It’s been two years since the St. Mary’s/Duluth Clinic Health System (SMDC) and the Benedictine Health System (BHS) formed Essentia Health, a joint governance body for two nonprofits that maintain separate operations, but have $1 billion in combined annual operating revenue.

SMDC and BHS were brought together informally five years earlier for the purpose of debt consolidation. The formal 2004 affiliation created a shared services health system designed to simplify the “healthcare continuum” for patients by easing their transitions to different types of care facilities.

The move also has created a healthcare powerhouse with holdings including 10 hospitals, 32 clinics and 68 long-term care facilities in nine states. Essentia Health gives SMDC and BHS more muscle to attract better financing for future acquisitions and construction, as well as lower prices for supplies and insurance.

In the past two years Essentia and its affiliates have recruited a key executive team (see sidebar) and in January announced plans to acquire Central Montana Surgical Hospital in Great Falls, MT.

In late February, Paul Lundgren interviewed Peter Person, MD, Essentia’s CEO, to put that pending acquisition into a larger perspective. Here’s what Essentia’s chief executive said.

BusinessNorth:

Are some of the recent executive hires at Essentia part of the ramping up for big changes in 2006?

Person: There’s only one new person, and that’s Dan Zismer. It’s not like we’ve got dozens of new staff, it’s just Dan. The approach that we've taken with Essentia Health is that, as we develop our strategies and as we have a better understanding of how we can move forward with our vision, we did not want to put another layer of corporate overhead on top of the BHS and SMDC. So, of the five people at Essentia — and that’s myself, Dale Thompson, Bert Norman, Dan

Zismer and Jim Abelsen — every one of us has a full-time job in BHS or SMDC. Dan Zismer was hired a year and a half ago to be my chief administrative officer at SMDC.

It’s a very small group of people and it’s essentially the five people who on a day-to-day basis are running the two separate organizations. I have the ability to tap into Cathy Von Rueden (SMDC), I have the ability to tap into John Smylie (Duluth Clinic) and Dan McGinty over at the BHS, but their employment is not with Essentia.

What is the vision and what are the core strengths of Essentia?

Person: Our vision is to be a national leader in providing quality integrated services across the care continuum. SMDC specializes in acute care, big-time tertiary acute care, cardiology, cardiac surgery, neurosurgery, so we’ve really combined in SMDC the physician multi-specialty group practice in a tertiary hospital. BHS has focused over the years more on small, rural hospitals and long-term care.

Think about how your family or anybody passes through the healthcare system at one time or another. Many of us, as we get older, will touch all parts of that, especially in a rural region. You may start out in your doctor’s office, you may go to a small community hospital, you may need to transfer to a bigger hospital, a tertiary care hospital, you may go to a nursing home for a short period of time, you may go to assisted living and you may just go back home. But with all of those components, the family has to basically manage each episode of care and literally be the carrier of the documents or the storyteller of what happens as that person, generally elderly, has moved from the clinic into the hospital to a bigger hospital back to the nursing home or whatever. What we’re about is integrating all that, bringing that all together.

What BHS and SMDC saw when we came together in our partnership is the ability to work with our core strengths, our core assets of what we do best and combine them in such a way that we can make healthcare relatively seamless for our patients. Basically, that’s what we see as our core strength.

What will we see from Essentia in 2006?

Person: From a patient’s perspective, in the Duluth/Superior marketplace, hopefully you’ll be seeing more coordination of services. From a business perspective, we would like to continue to grow. We think that we have a lot to offer to communities in terms of providing expertise in rural healthcare. So, we would hope over time that there would be more mergers, affiliations, purchases, joint ventures, whatever. Our plan is for Essentia to grow incrementally over time and at the same time, in our local market here, make our services more coordinated and patient-friendly.

Will all these acquisitions be outside the Duluth market?

Person: SMDC is well established here. We wouldn’t see Essentia doing anything in the SMDC market. Essentia Health, now with its presence in nine states, allows us to have a lot of potential opportunities outside of this region. (Great Falls, MT) is just one of those areas we’re looking at. I think we’re doing something else out in Idaho. There may be something in western Minnesota. There are a lot of things that we’re working on that would probably not be interesting from a patient’s perspective. But from a businessperson’s perspective, I think most people are encouraged when there is economic growth in organizations that are headquartered in Duluth. So, as Essentia gets stronger and bigger, there’s more opportunity for employment and economic opportunities in this Duluth/Superior region.

Can we expect diversification in Essentia’s future business plans?

Person: When you hear people talk about “what’s our core business? What do we do best?” — I think in healthcare we need to stick to what we do best and what our core business is, so we’re not looking at any kind of diversification.

We’re not doing what ALLETE did and buying a car auction. We’re not buying pharmacies and so on and so forth. It’ll be healthcare and physician practices and long-term care and assisted living and so on. It’s those areas that are our core business.

How many acquisitions are down the road? Are there specific goals or strategies?

Person: One of the challenges — and I’m learning this daily — is that small deals or big deals basically take a lot of time in preparation, understanding, communication and making the deal go through. There’s not necessarily a linear relationship between the size of the deal and the amount of time it takes.

I don’t see a lot of acquisition-type activity; I just see slow growth. We haven’t set any targets for acquisitions or growth. Many of them are situations that come to us; people call us and ask us if there are ways that we can work together and we have to review that.

As you can imagine, healthcare is a pretty complex animal the way it is, so a lot of our time is devoted to just making sure that what we have is providing a quality, value-based product on a day-to-day basis. The environment changes so quickly with payers and so on that there’s a lot of time invested in just making sure what we’re doing now we do best.

Useful Links:

Essentia Health

Benedictine Health System

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