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Let's make a deal: Lessons learned from hospital mergers

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Ronald Osladil
Ronald Osladil, Chair of the North Pine Area Hospital District in Sandstone, Minn., stands outside the Essentia facility Monday, September 10, 2012 in Sandstone.
Photo by Derek Montgomery for MPR News

Ron Osladil, chair of the North Pine Area Hospital District board in Sandstone, said he woke up one day and realized the hospital in his community, long run by Essentia, had been left behind. He looked at nearby hospitals and saw new waiting rooms and clinics. Yet his local hospital, built in 1956, hadn't received similar updates.

He blamed himself. The board, he said, hadn't paid close enough attention, had abdicated too much responsibility, hadn't made enough demands of Essentia. "They told us what they wanted to tell us. We seemed satisfied. We just didn't notice it at the time. We were sheep led to slaughter."

Last year, Osladil's board asked Essentia for improvements and when it didn't get a satisfactory response, said it wouldn't renew the lease agreement, in essence evicting the company. That led Essentia to say that under its lease terms, it would simply buy the hospital for the cost of its debt, around $170,000. The community was outraged.

Essentia switched its negotiating team, apologized for poor communication, agreed not to buy the facility and promised updates or even an entirely new hospital. "We ended up with a three-year lease with some teeth in it," Osladil said. "They have goals to meet during that period of time, increasing the service of physicians and specialties. At the end of the three years they should be in the process of building a new hospital."

Many hospital affiliations do lead to expanded services and even capital improvements. But relinquishing local control comes at a cost, and the dustup in Sandstone shows the difficulties that can arise when working out the details of these agreements.

"We were sheep led to slaughter."

It's a pressing issue right now because increasingly, independent hospitals in rural Minnesota are joining bigger systems--Sanford Health, Essentia Health, Mayo Clinic Health System and others. According to the Minnesota Hospital Association, 16 hospitals have joined systems since 2005. Of 148 hospitals in the state, only 42 remain independent.

"When you look at health care in general and how it will be delivered, things are changing so rapidly here," said Dr. Dan Nikcevich, president of Essentia Health in northeastern Minnesota and northwestern Wisconsin. "A lot of these changes that are happening are being driven by necessary innovation. It's forcing integrations and affiliations that five or six years ago wouldn't have happened."

In September alone, Deer River Healthcare Center officially joined Essentia, and the city council in Virginia voted to merge with the same organization as early as November. While these decisions are often politically and emotionally fraught, there are ways communities can improve the odds of getting what they want, according to Terry Hill, Executive Director of the National Rural Health Resource Center in Duluth. "Nobody needs to panic," Hill said. "They need to think carefully and be savvy shoppers.

"They have assets," Hill said. "If the local independent hospitals can form partnerships with doctors in particular, partnerships in the community itself, they can strengthen themselves to be more important and bigger players in the bigger systems. If they throw up their hands and say, 'Come and save me,' that is a panicky move. They may find someone to save them, but not from a position of strength."

Administrators from outstate Minnesota hospitals that recently affiliated with systems offered additional advice for seeking out and dealing with potential partners.

Sit down and establish a clear list of wants, said JoAnn Foltz, CEO of the Sanford hospital in Wheaton. "We went through a want list with the board," she said. "This is what we want to achieve as we go through the affiliation." The list in Wheaton included the ability to keep the current staff and benefits and continue longtime relationships with independent physicians. "We had loyalty to them," Foltz said. "They continue to come here. It's not a problem at all."

"They need to think carefully and be savvy shoppers."

Get a local person on the larger system board for a greater say, said Foltz. "One of our local board members is a representative on the network board. That is the next level. He has access to that if there are concerns."

Make sure a system will embrace the local community and healthcare needs, said Paul Hanson, President of Sanford Health of Northern Minnesota, who runs the hospital in Bemidji. "I wouldn't do it just because your neighbors are doing it," he said. "If you are looking at an alignment or merger, make sure you are doing it because you honestly believe you can thrive, that you can introduce new services and keep care closer to home. When you choose your partner, choose a lifelong partner."

Armed with a long-range plan, Hanson said he and the local board were able to rule out potential suitors quickly. "We identified areas of need and core services in Bemidji and the surrounding area. Those were some of the questions we asked some of the system candidates. Would they embrace what the local community said we needed? If they didn't, that would raise some of our eyebrows and we would not move on."

"When we were going through the process, we were told by one smaller system that maybe what the community of Bemidji was looking at was to just get smaller in order to meet our financial obligations," he said. "That conversation lasted 15 minutes and we left."

Look at the culture of the organization you're considering, said Mary Klimp, Chief Administrative Officer at Mayo Clinic Health System in New Prague. Klimp said her hospital, which had a solid bottom line before the sale, could have gone with another system. But, "we felt our culture lined up," she said.

When local communities consider an affiliation, the onus is on them, said Hill. "We can't assume the big systems will take care of us. We have to do some of the work ourselves. They are looking for folks who can stand up and provide the leadership themselves within their communities."