Rural hospitals struggle with rapidly changing health care

St. Mary's Duluth Clinic surgeons
St. Mary's Duluth Clinic surgeons Kevin Riess MD (left) and Surgeon Wendell Smith MD (right) both practice surgery in the Virginia Regional Medical Center in Virginia, Minn.
MPR Photo/Bob Kelleher

The theme of the annual Minnesota Rural Health Conference that opens in Duluth on Monday is "Leading change for rural health." But for hospitals in small Minnesota communities there hasn't been much to embrace about change.

The future was on display recently for a handful of practitioners in a conference room in the Virginia Regional Medical Center (VRMC). A pair of surgeons were getting a first look at single-incision laparoscopic machine the hospital is considering buying. The machine can be used to treat colon cancer or perform stomach surgery with a single incision rather than five or six incisions.

Surgeon Dr. Kevin Riess said the hospital needs this machine to keep up in the medical arms race. Riess said he wonders if the institution where he operates can afford it.

"For just the basic TV monitor, the light source, the cameras, the video equipment; the "cautery" (cauterizing) equipment and the basic instruments run probably a quarter of a million dollars," Riess said.


VRMC lost about $3 million over the last two years, and more than another million so far this year, on a net annual revenue around $55 million.

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They're not alone.

Not far away in Ely, the even smaller Ely-Bloomenson hospital is also running a million-dollar deficit. Both institutions face a laundry list of financial challenges, but the hospital administrators explain it starts with the amount of money state and federal governments are willing to pay to treat the neediest residents.

Dr. Wendell Smith, an employee of the Duluth-based Saint Mary's Duluth Clinic (SMDC) health system who practices in the Virginia hospital, said the main source of revenue for rural hospitals falls short.

"In small hospitals, such as Virginia, which has a 60 to 66 percent government pay, meaning Medicare and Medicaid, we get paid less from the government for what we do than what it costs," Smith said.

Smith said hospitals in larger cities like Duluth get enough non-government patients to make up the losses - something that's not an option in small towns like Ely or Virginia.

Virginia Regional Medical Center
The entrance to Virginia Regional Medical Center in Virginia, Minn.
MPR Photo/Bob Kelleher

"They're stuck in the middle. You don't have the volumes. You still have to provide the same quality. You still have to buy the same equipment. You don't have the economy of scale on the equipment, so your overhead is more and your reimbursements are less," he explained.

Meanwhile, the recession has hit elective health spending, for things like knee surgery that can be put off for a while. Admissions are way down and some unemployed patients have moved from better paying private insurance plans into government health coverage like Medicaid.

That leaves rural hospitals struggling to cut somewhere else - in staff, maintenance, or in many cases, by cutting loose money-losing nursing homes.


Federal health care reform does offer some hope for mid-sized hospitals like VRMC, according to Dr. Lawrence Massa, president of the Minnesota Hospitals Association.

"There's an add-on payment for hospitals located in low costs areas," Massa said. "There's also an add-on payment intended to offset some of the problems with that payment system for the smaller providers."

In Ely, Administrator John Fossum also said health reform offers some help, but that the full benefits are still several years away. Ely hopes to save money by cutting loose its unprofitable nursing home.

In Virginia, VRMC's approach to solve its financial woes is to spend more, hoping to improve the bottom line in the future.

Outside consultants are now fixing an ineffective billing and collections system, and finishing a system-wide efficiency study. The hospital is upgrading its surgical center to retain Virginia area residents who might otherwise drive 60 miles to Duluth for care.

In another effort to retain patients, VRMC has just begun new partnerships with Duluth-based providers who will send orthopedic and neurological specialists to Virginia a couple of days a week.

The problems facing VRMC are some of the topics on the agenda in Duluth this week where more than 350 people are expected for the two-day Rural Health conference.