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Leaders of M Health Fairview disclosed Friday that the giant health care system will cut as much as 2% of its staff, the first of several potential changes for the newly branded organization that could include reduced operations at the Bethesda rehabilitation hospital and the potential closure of St. Joseph's Hospital in downtown St. Paul.

The workforce reduction, announced in internal memos by University of Minnesota President Joan Gabel and Fairview chief executive James Hereford, is one of several strategies to emerge from a five-week series of "war room" sessions convened to address looming budgetary pressures.

"The decision by Fairview to lay off employees is incredibly difficult," Gabel wrote. "There are sound financial reasons why this action is necessary, but it does not lessen the pain employees will feel or the concern that patients may have due to this news."

Sources familiar with the recent strategy sessions told the Star Tribune that they involved about 50 leaders and doctors from M Health Fairview, the brand created by this year's operating agreement between Fairview Health and the university's academic medical center and doctors.

The sources said the sessions produced plans beyond the job cuts, which would take place in early 2020 and affect the equivalent of 500 full-time jobs within Fairview. Most of the cuts will be achieved by closing open positions rather than layoffs. Possibilities include reducing operations at Bethesda, partly by reducing referrals to the unique long-term care hospital from other hospital systems, according to the sources, who spoke on condition of anonymity because they weren't authorized to disclose these details.

Within three years, the organization also could close St. Joseph's, a financially struggling hospital in downtown St. Paul that was converted in 2017 to serve more mental health patients.

In an interview Friday, Hereford declined to confirm the plans under consideration for the two east metro hospitals, but he said that "all facilities" are being scrutinized. He said the organization is responding to changes in health care financing that will produce an estimated $80 million loss in net income next year, as well as rising costs for patients.

"The affordability crisis that consumers are facing right now — it really does demand and give energy to the necessity of health care delivery transformation," he said. "Health care has played the blame game and tried to deflect and say its been somebody else's fault. We're not going to do that."

Clinics also might be closed or reorganized in the next three years, he said, but patients should expect that the end result is faster, better care and more specialty services closer to their homes.

"Our patients want to stay in their communities," he said. "So the more we can bring that care to them, the better for our patients."

Bethesda is an aging facility near the State Capitol and serves a vital role of providing rehabilitation for patients coming out of intensive care after strokes, heart attacks and traumatic injuries. However, Hereford said reimbursement rates for that service have declined and that M Health Fairview must prioritize it for its own patients coming out of intensive care.

"We will have a strong bias for 'How do we use this as a core part of our … system?' " he said. "We can't be the answer for other health care systems that need to free up their ICUs."

Fairview Health merged in 2017 with HealthEast, largely to acquire its network of east metro primary care clinics that could feed patients to Fairview's specialists and to its flagship hospital, the University of Minnesota Medical Center. It also acquired Health­East's four east metro hospitals, including St. Joseph's, which was already losing money despite a multimillion-dollar renovation a decade ago.

Further losses were anticipated when St. Joseph's increased its number of inpatient beds for poorly reimbursed mental health care. Even so, M Health Fairview leaders were concerned when the hospital lost $32 million in 2017 and $44 million in 2018, according to figures from the Minnesota Department of Health.

St. Joseph's also was the target of two federal Medicare investigations this year, including one that faulted the hospital for failing to prevent a patient from attempting suicide using office scissors. The hospital also is canceling a contract with Universal Health Services, one of the nation's largest hospital management companies, which it had hired in 2017 to improve the expanded mental health services at St. Joseph's.

Competition from Google?

Margins for Twin Cities' hospitals systems had improved in recent years, in part through mergers that gave them stronger negotiating positions with health insurers over reimbursement rates. But signs of weakening have emerged. Bloomington-based HealthPartners recently announced 75 job cuts and the closure of its retail pharmacies. Minneapolis-based Allina Health reported revenue losses through the current fiscal year due to declines in federal Medicare reimbursement.

Hereford stressed that the latest moves aren't just about balancing a budget but about turning the loosely connected elements of HealthEast, Fairview and the U into an efficient and innovative care system.

One example is the new Mall of America clinic that opened this week and will provide on-demand medical care to shoppers and workers as well as travel medicine services for patients with airport layovers, he said.

"It's not just HealthPartners and Mayo" that are competitors in health care, he said. "We've got to worry about Walmart. We have to worry about Google."

Hereford said any proposed changes, at St. Joseph's or any other facility, wouldn't come at the expense of the system's commitment to mental health. He said colleagues are looking for ways to invest in outpatient and community treatments that prevent the need for as much expensive inpatient care.

Jeremy Olson • 612-673-7744