Minnesota's rural hospitals are hanging on — for now

MADELIA, MINN. – The prognosis for Madelia Community Hospital has been grim for some years now. Births are no longer scheduled here. Inpatient admissions have fallen to barely 100 per year. And the costs of patching together a medical staff have turned the hospital into a perennial money-loser.

Yet its new administrator is optimistic. The community-run hospital is hiring practitioners, expanding surgery capacity, extending urgent care hours, and even adding specialties such as laserfrequency ablation for nerve pain.

"What we're doing now has sparked a lot of interest," said Jeff Mengenhausen, who took charge of the hospital last year.

Madelia's 25-bed facility reflects the paradox of rural medicine in Minnesota at a time of growing financial pressures and hospital closures nationwide. Minnesota ranks among the worst states in the nation for its high number of financially distressed hospitals, and yet among the best in preserving rural hospital access.

Across the country, 104 small-town hospitals have closed since 2010, raising concerns that rural Americans are losing access to critical services, from obstetrics to X-rays to chemotherapy. Minnesota lost Lakeside Medical Center in Pine City and Albany Area Medical Center in that period, but still retains the third-highest number of rural hospitals in the nation.

The billion-dollar question — literally, considering the economic impact of rural hospitals — is whether Minnesota has managed to insulate itself from the closure wave or just delayed the inevitable for a cluster of money-losing facilities that are barely hanging on.

"I don't know which scenario will play out, but there are some real pressures … occurring," said Stefan Gildemeister, a health economist with the Minnesota Department of Health. "Demographically, if communities get smaller, it's going to be virtually impossible to hold onto a hospital."

That prospect alarms some civic leaders and public health officials. Several studies have found no effect on mortality among older adults after rural hospital closings, but some researchers have found worse outcomes. In one study, the University of Minnesota's Katy Kozhimannil found that the loss of hospital-based obstetric services in a county resulted in more preterm births and less prenatal care.

"Sometimes we think, '40 miles? Oh, that's not that bad.' But it's a change," Kozhimannil said. "If folks are not able to get in because they have to travel farther or take time off work, then that may be the mechanism" that results in worse outcomes.

A wave of closures could also hasten the economic collapse of rural towns, considering that a hospital generates about 170 jobs and provides up to 20 percent of the employment income in small communities, according to the National Rural Health Association.

Today in Minnesota, 19 rural hospitals are at risk for closure, the fifth highest number in the nation, according to Navigant, a Chicago-based industry consultant. Similarly, the state Health Department lists 32 hospitals in distress — meaning they lost money on institutional operations in four of the last eight years.

Health officials say Minnesota's rural hospitals have stayed open thanks to a wave of mergers with larger health care organizations, along with aggressive use of federal subsidy programs. But staying open amid financial distress can mean tough choices, including cuts that can backfire if they upset patients who then go elsewhere for care.

Mayo Clinic faced uproar when it halted inpatient care and surgeries in Albert Lea as part of a consolidation with its nearby hospital in Austin. North Shore Hospital in Grand Marais and others stopped scheduling deliveries because they were no longer performing enough to keep their providers competent and their liability insurance premiums low.

In Madelia, the community hospital has been a source of civic pride ever since 1918, when Dr. W.J. McCarthy began treating patients in a Victorian house. And it has been an important economic driver in recent years, as the town recovered from a 2016 fire that destroyed downtown storefronts.

But today the hospital is on the state's distressed list, having lost $400,000 to $1 million annually on operations from 2013 to 2017.

Some of that distress reflects a strategic choice hospital leaders made in 2011 — to terminate a contract with Mayo Clinic to staff their ER. The decision fractured community opinion and contributed to the hospital's financial struggles.

The concern at the time was that the doctors were sending too many patients up Hwy. 169 to Mayo's hospital in Mankato for inpatient care. But the divorce upset some residents who liked their Mayo doctors and stuck with them rather than with the local hospital.

Worse, the hospital couldn't find permanent replacements for the Mayo physicians, Mengenhausen said, and spent $1 million per year on temporary "locum tenens" doctors to fill ER and clinic shifts.

"That's really been draining," said Mengenhausen, adding that he can cut those costs 80 percent by hiring one doctor and two nurse practitioners to staff the ER instead.

One of Mengenhausen's first moves was to switch urgent care from a hospital designation to a clinic level of service. While the hospital can't bill as much for outpatient clinic care, the lower prices attracted more business. The clinic had its busiest month in history in April.

"Patients are coming back," Mengenhausen said, including some who pledged to never return after the Mayo split.

Judith Swezey Patterson chose the Madelia hospital for extended recovery following back surgery in Mankato, even though it is 80 miles from her home in Kasson, Minn. An optometrist with a practice in neighboring Lake Crystal, the 59-year-old said she knew many of the caregivers.

"To me, Madelia was just a better option, you know? Smaller hospital, more personal care. Not every community is so lucky to have that kind of service."

Two political decisions have helped Minnesota's hospitals, including an expansion of the state's Medicaid program in 2013. That change, permitted under the federal Affordable Care Act, enlarged the pool of poor and disabled Minnesotans with insurance benefits. Of the 104 rural hospital closures in the United States, 79 were in states that didn't take advantage of the Medicaid expansion, according to the Chartis Center for Rural Health in Chicago.

Minnesota also has the fourth-highest number of hospitals with "critical access" designation, created by Congress in 1997 to stem the last national wave of rural closures. Hospitals with no more than 25 beds qualify for the designation, which provides bonus payments from the federal Medicare program. Only Kansas, Texas and Iowa have more.

Sanford Luverne Medical Center has benefited from the designation, and nets $2 million in operating income each year. As the community ages, however, the hospital treats more patients covered by Medicare and Medicaid, which pay below cost even with the critical-access subsidy.

Cuts in government subsidies or Medicare rates could threaten even stable hospitals, said Tammy Loosbrock, senior director of Sanford Luverne.

"If you're not seeing hospitals close right now, it doesn't mean they're financially stable,'' she said. "We're one legislative decision away from either making it or breaking it."

Perhaps the biggest challenge for rural hospitals is maintaining a stable of doctors and other practitioners. One departure or retirement can cause lasting damage because it can take months for hospitals to find replacement doctors — and meanwhile patients seek care elsewhere.

Mayo's Springfield, Minn., hospital has hired three search firms in the last five years to address physician shortages and financial losses that put it on the state's distressed list. Mayo leaders said the hospital reached a "critical point" last year when it lost one of two general practitioners, as well as access to a surgeon.

An attempt to transfer management to the Avera McKennan system in South Dakota has fallen through, so for now Mayo is proceeding at the hospital with a reduced number of beds and services.

Mengenhausen's turnaround plan for Madelia rests on hiring two nurse practitioners for its ER, but it has taken months to recruit them.

Many hospitals are responding to the recruitment challenge by offering high school scholarships and medical education sponsorships. Sanford Luverne courted Dr. Austin Spronk, who grew up on a nearby farm, while he was a college undergraduate and signed a deal with him when he was only a first-year medical resident. Now married to his high school sweetheart, Spronk could be a family doctor in town for generations.

Local students "are more likely to come back," Loosbrock said, "and they're more likely to stay."

The fates of hospitals are also bound up with the types of specialist they can recruit and the changing demographics of the communities they serve. Many that stopped scheduling deliveries, for example, did so in part because their aging communities had fewer expecting mothers. On the other hand, aging communities often need orthopedic care, but some small hospitals can't provide it until they recruit specialists.

Cutting services can be a losing strategy if hospitals misunderstand how much they are valued by their communities, said Michael Topchik, an analyst with Chartis.

"As those offerings erode, we see a negative cycle follow. That is to say the loss of OB puts negative pressure on general surgery, [and] the loss of general surgery puts pressure on imaging and other services and labs."

RC Hospital and Clinics in Olivia, Minn., gambled when it responded to dwindling birth numbers several years ago by hiring full-time obstetricians and betting that it could lure back mothers who were delivering in Willmar or other cities.

Coupled with a move to a new building at the edge of town, the bet paid off. Birth numbers increased from the teens to around 70 per year. Net operating income has increased since 2013, reaching $3 million in 2017.

Andrea Hernandez said she couldn't imagine going anywhere other than the Olivia hospital where she was born. All five of her children were born there, including her infant daughter, who was delivered in March by the doctor who cares for her entire family.

"It's a small town so everybody knows everybody to begin with," said the 31-year-old mother. "Some of the nurses, it's like, 'Hey, I went to school with them!' "

Perhaps RC hospital's boldest investment was a surgical robot known as DaVinci, which cost the facility more than $1 million. Few small hospitals have these systems, but RC Chief Executive Nathan Blad said the expense was justified because the surgical robot improves outcomes and hastens recoveries. It also helped retain a valued surgeon.

Blad said the number of surgeries has increased, though the added revenue is offset by the cost of supplies for the robot. And such investments pay off only if the hospital has reliable primary care doctors who refer patients locally, he added. "You have to have a strong primary care base to have a successful rest of the hospital, because specialists need referrals."

The lifeboat for struggling rural hospitals has been to join large health systems or turn management over to them. In 20 years, the state's rural landscape has changed from a scatterplot of independent hospitals to four or five regional networks.

Sanford Health, based in Sioux Falls, dominates western Minnesota, while Duluth-based Essentia Health covers much of northern Minnesota. Mayo Clinic operates most hospitals in the southeast, while St. Cloud-based CentraCare Health and Catholic Health Initiatives, a Colorado-based nonprofit network, operate several in central Minnesota. The Twin Cities' Allina and Fairview systems operate a few rural hospitals as well.

Leaders of these systems said mergers have kept small hospitals open by sparing them from having to buy costly electronic medical records systems required by federal law, creating access to more physicians to cover scheduling gaps, streamlining administrative costs, and improving their leverage in buying pharmaceuticals and supplies.

"One of the positives of being able to lean on a larger system is that, even though some of [the hospitals] are sometimes in the red, they continue to have cash flow," said Traci Morris, Essentia's chief financial officer.

Consolidation also allows systems to make major regional investments, such as Sanford's creation of a stand-alone psychiatric hospital in Thief River Falls, that individual hospitals couldn't afford.

Mergers have not, however, been cure-alls. Most of Mayo's affiliates have thrived, but its hospitals in Red Wing and Fairmont are on the state's distressed list along with Springfield.

Small-town hospitals can struggle with staffing, even with Mayo's famous name and recruiting resources, but financial losses don't always mean they are failing, said Mary Jo Williamson, chief administrator for Mayo's health system. Sometimes Mayo invests in money-losing medical services at one hospital for the good of the entire regional system and its patients.

"We're not always chasing the financial yield," she said. "We're looking at how we can best deliver service across the whole."

No hospitals are truly going it alone any more, though, regardless of the names on their doors. Winona Health remains independent, but saves money by buying bulk supplies through Fairview and refers complex cases as needed to Mayo's hospital in Rochester.

Madelia's ER is supported in the event of complex cases via a telemedicine arrangement with Avera McKennan Hospital & University Health Center in Sioux Falls. A surgeon from Allina's New Ulm Medical Center also goes to the hospital weekly so patients can have colonoscopies and hernia replacements locally.

"He didn't have quite enough business to keep him busy" in New Ulm alone, Mengenhausen said. "Partnerships like that are critical for small hospitals."

Despite the acrimonious split in 2011, Mayo's Mankato hospital still sends patients to Madelia for skilled rehabilitation care after surgery.

To survive the closure wave, Blad said, small hospitals must maintain good surgical and treatment outcomes for patients, but they also need to invest in so-called population health efforts that keep their communities healthy and prevent the need for hospital services. While population health measures are money-losers now, insurers are beginning to pay hospitals for keeping patients healthy rather than performing more procedures.

Blad predicted that more hospitals will align or engage in partnerships to absorb these costs. Despite its financial stability, RC hospital is considering ending its run as an independent and joining a larger system such as Carris Health, which was formed by CentraCare to run hospitals and clinics in nearby Redwood Falls and Willmar.

"You can't stick your head in the sand and rely on past successes," Blad said. "What we've been talking about in health care for years has to come home to roost. You need to be able to adapt and change."

Jeremy Olson • 612-673-77