Rural healthcare facilities look to partnerships, affliations to remain viable   10/13/2009 by Beth Bily

(Photo: Conceptual drawing of White Community Hospital's planned reconstruction.)

White Community Hospital in Aurora is at a crossroad. The clinic, hospital and nursing home soon will be the site of $4 million worth of reconstruction.

Site development will begin later this year and construction will begin next spring in a project that will move the clinic from an off-campus location to a vacant wing once occupied by nursing home beds. The project also will create new lab space and a remodeled radiology center.

Before those improvements are underway, however, nonprofit White Community Hospital likely will be under new ownership, operating as a wholly-owned subsidiary of St. Mary’s/Duluth Clinic (SMDC) Health System. White’s shareholders will vote on the matter later this month. The merger would require simply majority approval by the SMDC Board and its parent, Essentia Health. Those votes are scheduled in December and January, respectively.

Laura Ackman, the hospital’s chief executive, views the merger as essential to the long-term viability of the nonprofit rural healthcare facility. “Right now we’re independent. We could probably survive the turbulence facing healthcare but we could definitely not thrive,” she said.

This small rural hospital generated $9.9 million in total revenue in the fiscal year ending June 30, 2008. It finished the 2008 fiscal year in the black, but not by much. With $9.4 million in expenses, its net income was $486,596. White Community Hospital posted a $153,863 net loss in the year earlier period, according to its federal income tax return also reported to the Minnesota Attorney General.

White executives are not alone in contemplating other business models. On July 1, Duluth Clinic–International Falls and Falls Memorial Hospital integrated operations, forming Rainy Lake Medical Center, a 50/50 partnership with SMDC. Other rural healthcare facilities in the region operating as wholly-owned subsidiaries of SMDC include clinics in Aurora, Babbitt, Chisholm, Deer River, Ely, Hibbing, Remer and Virginia.

SMDC has wholly-owned Wisconsin clinics in Ashland (with a satellite in Ironwood), MI), Hayward, Spooner and Superior, along with a hospital there. (SMDC also has three downtown Duluth clinics and in Lakeside, West Duluth, and Hermantown.)

“It’s pretty much accepted wisdom in the healthcare industry that every small rural hospital is going to need to network with other small rural hospitals or become part of a larger organization,” said Terry Hill, executive director of the Duluth-based Rural Health Resource Center.

The increasing cost of delivering care is forcing that consolidation.

Hill said new formidable challenges for small rural hospitals include amendments to the federal Health Improvement and Patient Privacy Act (HIPPA) that will require expensive legal consultation. And a provision in the American Recovery and Reinvestment (stimulus) Act of 2009 sets penalties for healthcare organizations operating without electronic medical records systems beginning in 2015. They will face a one percent penalty on federal Medicare reimbursements in 2015, two percent in 2016 and three percent in 2017. “The Recovery Act puts tremendous pressure on the rural hospital,” he said.

The new challenges compound existing pressures. Stagnant state Medicaid reimbursements for nursing home care hurts integrated facilities, like White, and nearly all rural healthcare organizations are struggling with physician recruitment, according to regional healthcare experts.

Mike Motley, SMDC’s vice president of regional operations, acknowledges small provider organizations are more likely than ever to extend a hand to a larger partner in this climate. “If (a small healthcare organization) needs access to expertise, whether its legal or whatever, we have that to offer,” he said.

In Aurora, Ackman predicts the planned subsidiary relationship would increase local patient access to healthcare services. She said White’s 145 employees would remain and the operation’s payroll could increase as services are added. At a Sept. 22 community forum, she said hospital management has received mostly positive feedback on the proposed merger.

The reasons for affiliation are clear, but healthcare mergers have not always been welcome in the region. In Wisconsin, the mighty Marshfield Clinic system, with more than 50 locations in central and Northwest Wisconsin, acquired Lakeview Medical Center in Rice Lake in April 2008. The merger received decidedly mixed local reviews, with some Lakeview board members claiming the clinic giant coerced decision-makers, threatening to drive the hospital out of business. Marshfield executives denied the allegation.

Meanwhile, local control and reduced competition create resistance to mergers.

In Grand Rapids, local control has been a major issue. Private, nonprofit Grand Itasca Clinic & Hospital was born from clinic mergers and the county’s departure from the hospital business. It moved healthcare from a publicly owned model to a private nonprofit status in the late 1990s. Hospital board members and executives later fought for and won an exit from a partnership with Allina, Benedictine and SMDC health systems.

State Sen. Tom Saxhaug, DFL-Grand Rapids, was then-chairman of the Itasca County Board of Commissioners. At the time he said a $20 million grant from the Grand Rapids-based Blandin Foundation to help finance a new hospital campus provided the local collective will to end the relationship with the healthcare partners and maintain independence.

In September, Saxhaug said he still favors local autonomy in the cost-benefit debate, but added the jury is still out, pending the outcome of national healthcare reform.

Dianne Mandernach is CEO of Duluth-based Sisu, the consortium of rural Minnesota healthcare providers that share information technology resources. She also served as Minnesota Gov. Tim Pawlenty’s first health commissioner. She said communities experience some loss of local control in a merger with a larger provider. Local autonomy, however, comes with a cost, and small towns must decide how much they are willing to pay for independence, she said.

Independence left Grand Itasca without support from a large network in a contract dispute with the region’s No. 1 health insurer, Blue Cross and Blue Shield of Minnesota. Grand Itasca’s six-month bold standoff began in late 2007 over the insurer’s in-network reimbursements. When the dispute ended in mid-2008, the Minnesota Blues had lost some insurance business to competitors. But it also cost the clinic and hospital Grand Rapids’ largest private employer, UPM-Blandin Paper Co. It forged a medical care provider deal with a nearby competitor.

Grand Itasca and Blue Cross ultimately reached a new agreement effective July 1, 2008. The insurance standoff and recession likely contributed to Grand Itasca’s $366,765 net loss in its fiscal year that ended on June 30, 2008. Grand Itasca posted a $2.7 million net profit in the year earlier, according to its federal income tax return filed with the Minnesota Attorney General’s Office.

Meanwhile, the independent city-owned hospital in Virginia also has had its financial woes. Figures released by the publicly owned hospital show a $1 million loss to date for 2009. VRMC lost $1.6 million in 2008, according to the Mesabi Daily News.

“The forces are pushing toward (greater collaboration),” Mandernach said. “Ten years from now there won’t be a lot of independents left. The two options (for collaboration) are networks, like Sisu, or affiliations.”

Motley maintained affiliation with SMDC doesn’t necessarily lead to a loss of local control. “Even though they’re (White) going to be a part of SMDC, the board will be local and will make recommendations to SMDC,” he said. “Whether it’s a 50/50 model or a full ownership, we still want that local influence.”

While the board would be local, SMDC and Essentia still would have ultimate say and acceptable margins would dictate healthcare decision-making.

Rep. Tom Rukavina, DFL–Virginia, whose district includes the Aurora hospital, expressed concern over the potential lack of competition the merger would create. “Personally, I think it’s not healthy to have all your eggs in one basket,” he said.

Rukavina also acknowledged, however, that cuts in state administered federal healthcare programs have put increasing pressure on the small, independent facility. “It’s getting hard for them to keep going,” he said.

Concerns over a lack of competition already played out in Wisconsin. Marshfield Clinic was targeted in antitrust lawsuits that alleged the healthcare system was overcharging patients and insurers. In January 1995, a jury awarded Blue Cross and Blue Shield of Wisconsin $48.6 million in damages, a decision overturned on appeal. Marshfield settled out of court in two other 1997 lawsuits.

But less competition sometimes produces benefits in the healthcare market. Motley said competition is a factor in a “misallocation of resources” in U.S. healthcare producing expensive inefficiencies. For example, nearly every Iron Range hospital has a high-cost MRI or CT machine on its campus, perhaps unnecessary duplication. “We need to think more globally than we do now,” Motley said.

“Is there a role for the hospital in the community? Absolutely,” Mandernach said. “But, I’m not ready to say that every small community needs its own hospital. Healthcare needs to be available within that ‘golden hour’ (after a life-threatening health incident).”

Meanwhile, the face off in Aurora over local control versus the benefits of affiliation with a larger network appears to have come to conclusion. SMDC affiliation holds the greater promise, according to its top administrator. Ackman expects affiliation to easily win approval from a majority of its 350 shareholders. In August, White Community’s board unanimously approved moving forward with the merger.

Affiliation relationships generally do not include an exchange of money, but a meeting for White shareholders is scheduled for Oct. 13, when other details of the deal likely will be unveiled. A merger vote will be scheduled by the end of October, Ackman said.

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