637 $ 161,895 $ 101,183 $ 31,011 $ 132,194
Percent 76% 24% 100%1 77% 23% 100%
$ 224,441 I$ 69,648 I$ 294,089
<65 65+
City Retiree Total City Retiree I Total
Annual Total $ 316,383 $ 225,513 $ 541,896 $ 171,024 $ 82,994 $ 254,018
Percent 58% 42% 100% 67% 33% J 100%
i:i i:.i:, i, Feefi3r, s~wi~e and HMO ~i ~ : ,
City Retiree Total
Annual Total $ 487,407 $ 308,507 $ 795,914
Percent 61% 39% 100%
I* This represents an anomaly resulting from the current HMO family rate for a retiree age 65
and over being the same as the family rote for retiree under age 6~.
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 108.22 $ 91.64 $ 199.86 $ 67.14 $ 52.86 $ 120.00
2 Party 223.74 170.75 394.49 134.74 102.26 237.00
Family 314.96 273.00 587.96 314.96 38.04 * 353.00
Monthly To~al $ 17,464 $ 14,203 $ 31,667 $ 5,714 $ 4,438 $ 10,152
Annual Total $ 209,568 $ 170,433 $ 380,001 $ 68,571 $ 53,263 $ 121,824
Percent 55% 45% 100% 56% 44%1 100%
$ 278,139)$ 223,686 IS 380,00t
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 108.22 $ 27.06 $ 135.28 $ 67.14 $ 16.78 $ 83.92
2 Party 223.74 55.93 279.67 134.74 33.68 168.42
Family 314.96 78.74 393.70 314.96 78.74 393.70
Mo~hi),Total $ 10,793 $ 2,698 $ 13,491 $ 8,813 $ 2,203 $ 11,016
Annual To~al $ 129,516 $ 32,380 $ 161,895 $ 105,759 $ 26,434 $ 132,194
Percent 80% 20% 100% 80% 20%1 100%:
<65 65+
City Retiree Total City Retiree Total
;Annual Total $ 339,084 $ 202,812 $ 541,896 $ 174,330 $ 79,687 $ 254,018
Percent 63% 37% 100% 69% 31% 100%
City Retiree Total
Annual Total $ 513,414 $ 282,500 $ 795,914
Percent 65% 35% 100%
* This represents an anomaly resulting from the current HMO family rate for a retiree age 65 I
tand over being the same as the family rate for retiree under age 65.
I
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Single $ 159.89 $ 39.97 $ 199.86 $ 96.00 $ 24.00 $ 120.00
2 Party 315.59 78.90 394.49 189.60 47.40 237.00
Family 470.37 117.59 587.96 282.40 70.60 * 353.00
Mon~hlyTotal $ 25,333 $ 6,333 $ 31,667 $ 8,122 $ 2,030 $ 10,152
Annual Total $ 304,001 $ 76,000 $ 380,001 $ 97,4~,9 $ 24,355 $ 121,824
Percent 80% 20% 100% 80% 20%I 100%
$ 401,460 I $ 100,365 I$ 380,001
Monthly Rates <65 65+
City Retiree Total City Retiree Total
Single $ 108.22 $ 27.06 $ 135.28 $ 67.14 $ 16.78 $ 83.92
2 Party 223.74 55.93 279.67 134.74 33.68 168.42
Family 314.96 78.74 393.70 314.96 78.74 393.7~
Monthly Total $ 10,793 $ 2,698 $ 13,491 $ 8,813 $ 2,203 $ 11,016
Annual Total $ 129,516 $ 32,380 $ 161,895 $ 105,759 $ 26,43,~. $ 132,194
Percent 80% 20% 100% 80% 20% I 100%
$ 235,275 I$ 58,814 l$ 161,895
<65 65+
City Retiree Total City Retiree Total
Annual Total $ 433,516 $ 108,380 $ 541,896 $ 203,219 $ 50,799 $ 254,018
Percent 80% 20% 100% 80% 20% 100%
City Retiree Total
Annual To~ai $ 636,735 $ 159,179 $ 795,914
Percent 80% 20% 100%
* This represents an anomaly resulting from the current HMO family rate for a retiree age 65 and
lover being the same as the family rate for retiree under age 65.
{~i( )1~ 1~/I,'\:~' /~(pO/W:' (~- Di(/^~/::\:~'(
Cost comparison Exhibit 12a
Structure City J Retiree I Total City I Retiree I Total To~a|
Current ,, ,r,, i:" T= ',='ia '"iiii='[= "i ':=T *[' iT'' =~':i,':'F F [F~=~i'="'i'"'ii ir .............. ;i : ",'"rT";'*"; '" = 'rr';'; ........................ T'~H=~;T*;i=';' 'r;;r;'
Included in over65 $ 488,396 $ 94,445 $ 582,854 $ 582,854
'Option1 $ 167,206 $ 212,795 $ 380,001 $ 79,347 $ 42,477 $ 121,824 $ 501,825
Option2 $ 193,125 $ 186,876 $ 380,001 $ 69,841 $ 51,983 $ 121,824 $ 501,825
Option3 $ 209,568 $ 170,433 $ 380,001 $ 68,571 $ 53,253 $ 121,824 $ 501,825
Option4 $ 304,001 $ 76,000 $ 380,001 $ 97,459 $ 24,365 $ 121,824 $ 501,825
Currant $100,809 $ 61,086 $161,895 $ 110,352 $ 21,842 $ 132,194 $ 294,089
Option1 $ 112,012 $ 49,883 $ 161,895 $ 116,684 $ 15,510 $ 132,194 $ 294,089
Option2 $ 123,258 $ 38,637 $ 161,895 $ 101,183 $ 31,011 $ 132,194 $ 294,089
Option3 $ 129,516 $ 32,380 $ 161,895 $ 105,759 $ 26,434 $ 132,194 $ 294,089
Option4 $ 129,516 $ 32,380 $ 161,895 $ 105,759 $ 26,434 $ 132,194 $ 294,089
:?'. !:;!:'?:i i:: '::;i ;~ii':!!:~ i ;i :: ;,:/:::?:i! i:, i;?i?, :.¥ '::?:?, ;~ ;;!:!. i::::'!!~:~ i';:,~: ?: ;ii::i:::?;i':iil i !i!:,:,;~i!:: ? i!:; FESi and H M O i!!i!! :.i!:;: ii'.!ii;;~ i;' ::i i':i '.i i i!!i i i i!!ii !!!ii!!i ii i!i ii :!:!!!!!:~il iiii::iiii i' i iii!;;,ii!! !i~ !i!ii!! ii i li!ii ! i ii!!il i!iiil i!iii! iii! i!ii !i':i!i ii i!i!!i!!iii
Currant FFS is not separated by under and over age 65 $ 876,930
Option1 $ 279,218 $ 262,678 $ 541,896 $ 196,031 $ 57,987 $ 254,018 $ 795,914
Option2 $ 316,383 $225,513 $ 541,896 $ 171,024 $ 82,994 $ 254,018 $ 795,914
Option3 $ 339,084 $ 202,812 $ 541,896 $ 174,330 $ 79,687 $ 254,018 $ 795,914
Option4 $ 433,516 $ 108,380 $ 541,896 $ 203,219 $ 50,799 $ 254,018 $ 795,914
City Retiree Total
Current '"$ 699,557 80% $ 177,373 20% $ 876,930
Option 1 $ 475,249 60% $ 320,665 40% $ 795,914
Option 2 $ 487,407 61% $ 308,507 39% $ 795,914
Option 3 $ 513,414 65% $ 282,500 35% $ 795,914
Option 4 $ 636,735 80% $ 159,179 20% $ 795,914
Contribution %
Exhibit 12b
IContdbution ~
Structure
Current Included in over 65 84% 16~
100%
Option 1 44%I 56%I 100' 65% 35~ 100%
Option 2 51%I 49%1 100% 57% 43~ 100%
Option 3 55% ~ 45% ~ 100% 56% 44~ 100%
Option 4 80%~ 20%[ 100% 80% 20~, 100o~
Current 62% 38% 100% 83% 17% 100%
Option 1 69% 31% 100% 88% 12% 100%
Option 2 76~ 24% 100% 77%
23% 100%
Option 3 80~ 20% 100% 80% 20% 100%
,Option 4 80~, 20% 100% 80% 20~ 100%
Current FF$ is not separated by under and over age 65 100%
Option 1
52%! 48%1 100%I 77%I 23% 100%
Option 2 58%I 42%J 100%I 67%J 33% 100%
Option 3 63%J 37%I 100%J 69%J 31% 100%
Option 4 80%1 2°%1 100%1 80%I 20 , 100
City Retiree Total
Current 80% 20% 100%
Option 1 60% 40% 100%
Option 2 61% 39% 100%
Option 3 65~ 35~, 100%
Option 4 80~, 20~ 100%
GOD w/NS BOOKE
5. MEDICARE RISK CONTRACTS
There is an arrangement whereby a retiree eligible for Medicare can assign his/her Medicare
benefits exclusively to an HlVlO and enroll in its "Medicare Risk Contract". There is a
reduced premium to the retiree. The HMO then provides its plan benefits in place of the
Medicare program.
We requested Medicare risk proposals from four HMOs which serve the Bakersfield area:
* Secure Horizons
· FlIP
· Kaiser
· Health Net
HICFA requires that a retiree who is eligible for Medicare be enrolled in both parts A&B in
order to be eligible for any insurance carrier's medicare risk product.
FHP in particular requires that both the retiree and the spouse be enrolled in parts A&B.
Secure Horizons requires that only one member of a family unit be enrolled in parts A&:B.
In other words, if the retiree was under 65 but the spouse was over 65 and enrolled in
Medicare parts A&B, they would be eligible for the two party rate,one Medicare.
Most of the City retirees are eligible for Medicare parts A&B. A few exceptions do exist. For
example: One retiree who was a firefighter never had another job. Firefighters did not pay
into Medicare Social Security until 1986. Most firefighters hold another job alongside their
firefighting job. The other job usually pays into Social Security, thus making most firefighters
digible for Medicare.
7
(-fODWh\(g ]~OOKE c. . .
~ DlC'KENSO/V
The City could offer the medicare risk product to retirees, stipulating that they must be
enrolled in parts A&B to be eligible.
Exhibit 13 illustrates City of Bakersfield retirees' zip codes vis a vis the HMO service areas.
Exhibit 14 compares the current Blue Cross benefits with those provided under the various
medicare risk programs.
Exhibit 15 shows the rates and premiums for age 65 and over retirees only - not including
their covered dependents. It assumes all eligibles will select the medicare risk program. We
used these assumptions because several variables are unknown:
· is the age 65 and over retiree covered by both parts A&B?
· does the retiree have a spouse that is:
- age 65 and over?
- covered by Medicare parts A&B?
· would the retiree select the Medicare Risk Contract?
Exhibit 16 shows the rates and premiums for age 65 and over dependents only - not including
the retiree. It assumes that all eligible dependents will select the Medicare Risk Contract. Thi~
assumption was made because of the same questions listed above.
Exhibits 15 and 16 are for illustrative purposes only and show the "best case" scenario.
Obviously, from the City's financial perspective, the "worst case" scenario is the maintenance
of the current arrangement.
8
Go~)wT,¥,s' BooKE 0 D~CX'ENSON
Bakersfield Exhibit 13
Medicare Risk Proposals. Network Zip Code Match
35173 ~! 35173 1 35173 1 35173 1
38320 1 38320 1 38320 I 38320 1
71842 1 71842 1: 71842 1 71842 1
76262 1 76262 1 76262 1 76262 1
79114 1 79114 1 79114 1 79114 1
83864 1. 83864 1 83864 11 83864 1
89128 1 89128 1 89128 1! 89128 1
7 93303 3 /~ 93611 1 ~- Misc. Zips: 5
+ Misc. Zips: 2,~ 93618 1 12
Covered bv 11/1/94 36 93725 1
93611 1 93726 1
93618 1 95370 1
93725 1 95531 1
93726 1 + Misc. Zips: 19
95370 1 32
95531 1
6
Covere~J Covered Covered Covered
93301 12 93301 12 93301 12 93301 12
93302 1 93302 1 93302 1 93302 1
93303 3 93303 3 93303 3 93303 3
93304 76 93304 76 93304 76 93304 76
93305 40 93305 40 93305 40 93305 40
93306 27 93306 27 93306 27 93306 27
93307 17 93307 17 93307 17 93307 17
93308 12 93308 12 93308 12 93308 12
93309 48 93309 48 93309 48 93309 48
93311 3 93311 3 93311 3 93311 3
93312 12 93312 12 93312 12 93312 12
93313 6 93313 6 93313 .0. 93313 6
Subtotal: 257 Subtotal: 257 Subtotal: 257 Subtotal: 257
Misc. Zips: 30 + Misc. Zips: 7 + Misc. Zips: 11 ~- Misc. Zips: 31
covered: 287 .7 :~64 268 288
total · ' '
95.7% 88.0% 89.3% 96.0%
retirees: 300
City of Bakersfield Exhibit f4
Medicare Risk Proposals - Benefits
Gold Basic Gold SH-STD 5 Health Seniority Plus
Fee for Service CaliforniaCare Gold Basic
Plus Premier (Over 85) Pledge Plan 4F
Office Visits 80% $5 copay $5 copay $5 copay $2 copay $5 copay $5 copay $5 copay
$6 copay, $3 copay, no $2 copay, $5 copay, no $10 copay, $5 copay, no
Rx $10/$5 copay $5/$2 copay limit $1,200
limit no limit limit no limit limit
per year
Hospital 100%/80% 100% 100% 100% 100% 100% 100% 100%
Health 100%, Limit
80% 100% 100% 100% 100% 100% 100%
Appliances $2,000
~Home Health
90%/70% 100% 100% 100% 100% 100% 100% 100%
Care
~100% after $25 100% after 100% after 100% after Same copay $35 copay,
Emergency 100%/80% copay, waived $50 copay, $50 copay, $50 copay, as non-
if admitted waived if waived if waived if $20 ¢opay emergency waivedadmittedif
admitted admitted admitted services
100% up to
Skilled Nursing 100% up to 100% up to 100% up to 100% up to 100% up to 100% 100 100% up to
Care 365 days/year '100 days 100 days 100 days 100 days days/year 1100 days/year
Ambulance 80% 100% 100% 100% 100% 100% 100% 100%
100% up to
100% after 100%, 100%, 100%, 190 days/ 100% up to
Inpatient Mental
Health $150 Not covered lifetime limitlifetime limitlifetime limit 100% lifetime + 45 190
copay/day of 190 days of 190 days of 190 days additional days/lifetime
days/year
Outpatient $20 copay up
Mental Health $101560 copay $20 copay $10 copay $10 copay $2 copay $10 copay to 20 $10 copay
visits/year
~sion Exam Not covered Not covered, $5 copa¥ $5 copa¥ $2 copa¥, $,5 copa¥, $5 copay $5 copay
City of Bakersfield Exhibit 14
Medicare Risk Proposals. Benefits
Fee for Service CaliforniaCare Gold Basic Gold Basic Gold SH-STD 5 Health Seniority Plus
Plus Premier (Over 65) Pledge Plan 4F
100% up to
$20 copay $20 copay $45 frames, 1
single lens, single lens, $10 copay $20 copay, pair/24 100% up to
single, bi or $60 benefit, 1
Eyeglasses Not covered Not covered $45 copay $45 copay limit 1 pair/2 months,
trifocal lens pair/24
bi/trifocal, Ibi/trifocal, 1 years replacement
pair/2 years pair/2 years 1 pair/year lenses/12 months
months
15%-30%
30% 30% $10 copay, Available as Available as discount
Hearing Aid Not covered Not covered limit 1 aid/2
discount discount supplemental supplemental (Beltone
years Brand)
Mammogram $50 copay $5 Copay $5 copay $5 copay $2 copay $5 copay $5 copay $5 copay
100%,
Routine Podiatry Not covered Not covered Not covered Not covered $2 copay Covered if Only covered
Medicare if medically $5 copay, limit
1 visit/month
approved necessary
Chiropractic $5 copay, $5 copay, $2 copay, Limited to $5 copay up
Care 90%/70% Not covered referral referral referral manual Not covered to 20
required required required manipulation visits/year
100% after 100% 100% 100%
Substance $150 100% inpatient
Abuse/Detox. copay/day detox only $5 copay $5 copay $2 copay inpatient,copay$10 inpatient,copay $5 inpatient,copay$10
outpatient outpatient outpatient
Exhibit 15
Medicare Risk Proposals. Retirees Only
This scenario assumes that all retirees who are 65 and over
participate in the medicare risk contracL Their dependents would
remain in the Blue Cross plan regardless of their age or Medicare
elig bility status.
Total Percent
Under 65 139 46%
65 and over 161 54%
Total 300 100%
Medicare Risk Participation Gold Basic Gold Health Seniority
Proposals Assumption Gold Basic Plus Plan
Plus Premier Pledge 4F
Single 161 $ - $ 27.25 $ 61.68 $ 30.65 $ 26.39 $ 31.14
Monthly Total $ - $ 4,387 $ 9,918 $ 4,935 $ 4,249 $ 5,014
Annual Total , $ - $ 52,647 $,,119,011 $ 59,216 $ 50,985 $ 60,162
Participation Assumption
Current Blue Cross !.Sg~i~i ~i~iiii~iliiiiiii ii~!~i~i¥~;:':~]~?iiiiii
Single 69 92 161
Cost
Single $ 192.61 $ 7.25 $ 199.86 $ 80.17 N/A
Monthly Total $ 13,290 $ 500 $ 13,790 $ 7,3~6 $ 21,166
Annual Total $ 159,481 $ 6,003 $165,484 $ 88,508 $253,992
Cost
~ingle $ 120.00 $ 7.25 $ 127.25 $ 80.17 N/A
Mon~lyTo~l $ 8,280 $ 500 $ 8,180 $ 7,3~6 $ 16,156
Annual Total $ 99,360, $ 6,003 $105,363 $ 88,508 $193,871
*Dces not include rote for vision benefi[
(~ODtP'hVS BOOKE ~9' Dzc×'~'~vsoN
Exhibit 16
Medicare Risk Proposals - Dependent Only
This scenario assumes that all dependents
who are 65 and over are Medicare eligible.
Medicare Risk Participation Gold Basic Gold Gold Health Seniority
Plus Plan
Proposals Assumption Basic Plus Premier Pledge 4F
Spouse Additional 71 $ $ 27.25 $ 62.00 $ 30.66 $ 26.39 $ 31.14
Monthly Total $ $ 1,935 $ 4,402 $ 2,177 $ 1,874 $ 2,211
Annual Total $ $23,217 $ 52,824 $ 26,122 $ 22,484 $ 26,531
Participation Assumption
Spouse Additional 23 48 71
Cost
Spouse Additional $ 192.63 $ 2.00 $194.63 $ 80.75 N/A
Monthly Total $ 4,430 $ 46 $ 4,476 $ 3,876 $ 8,352
Annual Total $ 53,166 $ 552 $ 53,718 $ 46,512 $ 100,230
Cost
Spouse Additional $ 117.00 $ 2.00 $119.00 $ 80.75 NIA
Monthly Total $ 2,691 $ 46 $ 2,737 $ 3,876 $ 6,613
Annual Total $ 32,292 $ 552 $32,844 $ 46,512 $ 79,356
*Does not include rate for vision benefit.
Goo~vs Boo~c~ & Dzczc~vso~v
City of Bakersfield
Retirees' Medical Benefits
White Paper
Prepared By: Jonathan J. Ellis - Accounting Supervisor
Prepared On: January 9, 1993
~ntroduction
Over the past twelve years the retirees' medical insurance
premiums have increased from $88,000 in 1979 to $718,000 in 1992.
The City's subsidy for retirees' medical insurance has also
increase over this period from a zero subsidy in 1979 to a $420,000
subsidy in 1992 (reference attachment A, A1 and A2). The present
aggregate City subsidy rate averages 58% of the total retirees,
medical premium.
The primary cause for the increase in' City subsidized
retirees' medical premium has been labor negotiated provisions
which resulted in total or partial subsidies of all increases since
June 1980 (reference Attachment B). The major factor which doubled
the City subsidy was the 19S9 restructuring of medical plans. This
restructuring caused retirees' indemnity insurance premiums to
increase 87%; however, restructuring also caused a reduction of
active members premiums to decrease 10.7%. The future savings
incurred by reductions of active member's insurance premiums has
been dedicated as subsidy for retirees .participating in the
indemnity health plan. This future savings equated to
approximately 42% of the total retiree indemnity premium in 1989.
This white paper outlines the chronological history of
retirees' medical insurance, summarizes the Insurance Committees
discussions and reviews alternatives to the City's subsidies of
retirees' medical insurance.
chronological History
Employees retiring on or after October 1968, who were eligible
for a PERS retirement (over 50 and 5 or more years of service),
were eligible to participate in the City's active members, medical
benefit plans. HoweVer, these retirees were responsible for 100%
of all premiums.
Premiums remained relatively stable until July 1980 when the '-
indemnity insurance carrier increased premiums thirty percent
(30%). Due to the premium increases, the labor negotiations with
the City addressed retirees' medical benefits. As a result of
these negotiations (resolution 42-80), the City agreed to
contribute a flat dollar amount for retirees' medical premiums.
This dollar amount represented the 30% premium increase effective
July 1, 1980.
The indemnity carrier'increased premiums 5.8% on July 1, 1981,
of which the retiree paid all cost increases. On July 1, 1983,
indemnity premiums increased 27%. During the labor negotiations
for that year, the City agreed (resolution 99-83) to increase
contributions towards retirees' medical premiums. The
1
contributions remained a flat dollar amount, however the intent was
to offset the premium increases on a graduated scale based on years
of service. The premium increases the City agreed to pick up were:
one-third of premium increases for employees with five to nine
years of service, two-thirds of premium increases for employees
with ten to fourteen years of service; and one hundred percent of
premium increases for employees with fifteen or more years of
service (reference Attachment B).
Effective December 1983, the City implemented a new medical
plan option, HMO. The City's retirees' contributions toward HMO
medical premiums were the same as indemnity.
Indemnity premiums increased 34% in July 1984 and an
additional 34% in February 1985. The City contribution from July
1984 through April 30, 1985 did not change except for the months of
July 1984 and February 1985, the City picked up 100% of the
increases. Effective May 1, 1985, the City changed the retirees,
medical contribution rate to reflect the following:
Two percent (2%) of the monthly premium for HMO (under age 65
rate) times each year of service for single party coverage,
and one and one-half percent (1.5%) of the monthly premium for
two-party coverage. Effective January 1, 1985, only employees
with a minimum of fifteen (15) years accumulated service shall
be eligible for participation in the retiree medical insurance
program.
Effective January l, 1988, indemnity premiums increased 19.8%.
The City contributed the May 1, 1985 formulated proportion plus
100% of the premium increases until August 1, 1988. On August 1,
1988, the City's contributions returned to the formulated amount
effective May 1, 1985 and the retirees absorbed the proportionate
share of the increases. Due to this increase and the steady
decline in indemnity enrolles (active and retired members), the
City recommended that a detailed study be made to review medical
plans.
The Budget and Finance Committee report 45-88 summarized the
findings and recommendations of the review on the City's health
benefit plans. The conclusion was to restructure the health
benefit plans to prevent further decline or loss of the inde~ity
option of health coverage. Therefore, the recommendation was made
to remove the retirees from the active employee experience pool
thus equalizing payroll deduction rates for the HMO and indemnity
plans. However, when separating the retirees in the indemnity
program, the indemnity premiums for retirees increased 87%.
Therefore the City agreed to increase contributions, effective
January 1, 1989, for retirees enrolled in the indemnity by 42% of
the total indemnity premium.' The 42% subsidy was derived by the
City's future savings via reduction of active members' indemnity
rates.
Indemnity premiums increased 87% effective January 1, 1989.
HMO premiums increased 9% effective December 1, 1988 and an
additional 4% effective July 1, 1989. The City's contribution rate
is based on a May 1, 1985 formula plus 42% of the total indemnity
premium.for all retirees participating in the indemnity program.
Effective January 1, 1990, the City's retirees, contribution
formula changed to reflect three percent (3%), of the lower of the
HMO or indemnity plans, of the single-party rate for retirees
(under 65)
age for each year of se.rvice and u~ to a maximum of
ninety percent (90%). In addition, the City continues to
contribute forty two percent (4~%) of the total indemnity premium
for all retirees participating in the indemnity program.
Indemnity premiums increased 46.7% effective January 1, 1990,
decreased 17% effective January 1, 1991, decreased 9% effective
January 1, 1992 and are expected to have no changes in 1993. HMO
premiums increased 6% effective December 1, 1989, increased 14%
effective December 1, 1990, decreased 2.5% effective March 1, 1992
and are expected to increase 13% effective January 1, 1993.
Effective March 1992 the City changed the MO carrier from Health
Net to Blue Cross California Care. Over this period no further
changes occurred to the City's contribution formula.
Insurance Committee, s Discussions
During the. period outlined in the chronological history
section, the City of Bakersfield's Insurance Committee held
frequent-meetings ~o review, discuss and propose recommendations to
changes in the City's Medical Benefits Program. The Insurance
Committee has been historically composed of representatives of each
of the City's bargaining units, retirees and City management.
· T~e meetings prior to 1980 were concerned with changing and
lmprov~ng active member's medical benefits and cost containment for
retirees participating in the City's med~c~
recurring theme of many of these me'tings
retirees' medical premiums via City contributions and Medical Trust
Account Reserves.
The major recurring items review by the Insurance Committee
since 1980 are:
Increasing the'years of service required for a retiring employee to
participate in the City's medical program
In 1983 the City's contribution formula was changed to account
for years of service and in 1985 the city limited medical
benefits to those new retirees that had fifteen years of
service. Since, the insurance committee has been discussing
the possibility of increasing the years of service
requirements to 20 years.
3
Increasing stop loss limits
In 1983 the stop loss limits were raised from $1,600 to
$2,000. Since, the committee has been discussing the
possibility of increasing this stop loss to $5,000 or $10,000.
Retirees' premium rate calculations
In 1989 the retirees medical history was separated from the
active members medical history in the calculations of
premiums. Since, the committee has been discussing the
possibility of combining the retirees' medical history back
with active members' medical history.
Increase medical, deductible
In 1981 and 1987 the medical deductible was raised first to
$100 and then to $150. Since, the committee has been
discussing the possibility of increasing the deductible to
$200 or $250.
Active members contribution to subsidize retirees' medical premiums
Since 1990, ommittee has been discussing the possibility of
(1) having aC flat dollar contribution by al} active members
which will be used to subsidize retirees' medical costs or (2)
setting a premium differential between active members and
retirees premiums (ie 50%) whereby the active member pays more
to subsidize the retirees. The second option was discussed
and unanimously agreed to by the committee on the meeting of
October 27, 1990. However, no recommendation or
implementation has occurred.
Limit retirees changes of dependents
In 1991 the committee start to discuss the possibility to
limit retirees from adding new dependents to their medical
coverage. For example, if a retiree legally adopted a grand
child or remarried, then the retiree can add them to his
existing medical coverage.
Alternatives
1. No Change
Historically, theCity's health insurance premiums have been
increasing annually an average of fourteen percent (14%) for over
the last twelve years. In addition, the City's subsidy as a
percent of total health insurance costs has been increasing
annually an average two percent. The City's total subsidy for 1992
is approximately fifty-eight percent of total premiums, up from
only thirty-four percent in 1983 (reference Schedule Alt1).
Assuming the current trend, the City can expect to subsidize
retirees' health insurance premiums by approximately 65% for a
total of one million dollars in the year 2000.
4
2. Reduce the City's 42% subsidy on indemnity insurance
The City has been subsidizing the retirees, indemnity premiums
by 42% since 1989, when the City's medical plans were restructured
(reference Schedule Alt2). However, the 42% subsidy was never
adjusted when the associated premiums experienced a decrease of 17%
in 1991 and a 9% decrease in 1992. Due to the 42% subsidy, in 1993
retirees will be paying less for participating in the indemnity
plan than in the H~O plan. This encourages retirees to move from
the H~O plan (least costly plan overall) to the indemnity plan
(most costly to City and overall). Every percent reduction in this
subsidy would save the City approximately five thousand dollars
annually, assuming all other factors remain constant.
3. Reduce retirees' formulated benefits ceiling
Presently the formulated ceiling is 90% of the lower of HMO or
indemnity single party rate. 'The City can save money with each
percent reduction in the ceiling. The savings will be dependent on
the reduction of the ceiling. For every percent reduction of the
ceiling, there is a corresponding increase of retirees affected
and increase in savings (reference Schedule Alt3).
4. Reduce retirees' formulated percentage of benefits
. ~res~ntly the City's retirees, medical benefit subsidy is
calculated using three percent per year of service with a ceiling
of benefits being ninety percent of the lower of HMO or indemnity.
single party rate. The City can save approximately twenty .one
thousand dollars a year, for example, if the percentage is changed
by one quarter percent.
5. Eliminate indemnity option from retirees, medical benefits
Elimination of the indemnity plan would save the City the
forty two percent subsidy presently being paid. The subsidy for
1992 amounts to $ 182,000 and is estimated to be $ 189,000 in 1993
(if everything remains constant).
6. Change benefit parameters
The City can change the existing benefit parameters such as:
increase required years of service to participate, increase
deductibles, increase stop loss limits, and/or limit retirees from
adding dependents to existing coverage. The cost savings to the
City is unknown.
Cit~ 9akersfield Attac ~nt A" ':.
Retiree~ ~dical Insurance
History
Calendar Retirees (~ January City Contribution Retirees Contribution
Year HMO Indemnity Total HMO Indemnity Total HMO Indemnity Total Total
2 1980 3 0 175 175 $ 0 $ 16,817 $ 16,817 $ 0 $ 88,600 $ 88,600 $ 105,417
2 1981 4 0 178 178 0 34,127 34,127 0 89,899 89,899 124,026
2 1982 0 195 195 0 37,502 37,502 0 98,790 98,790 136,292
1983 5 0 199 199 2,327 54,473 56,800 4.732 107,268 112,000 168,800
1984 6 12 208 220 5,061 80,374 85,435 9,878 144,372 154,250 239,685
1985 7 16 204 220 18,627 91,013 109,640 31,405 182,745 214,150 323,790
1986 44 187 231 28,740 102,080 130,820 41,129 173,331 214,460 345,280
1987 ' 56 192 248 32,675 106,730 139,405 44,970 184,630 229,600 369.005
1988 8 58 197 255 40,966 165,697 206,663 52,319 181,582 233,901 440,564
1989 9 91 170 261 61,299 355,363 416.662 80,650 230,561 311,211 727,873
1990 10 190 78 268 132,343 253,380 385,723 159,152 162,508 321,660 707,383
1991 11 182 85 267 144,255 258,491 402,746 170,094 136,468 306,562 709,308
1992 12 171 109 280 134,532 285,654 420,186 151,945 146,111 298,056 718,242
1993 13 159 124 283 147,635 313,175 460,810 166,837 137,494 304,331 765,141
Notes
1 In October 1968, retirees who were eligible tot PERS retirement (over 50 and 5 or more years of service) were eligible to participate in the City's medical
plans. However, retirees were responsible to pay 100% of the premiums.
2 For calendar years 1980, 1981 and 1962, costs were estimated based on number ot participating retirees multiplied by the prevailing premiums.
3 Due to retirees' medical premium rates Increasing 30.4% effective July 1980, the City agreed (Resolution 42-80) to pickup all increases.
4 In~lemnity premiums Increased 5.8%. Retirees pay total premium Increases.
5 Indemlnty premiums Increased 27~ effective July 1, 1983. City agrees to increase contribution amounts to partially or total olfset premium increases.
Contributions are flat dollar amounts that vary based on years of service. Effective December 1983, the City implemented a new medical plan option,
HMO. The City's retirees conlributions toward HMO medical premiums were the same as Indemnity.
6 Indemnity premiums Increased 34% on July 1, 1984.
7 Indemnity premiums Increased 34% on February 1, 1985. Ellective May 1, 1985, the City Implemented a new contribution formula that completely replaced
Ihe old indemnlly and HMO contribution methods and increased restrictions on who can participale in the luture.
8 Indemnity premiums Increased 19.8% on January 1988. The City picked up 100~ of the Increases until August 1, 1968, at which time, the retiree paid for
their proportationate share.
9 HMO premiums increased 9~ ellective on December 1, 1988 and 4% effective July 1, 1989. Indemnity premiums increased 87% eflective January 1, 1989.
The Indemnity premium increase was primarily due to restructuring of medical plans. City agreed to pickup 42~ of Ihe total indemnity premium and the
remaining premium was split baaed on the existing formula.
10 HMO premiums Increased an average o! 6% effective December 1, 1989 and indemnity premiums Increased 46.7~ effective Januar/1, 1990. The City
continued to pickup 42~ of the tOlal Indemnity premiums and changed the existing contribution formula to limit maximum contribution.
11 HMO premiums Increased an average of 15% effective December 1, 1990 and the Indemnity premiums decreased 17~ effective January 1, 1991.
12 City changes HMO cerrler effective March 1, 1992. HMO premiums decreased 2.5% and Indemnity premiums decreased
13 HMO premiums are expected to Increase an average of 13% effective January 1993.
Prepared By:.
Pi'epau, ed On: I
City of [ .*rsfield Attachmer. , ~
Retirees' Medical Insurance
Analysis of City Contribution ~
City Indemnity Contributions City HMO Contributions
Calendar Medical City City Medical City City
Year Reserve Funds Contributions Reserve Funds Contributions
1980 $ $ 16,817 $ 16,817
1981 34,127 34,127
1982 37,502 37,502
1983 54,473 54,473 2,327 2,327
1984 80,374 80,374 5,061 5,061
1985 91,013 91,013 18,627 18,627
1986 102,080 102,080 28,740 28,740
1987 i06,730 106,730 32,675 32 675
1988 1 57,446 108,251 165,697 720 40,246 40 966
1989 2 256,846 98,517 355,363 6,167 55,132 61 299
1990 184,115 69,265 253,380 . 5,825 126,518 132 343
1991 3 93,741 164,750 258,491 144,255 144 255
1992 285,654 285,654 134,532 134 532
$ 592,148 $ 1,249,553 $ 1,841,701 $ 12,712 $ 588,113 ' $ 600,825
I Per MOU, all Increases to retirees' medical premium will be funded by the Medical Trust account.
2 Increase of Medical Trust usage due primarily to City's 42% subsidy of indemnity insurance.
3 Medical Trust fully depleted in July 1991.
File Name: ClTYRMD
F~epaxe4 By:. 33
Prepaxe~J On:
Attachmer~, ,~2
City of Bakersfield
Retirees' Medical .~,mm_r-anc~ History
Thousands ~'/<
600
6OO
4OO
200
0
1980 1981198219831984198519861987198819891990 199119921993
City Paid ~ Retirees Paid
Source: Finance Depart~nent
· . ~ City of Bakersfield Attachment B
~ Retiree MediceJ Benefits
History of City Contributions
July 1980 through June 30, 1983
.ity contribution was a flat dollar amount which reflected a 30.4% increase in premiums effective July 1980.
Single Two Party Family
City contribution 7.55 17.79 22.48
July 1, 1983 through April 30, 1985
City contribution was based on existing flat dollar amount set in July 1980 plus a flat amount based on
years of service. New contribution formula was to paJlially offset premium increase of 27~. The
City's contributions increase accordingly:
Employees with five to nine years service, City contributed one-third of premium increases.
Employees with ten to fourteen years service, City contributed two-thirds of premium increases.
Employees with fifteen or more years service, City contributed total premium increases.
Single Two Party Family
City contribution
5 to 9 years service 12.52 29.49 37.25
10 to 14 years service 15.61 36.76 46.43
15 plus years service 18.69 44.02 55.62
City contribution toward HMO benefits equals the same dollar amount contributed to indemnity.
May 1,1985 through December 31, 1987.
City contribution was two percent (2%) of the monthly premium for HMO (under age 65 rate) times
~.ach year of service for .single party coverage, and one and one-half percent (1.5%) of the
.onthly premium for two-party coverage for HMO (under age 65 rate) times year of service
for retired employees with two party and family coverage. Effective January 1, 1985,
only employees retiring with a minimum of fifteen (15) years accumulated service shall be
eligible for participation in the retiree medical insurance program.
January 1, 1988 through July 31, 1988
City contribution based on formula set on May 1, 1985 plus 100% of all premium increases.
August 1, 1988 through December 30, 1988
City contribution based on formula set on May 1, 1985.
January 1,1989 through December 31, 1989
City contribution based on formula set on May 1, 1985 plus forty two percent (42%) of the
total indemnity premium for all retirees participating in the indemnity program.
'The change in contribution rates for the indemnity plan was due the restructuring
of the plan to separate the retirees and active employees. In setting separate
rates, the retirees premiums increased 87o/~ and the active employees premiums
decreased by 10.7%. If the indemnity plan was not restructured, the indemnity
premium rates would have increased by 21.5% across the board. The 42% contribution
was to reflect the total increased costs if no restructuring occured.
January 1, 1990 through present
'"ity contribution set at three percent (3%) of the lower of the HMO or indemnity plans
.,rd the single-party rate for retirees (under 65) for each year of service and up to a
maximum of ninety percent (90%). In addition, the City contributes forty two percent
(42%) of the total indemnity premium for all retirees participating in the indemnity
program.
JJ Ellil I
City of 9rsfield Attr 'ertl C" . "
H ! o!
Retirees* M~.,cal Premiums
79 - 80 80-81 81-82 82-~ 83-84
Percent Percent Percent Percent Percent
_ 1979 1980 Increase 1981 Increase 1982 Increase 1983 Increase 1984 Increase
Indemnity
Single 24.85 32.40 30.4% 34.28 ' 5.8% 34.28 0.0% 43.54 27.0% 58.47 34.3o/e
Two Party 58.52 76.31 30.4°/0 80.74 5.8% 80.74 0.0% 102.54 27.0% 137.71 34.3%
Family 73.96 96.44 30.4% 102.03 5.8% 102.03 0.0% 129.58 27.0% 174.03 34.3o,(
HMO
Single 69.98 0.0% 80.10 14.5o,(
Two Party 141.40 0.0% 161.73 14.4~
Family 203.38 0.0% ~99.64 12.9o,(
84-85 85-86 86-87 87-98 88-89
Percent Percent Percent Percent Percent
1985 Increase 1986 Increase 1987 Increase 1988 Increase 1989 Increase
Indemnity
Single 77.80 33.1°/0 77.60 0.0% 77.00 0.0% 93.20 19.8% 174.66 87.4%
Two Party 155.60 13.0o/0 155.60 0.0% 155.60 0.0°/0 186.41 19.8% 349.33 87.4%
Family 233.40 34.1% 233.40 ' 0.0% 233.40 0.0°/0 279.61 19.8% 523.99 87.40/0
HMO
Single 80.10 0.0% 80.10 0.0% 80.10 0.0% 80.10 0.0% 90.57 13. lO~
Two Party 161.73 0.0% 161.73 0.0% 161.73 0.0% 161.73 0.0°/0 182.75 13.0o~
Family 229.64 0.0% 229.64 0.0% 229.64 0.0% 229.64 0.0% 259.49 13.C?'
89-90 90-91 91-92 92-93
Percent Percent Percent Percent
1990 Increase 1991 Incr. -Decr. 1992 Decrease 1993 Increase
Indemnity
Single 256.24 46.7% 212.68 -17.0% 193.58 -9.0% 193.58 0.0%
Two Party 612.50 46.7% 425.38 -1.7.0% 387.18 -9.0% 387.18 0.00/0
Family 7'68.75 46.7% 638.06 -17.0% 580.76 -9.0% 580.76 0.0%
HMO
Single 95.60 5.6% 108.83 13.8% 106.11 -2.5% 120.15 13.2o/0
Two Party 193.39 6.8% 224.51 16.1% 218.90 -2.5% 248.36 13.5o/0
Family 277.99 7.1% 315.63 13.5% 307.7'4 -2.5% 349.53 13.6%
Please note that HMO rates quoted represents the under 65 category only.
i .,....,~: ,~,~8I
P,e~ee ~/: Al Em. I
I~epa~ee Oa: l~J'~ I
City of Bakersfield Schedule Alt1
Retirees' Medical Insurance
Analysis of City Subsidies
Calendar City Retiree Total Percent
Year Subsidy Contribution Premium Cil~ Subsidy
1983 56,800 112,000 168,800 33.65%
1984 85,435 154,250 239,685 35.64%
1985 109,640 214,150 323,790 33.86%
1986 130,820 214,460 345,280 37.89%
1987 139,405 229,600 369,005 37.78%
1988 206,663 233,901 440.564 46.91%
1989 416,662 311,211 727 873 57.24%
1990 385,723 321,660 707 383 54.53%
1991 402,746 306,562 709 308 56.78%
1992 420,186 298,056 718.242 58.50%
1993 I 460,810 304,331 765 141 60.23%
1994 E 532,079 340,182 872,261 61.00%
1995 E 616,514 377,864 994,378 62.00%
1996 E 714,162 419,429 1,133.591 63.00%
1997 E 827,068 465~226 1,292,294 64.00%
1998 E 957,590 515,625 1,473,215 65.00%
1999 E 1,091,652 587,813 1,679,465' 65.00%
2000 E 1,244,484 670,106 1,914,590 65.00%
Health insurance premiums known, estimate calculated on the assumption that the
number of retirees participating and their benefit options remain unchanged (12/92).
Assumes:
Health insurance premiums increase an average of 14%
Percent of City's subsidy increases only 1% per year till 1998 and then remains a fiat 65%
That the number of retirees participating and their benefit options remain unchanged (12/92).
~r~d B~ JJ Ellla
Pre.red On: 01~
uity o1 ~rs,eta ~chedule .~ : . "
Retirees' Me I Insurance _.~
Analysis of (~il~,'s 42% Suosidy o! Indemnily Plan
City
Calendar Subsidy Subsidy Retiree Total Annual Cost
Year Formula Flat % Total Costs Costs # retirees Per Retiree
Current City subsidy of 42%
1989 109,275 246,088 355,363 230,561 585,924 170 1,356
1990 78,707 174,673 253,380 162,508 415,888 78 2,083
1991 92,608 165,883 258,491 136,468 394,959 85 1,606
1992 104,313 181,341 285;654 146,111 431.765 109 1.340
1993 * 123,894 189,281 313,175 137,494 450,669. 124 1,109
· Estimated using same retirees count and mix as of 12/92.
Effective 111193, indemnity premiums remains constant and HMO premiums increase 13%.
Reduced 42¥o subsidy to reflect total premium decrease of 17% in 1991 & 9% in 1992
1991 1 92,608 98,653 191.261 203,350 394,611 85 2,392
1992 2 104,313 69,082 173,395 258,370 431,765 109 2,370
1993 2 123,894 72,107 196,001 254,668 450,669 124 2,054
I Since premiums decreased 170/o in 1991. then City's 420/0 subsidy reduced to 25%.
2 Since premiums decreased 17% in 1991 and 9% In 1992, then City's 42% subsidy reduced to 16%.
Reduce 42% subsidy to reflect constant average annual cost per retiree.
1991 1 92,608 157,844 250,452 144.159 394,611 85 1,696
1992 2 104,313 155,435 259,748 172,017 431,765 109 1,578
1993 2 123,894 162,241 286,135 . 164,534 450,669 124 1,327
I Subsidy calculated at 40%.
2 Subsidy calculated at 36%.
File Name: 8ALT1
Prepared By:. JJ EJlil
Prepa;ed On: 12/22/92
.,.' '~ City of Bakersfield Schedule Nt3
Retirees' Medical Benefits
Analysis of City's Subsidy Calculation
City Retiree Total
Formula % Subsidy Total Contribution Cos~
Monthly
Current Formula for 1993
HMO 12,302.94 0.00 12,302.94 13,903.11 26,206.05
Indemnity 10,324.50 15,773.44 26,097.94 11,457.82 37,555.76
Total 22,627.44 15,773.44 38,400.88 25,360.93 63,761.81
2.75 % per years of service
HMO 11,541.91 0.00 11,541.91 14,664.14 26,206.05
Indemnity 9,607.69 15,529.52 25,137.21 12.418.55 37,555.76
Total ' 21,149.60 15,529.52 36,679.12 27,082.69 63,761.81
80 % Ceiling
HMO 11,050.24 0.00 11,050.24 15,155.81 26,206.05
Indemnity 9,151.59 15,529.52 24,681.11 12,874.65 37,.555.76
Total ' '20,201.83 15,529.52 35,731.35 28,030.46 63,761.81-
Annualized
Currant Formula
HMO 147,635.00 0.00 147,635.00 166,837.00 314,472.00
Indemnity 123,894.00 189,281.00 313,175.00 137,494.00 450,669.00
Total 271,529.00 189,281.00 460,810.00 304,331.00 765,141.00
2.75 % pe~ years of sewice
HMO 138,503.00 0.00 138,503.00 175,970.00 314,473.00
Indemnity 115,292.00 186,354.00 301,646.00 149,023.00 450,669.00
Total 253,795.00 186,354.00 440,149.00 324,993.00 765,142.00
80 % Ceiling '
HMO 132,603.00 0.00 132,603.00 181,870.00 314,473.00
indemnity 109,819.00 186,354.00 296,173.00 154,496.00 450,669.00
Total 242,422.00 186,354.00 428,776.00 336,366.00 765,142.00
Impact
2.75 aA per years of service
HMO (9,132.00) 0.00 (9,132.00) 9,133.05 1.00
Indemnity (8,602.00) (2,927.00) (11,529.00) 11,526.00 0.00
Total (17,734.00) (2,927.00) (20,661.00) 20,662.05 1.00
80 aA Ceiling
HMO (5,900.00) 0.00 (5,900.00) 5,900.00 0.05
Indemnity (5,473.00) 0.00 (5,473.00) 5,473.00 0.00
Total (11,373.00) 0.00 (11,373.00), 11,373.00 0.00
Current: Exhibit 17
25 Years
Service Under and Over Age 65
City Retiree Total
Single $ 196.56 $ 3.30 $ 199.86
2 Party 278.31 116.18 394.z{9
Family 359.56 228.40 587.96
25 Yearn
Service <65 65+
City Retiree Total City Retiree Total
Single $ 112.62 $ 22.66 $ 135.28 $ 83.92 $ - $ 83.92
2 Party 112.62 167.05 279.67 ' 112.62 55.80 168.42
Family 112.62 281.08 393.70 - . .
20 Yearn
Service Under and Over Age 65
City Retiree Total
Sin~lle $ 174.04 $ 25.82 $ 199.86
2 Party 255.78 138.71 394.~.9
Family 337.04 250.92 587.96
20 Yearn
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 90.10$ 45.18$ 135.;~8$ 83.92$ $ 83.92
2 Party 90.10 189.57 279.67 90.10 78.32 168.42
Family 90.10 303.60 393.70
15 Years
Service Under and Over Age 65
City Retiree Total
Sin~lle $ 151.51 $ 48.35 $ 199.86
2 Party 233.26 161.23 394.49
Family 314.52 273.44 587.~6
15 Yearn ...... '
Service <65 65+
City Retiree Total City Retiree Total
Single $ 67.57 $ 67.71 $ 135.28 $ 67.57 $ 16.35 $ 83.92
2 Party 67.57 212.10 279.67 67.57 100.85 168.42
Family 67.57 326.13 393.70
Option 1: Exhibit 18
25 Yearn
Service <65 65+
City Retiree Total City . Retiree Total
Single $ 112.62 $ 87.24 $ 199.86 $ 83.92 $ 36.08 $ 120.00
2 Party 112.62 281.87 394.49 112.62 124.38 237.00
Farr~ily 112.62 475.34 587.96 112.62 240.38 353.00
25 Years
Service <65 65+
City Retiree Total City . Retiree Total
Single $ 112.62 $ 22.66 $ 135.28 $ 83.92 $ - $ 83.92
2 Party 112.62 167.05 279.67 112.62 '55.80 168.42
Family 112.62 281.08 393.70 112.62 281.08 393.70
20 Years
Service <65 65+
City Retiree Total City Retiree Total
Single $ 90.10 $ 109.76 $ 199.86 $ 83.92 $ 36.08 $ 120.00
2Party 90.10 304.39 $ 394.49 90.10 146.90 $ 237.00
Family 90.10 497.86 $ 587.96 90.10 262.90 $ 353.00
20 Years
Service <65 65+
City Retiree Total City 'Retiree Total
Sin~lle $ 90.10 $ 45.18 $ 135.28 $ 83.92 $ $ 83.92
2 Party 90.10 189.57 $ 279.67 90.10 78.32 168.42
Family 90.10 303.60 $ 393.70 90.10 303.60 393.70
15 Years
Service <65 65+
City Retiree Total City Retiree Total
Single $ 67.57 $ 132.29 $ 199.86 $ 67.57 $ 52.43 $ 120.00
2 Party 67.57 326.92 394.49 67.57 169.43 237.00
Family 67.57 520.39 587.96 67.57 285.43 353.00
15 Years
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 67.57 $ 67.71 $ 135.28 $ 67.57 $ 16.35 $ 83.92
2 Party 67.57 212.10 279.67 67.57 " 100.85 168.42
~Famil¥ 67.57 326.13 393.70 67.57 ' 326.13 393.70
Opt/on 2: Exhibit 19
25 Years ' ' " ..............................................................................
Service <65 65+
, . City Retiree Total City Retiree Total
~Smgle $ 101.46 $ 98.40 $ 199.86 $ 83.92 $ 36.08 $ 120.00
2 Party $ 155.61 238.88 394.49 $ 155.61 81.39 237.00
Family $ 198.37 389.59 587.96 $ 198.37 154.63 353.00
Service <65 65+
Cit~ Retiree Total City Retiree Total
Single $ 101.46 $ 33.82 $ 135.28 $ 83.92 $ $ 83.92
2 Party 155.61 124.06 279.67" 155.61 12.81 168.42
Family ~98.37 195.33 ~93.70 198.37 195.33 393.70
20 Yearn ~
Service <65 65+
City Retiree Total City Retiree To~!
Sin~lle $ 81.17 $ 118.69 $ 199.96 $ 81.17 $ 38.83 $ 120.00
2 Party 124.49 270.01 394.49 124.49 112.52 237.00
, Farr, ily 158.69 429.27 587.96 158.69 194.31 353.00
20 Years ' ................ ~ .........................................................
Service <65 65+
City Retiree Total City Retiree Total
Single $ 81.17 $ 54.11 $ 135.28 $ 81.17 $ 2.75 $ 83.92
2 Party 124.49 155.19 279.67 124.49 43.94 168.42
Family 158.69 235.01 393.70 158.69 235.01 393.70
15 Years
Service <65 65+
City Retiree 'l:otal City Retiree Total
Single $ 60.88 $ 138.9~ $ 199.86 $ 60.88 $ 59.12 $ 120.00
2 Party 93.36 301.13 394.49 93.36 143.64 237.00
i Fardily 119.02 468.94 587.96 119.02 233.98 353.00
15 Yearn ..................................
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 60.88 $ 74.40 $ 135.28',$ 60.88 $ 23.04 $ 83.92
2 Party 93.36 186.31 279.67' 93.36 75.06 168.42j
Family 119.02 274.68 393.70 119.02 274.68 393.70
Option 3: Exhibit 20
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 90.30 $ 109.56 $ 199.86 $ 56.02 $ 63.98 $ 120.00
2 Party 186.68 207.81 394.49 112.42 124.58 237.00
Family 262.79 325.17 587.96 262.79 90.21 353.00
Service <65 65+
[City Retiree Total City Retiree Total
Single $ 90.30 $ 44.98 $ 135.28 $ 56.02 $ 27.90 $ 83.92
2 Party 186.68 92.99 279.67 - 112.42 56.00 168.42
Family 262.79 130.91 393.70 262.79 130.91 393.70
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 72.24 $ 127.62 $ 199.86 $ 44.81 $ 75.19 $ 120.00
2 Party 149.34 245.15 394.49 89.94 147.06 237.00
Family 210.24 377.72 587.96 210.24 142.76 353.00
20 Years
Service <65 65+
"City Retiree Total (~ity Retiree Total
Sin~lle $ 72.2~ $ 63.04 $ 135.28 $ 44.81 $ 39.11 $ 83.92
2 Party 149.34 130.33 279.67 89.94 78.48 168.42
Family 210.24 183.46 393.70 210.24 183.46 393.70
15 Years
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 54.18 $ 145.68 $ 199.86 $ 33.61 $ 86.39 $ 120.00
2 Party 112.0~ 282.48 394.49 67.45 169.55 237.00
Family 157.68 430.28 587.96 157.68 195.32 353.00
t5 Years
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 54.18 $ 81.10 $ 135.28 $ 33.61 $ 50.31 $ 83.92
2 Party 112.01 167.66 279.6'~ 67.45 100.97 168.42
, Family 15~.68 236.02 393.70 157.68 236.02 393.70
Option 4: Exhibit 2f
25 Years
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 133.41 $ 66.45 $ 199.86 $ 80.10 $ 39.90 $ 120.00
,2 Part7 263.32 131.17 394.49 158.20 78.60 237.00
Family 392.46 195.50 587.96 235.63 117.37 353.00
25 Years
Service <65 65+
City Retiree Total City Retiree Total
Sine, lie $ 90.30 $ 44.98 $ 135.28 $ 56.02 $ 27.90 $ 83.92
2 Par~, 186.68 92.99 279.67 112.42 56.00 168.42
Family 262.79 130.91 393.70 262.79 130.91 393.70
20 Years
Service <65 65+
City Retiree Total City Retiree Total
Single $ 106.73 $ 93.13 $ 199.86 $ 64.08 $ 55.92 $ 120.00
2 Party 210.66 183.83 394.49 126.56 110.44 237.00
Family 313.97 273.99 587.96 188.50 164.50 353,00
20 Years
Service <65 65+
City Retiree Total City Retiree Total
Single $ 72.24 $ 63.04 $ 135.28 $ 44.81 $ 39.11 $ 83.92
2 Pa~y 149.34 130.33 279.67 89.94 78.48 168.42
Family 210.24 183.46 393.70 210.24 183.46 393.70
t5 Years ..............
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 80.04 $ 119.82 $ 199.86 $ 48.06 $ 71.94 $ 120.00
2 Part7 157.99 236.50 394.49 94.92 142.08 237.00
Family 235.48 352.48 587.96 141.38 211.62 353.00
15 Years
Service <65 65+
City Retiree Total City Retiree Total
Sin~lle $ 54.18 $ 81.10 $ 135.28 $ 33.61 $ 50.31 $ 83,92
2 Party 112.01 167.66 279.67 67.45 100.97 168.42
Family 157.68 236.02 393.70 157.68 236.02 393.70