February 27, 2010
More than a century ago, a hospital with eight beds and two nurses opened in a wooden house on Institute Street east of downtown Colorado Springs.
Since then, that hospital has evolved into Memorial Health System, a half-billion-dollar-a-year-business with two sprawling campuses, 4,122 employees, nearly 30,000 annual admissions and the busiest emergency room in Colorado.
Memorial, which the city has owned since World War II, may be in for more radical change in its second century.
During the next several months, a City Council-appointed commission will lead a community conversation about Memorial in a series of town hall meetings.
Memorial’s governance will be part of the discussion. But the question that will be under the microscope is whether Memorial should be sold.
Two central issues will be Memorial’s finances and the risk to taxpayers if Memorial can’t cover its expenses.
After the community dialogue, the Citizens Commission on Ownership and Governance of Memorial Health System will issue a recommendation to the council. Among the many possibilities: Ask voters whether to sell Memorial.
Memorial officials have said it could take up to nine months for the commission to evaluate options and generate a recommendation.
The commission is already about a month behind schedule. Under a time frame suggested by Memorial officials, the council was supposed to appoint the commission by the end of January. But back-to-back resignations of two high-profile members over conflict-of-interest concerns left council members scrambling; their replacements were named last week.
The 11-member commission includes health care professionals, retired military members and a neighborhood activist.
Commissioner Stephen Hyde, a health care consultant and author who has advocated selling Memorial, said he’s going into the process with an open mind.
For Hyde, the discussion will revolve around money.
“The question I would ask is A) How much is the hospital worth? B) How much could it be sold for? and C) Would the city be better off with the money than with owning the hospital, because, obviously, the hospital isn’t going to go anywhere,” he said.
The question has simmered in Colorado Springs for decades.
It resurfaced in August, when the council-appointed Sustainable Funding Committee recommended exploring changes to Memorial’s ownership and governance.
Memorial, which had $542 million in operating revenue last year, is composed of three hospitals and more than a dozen other facilities.
The City Council appoints a Board of Trustees not to exceed 15 members to oversee day-to-day operations.
Neither the city’s general fund nor taxpayers contribute anything to the operations of Memorial, and no money flows back to the city government unless it’s for services rendered, such as legal matters or audit services.
Even though Memorial doesn’t receive taxpayer subsidies, it was labeled a liability by the Sustainable Funding Committee, which studied what the city pays to deliver services and how much money it gets in return.
“There is a legal and likely a ‘moral’ obligation for the General Fund to possibly fund shortfalls in (Memorial’s) revenues if they occur,” the committee said in its report.
In the fickle health care industry, the difference between surviving and going under is getting razor-thin, said Larry McEvoy, who was named CEO in 2008, the year Memorial lost nearly $32 million and opened a campus in northern Colorado Springs.
Memorial has returned to profitability under McEvoy’s leadership.
“I don’t mean to be alarmist,” he said. “But the economics of the industry would suggest that the days of having Memorial sit over in a corner and just happily do things while taxpayers didn’t need to worry about it, it would be foolish to assume they’re going to continue.”
The risk reaches beyond the city’s general fund. Property owners could face higher taxes if Memorial struggles.
Mayor Lionel Rivera said an ordinance approved by voters in 1949 allows the City Council to levy a tax to pay for the operation and maintenance of Memorial.
Since the ordinance predates the Taxpayer’s Bill of Rights, which requires voter approval of new taxes, it takes precedence, Rivera said.
“In theory, if we run (into) very tough economic times, and Memorial has debt payments to make, and the revenues aren’t there to service the debt, then the (ordinance) would allow that,” he said.
So far, Memorial has mostly paid its way; the city issued $21 million in general obligation bonds in the 1970s that were repaid with property taxes.
Memorial’s financial condition has worsened, for the most part, since 2003.
That year, Memorial earned $41.7 million. For the next four out of five years, profits fell, including the loss in 2008. That loss resulted from $28.8 million in investment losses and interest costs that nearly doubled to $22.6 million as the nation’s financial markets neared collapse.
Memorial Health System’s deteriorating profitability has resulted in part from expenses that outpace revenue. Memorial’s operating expenses increased 63.2 percent from 2003 to 2009. During that time, revenue rose more slowly — 54.7 percent. As a result, Memorial’s cash on hand — money that would sustain operations without any revenue — fell from 249 days in 2004 to 167 days in 2009.
Each of those trends improved last year. Since McEvoy was named CEO, Memorial has focused on cost-cutting, including outsourcing its food and nutrition operations and not filling about 670 jobs. Memorial cut its operating expenses 4.8 percent last year, while its operating revenue dropped by just 1.7 percent, allowing the system to post its best operating income in five years – $34.2 million.
Still, the amount Memorial loses treating low-income patients, either through Medicaid or with free care, more than tripled from 2003 to 2009 to $53.3 million.
To curtail those losses, Memorial is matching more patients to government and other assistance programs and offering more incentives and discounts for people to pay their bills and avoid collections.
The effort has paid off. From 2008 to 2009, the cost of indigent care grew only 6 percent.
But as long as those losses continue to grow, they threaten Memorial’s profitability.
“There are risks to selling the care just as there are to keeping it the same,” McEvoy said. “We think that this dialogue ahead will help illuminate those things so people can be clear about what’s in front of them and clear about what they want to do.”
McEvoy said a risk of selling Memorial is that a private company would likely care only about the bottom line.
Industry analyst Jim Hertel agreed.
“If the hospital were to be sold to an outside entity, and it had fiduciary responsibility to its own organization ... it would have a degree less of interest in the community due to its own fiduciary responsibility than a community-owned hospital like Memorial has today,” said Hertel, who publishes the Colorado Managed Care newsletter.
Hertel said Colorado Springs has “always been a hotbed of hospital competition” between Memorial and Penrose St. Francis Health Services. But the two have worked in a “combination of harmony and market competition to serve the community,” he said.
Penrose, for example, provides nearly as much free and unreimbursed medical care as Memorial — $63.3 million in the fiscal year ended June 30.
Memorial provided $69.8 million of such care, which also includes losses from treating low-income patients, in 2009.
Penrose is “very interested” in the community discussion, spokesman Chris Valentine said.
But “we feel it is not appropriate for us to play an active role in that conversation,” he said.
Another concern about selling Memorial is whether a different provider would still accept Tricare, the military’s version of civilian health insurance. Colorado Springs is home to more than 40,000 active-duty troops and tens of thousands of military retirees.
Matt Fenwick, a spokesman for the American Hospital Association, said Colorado Springs is taking the right approach by engaging the community in a discussion.
“Moving forward, I think all hospitals are going to have to look at where they are financially (and at) their ownership structure,” he said.
McEvoy said people ask him whether he’s afraid of having that conversation.
His answer: no.
“We’ve got 100 years of good story here,” he said. "But the other thing is, standing still terrifies us."