by Mike Kroll

Times are tough in Galesburg. Ask anyone who works for Maytag, or any area school superintendent, or local government official; they will tell you that there is pitifully little economic news that’s not downright distressing. Ask Dennis Renander, CEO of Galesburg Cottage Hospital what’s new and rest assured he will not be pleased to tell you that one of the nation’s two principle bond rating firms just reduced his hospital’s credit rating and characterized the institution’s future credit outlook as negative.

The last few years have not been kind to the hospital’s bottom line. Moody’s reported May 16th that the hospital just experienced "two years of unexpected operating losses" ($1.1 million in 2001 and nearly $6 million in 2002), a "significant loss of market share" (from 60 percent in 2000 to 43 percent in 2003), "declining admissions" (down 14 percent in 2002 and 17 percent during the first quarter of 2003) and is saddled with over $24 million in debt. All of this information and more is contained in a Moody’s credit rating analysis, copies of which are now circulating around town. That report supported Moody’s decision to reduce Cottage Hospital’s institutional credit rating from Baa2 to Ba1 – from investment grade to non-investment grade.

"In real world terms what this means is that we may find credit a little more expensive in the near term," explained Renander. "While this rating change is hardly good news it’s not alarming news either – and frankly it shouldn’t be too surprising given the state of health care in this country and the local economy. Cottage Hospital will weather this challenge and we will most probably better serve our community because of the changes we make."

Galesburg is both blessed and cursed to have two independent mid-sized hospitals serving an area with a population base of less than 100,000 and directly competing with both the Peoria and Quad Cities healthcare markets – as well as a new $60 million facility in Burlington. Hospitals earn their keep by serving patients and performing medical procedures and competition is very real. Renander makes the point that a hospital isn’t really its buildings and equipment but rather its people. He emphasizes that the doctors, nurses and other health professionals who serve patients every day define a hospital. Echoing that view, Moody’s report points out that Cottage is fed by a "relatively small physician group" (approximately 50 according to Renander). The more physicians affiliated with a hospital, presumably the more patients are served and medical procedures performed.

With tough economic times facing the Galesburg area, the two area hospitals have both faced similar financial challenges. The pending closure of Maytag will mean a huge loss of revenue for both Cottage and OSF St. Mary Medical Center. Renander acknowledged that when Maytag closes up shop, his hospital alone stands to lose as much as $1.5 million in annual revenue – and he says St. Mary’s has an even bigger share of the current Maytag pie. The loss of local employment, particularly those with health benefits, will hit both hospital’s bottom lines hard.

In addition, a managed care plan marketed by Cottage no longer exists; the firm handling it pulled out of the Galesburg market, taking with it the 400 families who were committed to Cottage exclusively.

But these tough times didn’t exactly sneak up on Renander. "When I arrived here five years ago we knew that the hospital was facing some harsh financial realities yet it was also clear that for the long-term health of the institution we needed to make some substantial investments." Those investments include the new $15.5 million medical building immediately north of the hospital that was completed late and over budget but was "absolutely essential to the hospital’s future." Given the absolute dependence upon the physicians to feed your hospital it is essential that they have a nice place to practice, preferably attached to your facility. "We were having trouble recruiting physicians with the crowded and outdated medical offices we provided."

The very nature of the hospital business has changed and Cottage had to change with it to survive. "In 2002, I anticipated an operating loss of about $3 million and we took steps to attempt to balance that out with reductions that year." They implemented $2.86 million in reductions in April 2002. Renander and his administration closed the money-losing behavioral health unit, reduced staff by 34 full-time-equivalent positions (including slashing the hospital’s administrative overhead) and reduced employee benefits. Cottage finished the year with $52 million in total revenues but $5.9 million in operating losses. The added $2 million was largely due to the accountants accelerating the write-off of nearly that much bad debt.

"We are in the midst of strategic modeling with an outside consultant as we try to adapt this hospital to the changing financial realities." Sometimes apparently good news isn’t really welcome news. "As part of this planning process, we have been studying all kinds of data about our operations and have determined that Cottage is among the lowest cost healthcare providers in the area. Of course our closest competitor [OSF St. Mary’s] is nearly as cost-efficient but compared to other similar hospitals in this region, Cottage is extremely cost efficient. Unfortunately, that very efficiency doesn’t leave much fat to trim to generate cost savings." The economic health of the hospital is tied to serving more patients and performing more procedures and collecting timely reimbursement for those services.

A key difference between Galesburg’s two hospitals is that Cottage is totally independent and modest-sized while OSF St. Mary Medical Center is a little smaller but part of a huge healthcare organization with deep pockets and the advantages of economies of scale. Renander sees this competitive relationship between Cottage and St. Mary’s as "competitively collaborative." There have been some fairly creative arrangements formed between the two competing hospitals such as the Intercommunity Cancer Treatment Center and the Galesburg Hospitals Ambulance Service that was formerly owned in tandem by the two hospitals.

"Each of us have differing strengths," noted Renander. "A key strength of this hospital is that we are comparatively much more agile. We just move faster to formulate new ideas and implement them because we don’t have that long bureaucratic train. We were ready to go with the $750,000 addition to the Cancer Treatment Center, now in progress, right away but it took OSF months and months to finally approve the construction, even though it will more than pay for itself."

Despite some outward signs of cooperation, there are other signs that OSF is playing hardball. The unflattering Moody’s report was widely circulated to OSF employees and to just about all area physicians. Renander says he knows what fax machine it came from.

Renander and his board have their work cut out for them. Cottage’s service volumes have been down each of the last three years and while they have cut staff by more than 16 percent the only real way to bring the hospital back into the black is by increasing revenues during locally bleak economic times.

"I am optimistic about the future of this community and Cottage Hospital’s place within it. Sure some things have to happen in the near future. We need to replace the lost jobs in this community, preferably with a greater mix of jobs. Healthcare financing reform needs to occur – the question is will it come sooner or later? I see this area being served by both hospitals for some time and I cannot foresee a time when both wouldn’t have a presence in the community. Together we have adequate resources to meet the healthcare needs of the community but there is room to examine how those resources are distributed. We need to remember that neither hospital campus is really big enough to fully serve this community alone."

Cottage Hospital received some tentatively good news Monday night at the Galesburg District #205 School Board meeting. The district’s self-insurance program had been utilizing OSF St. Mary’s as their exclusive preferred provider but that agreement expires at the end of June. Laurie Miller, president of Miller & Buetner, the school district’s third party administrator, approached both local hospitals about a new multi-year contract seeking pricing for both shared and exclusive service arrangements. Not only did OSF come in substantially higher in all respects but they also wouldn’t even consider any type of side-by-side arrangement with Cottage.

"It really surprised me that OSF St. Mary’s wasn’t very accommodating," said Miller. "They absolutely refused to participate in a side-by-side plan." She said that OSF officials told her that if the school didn’t adopt the exclusive OSF plan, OSF-owned doctors would not be allowed to participate at any discounted rate. Furthermore, if the Cottage proposal were accepted, OSF’s St. Francis Medical Center in Peoria would not be available for tertiary care to school district personnel. Miller is working with Methodist Hospital in Peoria and one of the Quad City facilities to make sure that all advanced services will be available. The Cottage Hospital proposal just might be a good example of that agility Renander commented on. Their proposal, likely to be approved at the next school board meeting, actually will mean reduced healthcare expenses for the school district during the first year and it locks in costs for a full five years as compared to a substantially costlier three-year OSF plan.

The offer was presented as a discussion item Monday night but both Miller and incoming Superintendent Neil Sappington recommended the Cottage offer. School District 205 is one of this area’s largest employers with about 650 families of employees and retirees covered. Winning this contract will feed a substantial number of both patients and procedures into Cottage Hospital just when Renander needs them most.