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Virginia's big question: Essentia or no?

Virginia Regional Medical Center (News Tribune file)

Rocci Lucarelli has lived in Virginia all his life -- 76 years, the same age as the Virginia Regional Medical Center.

Now, as a member of the Virginia Hospital Commission, Lucarelli will have a vote deciding what will become of the city-owned hospital.

"It's one of the biggest decisions we will make," he said.

Nevada Littlewolf also has to make that choice as a member of the Virginia City Council. She's well aware the decision will affect the lives of her two young children, friends and neighbors -- including 450 who work for the hospital, the city's largest employer.

"Everybody in Virginia knows that this is probably the most important issue that is affecting us right now," she said.

The votes by the Hospital Commission and City Council are coming in less than two weeks.

The choice: Whether Virginia Regional Medical Center should affiliate with Duluth-based Essentia Health, a decision that weighs local autonomy against the stability of a larger health system. It's the latest chapter in the growth of Essentia, which traces its roots to a small Duluth hospital started by Benedictine nuns and now reaches across the Upper Midwest and beyond.

Essentia's growth

Essentia is more than just the biggest health-care provider in Duluth. It sprawls over four states -- Minnesota, Wisconsin, North Dakota and Idaho -- with 17 hospitals and 64 clinics. Last year, it reported nearly $1.6 billion in revenue, dwarfing other Northland-based health-care providers.

It's investing in communities such as Aurora, where a new clinic opened last week next to the hospital it took over in 2010. Both will switch to electronic medical records, officials said, and there also have been radiology upgrades, and almost eight new full-time staff positions added.

But not all of Essentia's growth has been welcome. In Sandstone, the North Pines Area Hospital District board voted last fall to cancel a lease with Essentia signed in 1997. Ron Osladil, the North Pines board chairman, said Essentia hadn't invested in hospital improvements, promising a new building four years ago and then reneging on it.

Although Essentia officials recently have moved to mend fences, past experience makes people in Sandstone question Essentia's sincerity, Osladil said.

Dan McGinty, chief administrative officer for Essentia's East Region disputes that any pledges were broken. Essentia conducted studies about Sandstone's needs, he told the News Tribune, but never committed to building a new facility. Yet it did pump cash into the facility, which he said had been on the brink of closure when Essentia came in.

"We have been successful in terms of turning it around financially," he said.

Why hospitals join

Communities may have high expectations that no health system can satisfy, one industry observer told the News Tribune.

"The pressures on these systems are immense right now," said Terry Hill, executive director of the Duluth-based National Rural Health Resources Center, a nonprofit that describes itself as a resource for rural health information, education and technical assistance.

"They are being asked to do more with less," he said about entities like Essentia. "Sometimes (they are) being asked for a whole lot that they're not going to be able to deliver."

Essentia's McGinty said he understands how friction can occur between an out-of-town health system and a local community.

"They know that you can't just join a system, get all the benefits, get somebody's capital infused into your town and then be able to let loose and do whatever you want," McGinty said. "But the rub usually comes around: Where is that line drawn?"

Financial pressures may force smaller hospitals to consider joining big health systems, said Lawrence Massa, president of the Minnesota Hospital Association. Examples are the cost of switching to complex electronic medical records systems and increased regulatory require­ments. A health system can dedicate one department to perform those duties for all its hospitals and clinics. It also can devote resources to recruiting physicians and nurses across its system, Massa said.

But although local hospitals gain in terms of stability and recruiting, they do give up autonomy when they become part of the Essentia system, McGinty said. One reason for that is practical: The health system sells bonds to finance its expansion, and those who buy them "want to know that there's one place they can go if things don't go well financially."

Each Essentia hospital has a local board, McGinty said, whose guidance is valued. But the ultimate authority rests with Essentia's executives. In the health system's East Region, including all of its clinics and hospitals in the Northland, that means McGinty and Dr. Daniel Nikcevich, interim president and chief medical officer for the region.

Virginia's dilemma

The need for a change in Virginia isn't disputed. Virginia Regional Medical Center had been losing money before 2010. It broke even that year, and last year finished in the black, according to William Smith, the hospital's chief executive officer. It had a $600,000 surplus for the first quarter of this year, excluding an $850,000 one-time payment from the city. But Smith wasn't optimistic about sustaining that growth.

"So far it's been a great year, but we have some expenses coming up that we're going to address," he said. "We're hoping to show a profit for this year, but it's only going to be slight."

And slight profits aren't enough to sustain the hospital, which needs $36 million in infrastructure improvements, Smith said. "Our ability to reinvest is marginal, and our need to reinvest is great," he said.

After months of talks, the Hospital Commission received a final proposal from Essentia on May 23, said Joe Leoni, the commission's chairman. After a public forum on Thursday, the commission will vote on June 11 and the City Council the following day.

The deal wouldn't be official until September, Leoni said, after lawyers hammer out details of the lease agreement.

How will it work?

Last fall, Virginia voters overwhelmingly approved a referendum to change the hospital's management structure. The Virginia Hospital Commission and City Council then sought at least 18 proposals to manage the facility, Smith said. They received only four responses, and a committee picked Essentia's plan as the best, Smith said.

Here's how it would work: Virginia's hospital would become a secondary hub, meaning Essentia's other facilities in Hibbing, Chisholm, International Falls, Ely, Babbitt and Aurora would feed into Virginia. Cases too complex for the Virginia facility would go to Duluth.

That's a departure from the current model, in which all of those communities, including Virginia, feed directly into Duluth.

The city of Virginia would continue to own the hospital, and Essentia would make lease payments that would be reinvested in capital improvements, Smith said. Essentia would write a $7 million check as a starting point for infrastructure improvements.

The plan also obligates Essentia to add another $7 million to the hospital's payroll over the next five years, McGinty said.

An existing Essentia clinic across the street from VRMC would become the hospital's outpatient clinic. The combined operation would aid in recruiting doctors to Virginia, Smith said.

"You get a more stable atmosphere when you have the two merged or leased together," he said. "And the recruitment possibilities then would stabilize."

The mayor objects

Virginia Mayor Steve Peterson, who has a vote on the City Council, complains that information regarding Essentia's plans hasn't been satisfactory.

"We've been negotiating with Essentia for months," he said. "The questions still haven't been answered."

Peterson cites past promises regarding the Essentia-run Virginia clinic as one basis for his wariness.

"There were a lot of promises being made ... about how we were going to have a regional heart center, specialty and primary-care physicians," he said. "Didn't happen."

McGinty acknowledged the perception that some questions hadn't been answered.

"We're trying hard not to make promises that may be perceived to be not kept in the future," he said. "So we're choosing our words very carefully, and we perhaps haven't been to the point where we can be specific enough to satisfy Mayor Peterson's questions."

As far as the promises, McGinty said he has looked into them. He said some of them occurred long ago, and the two sides have a difference of opinion on whether they were kept.

"Mayor Peterson is entitled to his opinion," he said.


City Councilor Littlewolf said she wants to hear what is said at Thursday's forum before making up her mind. Her concerns stem from dealing with the existing Essentia clinic in Virginia, particularly services for children.

"If the clinic was serving the community in a way that people really felt good about, I don't think there would be a lot of questions about whether the hospital should merge with them," she said.

Leoni, the Hospital Commission chairman, said he's confident the commission will approve the plan, and he thinks Virginia residents will accept it once they know the details.

"They know the handwriting's on the wall that we have to affiliate with someone," he said.

Commission member Lucarelli said he's not sure how he'll vote, although he's leaning toward "yes." But he wants an ironclad deal vetted by lawyers.

His doubts come from reading about Essentia's conflicts in other towns, Lucarelli said, as well as the perception that past promises weren't kept.

"It's a tough decision," he said. "Up until you make the vote you wonder: Am I doing the right thing?"

Coming Monday

While some Northland hospitals have merged with or are exploring mergers with Essentia Health, Community Memorial Hospital in Cloquet seems to be not just surviving, but thriving as an independent.