Janesville—the 10th most populous city in Wisconsin—will join its big-city brethren in two years when a second hospital opens here.

But whether St. Mary’s Janesville Hospital is a necessity that local residents have pined for or a duplication that will drive up local health care costs will be debated long after the $150 million hospital and clinic campus opens at Racine Street and Interstate 90/39 on the city’s southeast side.

SSM Health Care and Dean Health System will break ground later this month on the 313,000-square-foot hospital and clinic that will sit on a 50-acre parcel. The campus is expected to open in late 2011.

Dean, which operates Riverview and Northview clinics in Janesville, is the longtime physician partner for St. Mary’s Hospital in Madison.

On any given day, Dean doctors are responsible for about 30 percent of the patients admitted at Mercy Hospital, which stands to lose at least $25 million a year when Dean doctors take those patients to the new hospital.

Since SSM and Dean first announced the project in April 2008, two camps have staked out their turf on the project.

There are those who don’t like Mercy Health System, which operates the only hospital in Janesville, which is the only entry on a list of 14 most populous Wisconsin cities with just one hospital.

Others say Mercy Hospital has served the community well for more than 100 years and has expanded to offer services that aren’t available even in Madison.

Is there a need?

There’s no formula that says a city should have a given number of hospitals, but an industry benchmark suggests that a population should have 2.6 hospital beds per 1,000 residents.

SSM officials said that Rock County is expected to have a population of 161,000 in 2012. That would require about 420 beds.

The county has three hospitals: Mercy Hospital in Janesville, Beloit Memorial Hospital and Edgerton Hospital and Health Services.

Together, the three currently staff 316 beds, which supports the contention of SSM and Dean officials that the area will need 100 more hospital beds.

But there’s a rub: The three hospitals are licensed for 521 beds, 100 more than the number SSM and Dean officials say the area will need.

Javon Bea, Mercy’s president and CEO, said industry trends have shifted care from an inpatient to outpatient basis. Censuses at hospitals in Rock County and the state have been declining since 1991, he said.

Given those trends, which he expects will continue to be driven by technological advances, Bea doesn’t believe the county will need 420 beds. But if it did, the three hospitals here are positioned to meet the need.

“We have over 500 beds already, and we’re only using 300 of them,” he said.

Mercy Hospital has remodeled its patient rooms to mirror an industry shift from two beds per room to one. The remodeling left the infrastructure in place to accommodate two beds if warranted.

“The bottom line is that we can bring another bed in very easily if we need it,” Bea said. “There are tons of beds in the area.”

That may be, but SSM and Dean officials said their surveys indicate that a large percentage of local residents don’t want beds at Mercy. They also believe the demand for hospital beds will grow as baby boomers age.

In announcing the project in 2008, Dean President and CEO Craig Samitt said studies show that 40 percent of patients leave the Janesville area for hospital care.

SSM and Dean have carefully carved out a primary service area for the new hospital that includes all of Janesville’s zip codes, as well as those in Milton, Orfordville and Evansville. A secondary service area reaches out to include communities in Walworth, Green and Jefferson counties.

SSM didn’t include Beloit and Edgerton in the new hospital’s service area, said Mary Starmann-Harrison, president and CEO of SSM Health Care of Wisconsin.

“The Beloit community wants to stay local for their health care, and the same with Edgerton,” she said. “It’s the Janesville community that I think will stay home for care to a greater extent as they have choice.”

Based on patient discharge data from the Wisconsin Hospital Association, 68 percent of the residents in the primary service area—Janesville, Milton, Orfordville and Evansville—who were admitted at a Wisconsin hospital in 2008 were admitted at Mercy Hospital.

Thirty-two percent were not.

Of the 32 percent who weren’t admitted at Mercy, the majority went to St. Mary’s, UW Hospital & Clinics or Meriter in Madison.

Kerry Swanson, president of St. Mary’s Janesville Hospital, said about 12 percent of the people not admitted at Mercy went elsewhere for tertiary care that isn’t provided in Janesville.

“The majority of the patients who are leaving could come to Janesville and receive care,” she said.

Added Samitt: “We heard loud and clear that patients wanted choice.”

Bea and Mercy officials interpret the numbers differently. He said the majority of those leaving have no choice. They’re leaving Rock County for tertiary care not available in Janesville, such as transplants, burn treatment or neo-natal care. Or, he said, they’re being hospitalized elsewhere for emergency care.

“These aren’t people who are choosing to leave,” he said.

Mercy averages about 100 inpatients a day at its hospital. History in other markets suggests that St. Mary’s immediately will fill 30 of the 50 beds.

That will tap the pocketbook of Mercy, which in 2007 reported net revenue of $9,912 per patient discharged.

Mercy had about 8,500 discharges in 2007, meaning that the loss of 30 patients to the new hospital could amount to more than $25 million a year.

“It will be a significant hit,” Bea said.

Mercy has already started to plan for it by cutting nontraditional health care services, such as the Mercy in Motion transportation service, he said.

Quint Studer, a national health care leadership consultant and former Mercy executive, said the new hospital/clinic project is a business decision that in large part is based on money.

Studer said the Dean system is well established in Rock County, both with its clinics and insurance plan. Integrating with a St. Mary’s hospital in Janesville, he said, will keep money in the Dean/SSM family instead of channeling millions each year to a competitor.

“Right off the bat, they’re guaranteeing themselves 30 percent of the market,” Studer said

The new hospital then can compete to fill its remaining beds, and aiding that effort will be patients’ perception of Mercy Hospital, he said.

“Because Mercy is the only hospital in town, you tend to get two camps: those who feel it’s the best and those who feel like it’s the worst,” Studer said.

Studer said Mercy has struggled at times with patient perceptions.

That’s borne out in hospital survey statistics provided by the federal government. Only 44 percent of the patients discharged from Mercy Hospital in 2008 said they would definitely recommend the hospital to others.

Across Wisconsin, the average was 71 percent.

Bea said patient perception data is one of seven measures of service and that almost all of the system’s other measures are better than state and national benchmarks.

“We know that our HCAHPS scores, which measure patient’s perception of service, have been significantly affected by our major remodeling project that we have been undergoing over the past two years in our effort to upgrade our entire hospital and convert to private patient rooms,” Bea said. “We are excited about our facility improvements and are confident that our published results will be excellent in the future.”

Starmann-Harrison said SSM and Dean are replicating a model that’s been successful with Dean physicians and St. Mary’s in Madison.

“We’re really able to do extraordinary things in improving patient care because we work so closely together,” she said. “We’re trying to replicate that model so we have that hospital-physician partnership in Janesville.”

A duplication of services

SSM and Dean officials said the new hospital will not offer any services that aren’t already available at Mercy.

Mercy officials agreed and added that Mercy will continue to offer services not available at the new hospital. They include heart surgery, neurosurgery and Mercy’s upcoming certification as a Level II trauma center, a designation none of the Madison hospitals has achieved.

Where the two camps part ways is on the question of whether duplication of services will drive up local health care costs.

“The real value of the new campus is the power of integration in the various parts of the system,” Samitt said. “The focus is about improving the value of health care. We already do that very well. We’re a leader in Wisconsin, and we want to bring that to Janesville.

“The notion that costs will rise, which I understand is people’s concern, I would argue is unwarranted.”

Samitt said competition will force quality and efficiency improvements that benefit consumers.

Mercy welcomes competition, but this competition doesn’t make sense, Bea said.

Mercy, he said, was silent when Riverview built an outpatient surgery center in 1993 at a time when Mercy was also expanding its outpatient services.

“They did that in a growing market, and we both were going to be competing in a growing market and could keep costs competitive,” Bea said.

“But when you’re building in a declining market—patient beds—then basically we have to continue to spread our fixed costs over an average of 70 patients instead of 100. They’re going to have to spread their $200 million over whatever they figure they’re going to average.”

Mercy and St. Mary’s officials agree that patients at the new hospital won’t see a bill that includes a line item charge for the new facility. Both systems say they’ll be competitive on cost.

“There’s no way to replace that loss of 30 beds immediately,” said Joe Nemeth, a Mercy vice president. “We’ve been at this issue of trying to build market share for a long time, and it’s been a slow go. We started in 1996, and the doctors of Janesville at that time were the stars of the area, and we attracted patients from a long way out. As we developed new services in Illinois, we’ve been able to pick up more and more.

“We hope as our outreach continues that we will be able to keep our costs in a steady stream, although I wouldn’t be predicting them to go down.”

Bea said Mercy can spread costs among a system that includes 64 facilities in 24 communities in southern Wisconsin and northern Illinois.

“If we were just in Janesville, the answer would be a definite ‘yes, hospital costs will go up,’” he said.

Bea and Nemeth said they expect St. Mary’s will spread any fixed cost increases in Janesville to Madison and perhaps to other SSM facilities in Wisconsin and other states. But SSM and St. Mary’s have to remain competitive in their other markets, particularly in Madison, Bea said.

Choices?

Whether a patient is hospitalized at Mercy or St. Mary’s Janesville could depend in large part on the patient’s health insurance.

Dean Health Plan covers about 19,000 lives in Rock County. MercyCare covers about 21,000.

“Even in an open plan where you don’t have a limited network, you pick a doctor, and that doctor’s going to practice someplace,” Bea said. “When a patient picks a Dean doctor, they’re picking St. Mary’s whether they want it or not, and the same is true with Mercy doctors.

“By choosing the doctor, they’re choosing the hospital.”

For consumers, choice usually presents itself in the form of “Plan A” or “Plan B.” Costs, quality and service often factor into the decision, but once a plan is selected, it typically funnels the consumer to one network or another.

“There are a couple of insurance products sold in this area that have both of us, but there’s more that just have Mercy,” Nemeth said.

Nemeth said that about 35 to 40 percent of Rock County residents have a choice of either MercyCare or the Dean plan. But once they pick a plan, they’re in that network.

Another 42 percent have insurance plans that will allow them to go to either provider, he said.

“A lot of this is driven by the Dean Health Plan,” said Studer, the industry consultant. “They want to manage the cash as much as they can and integrate clinical quality throughout the system.”

What SSM/Dean is doing is reflective of what Studer sees in other U.S. cities. The advantage in Janesville, he said, is that Dean already has a market base that decreases the risk of the project.

“When the dust settles, I think the consumer will probably benefit,” he said.

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