Fairview courts partners to preserve St. Joseph's Hospital

Fairview Health is seeking partners to preserve some medical care at St. Joseph's Hospital, particularly its mental health care, despite the health system's multimillion-dollar shortfalls, which led its leaders to consider closing the St. Paul facility.

Opposition to the closure of St. Joseph's compelled James Hereford, Fairview chief executive, to consider alternatives, although he said the health system would need support and investment from other community, medical and social service groups that have an interest in keeping the hospital open.

"There is a shared interest here," he said Wednesday.

Critics of Fairview's closure discussions, announced last fall, had increased in recent weeks to include the Minnesota Nurses Association and a group of St. Paul City Council leaders. Others criticized Fairview for a partnership with the University of Minnesota that they said cost the health system millions of dollars and pressured it into considering the closure in the first place.

Fairview went from an operating income of $86 million in 2018 to a $96 million loss in 2019 — with another loss projected this year.

One person closely involved with Fairview's negotiations with the U said that terms of their new partnership in 2018 committed Fairview to an estimated $80 million per year in additional spending on the U's academic physicians.

"That $80 million-plus gap in additional costs is huge when your margin is only $100 million in good years," said the source, who spoke on condition of anonymity.

Closing St. Joseph's was just one solution that emerged when Fairview and U leaders met in fall 2019 to address the health system's budget problems.

They also proposed closing Bethesda Hospital, a long-term care facility in St. Paul, but later decided to reduce its number of beds by half and only admit patients from other Fairview facilities. That move was completed this month.

Fairview also announced a 2% staff cut throughout its system, which includes the University of Minnesota Medical Center, as well as hospitals in Edina, Burnsville and other locations.

Hereford said that the new partnership with the U, which created the M Health Fairview brand, might have caused short-term budget shortfalls but will ultimately be a long-term source of growth and improvements in patient care.

He pinned some of the financial losses on rising costs of staffing and medical equipment that are hurting all hospital providers right now.

The idea behind M Health Fairview was that Fairview would use the popular U-themed brand to entice more patients to its primary care clinics and hospitals, and it would then refer more patients to the university for specialty care and clinical research.

Leaders were so confident that M Health Fairview would generate growth that Fairview agreed to more than triple its payments to the U for academic research — from about $8.7 million per year in 2017 to at least $35 million in 2018 and $50 million in 2022.

But the deal created other costs that some Fairview leaders might not have anticipated, according to the anonymous source familiar with the negotiations. Fairview agreed to increase payment rates to the university's physicians via their group practice, University of Minnesota Physicians (UMP).

At the same time, the new streamlined contract did away with old agreements that obliged UMP doctors to provide minimum amounts of clinical care, the source said.

"Fairview is relying on the UMP docs to drive higher revenue, but the UMP docs are not required to drive higher revenue," the source said.

Hereford disagreed, and said the current system clarifies the clinical roles of U physicians. He added that it worked well at Stanford Health Care, where he previously was chief operating officer.

Some analysts said that St. Joseph's was at risk for closure regardless of the M Health Fairview deal — given that it is wedged in St. Paul between the larger Regions and United hospitals.

Closure might have happened already if Fairview hadn't merged in 2017 with HealthEast and taken on the money-losing St. Joseph's in addition to other more lucrative hospitals and clinics in the east metro, said Allan Baumgarten, a Twin Cities health care market analyst.

"I think that Fairview was happy to get [HealthEast's] Woodwinds and St. John's, which are consistently profitable and have great geography, and had to take St. Joseph's and Bethesda to make the deal," he said. "I think Hereford thinks that the inpatient infrastructure of the overall system is just too big today and will drag the system down in the future unless steps are taken to right-size inpatient facilities and to cut way back on the losses."

Hereford said Fairview officials have been in more than 100 meetings about the fate of St. Joseph's and have talked with leaders of the Sisters of St. Joseph of Carondelet, who founded the hospital amid a cholera epidemic in 1853. The Sisters have been strong advocates for the hospital, opposing a recent expansion plan by Regions that could have threatened its viability.

Closure of its 105 inpatient mental health beds would be a hardship on all hospitals, especially emergency departments receiving mentally ill patients in crisis with nowhere else to go. Hereford said health systems in San Diego and Portland have teamed up to jointly operate mental health hospitals, and he has pitched the idea to the local Allina and HealthPartners systems to preserve St. Joseph's.

Fairview also estimates that 10% of St. Joseph's ER patients are homeless people who are out of options after shelters close. Hereford said part of the hospital could be converted into additional shelter beds.

All discussions are preliminary, and Hereford said nothing will change at St. Joseph's in 2020.

"A hospital is too important to a community to move quickly," he said. "I think we want to do it right."

Fairview has a competing pressure, though, to move forward with planned cuts.

S&P Global issued a report in January about Fairview's financial health, deciding to maintain its A+ bond rating but to downgrade its outlook from stable to negative. In a report led by analyst Allison Bretz, S&P commended Fairview for looking for $150 million in cuts or new revenue in 2020 but said it needs to press forward with those plans to maintain its rating, which is vital when it comes to obtaining financing for future expansions or renovations.

"While we recognize that management has a robust turnaround plan in place," Bretz wrote, "failure or significant delay to execute this plan could result in a financial profile no longer appropriate for the rating."

Jeremy Olson • 612-673-7744