Introduction The Fargo, North Dakota healthcare market is served by many different physicians and hospitals. This area includes an eastern North Dakota and a portion of western Minnesota. St. Lukes Hospital and the Fargo Clinic are both major players in this region. St. Lukes was a community not-for-profit hospital, and the Fargo Clinic was two separate for-profit corporations.
Until recently, they have been operating as separate entities. In 1986, they formed a partnership and proceeded to operate separately but under the trade name of MeritCare. This was done to position both of the companies for future growth, merger, or expansion. As of January 1, 1993, the restructured nonprofit organization had been functioning as one. The official merger date was set for July 1, 1993. It is felt that the merger will allow both organizations to cut costs and increase stability by eliminating duplication of facilities and services, increasing overall efficiency, and providing better economies of scale.
The ultimate goal of the merger will be to provide an integrated, cost-effective system of care that will be appealing to the market they operate within. Background The Fargo-Moorhead Metro Area that these facilities serve had a 1990 population of over 150, 000. The total market area includes another 215, 000 persons. Medicare, Blue Cross/Blue Shield along with other traditional forms of health insurance, dominates the payor market.
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HMOs and PPOs make up less than five percent of the market. The total market area has 14. 6% of the population over 65, which is higher than the national average. This number should help explain the importance of the Medicare market. The Fargo Clinic, in 1993, had 250 physicians in 30 locations.
Five of these are larger clinics, with the rest being smaller community-based facilities. They had over a million patient visits in 1992, with over half coming from Minnesota. Revenues were $150 million which represented over a 50% growth in the last five years. The Fargo Clinics physicians represented 70% of the total in the market. In the mid-1980 s, they embarked on a rapid expansion by purchasing many area primary care centers. This has provided them with a solid base of much needed primary care capacity from which to grow on.
St. Lukes Hospital is equipped with 357 staffed beds and 40 nursery bassinets. They are a tertiary care facility and the largest hospital in North Dakota. Over 99% of the admissions, which are served by their 2, 400 employees, already come from physicians of the Fargo Clinic. In 1992, they had over 100, 000 days of inpatient care. The birthing facility delivered more that 1, 500 babies in 1993.
Market share has steadily increased to 60% of inpatient visits in their service area, with 60% of them coming from Minnesota. St. Lukes also operates the Roger Maris Cancer Center, which provides care to a larger region than the acute care hospital. Total revenues have increased over 60% in the last years, and they have a fund balance of over $69 million.
Strengths In 1986, Fargo Clinic and St. Lukes Hospital merged to create their biggest strength an integration of facilities and services (MeritCare).
This eliminated duplication, which allowed them to focus on other health care strategies as well as cut costs. Radiology, Information systems, Plant operations, Human resources, Planning and marketing, Housekeeping, Utility management, Maintenance of equipment, and telecommunications are several areas in which MeritCare can consolidate and cut costs. St.
Lukes strengths also include that they are the largest hospital and private employer in North Dakota. As of 1993, outreach activities at St. Lukes Hospital were established. These networks included such things as oncology (20 locations), emergency heart services (30 locations) and maternal child care (18 locations).
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These outreach activities will help them to grow and strengthen their market position. The Roger Maris Cancer Center is a strength of MeritCare.
It provides cancer treatment to people in three states, pulling patients from eastern North Dakota, northern South Dakota and western Minnesota. This has been a very successful venture increasing patient visits per month by 100. The strengths of the Fargo Clinic add significant strength to the MeritCare merger. One of the main strengths of the clinic is that it is one of the largest multi specialty clinics in the country with 30 locations throughout North Dakota and Minnesota.
It also presents an integrated, cost-effective system of care that should be integral in obtaining profitable managed care contracts. By having the hospital and clinic operating as one entity, the quality of care should improve with a slower rise in costs. This increase in quality of care will improve community health care and increase their patient load. Weaknesses A weakness of MeritCare is shown through the non-integration of information systems. This task has not been accomplished due to many priorities that are present.
Once MeritCare is fully integrated, information systems will be a major strength. Other weaknesses include Fargo primary care doctor revenues are not sufficiently covering their overhead and compensation expenses. The clinic also is short physicians in OB/GYN and some other specialty services. The lack of physicians could cause MeritCare to lose significant amounts of patients. A final weakness of the clinic deals with its physician compensation. Its compensation is narrow when compared to other clinics.
Due to regulatory constraints compensation is a very complex and difficult issue that needs legal consultation involved throughout the process. Only 20 percent of the specialists in the clinic are paid in the upper range of compensation benefits. Opportunities Opportunities that were triggered during the merger are: (1) Health care reform, (2) Changes in the marketplace, (3) Reimbursement for both physicians and hospital, and (4) Structuring and managing joint ventures more effectively. These opportunities will lead MeritCare to a vertical integration, which will allow them to lead a higher quality of care and slower rise in costs for the community.
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Vertical integration will raise the publics interest and increase Meritcare overall patient revenue. Other opportunities of this merger is an increase in efficiency of operation, streamlining of administration, and the advantages of economies of scale. The consolidation of departments will help MeritCare to be more efficient in their operations. The consolidation will allow them to cut costs as well as streamline administration. The merger created economies of scale that allows them to order large amounts of supplies at a discounted rate. With the merger, there will be increased capital for both organizations.
They can use the capital for such things as a new integrated information and delivery system. This will allow Fargo and St. Lukes to have better access to information and be able to share information between one another in a simple, fast manner. Physicians as well as patients can benefit from such a system.
Finally, MeritCare may want to look into reentering managed care. MeritCare may want to consider trying to establish an HMO. With the merger, there will now be more access to the necessary capital, which will allow them to provide training for physicians to function within an HMO environment and improve the current data systems. Threats There are several threats that MeritCare may possibly face. First, with the merger between Fargo and St. Lukes to form MeritCare, there may be a cultural as well as managerial conflict.
St. Lukes had been a not for profit, community hospital for many years while the Fargo Clinic had been made up of two for profit organizations. Differences in management styles between the organizations could indeed be a grave problem for MeritCare in the future. The Fargo Moorhead operating area has traditionally been a traditional health insurance coverage area. The threat in this is that the development of Health Maintenance Organizations in the nearby Minneapolis-St. Paul area could change the entire payment process for MeritCare.
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The organization may not be able to handle this shift. In addition, MeritCare is also facing troubles with the current pay system. There is declining reimbursement for both physicians and the hospital due to DRGs. Another threat for the organization is that they may have a hard time holding on to specialists.
The reason for this is that specialist compensation is expected to decrease while primary care physicians compensation is expected to increase. This may cause some specialist to leave the area in search of greater compensation. Another threat that MeritCare may face because of the merger is the new government regulations in structuring and managing joint ventures. The federal government has been making it more difficult for these types of mergers. Finally, other threats for the organization are that they could end up losing patients due to the merger. Even though competition has not been a major problem in the past, if area residents become unhappy with the merger, then this may be a cause of concern in the future.
Recommendation We recommend that when considering health care reform and changes in the marketplace, that MeritCare take a proactive approach. Easy access to patients, quality of care, customer satisfaction, affordable costs, and preventative measures need to be implemented in order for them to position themselves ahead of the competition and increase their patient base.
