Munson needs money to expand

Region

DEAL BREAKERS IN NEGOTIATIONS

Munson Healthcare officials spelled out a series of "non-negotiable" items that will be included in any affiliation deal struck with Spectrum Health in Grand Rapids. Those include:

- Maintaining a "private practice" model utilized by Munson that allows doctors to continue as independent practitioners if they so choose.

- Keeping "sufficient" local control over northern Michigan operations, including the Munson Healthcare board and the Munson Medical Center board.

- Maintaining Paul Oliver Memorial Hospital in Frankfort, which is owned and operated by Munson Healthcare. Paul Oliver has been affiliated with Munson since 1986.

- Continuing "tertiary" or high-level health care services at Munson in areas including high-end cardiology, cancer treatment and neurosurgery.

- Protecting employee benefits at Munson, including pension obligations.

Related Photos

Munson Healthcare President and CEO Ed Ness in Munson Medical Center. Record-Eagle/Jan-Michael Stump
Munson Healthcare president and CEO Ed Ness has instituted new outreach methods, including a "Lunch With Ed" program. Record-Eagle/Jan-Michael Stump

May 16, 2010

By Bill O'Brien bobrien@record-eagle.com The Record Eagle Sun May 16, 2010, 12:34 PM EDT

TRAVERSE CITY — Munson Healthcare's wish list of expansion projects over the next five-to-seven years is a pricey one.

A new hospital tower with 100 additional beds and upgrades to its neonatal intensive care and obstetrics units — pegged at around $130 million — share priority status with a $40 million cancer treatment center.

Those are among an estimated $340 million in capital projects and technology needs Munson officials identified as crucial for the facility's growth and stability over the next decade.

The ability to generate capital to fund such big-ticket items is driving Munson's partnership talks with deep-pocketed, Grand Rapids-based Spectrum Health.

"You've got to have the facilities to take care of patients and recruit doctors," said Ed Ness, Munson Healthcare's new president and CEO.

But questions over those estimates — from both inside and outside of Munson circles — prompted hospital officials to seek a third-party assessment of its financial projections. Munson Healthcare's board hired health care consultant FTI Cambio to review its estimates, a study that should be completed by late June.

In the interim, Munson officials plan to share more information with the public about a merger's advantages and delineate challenges it faces as a standalone entity.

"We need this opportunity to step back and be communicating with the public," Ness said.

Munson estimates it can borrow $40 to $50 million on its own for capital needs projects, Ness said. But incurring additional debt could endanger its "A" bond rating, which would drive up borrowing and operational costs.

Ness said an estimated $100 to $130 million "gap" exists between what Munson can raise on its own and what it needs for its capital plans, a void Munson can fill with Spectrum's help. Spectrum's "AA" bond rating and millions in foundation funds make a merger attractive.

"That's why we need to make sure that gap analysis is correct," said Ness, who this month took over as Munson Healthcare CEO following Doug Deck's sudden departure. "Those are the numbers being verified by this so-called second opinion."

Munson Healthcare board Chairman Tom McIntyre said Spectrum is committed to "whatever it takes" to ensure Munson can build a cancer center and new hospital tower.

"Right now, I believe Spectrum is the most logical partner," McIntyre said.

Munson officials said they've identified several "non-negotiables" in their Spectrum discussions that must be part of any agreement.

"I think what has to be protected is the local control for things that matter," Ness said.

Munson's so-called "deal breakers" include:

n Maintaining a "private-practice" model Munson fostered over the years that allows doctors to continue as independent practitioners if they so choose.

n Keeping "sufficient" local control over northern Michigan operations, including the Munson Healthcare board and Munson Medical Center board. CEOs of both organizations would answer to their respective boards and not Spectrum, officials said.

n Maintaining Paul Oliver Memorial Hospital in Frankfort, which is owned and operated by Munson Healthcare. Paul Oliver has been affiliated with Munson since 1986.

n Continuing "tertiary" or high-level health care services at Munson in areas including high-end cardiology, cancer treatment and neurosurgery.

n Protecting employee benefits at Munson, including pension obligations.

Munson officials don't expect a problem with Spectrum over those items.

"I don't believe any of these will be an issue," McIntyre said.

Still, some continue to hold reservations over the potential merger. Frankfort Mayor Bob Johnson has questioned the proposal and said he remains concerned a partnership could prompt job losses or service cuts at Paul Oliver.

"I'm not worried about the hospital per se," Johnson said. "My main concern is still about jobs and losing jobs, or having to go somewhere else for a procedure," he said.

Munson officials said they, not Spectrum, will maintain control over local operations and services.

"That would not be a Spectrum decision," McIntyre said.

Munson is sound financially, officials said, but other Michigan health care systems struggle with rising costs, tighter credit from lenders, and less reimbursement from state and federal sources and private insurers. Those factors are forcing health care providers into a variety of partnerships throughout the state and the country, officials said.

"We're at a point where we have to deal with them," McIntyre said.