With Detroit economy improving, ministry facilities up capital spending

May 15, 2014


After years of steep economic decline, Detroit is seeing signs that the worst may be behind it. Although the city is still working through municipal bankruptcy, there are glimmers of economic activity in the city's private sector and some signs of economic hope in the region. Some southeast Michigan Catholic health facilities that had reduced their capital spending for several years now are increasing their investments in their infrastructure.

"Like a lot of health care systems, we had slowed our investments … and looked at where to cut back," said Patrick McGuire, executive vice president and chief financial officer of St. John Providence Health System, a Warren, Mich.-based subsystem of Ascension Health that has six hospitals in the Detroit area.

He said that now that there is some "reason for optimism" in Detroit, St. John Providence is committed to investing in projects it had deferred. The system's 2014 capital spending budget of $120 million is double that of 2013, McGuire said.

In the Detroit health care landscape, McGuire said, "Everyone is realizing, you can't slow down forever — you have to invest."

A view of downtown Detroit's Woodward Avenue, from a deteriorating building.

Economic undertow
According to information compiled by the International Business Times in 2011, Detroit's well-documented downturn started earlier than the nationwide recession and was more pronounced. The auto industry-dependent city was "crippled by the closing of factories, falling home prices, the exodus of tens of thousands of residents, rampant violent crime and massive poverty." Two of the three major automakers in Detroit declared bankruptcy in 2009, and the city of Detroit filed for bankruptcy last year.

At the start of the downturn in Detroit, "we didn't know how bad it would get," said McGuire. "We're in an auto town, which includes suppliers, engineering firms, ad agencies — so there were huge ripple effects, including increasing unemployment" as the auto industry declined.

Saint Joseph Mercy Health System of Ypsilanti, Mich., has six inpatient facilities and a network of outpatient facilities in southeast Michigan and its parent, Livonia, Mich.-based CHE Trinity Health has four additional sites in other Michigan regions closely tied to the auto industry. Michael Gusho, regional chief financial officer of Saint Joseph Mercy Health System, noted that "the economics of the community influence the financial performance of the hospital over time."

McGuire noted that when people were losing their jobs during the economic downturn in Detroit, many also lost their health insurance, and this impacted the payer mix at St. John Providence's hospitals, which in turn impacted revenues.

This weak local economic picture was just part of the reason St. John Providence slowed its capital investments during the downturn, McGuire said. Additionally: "When the markets had a rough time around 2007-2009, the markets' poor performance showed up on our balance sheets" and convinced St. John Providence that "it made sense to pause and take a step back" when it came to capital spending.

Signs of improvement
Gusho of Saint Joseph Mercy noted, "the economy in the Detroit area has significantly improved over the last couple of years," but, he cautioned, "given unemployment statistics, (Detroit) is still behind the nation."

According to the Bureau of Labor Statistics the unemployment rate in Detroit was 15 percent in 2009 and 9.4 percent in 2013, as compared to the U.S. rate of 9.3 percent in 2009 and 7.4 percent in 2013.

McGuire said signs of hope in the Motor City include that auto companies are doing well — car sales are up, and the companies are talking about hiring — the state government is in better fiscal shape than it has been since the recession started and Detroit is working out its bankruptcy plan. (The Detroit Free Press reported April 28 that the city had reached a five-year agreement with 14 of its unions, but details of the deal were not released. The paper said the city also had reached deals recently with its pension funds, its retiree committee, two banks and its general obligation bondholders.)

Steve Paulus is southeast Michigan regional vice president of strategy for the Saint Joseph Mercy system. He said, "We continue to see an uptick in development across southeast Michigan — housing starts, new businesses, et cetera."

Cautious optimism
With the improvements in the Detroit economy — combined with healthier capital markets nationally — St. John Providence is investing more than $190.7 million total in fiscal years 2014 and 2015 on capital projects. The system had spent $60 million on these projects in 2013. Among the projects the system is funding are a completion of shelled space at Providence Park Hospital, in the Detroit suburb of Novi, Mich.; a neo-natal intensive care unit renovation at St. John Hospital and Medical Center in Detroit; the replacement of telemetry equipment at Providence Hospital in the Detroit suburb of Southfield, Mich., and at St. John in Detroit; and an upgrade of information technology systems throughout the region.

Paulus of the Saint Joseph Mercy system said that system's investments in southeast Michigan hadn't been hampered much during the recession because "our capital spending plans are directed at enabling the health system to deploy the resources it needs to meet the needs of the populations its facilities serve." According to Gusho, over the last six years, the Saint Joseph Mercy system had invested about $1 billion in capital projects in southeast Michigan, including adding private inpatient rooms, adding outpatient facilities and improving information technology systems. Its five-year plan, already under way, includes the addition of a cancer center at Chelsea Community Hospital in Chelsea, Mich.; a patient tower at St. Joseph Mercy Oakland in Pontiac, Mich.; and an outpatient surgery center at St. Joseph Mercy Ann Arbor in Ypsilanti. It also plans to renovate patient rooms at St. Mary Mercy Livonia, Mich. These communities are in suburban Detroit; and all were affected by the city's economic downturn, according to a Saint Joseph Mercy spokesperson.

McGuire noted that other health care providers around the Detroit area also are investing once again, although he said some of them were more impacted by the downturn than the financially stable St. John Providence; and those facilities are having a harder time recovering.

Payer mix
McGuire said St. John Providence recognizes that there is a need for caution.

He said 20 percent of St. John Providence's patients are insured by Medicaid; 45 percent by Medicare; 5 percent are uninsured; and 30 percent have other sources of insurance, primarily Blue Cross. Michigan is among the states that have expanded

Medicaid rolls, and so the percentage of Medicaid-insured patients could rise, McGuire said.

Also, many employers are shifting employees onto less generous private insurance plans, making employees responsible for more of the health care costs they incur, and it can be difficult for hospitals to collect those co-pays and deductibles, said McGuire. "The scope of the problem is large and growing," McGuire said. "It is difficult to separate those who can't pay from those who won't pay." The amount of bad debt associated with this issue is unavailable, but "it is in the tens of millions of dollars annually" at St. John Providence, said McGuire.

He added that with those revenue concerns and with other financial pressures there will be continuing incentives for health care providers to reduce the cost of providing care, and this includes St. John Providence. These cost-cutting efforts will coincide with investments in new priority areas under health care reform, including outpatient care and care coordination models.


Copyright © 2014 by the Catholic Health Association of the United States
For reprint permission, contact Betty Crosby or call (314) 253-3477.

Copyright © 2014 by the Catholic Health Association of the United States

For reprint permission, contact Betty Crosby or call (314) 253-3490.