Hard times curtail Park Nicollet's ambition

  • Article by: CHEN MAY YEE , Star Tribune
  • Updated: May 23, 2009 - 3:23 PM

Park Nicollet Health Services has spent aggressively to compete with bigger rivals, but the economy has forced it to eliminate 7 percent of its workforce.

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Park Nicollet held an opening Thursday for its $29 million Melrose Institute in St. Louis Park to treat people with eating disorders.

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Park Nicollet Health Services is the Twin Cities' smallest hospital and clinic group.

But its ambitions were big.

During health care's boom years over the past decade, Park Nicollet invested heavily to compete with its far-bigger rivals, Allina and Fairview. It sent executives to Japan to learn Toyota's "Lean" production process, adopting productivity techniques that would later spread to the rest of health care. It installed not one but two electronic medical record systems, one after the other, and borrowed millions to build new specialty centers.

Then the recession hit, and hospital groups big and small saw their rosy business projections fall apart.

As a result, Park Nicollet has announced three rounds of layoffs since December -- more than any other hospital group -- eliminating 7 percent of its workforce. It closed an occupational health clinic near Minneapolis-St. Paul International Airport and plans to close a longtime clinic in Hopkins.

"Everybody's extended themselves," said Allan Baumgarten, an independent Twin Cities health care consultant. "Have they extended themselves more than other groups? That's a serious question."

Small cushion

While Park Nicollet is hardly alone in suffering the shocks of the recession, it has the smallest cushion. With just one hospital -- Methodist Hospital in St. Louis Park -- Park Nicollet has only 6 percent of the Twin Cities market, compared to 23 percent for Fairview and 27 percent for Allina, according to Baumgarten.

Bigger groups with wider geographical reach, Baumgarten said, might be "a little more protected from the financial trends."

Park Nicollet said it is simply making tough choices more quickly than others.

"We have been aggressive in shifting our reliance on investment income to operating earnings, something we believe other systems may have to do down the road," spokesman Jeremiah Whitten said.

Times of change

At the eye of this storm is Chief Executive David Wessner, who came to Park Nicollet from the Geisinger Health System in Danville, Pa., in 1994.

Wessner soon became the first non-physician chief executive at Park Nicollet, then called HealthSystem Minnesota. He took over the smallest group in a landscape dominated by large clinic-hospital systems created during a merger wave in the 1990s.

Wessner, who declined to be interviewed for this article, turned the money-losing business around, cutting costs and forging contracts with health insurers to add new patients.

He also applied business ideas and technology to health care. Among them was the Toyota "Lean" method, which studies work processes to reduce waste and raise quality. Devotees say anything can be "Leaned" -- from improving the flow of instruments in operating rooms to assigning pillows to each hospital room so a nurse doesn't have to walk down the hallway to fetch one.

Park Nicollet was also one of the first health organizations in the metro to introduce electronic medical records to replace paper files. Its system, called LastWord, went live in 2004. But when another system, Epic, became a community standard, Park Nicollet was forced to switch.

Staff friction

The succession of changes wore down staff. Some believed they had become incidental to the work of caring for patients. "People are kind of tired of management fads," said Kent Searl, a nurse in the intensive care unit who joined Methodist Hospital in 1992. "We were offering suggestions and getting pushback on safe staffing, yet being told to reduce the number of pens and pencils."

Doctors chafed at having to see more patients each day.

"It just became a patient mill," said Dr. Richard Wahlstrom, a longtime doctor in the Hopkins clinic. Wahlstrom used to see 15 patients a day, in the 1970s and 1980s. That rose to between 25 and 30 a day just before he retired in November, partly because of burnout.

When the economy went south last year, discontent grew within the ranks. Doctors carped over spending on new buildings, on having to learn another electronic record system and even Wessner's salary. (He received $1 million in compensation in 2007, compared to Allina CEO Dick Pettingill's $1.3 million.)

It's a familiar tussle between physicians and business leaders playing out around the country. Park Nicollet leaders are meeting with physicians and "taking their concerns seriously," Whitten said. With 600 physicians, he said, "disagreement is natural."

Another source of friction was Park Nicollet's ambitious program of capital spending. In the past few years, it opened a new heart and vascular center along with a new cancer center, and it entered a joint venture for a new orthopedic specialty center. Last week, it opened an institute for eating disorders.

At the end of 2007, Park Nicollet had $384 million in long-term debt, according to Standard & Poor's. For health systems with an A rating, the median debt-to-capitalization ratio is 45.4 percent. Park Nicollet was a little higher, at 48.2 percent. "Close enough," said Ken Rodgers, director of S&P's public finance department in New York.

Last July, S&P affirmed its A rating on Park Nicollet's long-term debt, but tacked on a negative outlook because of weakening margins.

That debt, however, cost Park Nicollet in significantly higher interest payments when the credit markets seized up last year. Then came a dropoff in patient volumes as the economy tanked and people put off elective procedures.

In February, when Wessner testified on state budget cuts at the Capitol, he said Park Nicollet had lost $148 million in 2008, including investment losses. "We have relied on these investments for too long," he said. "When we've had them taken away, we've exposed our vulnerability."

However painful, the months of cuts have already had an effect. Park Nicollet's operating margin, a negative 1.2 percent last year, swung to 1.2 percent positive early this year, Whitten said.

"We feel our quickness in adapting ensures our ability to continue to be a local and national leader in quality health care," he said.

Chen May Yee • 612-673-7434

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