Health care delivery under stress
Insurance, board politics drive prices up

by R.W. Clever

Health care, like everything else, eventually boils down to money. Costs of medical services are up sharply, along with health insurance premiums and the malpractice insurance without which reputable physicians can’t work. Medicare payments, for most eligible patients, don’t cover the full cost of the services provided.

The entire health care system is financially challenged these days, but nowhere more than in Washington State’s rural counties, including Skagit. The tension between the demand for services and the money to pay for it is, it seems, eternal. On top of that, the average age of our population is moving upward, probably the biggest future strain on the system.

“The overall demographic is aging,” said Don Schlichtman, administrator of Skagit County’s largest group medical practice. “Older people are living longer, surviving more (medical) episodes. The birth rate is down. The future of health care expense is so dicey. And Congress has been totally unwilling to face up to the long-term needs for Medicare financing.”

Gregg Davidson, recently appointed superintendent of Skagit Valley Hospital, agrees that the demographics of coming decades and the aging of the “boomer” generation are a bit scary.

“People over the age of 65 consume four times the health services than any other age group,” he said. “In addition to that trend, we are seeing resurgence in acute care and more diversion of patients to other acute care facilities.”

In other words, the beds are filling up, adding to the strains on the financial underpinnings of the health care system.

As administrator of Skagit Valley Medical Center, a group practice involving more than 50 physicians and other medical professionals, Schlichtman deals with the numbers every day. And they aren’t looking any prettier today than yesterday.

“Solvency is always a challenge,” he said.

Coincidentally, on the day of his interview with this magazine, physicians at the center’s clinic had closed for business for half the day to participate in a Seattle rally protesting high malpractice insurance rates. Malpractice insurance rates – up 85 percent last year for Skagit Valley Medical alone – are one of the profession’s poster children for the financial drain on the medical services delivery system.

Even as employers, physicians are feeling the pinch of rising costs of health insurance plans they provide for their staffs. Skagit Valley Medical Center pays 100 percent of its employee’s health care premiums, amounting to about $350 per month, but is receiving less coverage for that amount that it once did.

“We’re a medium sized group,” said Schlichtman. “In the past we have always been rated with other employers of similar size. But we had to reduce benefits to employees (because of rate hikes).”

Schlichtman is quite familiar with the lugubrious arithmetic of health care. He once administered Oregon’s Medicaid program and still commutes weekends to Portland where his wife is a health care professional. He sees health maintenance organizations (HMOs), or cooperatives, as a means to help control both costs of service and insurance rates. But HMOs, with the exception of Group Health Cooperative, have not caught on in Washington the way they did in Oregon.

“Washington has not embraced HMO care like Oregon,” said Schlichtman. “Kaiser (Permanente) has close to one third of the market in the Portland area. The public kind of got used to that. In Washington, a lot of the unions have resisted taking benefits away by offering only HMO coverage. They see it as a freedom of choice issue.”

Meanwhile, Skagit County is in the midst of a shakeout in its hospital system, partly driven by the cost issues, partly by local politics. Skagit Valley Hospital, the primary patient care facility in the county, is in the process of severing a 10-year joint operation with United General Hospital, of Sedro-Woolley. The likely end of the operating relationship between the two hospitals and two hospital governing districts could come by the end of the year.

Hospital districts are provided for under state law but are not widely established in Washington State. They are created for the purpose of providing governance and some tax support for hospitals in areas that might not otherwise have them. There is currently no tax support of Skagit Valley Hospital. But in 2003, taxpayers in United General’s District 304, covering most of East Skagit County from Sedro-Woolley east, will pay a total of $1,667,193 toward general support and two bond issues for the hospital.

Affiliated Health Services (AHS), a third-party corporation created to operate the two hospitals together, will likely go out of existence when the relationship between the two districts ends. Dissolving the relationship may be a bit tougher than creating it in the first place.

Affiliated has operated both hospitals as a single unit since 1991, when the two hospital districts decided to merge their operations to save money and offer a wider range of services to their patients. But the alliance began to break apart when the two districts could not agree to proceed with the creation of a new hospital campus on the north side of Mount Vernon on land that would have allowed for more expansion while being closer to Sedro-Woolley patients.

“I’ve heard it said that when they put this thing together they didn’t want to make it easy to take it apart,” said Karen Sackett, director of AHS.

If it has proved at least possible to dismantle the relationship, it hasn’t proven inexpensive. The two hospital districts have spent $1.7 million to date on legal and other expenses related to the breakup – a figure that has some in both communities up in arms.

As interim Chief Executive Officer of AHS, Sackett is something of a circuit rider for troubled health care facilities. She said she lives in Colorado but took the AHS job specifically for the purpose of facilitating the dissolution of the marriage between District 1, which oversees Skagit Valley Hospital, and District 304, which governs United General, in Sedro-Woolley.

Once the breakup is final, she said, AHS will discontinue, except for some of the financial functions still needed to account for bills and payments on services rendered under the former partnership.

Skagit Valley Hospital, while cramped at its present location on top of the hills of Mount Vernon east of Interstate 5, still is the primary provider of critical care in the county. Hundreds of physician offices and clinics and related medical services have grown up around the hospital during the several decades of its existence there. It was resistance from that community of providers to having to either undergo the expense and confusion to their patients to relocate their facilities or face the possible isolation from the hospital complex envisioned a few miles to the north.

The breakup of the two hospital districts has been largely amicable, although there have been flares of temper along the way. Upper Skagit Valley residents who regularly vote to support a tax subsidy to United General have long resented what they see as the “down hill” attitude toward the Sedro-Woolley facility and its patients. While some in the community admit that there is an element of parochialism contributing to the breakup, they insist that United General is a crucial link in health services to the underserved population of the upper Skagit Valley.

Consolidation, driven by spiraling costs of health care service, is moving the industry as a whole, but in no rural community is it more apparent than in Skagit County, where resources are tight and health care providers stretched thin.

Employees at both hospitals are concerned about how they will be dealt with in the aftermath of disaffiliation. Departing District 304 Superintendent Dwight Harshbarger says he’s concerned about that issue and is trying to keep employees notified of developments. Some of the employees are not specifically employed by either hospital, but are moved back and forth by Affiliated.

After a false start on the hiring of a new superintendent, District 304 commissioners picked Gregory Reed, a former Eastern Washington man now working in Missouri, to be superintendent of United General Hospital. Paul Cardwell, of Indiana, had taken the job but changed his mind when his current boss offered him more money.

United General had offered Cardwell a three-year contract paying $190,000 a year. Negotiations were ongoing when he notified the board of his decision to remain in Indiana. Affiliated Health Services assisted the board in the search that culminated in the hiring of Reed.

Reed runs Pike County Memorial Hospital in Louisiana, Mo., north of St. Louis, a 32-bed facility. He holds a Master of Hospital Administration degree from the University of Minnesota and a Bachelor’s degree in communication from Eastern Washington University in Cheney. He also served as assistant administrator and chief operating officer at Kennewick General Hospital and five years as a district manager with Blue Cross of Washington and Alaska, based in Richland.

The new United General superintendent will start on July 1. Reed is seen as something of a savior of small, financially challenged hospitals. According to District 304 commissioners who reviewed his resume, Reed was credited with a dramatic turn-around in the hospital’s fortunes in just one year. In that first year, the hospital’s finances moved from $480,000 in annual losses to a $360,000 gain.

District 304 commission president Barbara Dow has said the district was lucky to get Reed.

A major hurdle was crossed for the two hospital districts last February when state Health Law Judge John F. Kuntz ruled that they did not have to seek certificates of need from the state. The judge’s ruling was that since the two districts had already existed separately, their split did not represent the creation of new facilities, but rather the continuation of previously existing ones.

“This is a great victory for us,” said Skagit Valley Hospital boss Davidson at the time. “This removes a major hurdle and a huge amount of work and time that would have gone into a Certificate of Need.”

Davidson noted, too, that the process was helped along by the mutual cooperation between the two hospital districts. The ruling was in response to an appeal by the two districts from an August 2002 decision by the state Department of Health that would have required the lengthy “certificate of need” process before the hospitals could be licensed by the state to operate separately again.

One possible financial advantage to United General would come from winning designation from the state as a Critical Access Hospital (CAH) under a federal program created in 1997 as a safety net to assure Medicare beneficiaries access to health care services in rural areas. Among other things it allows rural hospitals with the CAH designation to receive compensation from Medicare based not on a standard formula, but rather for its actual costs of providing a service. States must opt in to the program, which Washington has.

United General has begun that application process and its chances of getting the CAH designation are considered good. One of the reasons that the District 304 board had selected Cardwell initially for the superintendent’s position at the hospital was his experience in running CAH hospitals. The board sees the CAH tag as the hospital’s route to financial stability.

The District 304 board is hoping that whatever magic Reed was able to work in Missouri can be transplanted here.