In his first full year as president and CEO of St. Joseph Mercy Health System’s Ann Arbor, Saline and Howell hospitals, Robert Casalou had to deal with economic woes to which the health-care industry was once thought to be immune.

That meant the man whose most recent job was opening a new hospital had to oversee layoffs and other budget cuts. St. Joseph Mercy in May cut the equivalent of 350 full-time employees, 6 percent of its workforce, to help balance its fiscal 2010 budget. But though times are still tough, Casalou said he expects the hospital to finish 2010 in the black and to launch several new initiatives this year.

And not all was bleak in 2009. The hospital opened Packard Health West, a new Ann Arbor location for nonprofit Packard Health, which serves the under-insured in Washtenaw County.

Casalou came to St. Joseph Mercy in September 2008 from his role as president of Providence Park Hospital in Novi, where he oversaw the construction and opening of that $224-million facility. Those were more optimistic times, as new hospitals opened across Southeast Michigan and job growth in the sector exploded.

Casalou recently sat down with AnnArbor.com to discuss the challenges and successes of 2009, as well as St. Joseph Mercy’s outlook for 2010.

Question: The health-care sector in short order has gone from being one of Southeast Michigan’s few areas of economic growth to just another field experiencing budget cuts and staff reduction. What happened?

Answer: A lot of people thought that health care was recession-proof. I think this last year and a half has proven that theory wrong. Even through health care is something people need, there’s an elective side people will defer if they need to get groceries and pay the bills. It was a tough year.

Q: Despite the economy, what were some of the bright spots this year?

A: We acquired and merged with (Chelsea Community Hospital), which is part of our family now. This past October, we installed an entirely new (information-technology) system. That is no small task. We attacked this H1N1 with a lot of success and managed the peak of it very well despite all the predictions of demise. Even though our finances were strained, we maintained a strong financial position. We’re not in the condition some health systems are in, bleeding red ink and burning through cash.

Q: But you had to make staff cuts to maintain that financial position, right?

A: We did go through staff reduction. Fortunately, that positioned us fairly well for this year, trying to survive another year of bad economic news. People talk about the economy recovering. I don’t know about you, but we haven’t seen it yet. Ann Arbor really didn’t experience the downturn as early, or as deep, as other parts of Southeast Michigan. When I was part of Providence, we were taking our licks 2-3 years ago. Ann Arbor really started to feel this about a year ago.

Q: You said earlier this year that St. Joseph Mercy would fall into a crisis mode without layoffs. Seven months later, do you think that would have come to pass, and do you think you made the right amount of cuts?

A: If we hadn’t made those changes, we absolutely would be facing more of a crisis. I’m sorry we had to do what we did, but I’m glad we did it, because we’re still looking at (high) costs. We’re not out of the woods, but we’re not in a slash-and-burn situation. We remain concerned - everyone’s antennas are up, because what we’re not able to determine is when we’ll start seeing some recovery. That’s the main worry - what’s going to happen a year from now? Are we going to (face) restructuring?

Q: Many critics warned about tough times in the health-care sector, arguing there were too many hospital beds in Southeast Michigan. Should health systems have cut back on expansion, and even reduced the number of beds, to prevent this?

A: I never disagreed with that statement. There are too many hospital beds licensed for the number of people who live in Southeast Michigan. The issue always has been the beds are in the wrong concentration. There’s a high concentration in the city of Detroit and in the first ring of suburbs, like Southfield, yet the population has moved.

Q: How does that affect Ann Arbor?

A: In Washtenaw County, it’s a much different situation. We already had this concentration of population here; you don’t see much movement in Ann Arbor. Having us and (the University of Michigan Health System) more than meets the need of this community. We have a different dynamic in this community as opposed to what we have in Oakland and Wayne.

Q: But we are still seeing new health-care facilities and clinics opening in Washtenaw County. Even St. Joseph Mercy funded the opening of Packard Health West in Ann Arbor. Is the county, even in a recession, becoming over-saturated with health care?

A: What happens is people are believing health care is moving more toward outpatient (care), and (becoming) more about access and convenience. (They think) there’s an opportunity to create small clinics people can get in and out of, instead of coming to a campus like ours, which is very big and maybe not as easy to get in and out of as a clinic in a strip mall. You get a doctor putting up an urgent-care sign and staying open until 10 (p.m.) because they’re trying to get more business. Our Packard strategy had nothing to do with competition. (We funded it because) so many people in this area can’t get primary health care. Packard had a model second to none to deliver that. You don’t see us building a whole lot of urgent cares. We’re all about quality. My fear is, when you start proliferating all these clinics, you get variable quality. We won’t allow our name to go on anything we don’t feel is the best we have to offer.

Q: What will 2010 look like for St. Joseph Mercy?

A: We’re measured in terms of optimism, in terms of setting realistic goals we think we can achieve. We’ll be in the black, but we’re by no means setting targets like the good old days. We expect our profitability in terms of net income to be about half of what it used to be. That’s realistic in the current environment, and that’s enough to sustain us. We’re in the last phase of a big building renewal program here in our Ann Arbor campus. The tower phase opens up here in May, and we will have replaced all the beds over a period of 3-4 years. We’re also doing some things unrelated to facilities. We’re launching a lot of initiatives to … look at nutrition, obesity and smoking for people who work here, as well as going into the public. There will be visible signs of our initiatives after the first of the year. The other thing we’ll be looking at is the continuing challenge to our community of people losing benefits. I think uncompensated care will continue to rise, and we’ll just have to figure out how to absorb that and stay financially strong.

Q: What are your top five goals for the new year?

A: 1. We still have a long way to go to improve and perfect the quality of services we render. We’re striving to be perfect in the quality arena - eliminating all preventable injuries and errors that occur. 2. Sustain this (St. Joseph Mercy) ministry. We’re faith-based, so this community knows we can give them health care regardless of their ability to pay. 3. We’re looking at partnerships in the community to improve health and wellness - improving programs, services, clinics and access so we can give health care out in the community and keep (people) out of the hospital. 4. Staying on the forefront of research and technology. 5. Integrating our five hospitals. We cover everything from Howell to Dundee to Canton, out to Jackson, and we have five hospitals located in that quadrant. We really need to work closer together.