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Essentia Health took a city board by surprise when it invoked a lease clause that allows it to buy the 25-bed hospital, which has the only 24-hour ER for miles.

Glen Stubbe, Star Tribune

Local officials fear a hospital takeover by Essentia could have unhappy consequences for the Sandstone area.

Glen Stubbe, Star Tribune

Sandstone. Minn., fights for hospital

  • Article by: LARRY OAKES
  • Star Tribune
  • April 2, 2012 - 11:18 PM

SANDSTONE, MINN. -- Civic leaders here are crying foul over what they view as a hostile takeover of one of Sandstone's most precious assets: a 25-bed hospital that has the only 24-hour emergency room and heliport for miles.

Last fall, the citizens' board that controls the hospital's land and building served notice that it was essentially evicting the Duluth-based medical corporation Essentia Health, which had run the hospital for 15 years. Board members say they were frustrated that Essentia didn't want to expand or rebuild.

Essentia's response hit the community like a one-two punch: First it fired the hospital's two top local administrators, who had advocated for upgrades to the facilities. Then it notified the community that it was exercising its option, spelled out in its lease, to buy the hospital when the contract expires in August for the cost of its debt: about $170,000.

Local leaders say if the purchase goes through, their power to preserve the hospital's future will be lost to a company that could, for all they know, close the hospital or simply use it as a feeder. They aren't reassured by Essentia's statements that the hospital will remain a vital part of the nonprofit's $1.5 billion network.

The controversy comes as more of Minnesota's small, so-called "critical-access" hospitals like Sandstone's are being absorbed by health care corporations such as Mayo, Sanford and Essentia. And it's sparked debate about the purpose of the extra Medicare reimbursements such hospitals get.

A program created by Congress in 1997 to help keep rural hospitals open has meant hundreds of thousands of dollars in additional revenue per year for each of approximately 1,300 hospitals. Though wildly popular with members of Congress from rural areas, some question if the program is still serving its purpose as the hospitals are acquired by bigger corporations, and President Obama has proposed trims to the $8 billion program as part of his 2013 federal budget proposal.

Minnesota, with 79 such hospitals, has the third most in the nation, behind Kansas and Iowa. A former lawmaker who helped implement the state's program said it was designed to help secure a future for those hospitals, not make them better acquisition targets.

"Essentia is pulling all of those dollars up to itself and not helping Sandstone thrive," said Becky Lourey, a former DFL state senator and representative who now runs a health care consulting firm.

Essentia disputes that charge, saying it has spent millions on the hospital.

In small towns, the stakes are high. "I can't imagine what my little town would be without its hospital," said Lenny Bonander, a Sandstone City Council member and small-business owner. "We'd go from being Sandstone to being Tombstone."

From good will to bad

Pine County chose Sandstone as the location for the county's only hospital in 1956. Essentia Health Sandstone provides jobs to 270 people and peace of mind to residents who otherwise would have to travel to Mora, Moose Lake or Grantsburg, Wis., for emergency care.

Three years ago, Brad Samuelson of Pine City was working on his roof when he fell. Hospital doctors quickly diagnosed internal bleeding from a ruptured aorta and got him on a helicopter to Duluth and a waiting surgeon. "I thank God every day that that hospital was there," Samuelson said.

The hospital ran independently until financial problems nearly forced its closure in the late 1990s. To save it, local officials asked Essentia, then St. Mary's Duluth Clinic Health System, to buy or manage it. Essentia chose the latter.

But the relationship has soured in recent years. Essentia was reluctant to discuss the hospital's future, board members say, and wasn't all that interested in building a new hospital, even though the city bought the land and made other preparations

Meanwhile, Sandstone residents watched as critical-access hospitals in Aitkin, Cloquet and Mora got upgrades and new buildings.

Local officials got fed up last summer when several groups, including the Chamber of Commerce and the school board, pressed Essentia in writing for details of its plans for Sandstone, and got what they considered a vague, non-committal reply. At the time, Essentia was discussing a partnership with Mercy Hospital in Moose Lake, less than 25 miles away. Sandstone officials said they began to feel used.

Lourey said Essentia "is not living up to its nonprofit status." She noted that its CEO, Dr. Peter Person, received compensation of $1.7 million in 2009, according to the nonprofit's most recent federal filing. She's trying to get the state attorney general's office to look into the issue.

'No intentions' to close

Dr. Thomas Patnoe, president and chief medical officer of Essentia, which has 17 hospitals and 64 clinics across the Upper Midwest, says it won't abandon Sandstone.

"It just wouldn't make any business sense for us to purchase it and then close it," Patnoe said. "We have absolutely no intentions to close that hospital."

He disputes the charge that Essentia neglected Sandstone's facilities, noting its considerable help included $6.2 million in improvements to the hospital between 1997 and 2011. Hospital district taxes covered only about $3 million of that, with Essentia footing the rest of the bills.

"We believe our patients and employees, as well as the residents of the nursing home, will have a healthier future by staying with Essentia Health rather than going it alone," Patnoe said.

He said the top two hospital executives were fired not for siding with the hospital board but because he wanted managers experienced in negotiating a hospital's transition to new management.

Pattern of acquisition

Just 41 percent of the state's hospitals are now independently owned. Many of those acquired in recent years are critical-access hospitals like Sandstone's. Mayo, Sanford and Essentia now own 21 of the state's 79 hospitals with that designation, according to Judy Neppel, executive director of the Minnesota Rural Health Association.

Neppel said the association is studying whether being acquired changed the critical-access hospitals' financial picture or level of care. But so far, she said, anecdotal reports indicate such purchases seem to help a hospital, not hurt it.

"It appears to help them with recruitment of physicians," Neppel said, "and also it helps them meet new electronic records requirements, which can be very expensive."

Mark Schoenbaum, director of the Office of Rural Health and Primary Care for the state health department, said health systems don't appear to be buying such hospitals simply for their critical-access status or to close them. "Critical-access [status] definitely stabilized many hospitals in Minnesota and nationally, but it didn't turn them into cash cows."

Ethics questioned

Sandstone's single-story hospital is compact and tidy, with a couple of intersecting hallways that lead to patient rooms, a bustling central nurse's station and attached nursing home.

A semitrailer truck with portable MRI equipment parks outside twice a week, and helicopters from Duluth or the Twin Cities swoop in to pick up patients who need immediate transfer.

Sandstone leaders say that if Essentia buys the hospital for the cost of a moderately priced home, it will only sour further the already bad taste in the locals' mouths.

"They've been paid well -- above the standard [Medicare] rate -- for the use of that hospital, and when they buy it out, it's at a significantly reduced rate," said Chamber of Commerce President Tim Schmutzer. "It shows a lack of ethics."

Patnoe cautioned that Essentia won't necessarily pay the lowest price possible. He agreed the hard feelings are unfortunate but implied that Essentia isn't entirely to blame. He said it came as an unpleasant surprise to Essentia when the hospital board abruptly canceled Essentia's lease.

"Nobody would have chosen to get to the point we are, where there is so much emotion on each side," he said. "I hope we can get to the point where we can look forward and move on from here."

Larry Oakes • 612-269-0504

By Larry Oakes loakes@startribune.com SANDSTONE, MINN. Civic leaders here are crying foul over what they view as a hostile takeover of one of Sandstone's most precious assets: a 25-bed hospital that has the only 24-hour emergency room and heliport for miles. Last fall, the citizens' board that controls the hospital's land and building served notice that it was essentially evicting the Duluth-based medical corporation Essentia Health, which had run the hospital for 15 years. Board members say they were frustrated that Essentia didn't want to expand or rebuild. Essentia's response hit the community like a one-two punch: First it fired the hospital's two top local administrators, who had advocated for upgrades to the facilities. Then it notified the community that it was exercising its option, spelled out in its lease, to buy the hospital when the contract expires in August for the cost of its debt: about $170,000. Local leaders say if the purchase goes through, their power to preserve the hospital's future will be lost to a company that could, for all they know, close the hospital or simply use it as a feeder. They aren't reassured by Essentia's statements that the hospital will remain a vital part of the nonprofit's $1.5 billion network. The controversy comes as more of Minnesota's small, so-called "critical-access" hospitals like Sandstone's are being absorbed by health care corporations such as Mayo, Sanford and Essentia. And it's sparked debate about the purpose of the extra Medicare reimbursements such hospitals get. A program created by Congress in 1997 to help keep rural hospitals open has meant hundreds of thou

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