The Success & Significance of HEALTHSOURCE

Unlike many entities that are a creation of government, HealthSource Saginaw (pictured right) is one that actually works profitably while fulfilling its mission of providing affordable long term care health care facilities to the 14-County region of East Central Michigan, which it has been doing in one form or another for 75 years.

Apart from providing 213 licensed beds for restorative care and people needing assistance with daily living activities, HealthSource is a hybrid of services, a focal point for medical rehabilitation providing 38 beds, as well as a provider for increasingly costly & rare services such as inpatient & outpatient treatment for children, adolescents & adults who face chemical dependency and mental health issues through the White Pine Mental Health Center and Pathways Chemical Dependency Center, which provides 41 beds for mental health and 27 beds for chemical dependency.

At a time when many hospitals throughout the region are moving away from costly long term care services and risky, cost-intensive mental health & chemical substance services, HealthSource Saginaw is actually expanding its involvement into these arenas, contracting with Bay Medical to provide specialized services, to cite one example.

Through the stewardship of CEO Lester Heyboer, Jr, (pictured below) the facility has taken a $400,000 annual loss and turned it into a $500,000 annual gain; but because HealthSource is a municipal health facility heavily dependent upon Medicare & Medicaid dollars and the fact President Bush has threatened to slash $182 billion from Medicare and $17 billion from Medicaid over the next five years, this would translate into a $372 million reduction to Michigan in 2009 and $4.4 billion over the next five years.

With a newly constructed facility replacing the dated & worn buildings at HealthSource now poised to enable it to provide state-of-the-art care well into the 21st Century, Saginaw County voters are being asked on Tuesday, August 5th to approve a .20 reduced millage renewal, which will cost the average homeowner only $10.00 per year and bring in about $1 million, or 4 percent of Healthsource's budget the first year. 

Moreover, apart from the fact this renewal is only for a four-year period instead of the current 10-year duration, it is entirely conceivable that given Heyboer's track record, HealthSource could become completely self-sufficient and independent from property tax support by the time this requested 4-year renewal expires.

A large part of this is due to innovative management.

With their new Biomass technology that allows stimulation of muscle groups, Multiple Sclerosis patients are able to stimulate their muscles and improve walking ability.  By sending a 'message' to the nerve endings to contract and straighten, one young girl with cerebral palsey, for example, is able to run across a room. In the long run, this technology prevents serious operations.

Unfortunately, due in large part to the operational success of its organizational structure, HealthSource has also become a political football of sorts, with certain members of the Saginaw County Board of Commissioners questioning whether the facility could be sold or spun-off to private entities, thereby defraying the current Saginaw County deficit and mitigating their own inability to operate in the black.

Indeed, back in April and during the midst of a prolonged labor contract negotiation with HealthSource nurses, Saginaw County Commissioner Chairman & HealthSource Board member Cheryl Hadsall actually attempted to block the reduced millage request from being placed on the August ballot, in part due to HealthSource officials turning away mental patients sent to the facility by law enforcement & judicial officers, mainly due to insufficient staffing levels to handle the overload.

And to add more muck to this mix, a volley of negative press ranging from State health care violations to Heyboer's request for a $10,000 raise have largely served to tilt public perception away from what a remarkable resource HealthSource Saginaw represents to our community.

Hopefully, this piece will shed some much needed light & perspective upon those concerns.

Historical Perspective * Who's in Control?

Attorney Peter Jensen possesses the strongest historical knowledge of HealthSource Saginaw.  Back in 1989 he worked with then Board of Commissioner Chairman Fred Todd and wrote the Articles of Incorporation for the facility that allowed it to operate as a non-profit corporation; and today Jensen still serves as legal counsel for HealthSource.

"The first thing to understand about HealthSource is that it is a separate legal entity from Saginaw County and serves as a hospital that can be financed by the county. We have an operating millage and that's the only money we get from the County."

"When the Articles of Incorporation were originally put together, it was designed as a 9-member board with one county commissioner; but the Board of Commissioners rejected this and put 3 commissioners on."

"What I find amusing is that historically County Commissioners have always complained that they never know what's going on out at HealthSource," notes Jensen.
"That was a quote back when it was a five member board and that was a quote when the first audit came out, because funds are maintained by the County Treasurer."

"The fact is simply that it's a large business and an unusual structure.  If you look at Sparrow Hospital in Lansing and other former 'community hospitals', most of them have almost no municipal control anymore. This is because a hospital operates very differently than the business of the county."

"One of the things I recommend is that the Board under the IRS standards for non-profit corporations limit the number of politicians on the HealthSource board. It requires more community input and I think that would better serve the public."

In terms of origin, the County established Saginaw Community Hospital back in 1925. Originally it served as a sanatorium for TB patients established pursuant to Public Act 177 of 1925. Over the years through statutory modifications, the hospital was allowed to change the type of healthcare it provided, but the general corporate structure was never changed.

Under this old structure it was one of 37 hospitals in Michigan identified as a municipal hospital, and while it had a separate board, the County in fact remained the employer of all hospital employees and the hospital had no independent authority to borrow money or gain financial independence from the County.

One important restriction was that the hospital could not lease out space to 3rd Parties or other direct providers or enter into joint ventures without Board approval.  If this remained true today, HealthSource would not have evolved into the successful hybrid that it has morphed into.

The legislative response to this problem was Public Act 230 of 1986, which was designed to allow those counties that had community hospitals to create healthcare corporations that mirrored those corporate structures of the private medical community.

With the passage of this act, former county hospitals now became separate legal entities whose operations were distinct & independent of the county.

"Under Act 230, something we have not explored, is that the county has the ability to give property for the maintenance of hospital services," continues Jensen. "Current real properties are held in trust for the county of Saginaw, but under Act 230, the county could amend that deed and quitclaim the property to HealthSource by statute and not require HealthSource to pay any monies."

"The problem with amending the articles, or adopting any of these measures, is that the Board of Commissioners would have to approve it, continues Jensen.

"But even if the County decided to sell HealthSource, there are huge restrictions on such a sale under the statute that I think would preclude any other hospital in this day and age putting money into it."

"HealthSource is finally turning into what I envisioned it becoming when the Articles of Incorporation were fashioned and now we have a relationship with Covenant and St. Mary's,' concludes Jensen.

"We all rely upon it for key services provided to the community, so frankly, I don't understand the question of selling it. First you'd have to pay $38 million for it up-front, but what good would that do us? You have to keep it running at the same pace for 25 years, offering the same services to the community, and if you spun-off the profitable divisions, the long term care would suffer."       

"Personally, I think the hospital should run like the statute says and that will be sufficient. The bottom line is there are people that know how to run hospitals and in my opinion, Les Heyboer does a fine job. I don't want the hospital to run like any other public entity; I want to see the hospital run like a hospital that provides long-term care and unique community services."

"When Malcolm Fields says we need this hospital, I think his opinion should carry more weight than the opinion of non-health care individuals."
 

Issues, Concerns & the Future of HealthSource

Lester Heyboer, Jr, is the President & CEO of HealthSource Saginaw and responsible for overseeing 445 employees, an accredited medical staff of 50, and providing 319 licensed beds to the community.  

While not the most colorful apple in the barrel when it comes to 'people skills' (one Board member noted to me that his biggest weakness is talking like an "audit report") as I sat down with Heyboer to discuss critics, problems, fate, and the future of this crowning community resource known as HealthSource, I found him to be both cordial, thorough, and forthright.

Review:  I'd like to start by asking your take on the union issue with nurses that took so long to negotiate. Initially they rejected your offer of a 6 percent raise to a starting salary of $22.00 per hour.

Heyboer: The protocols in the business world usually follow the notion that contract negotiations are held close to the vest and you keep relatively quiet until you know there's an agreement. When General Motors negotiates, for example, little information is known until a settlement is reached. When other people become involved it takes confidentiality out of the picture and makes it more difficult to arrive at an agreement. Frankly, all the publicity had a bearing on our ability to reach an agreement on a timely basis.

Actually, we don't have much turnover with nurses.
We had 12 RN's that went in 2007, which isn't unusual. Educators can now provide slots to get through an RN program in less than 4 years, but there's a credible side to this because not enough providers are training them. It takes a Master's level RN to be an instructor and of all the small little hospitals in the thumb area, for example, there is only one Master's level RN. I didn't know this until we surveyed them that there isn't the level of education out there in nursing that's required, which was a surprise to me.

Review:  Many people do not understand the importance of HealthSource in terms of the services and affordability it offers and politics tends to distract from the overall picture. Do you feel that chemical dependency and psychiatric services are equally important to provide to the public as long term care?

Heyboer: Yes, because not a lot of entities are able to offer psychiatric services both in and outpatient at the level we do. When I came on-board in 1993 and for a five-year period this facility was going through a metamorphosis. The reimbursement mechanism to pay and sustain those services is changing. The average stay was 30 days and now that is ratcheted down to six days, which causes a reduction in occupancy levels and revenue. As a result of that happening many providers got out of the business.

When I first came here it didn't take long to recognize that you have to achieve economics of scale and merge operations.  It took awhile to turn a $400,000 loss into a $500,000 gain, but that's what happened.

Essentially, we offer most of the mental health services north of Detroit because it's a hard and expensive program to run. Right now, for example, adolescent beds are down to 4 from an 11-bed unit because it's summer. But when school starts that number will go up again.

Review:  Let's talk about the importance and significance of this millage request.

Heyboer: Right now the State of Michigan funding of the Medicaid program is over 50 percent supplied by matching federal programs and provider taxes, which is a little scary to us.
Long-term care is about 85 percent at the basic side, but in the skilled side it's almost all Medicare. They're entitled to 100 days of coverage in a skilled nursing facility, but the average length of stay is 30 days. The reason we are here is access. If we weren't here one really has to question who would be providing these services? You'd have to go to Flint or other markets to get this level of care.

Our most significant loss comes from long-term care, as the chemical dependency and psychiatric units are profitable. That's the reason for the millage. We'll take on a resident that has renal dialysis needs, which means a whole lot of medications & transportation costs, and virtually no profit margin. But we see that as our responsibility as a community member and for asking this millage in the first place.

This is a last resort for those folks, as no other nursing home will take them. They may come here with a very high stage pressure sore and need a special type of mattress that can cost $200.00 per day and we watch them very closely.

Review:  What about the negative press that came about from the number of State of Michigan violations finding 19 deficiencies with long term care services? It's my understanding that you didn't have any difficult 'tags' over the last 7 years but that the State is taking a more demanding look at psychotropic drugs.  Plus I'm told that hospitals like Covenant and St. Mary's routinely get cited but never make headlines.

Heyboer:  There's not a major hospital in the world that would pass the long-term care survey, and with chemical dependency & psychiatric we were in 100 percent compliance with the Bay/Arenac folks when they looked at psychiatric services.  But the bar is being raised and the nursing home industry is in the sights of every government oversight committee, which causes the perception of not providing very good care.

We need to move it up to a different level and if anything good comes out of these surveys it makes you achieve levels faster than you would otherwise.  The downside is that it costs more money to do it that way and would work better in a collaborative approach that was more proactive than reactive.

But we've filed our plan correction, did what we said we would do, and the State extended that on to another requirement of having a family member sign off for prescription usage, which we don't believe is probable of being done without substantial error, because many people staying here do not have a responsible family member that can sign off.

I think the nursing industry in the future will be challenged and the long-term survey is the hardest because of the way they are conducted.  The average facility might have 18 citations, but a lot of the citations are duplicated in other areas. A few years ago the average number of citations might be 7 or 8, but because of government changes and the stringency of Michigan being held up as an example by the Federal government, that's no longer the case.

Review:  What about the notion of moving HealthSource into a 501.c3 corporation, which would free the facility from the limitations imposed upon public entities and allow you to diversify into non-traditional hospital ventures?  The disadvantage, of course, is that you would not have the financial backing of Saginaw County should the hospital run into financial difficulty, although it would make you responsible solely to the Board of Trustees to direct policy and purpose to the community and free you from flavor of the month political agendas stemming from the Board of Commissioners.

Heyboer: Well, this next step you suggest would be a political step and turn into a political debate. Certain members of our Board and the Commissioners do not believe that should happen.  I believe that HealthSource is here for the benefit of Saginaw County. There are examples where such changes have been adopted and governance responsibility does not permit the politics, and the IRS is strict with non-profit status in terms of following a duty to the corporation and not the County of Saginaw, even though you must continue to guarantee levels of service to the County.

Review:  What are your thoughts about those from the County whom advocate selling the profitable arms of the hospital to another entity?

Heyboer: As constituted right now you could spin off the psychiatric to private investors and increase assets into the County coffers and put the proceeds into the bond payoff, but if you do that you run into double taxation necessary to run the long-term care facility. 
It's a divide & conquer rationale. But if you sell to a private investor you no longer have any type of control over what you have access to and the whole mission of HealthSource would become subverted.  If you have a long term care facility that is losing money, what investor in his right mind would buy a business with a negative cash flow?  In my opinion it would be setting the hospital up for failure.

Section 230 hospitals have strict obligations and without the way the entity is constituted as it is now, it doesn't have the cash flow. As a whole it took me 5 years to turn HealthSource around. At one time I was down to $50,000 in cash and was looking at a $350,000 payroll to meet on Friday, but knew where the money was in a receivable bond, knew the books at the State level, and told them I needed the money and needed it fast.

There are behaviors in play not conducive to making HealthSource work, but my thinking in business is that those that are successful are very customer based. 

This millage is a reduced request and I believe we can do more with less from the taxpayer. I'd like to get the facility to the point in 20 years where it could be supported entirely without any government funding.

Final Thoughts

Under the current balance sheet, HealthSource is operating with a total liability & fund balance of $62,941,580.  It is structured in such a way as to provide invaluable services to the region that it services, but due to the unique & costly nature of those services, it requires the support of the public on August 5th for a nominal millage renewal.

A similar debate was waged back in the mid '90s about whether to sell the facility, but determined then - as it is today - that to do so would carry very little value, leaving a huge mortgage and a major service line with 213 beds that would generate a $2 million loss annually. Moreover, the buyer would have to agree to cover those 213 beds with 90% Medicare & Medicaid funds.

Unfortunately, there is a poisonous atmosphere on the current HealthSource board, with personal agendas outshining community purpose. 

Recently Trustee member and County Commissioner Chairman Cheryl Hadsall removed long term Trustee member Walter Frahm and also persuaded trustees Robert Cramer and Cathy Trudell to decline a pay increase for Heyboer that would bump his base salary of $162,240.
The CEOs at similar sized institutions receive an average of $207,805.
Ironically, McLaren Regional hospital pays their CEO $5 million per year.

Regardless of the merits of this offshoot debate, it should not color one's verdict on the success of HealthSource Saginaw, nor the significance of the pivotal role it provides in the community.

As one Trustee that requested anonymity put it: "I believe selling HealthSource would be a major mistake, but I'm fed up with this constant media harassment that detracts from the positive direction and course the hospital has taken."

"Unlike the County, HealthSource is making money and has no layoffs.  Plus they had the guts to ask for continuation of a reduced operation millage, whereas the County Board of Commissioners did not."

"I'm tired of the silliness of it all. If trustees are arguing over the fact that it was built in the first place, a majority of voters said 'Let's build it'."

"Now that it is on sound financial footing, we need to support it, stop all this bickering and in-fighting, and move forward."