Marshfield Clinic: the empire strikes back

Already one of the largest private clinic systems in the nation, the Marshfield Clinic is amid a massive expansion. It has 52 rural locations in central and Northwest Wisconsin. In the first five months of 2008 the health system has opened three new clinics and plans to open three more by year’s end. It plans three more over the next two years, including its furthest push north into Hayward.

On April 1, 2008, Marshfield Clinic acquired the nonprofit Lakeview Medical Center in Rice Lake for literally nothing: $0.00.

Marshfield calls it an “affiliation.”

The merger raised the ire of longtime Lakeview board members who charged that Marshfield coerced the hospital by threatening to drive it out of business with a new, $50 million clinic in Rice Lake.

Area residents and employers also raised objections, saying the consolidation would drive up medical insurance rates, which in central Wisconsin are already among the highest in the nation.

In January 2008 a group of antitrust lawyers from the Wisconsin firm of Michael Best & Friedrich LLP filed a confidential memorandum with the Wisconsin Department of Justice, asking it to review to the Lakeview hospital acquisition BusinessNorth obtained the memorandum through a public records request under the Freedom of Information Act. The memo estimated Lakeview’s total assets at a minimum value of $75 million and a maximum of $102 million.

The Justice Department did not move to stop the merger, but declined comment on whether an investigation is pending when contacted by BusinessNorth.

Any citizen can file a lawsuit at any time to have the merger undone, said James Troupis, one of the attorneys who prepared the memorandum.

But undoing a merger is like “trying to unscramble eggs,” said Michael Waxman, a Marquette University law professor specializing in antitrust issues. Nevertheless, state or federal officials could challenge the acquisition, he said.

Rapid growth

Marshfield Clinic was founded in 1916. In 1978 it had just five regional centers, but by 1998 that number had increased to 39. The health system generated $914 million in revenues in 2007. The clinic profits were $20.4 million. Marshfield also owns a health maintenance organization, Security Health Plan, which insures nearly 150,000 members.

In the 1990s Marshfield Clinic became the target of several antitrust and class action lawsuits, claiming the clinic conspired to eliminate competition and overcharge patients and insurers.

Blue Cross and Blue Shield United in Wisconsin contended it was shut out of the market because Marshfield dominated the area. At one point more than 60 percent of the physicians in certain primary and specialty care markets, including every physician in five counties, were affiliated with Marshfield. In January 1995 a jury awarded Blue Cross and Blue Shield $48.6 million in damages.

The 7th U.S. Circuit Court of Appeals later overturned the damage decision, finding that Marshfield illegally conspired with its competitors to divide the market, but that did not constitute an illegal monopoly. The case was appealed to the U.S. Supreme Court, which declined to review it.

Still, Marshfield agreed to pay $4.65 million in a separate 1997 class action settlement filed by consumers. Half of the amount was designated for a trust fund for low-income healthcare, divided up by other clinics in north and central Wisconsin. The clinic admitted no wrongdoing in the settlement.

A third case, State v. Marshfield Clinic, was settled in 1997.

Then-attorney general (and now governor) James Doyle agreed to not challenge the merger of Marshfield and Wausau Medical Center “provided that the clinics refrain from additional acquisitions and agreements which might limit competition in north central Wisconsin,” stated Doyle’s 1997 news release. But the agreement was limited to a seven-county area for three years and to Marathon County (where Wausau is the county seat) for five years.

Taking over Lakeview

Marshfield has been gathering assets in the Rice Lake region over the past two decades. In 1991 it acquired the Indianhead Medical Center clinic, a few steps from Lakeview. Marshfield also acquired a clinic in nearby Chetek in 1996, and the Group Health Clinic in Rice Lake in 1998.

Marshfield and Lakeview had a symbiotic relationship. Lakeview did not have its own doctors, but contracted with Marshfield to have clinic doctors treat patients in the hospital. By 2000 both the clinic and hospital were running out of room; the Marshfield Indianhead Center even was using closets as office space.

The two entities began negotiations to open new neighboring facilities. They both bought land near the intersection of state Highway 48 and U.S. 53 and jointly reimbursed the city for roads and utilities.In 2004, however, the Marshfield strategy took on a harder edge: The clinic announced it would inaugurate outpatient surgery, directly competing with the hospital, and proposed taking over all of Lakeview’s assets.

Lakeview was a tempting morsel indeed: it was profitable, had zero debt, and tens of millions in cash assets.

But it also was vulnerable. The hospital administration predicted a new Marshfield satellite would deeply wound Lakeview with an estimated $10 million net loss over three years.

“GIVE US YOUR HOSPITAL OR WE WILL KILL IT is the essence of the message delivered by Marshfield Clinic Administration,” stated a full page ad in the Rice Lake Chronotype on April 13, 2005 (above). The statement was signed by four Lakeview board directors, seven former board members, two doctors, and two members of the community.

It was the first shot in what became a two-year ad war in the Chronotype with both sides paying to publish their opinions.

“We began to talk open, honest collaboration about affiliation instead of a complete takeover,” Karl Ulrich, Marshfield Clinic’s president and chief executive officer, told BusinessNorth. “Clearly some personality conflicts, certainly misinterpretation of data led to hard feelings and the lack of synergy in ’04 and ’05.”

Ulrich acknowledges the new Marshfield clinic would have “made a dent” in Lakeview’s revenue, but denies the clinic tried to run the hospital out of business.

Several years earlier the clinic decided to open ambulatory surgery at its flagship in Marshfield, much to the chagrin of St. Joseph’s Hospital there. But there proved to be such a demand for the services that both the clinic and hospital are doing well, Ulrich said.

Chaos reigns

Whether Marshfield was threatening the Rice Lake hospital’s very existence, many people there perceived it that way. The Lakeview board, however, was divided over how to deal with the problem. And the situation turned the board room into a battlefield.

Here’s an account from Gary Stelzer, M.D., in a paid advertisement he placed in the Dec. 16, 2007 edition of the Rice Lake Chronotype: “Beginning that fall, 2004, a long struggle ensued, during which time the LMC board of directors came under enormous and unrelenting pressure from medical company lobbyists (in what they called a full court press) to relinquish ownership of the hospital.”

A Lakeview board member for 19 years before his resignation in 2007, Stelzer strongly favored independence, even though he was employed by Marshfield.

His open letter to readers continued: “In 2005, six (Marshfield) physicians invited themselves to the hospital board room a half a dozen times to repeat their appeals for affiliation, and which every board member understood to mean giving the company the hospital. Objecting board members came under constant pressure, via letters, personal visits, and evening phone calls, to vote obediently or resign. And of course, some did resign. Hospital staff in particular were heavily lobbied and, in so many words, made to worry that their jobs might be in jeopardy, under the dire threat of the hospital’s economic collapse, if they did not actively join the campaign to acquire LMC.”

Between 2005 and 2007 six of the 15 board seats turned over.

In December 2005 the board voted out Wayne Arnold, the Rice Lake city attorney who was the hospital’s legal counsel during the period 1974-1985, and a board member since 1985. He also served as chairman during 1990-1999. His name is at the top of a plaque at the hospital’s entrance. He was passionate about keeping Lakeview independent and other members found him too divisive.

Just before showing Arnold the door, the board hired private consultant Michael Rindler for $300,000 to help the hospital explore its options.

Over the next few months Rindler re-energized the board and came up with several strategies to help them compete with Marshfield.

On April 28, 2006, four months after Arnold’s departure, directors voted to remain independent. The board also put out invitations to other healthcare systems to set up a presence at the hospital.

But the plans to stay independent unraveled over the next year. “The commitment was not genuine, the board declined to even discuss putting the persons in place to execute the plan, running instead a virtual plan that failed,” Stelzer wrote.

The board voted to resume talks with Marshfield on June 27, 2007.

On Nov. 14, 2007, Arnold fired off this e-mail to the Wisconsin attorney general’s office: “The board has since been co-opted, by virtue of several board members having lucrative business connections with Marshfield and Lakeview, and they are no longer interested in fighting on behalf of the community.”

The newly integrated Lakeview has pledged to use $20 million from its building fund to finance construction of a new hospital next to the new $50 million satellite that Marshfield Clinic formally dedicated on May 20 at the highways 48-53 site. Another consolation is that $4 million will be set aside for a community health fund.

Mark Johnson, president of Rice Lake Weighing Systems, lobbied against the affiliation and is skeptical that the new fund will benefit the community. “I think it will pay for bad debts to Marshfield,” he said.

Johnson is also the husband of former Lakeview board member Barb Johnson, one of the last members to oppose the integration. He was one of 30 area business leaders, mostly owners and managers, who signed a Nov. 16, 2007 letter calling the proposed integration “a major injustice” that “will undoubtedly negatively affect the costs of healthcare for all citizens of Rice Lake.”

Dan Lawler, a Rice Lake Realtor who also signed the letter, said, “The board felt they had to get in bed with the devil that caused the problem in the first place.”

Lack of healthcare competition…is good?

The January 2008 memorandum filed by Michael Best & Friedrich LLP to the Wisconsin attorney general on the Lakeview-Marshfield merger warned, “The anticipated acquisition will effectively eliminate competition with the inevitable consequences of higher prices and lower quality for a broad range of health care service.”

The memo further states, “Marshfield’s proposed acquisition of LMC will ensure that consumers of medical care in Rice Lake and the surrounding areas will have little, if any, choice in the future. Marshfield Clinic will be in complete control not merely of physician services, but of all of a broad range of healthcare services. If LMC and Marshfield become one entity, there will no longer be competition for numerous services in the area and Marshfield will have almost no check on its market power. By controlling the hospital, Marshfield will control hospital privileges, outpatient care of every type, and can prevent entry of physicians into the market.”

There is competition from Luther Midelfort-Mayo Health System, which opened a clinic in Rice Lake in September 2007. Luther-Midelfort answered Lakeview’s call for partners in 2006, expecting it would be able to work with the hospital.

Instead Lakeview “chose to work with Marshfield,” said John Dickey, Luther Midelfort’s chief administrative officer.

“We knew Marshfield would have a strong presence,” Dickey said. “Our intention is to provide a choice. We will fill that niche to the extent the community desires us to.”

Marshfield’s chief executive Karl Ulrich argues competition actually drives up healthcare costs. “In general when you have competition it keeps prices lower. Medicine is just the opposite,” he told BusinessNorth. “Competition results in duplication of services. Clinics buy new equipment to compete, which results in (cost) escalation.”

In the 1995 Blue Cross/Blue Shield United lawsuit against Marshfield, the 7th U.S. Circuit Court of Appeals noted a lack of competition can be desirable in small markets, given specialization and technology in medicine today.

“If an entire county has only 12 physicians, one can hardly expect or want them to set up in competition with each other,” the court decision read.

Marshfield now has 776 physicians in 16 counties.

“The most significant factor driving healthcare costs in Wisconsin is the relative lack of competition,” states a May 2008 study by the Wisconsin Policy Research Institute. Healthcare systems have increased their market power by employing physicians, giving them a referral base for their hospitals, and making it harder for competitors to enter the market, it states.

According to a 2006 report by the U.S. Government Accountability Office, eight of the 10 most expensive cities for healthcare in the nation are in Wisconsin. La Crosse is at the top, followed by Wausau, Eau Claire, Madison, Janesville-Beloit, Green Bay, Appleton-Oshkosh-Neenah, and Racine. The study blamed weak competition and the inability of health maintenance organizations to pay doctors flat fees.

A 2007 study by Citizen Action of Wisconsin ranked Northwest Wisconsin as the most expensive region in the state to receive health care, citing Chippewa Falls, Hudson, Menomonie, River Falls and Superior.

Ulrich is aware of the problem. “Employers feel a very direct effect and they’re saying they’ve had enough. We’ve seen a decrease in employers that provide healthcare.”

He blames “tough times in the economy in general” and other factors.

“One of the pressures has to do with the population increasing in age, more Medicare, Medicaid . . . 63 percent of the clients are fixed payers,” he said. “The biggest stress is that the government hasn’t increased the pay rate to physician groups. That creates a cost shift to employers. If 50 percent of the patients don’t increase pay, the other 50 percent are liable.”

Ned Wolf: man in the middle

Ned Wolf, chief executive officer of Lakeview Medical Center, guided the hospital through its affiliation with Marshfield Clinic. Some community members are bitter that he let it happen. Wolf spoke with BusinessNorth reporter Richard Thomas on May 20, the day of the dedication ceremony of the Marshfield Clinic Rice Lake Center. Critics say Marshfield used the threat of a new clinic to force Lakeview into affiliation.

BusinessNorth: Why was the merger of Lakeview and Marshfield necessary?

Ned Wolf: We’ve worked together for a number of years. They had become increasingly our medical staff except a couple of doctors. They started on a large clinic here which was going to have all the outpatient services and we saw that we would be losing that work, and we felt that it was probably in the best interest of us to continue to work with our medical staff and have the affiliation take place.

BN: At what point did Marshfield start talking this affiliation?

NW: We talked about joint ventures, it subsided for a while, we talked about joint ventures again, and then at that point they proposed the total affiliation. During that time the hospital went through considerations, “No, we don’t want to do that,” looked at the ability to perform as an independent hospital. After looking at that, pursuing a number of options, we realized we were going to be spending a lot of resources, and we weren’t sure it was going to be all that successful. That’s why we went back to Marshfield and said we’d like to look at the affiliation relationship.

BN: Back in 2005 there was that full page ad saying Marshfield was telling the hospital to hand over its assets or die. Was it really that coercive?

NW: No, that was somebody’s interpretation.

BN: How was it wrong?

NW: That was an individual interpretation on that issue.

BN: It was a number of board members, wasn’t it?

NW: It was a board member who subsequently resigned. He had a different perspective on it.

BN: That was Wayne [Arnold]?

NW: Yes.

BN: Did he resign or was he voted off?

NW: You know, I’m not even going to cover that, that’s past history. I’m really not going address that at this point. That’s personal, that’s board business. I didn’t come in this to address that.

BN: The same people are saying the integration is going to result in higher prices and lower quality care. Are they wrong about that?

NW: I think the integration’s going work well, both in terms of helping us control costs and improving our quality of care.

BN: In Milwaukee there was a study earlier this month saying because of lack of competition health prices are high there. What’s to stop that from happening here?

NW: There’s more competition in Rice Lake, if you notice Luther Midelfort opened a clinic here in the past year. So that’s more competition, not less…

We’ve had the only hospital in Rice Lake, although there are how many hospitals within 20-30 miles of here: Cumberland, Ladysmith, Spooner, Shell Lake.… In Rice Lake now, there are more physicians than ever before… Outreach physicians and independent doctors still work at the hospital.

BN: Independent doctors are welcome to work at the hospital here?

NW: The hospital’s providing the outpatient surgery services in the new building as well as the imaging services. And we’ve already had surgeons perform services up there. All the imaging being produced up there now is being read by non-Marshfield radiologists. We have a relationship with them.

BN: They’re not being pressured to join Marshfield?

NW: No. They’re not being asked to join Marshfield and they’re not asking to join Marshfield. [Note: Integration critics charge that Marshfield is threatening to bring its own radiologists to replace Diagnostic Radiology Associates, which has worked with the Lakeview for 25 years. DRA officials declined comment when contacted by BusinessNorth.]

BN: Was there a group of anesthesiologists who were pressured to join Marshfield?

NW: No, I don’t think they were pressured to join Marshfield. I wasn’t involved in that. The anesthesiologists who were practicing here in Rice Lake have been independent and they joined Marshfield Clinic. All four of them made that decision I think independently. But you’ll have to talk to them. I didn’t make the decision, I wasn’t involved in the negotiations with Marshfield. [The anesthesiology group in question did not return BusinessNorth’s phone calls.]

BN: I understand the hospital hired a consultant to explore options (besides integration). None of those options were feasible?

NW: We pursued some of those, and we felt they weren’t going to prove to be best decision for the hospital in the long run.

BN: May I get a copy of the consultant’s report?

NW: No, that’s a private report.

BN: The hospital pledged transparency on the whole issue. Wayne (Arnold) has called for the final written document of the agreement to be released but has been refused.

NW: We haven’t released the private document as far as the actual agreement. We’ve talked very openly to the community and the public about virtually everything in that agreement.

BN: Then why not release the final document?

NW: Because we’re both private organizations still.

BN: What have you released to the public?

NW: We’ve told them a lot as far as what this arrangement is, in terms of creating a new board. The commitment to plan and build a new hospital.

We said we’re going to create a community health foundation which will fund health initiatives in the community to the tune of $4 million. That money’s been put in escrow at this point. That’s been established.

We said that we would expand our emergency and urgent care services and that’s taken place. As of April 14, we relocated the urgent care services from the clinic to the hospital. We’ve had a number of criteria that we’ve shared and talked to the community about and told them where things are with that. We’ve been very open about it.

BN: How do you respond to criticism that other than the community fund, Marshfield acquired the hospital for nothing?

NW: The hospital is working with Marshfield, we’re not-for-profit, they’re not-for-profit organizations. The hospital continues as a corporation, and we continue to be an open medical staff and serve the community — physicians can practice here, serving very much the same way as we did before.

BN: Were you involved in the negotiations between Marshfield and the hospital?

NW: Yes I was.

BN: Is that conflict of interest, negotiating with your future employer?

NW: No, I don’t see it that way. I was totally accountable to the board of directors. The board of directors was very involved. We had a committee of the board involved in the negotiations as well and that committee was reporting back to the board periodically, keeping the board fully abreast of where things were. I have no vote on the board.

BN: If rates go up in the next few years, how will you address that?

NW: Same way we did before in terms of trying to manage our costs as best as possible and looking at where there are opportunities to increase productivity, which is an active goal that we have, look at opportunities in terms of materials and supplies we’re purchasing, get more purchasing power, and gain some efficiencies in that. And other active goals we have in place. We face those challenges. Healthcare is a tremendous challenge, we have to compete for personnel that are highly trained in this field. So we’ll do it by good business practices.