Mayo Clinic wants to make Rochester a global medical destination. But who benefits?

ROCHESTER, Minn.—In early November, snow clings to every surface in this town, and locals dart from their cars into the warmth of low-slung buildings. The gray sky is still, save the clouds of steam dissipating off of rooftops.

That is, until you get downtown. There, the largest public-private economic development project in the state’s history is taking shape. The city’s modest skyline is now dotted with high-end hotels and apartments. There are glassy, modern-looking buildings where startups dream of breakthroughs. Concrete construction barriers, chain-link fences, orange cones and cranes mark the site of the next flashy thing.

This is the Destination Medical Center campus. It’s a sweeping economic development plan partly funded by $585 million in public dollars over 20 years for projects to lure patients to healthcare powerhouse Mayo Clinic as well as bioscience companies the system partners with, along with residents and visitors. The tax dollars don’t go directly to Mayo, but they fund infrastructure that supports hotels, office buildings, street improvements and public transportation.

The state funding is delivered incrementally on the condition DMC’s leaders prove they’ve made progress toward the promised $5.6 billion in private investment from developers and new businesses. Of that total, $3.5 billion will come from Mayo itself in the form of expansions to its Rochester campus.

Around 36% of Mayo patients coming to Rochester are either from out of state or international. Those patients and their families want nice hotels, restaurants and things to do—amenities promised under the project.

“When people touch Mayo Clinic, at first when they get there, find where their room is, find where their hotel is, all of that—they had a very positive experience,” said Lisa Clarke, executive director of the DMC Economic Development Agency, a private not-for-profit created to promote the project. “When they stepped off the curb of Mayo Clinic, they had less confidence they were going to find what they were looking for out in the community. That gap is DMC.”

Mayo also expects the DMC to boost its revenue through new products and other innovations created through closer collaborations between Mayo scientists and their counterparts from businesses flocking to the area. That includes big names like Google, Epic Systems Corp. and Boston Scientific. Buildings like One Discovery Square are intended to foster such partnerships.

“We’re looking for places where people are able to rub shoulders and be more innovative with each other,” said Jim Rogers, Mayo’s chief business development officer.

It’s an equally sweet deal for the city and state, which expect to collect up to $8 billion in net new tax revenue over 35 years. The project also promises to create more than 30,000 new jobs.

“Right now, I would say it has to be seen as one of the—if not the most—significant redevelopment (projects) in the country,” said R.T. Rybak, chairman of the DMC Corp.’s governing board and former mayor of Minneapolis.

But no rapid change occurs without hitches. Some longtime residents say the new apartments and hotels don’t feel accessible to them, but rather, seem to be directed at affluent visitors who can drop thousands of dollars a night on fancy hotel suites. They feel the community’s needs are being overlooked and not enough has been done to mitigate the effect of rising property values on low- and middle-income residents and small businesses.

Property taxes increased 38% between 2013—the year DMC was approved—and 2019 in the county that includes Rochester. Mayo itself has been hit hard, since despite its tax-exempt status, the system’s clinics and labs are among the county’s largest property tax payers.

The recent news that Mayo is pulling out of two southwestern Minnesota communities while opening a new hospital in the wealthy United Arab Emirates doesn’t help the image that Mayo is catering to the affluent.

Even though Rochester has a population of 117,000, a fraction of the size of cities like Cleveland or Baltimore, the DMC’s promoters tout the vision of making it America’s City for Health. Others are skeptical. Dee Sabol, executive director of the city’s not-for-profit Diversity Council, said the DMC causes tension for locals who feel they live in the shadow of a world-renowned hospital where they can’t get care. She said Mayo in some cases is not an affordable option even for people who have health insurance. “We can’t be America’s City for Health and truly be a destination medical center if we don’t have health equity for the people who reside here,” she said.

Mayo officials said they work with patients to support those unable to pay for necessary care.

Others want to see a commitment from Mayo to treat more low-income patients in an exchange for that public funding.

In 2018, just 3% of Mayo’s net medical service revenue came from Medicaid, which is lower than other world-renowned health systems. That metric was 8% at Cleveland Clinic that year, and 6.5% at Cedars Sinai Health System in Los Angeles.

“People need to feel they have access to your services,” said Rulon Stacey, a managing director at Navigant. “Otherwise, it feels like you’re using state money to cut out services from people who need it most. That to me seems ethically counterintuitive.”

Even on a brisk November day, Clarke—the public face of the DMC—is excited to lead a reporter on a walking tour of the development’s busiest stretches, including the future site of a public plaza that will feature art, entertainment and green space.

Along the way, Clarke points out the newest apartments and offices, and roads slated to become more bike-friendly. In the lobby of a hip new building called One Discovery Square, where Mayo’s researchers will work alongside companies like Philips and Epic, she explains over the whir of a latte steamer that she sees something different—a new construction project or business going in—every day in Rochester. At first, people complained that the DMC wasn’t doing enough. Now, she said, she hears the opposite.

“I figure we must be doing something right,” she said. “We’re right in the middle.”

Clarke is quick to correct the widespread misconception that the DMC is part of Mayo, pointing out that, although the DMC was Mayo’s brainchild, the two are separate legal entities. Even so, Clarke came to her position from Mayo, and Mayo still covered her nearly $326,000 in total compensation in 2018, plus the salaries of three others at the DMC Economic Development Agency. Its eight-member board includes three Mayo executives. Mayo also contributed $1.3 million to the agency’s budget in fiscal 2020.

The DMC EDA can’t greenlight tax spending on its own. Instead, it recommends projects to the eight-member board of DMC Corp., another not-for-profit established by the 2013 state legislation authorizing the development. The DMC Corp. board has appointees chosen by the governor, the city, the county and Mayo, and it’s the entity that—along with the city of Rochester—gets to decide how tax dollars are spent.

“It really creates much less risk for the state of Minnesota in terms of the public investment,” Clarke said. “Because if we don’t build, more dollars don’t flow. It’s a really interesting investment model, one that has garnered interest from across the country right now, and certainly in the state of Minnesota.”

Early on, Rochester Mayor Kim Norton said she had hoped the city and DMC Corp.’s board would act as mediators when it came to vetting the DMC Economic Development Agency’s ideas and turn down projects that weren’t in the best interest of the city instead of swiftly approving them. “I sometimes feel like it shouldn’t be rubber-stamped,” she said. “Everything should be questioned.”

Rybak, the DMC Corp.’s board chairman, called DMC the “anti-Foxconn,” referring to neighboring Wisconsin’s widely criticized deal with the Taiwanese manufacturing company. Wisconsin agreed to give Foxconn $3.6 billion in tax breaks and other subsidies in exchange for a $10 billion plant and 13,000 jobs in lakeside Mount Pleasant. Foxconn later dramatically scaled back its investment.

With the DMC, Rybak said not only is far less public money involved, none of it goes directly to Mayo.

Before Minnesota lawmakers approved the funding, Mayo’s then-CEO, Dr. John Noseworthy, made it clear that Arizona or Florida, where Mayo’s other campuses are located, would welcome the development there. The current Mayo CEO, Dr. Gianrico Farrugia, was unavailable for comment on this story.

“There is only one Mayo Clinic,” Rybak said. “It has the opportunity to expand a lot of other places. As a Minnesotan, I really want it to expand here.”

The DMC is about supporting Mayo’s growth, but Clarke wants people to know it’s also for the community. On the walking tour, she paused in front of a historic theater that DMC funding recently paid to restore and reopen as an events and retail space, kicking off with a Beatles exhibit. It borders a grassy plaza between downtown buildings. Here, the DMC plans to add water features, new benches, lights, trees and public art. It’s one of several public spaces included in the master plan.

“We want community members to come here and play and bring their families and enjoy that space,” she said.

Mayo is actively recruiting new businesses to Rochester, in an effort to spark marketable technologies. Mayo is putting researchers and clinicians on each level of the One Discovery Square building. The same will be true of the planned Two Discovery Square.

The goal is twofold, Rogers said: Develop tools that improve patient care and then commercialize them.

“From a business development realm, we’re trying to drive revenue back into the institution,” he said.

A man believed to be paralyzed for life after a surfing accident is walking again after a Mayo neurosurgeon injected stem cells into his spine.

A patient with chronic obstructive pulmonary disease went from using an oxygen tank to climbing a mountain after receiving a double lung transplant at Mayo.

A young boy born with four congenital heart defects is as active as ever after surgeries at Mayo.

It’s these kinds of stories that underpin Mayo’s reputation as world-renowned for treating the rarest and most serious conditions. They are what bring patients from around the world to its Rochester campus.

They also help explain why Mayo’s Medicaid revenue is lower than that of its peers. Dennis Dahlen, Mayo’s chief financial officer, said being a “destination practice” necessitates protecting its capacity to treat the most severe conditions and referring routine cases elsewhere.

“It’s a one-of-a-kind business model and it’s hard to wrap your hands around it, but we’re really trying to create space and the availability of our services to a patient load that can really benefit from it,” he said.

Mayo’s Rochester campus, for example, has a proton-beam facility. If Medicaid patients need that level of treatment, Mayo would absolutely see them, Dahlen said.

“If what somebody is looking for is normal surgery or a normal regime of therapy that can be provided maybe closer to their home or at another facility, we might make a different choice,” he said.

Nonetheless, Mayo’s tax-exempt designation requires the system to provide free care to low-income patients and community programming, although federal law doesn’t dictate how much. The system took some heat in 2017 when it came to light that former CEO Noseworthy had instructed employees to prioritize privately insured patients over those covered by government-subsidized programs like Medicaid.

Noseworthy later walked back the statement, but the fact remains that Mayo’s Medicaid mix is far lower than other specialized health systems. Dahlen said that’s also because a significant proportion of Medicaid spending covers pediatric and obstetrics care, services Mayo does not deliver at its Arizona and Florida campuses. Medicaid paid for 52% of all births in Arizona and 57% in Florida in 2017, according to the Kaiser Family Foundation.

About 0.66% of Mayo’s expenses—$78 million—went toward providing free or discounted care to low-income patients, or charity care, in 2018. That’s about the same as Cedars-Sinai. At Cleveland Clinic, the ratio was 1.3%.

A Mayo spokeswoman said each year the provider receives more requests for charity care than it can reasonably accommodate. Mayo evaluates each request against defined criteria.

That’s even as Mayo’s financial performance outpaces its peers. The health system drew $12.6 billion in revenue in 2018 and posted a 5.6% operating margin that year, compared with 1.7% across all not-for-profit and public hospitals.

“It’s been a concern for a number of years: Is Mayo moving toward a model that’s catering toward a wealthier class?” said Norton, Rochester’s mayor.

Stacey, of Navigant, was CEO of Minneapolis-based Fairview Health Services, the University of Minnesota affiliate now known as M Health Fairview, when lawmakers approved the DMC. At the time, he said it was frustrating to see so much money go toward helping a competitor.

In hindsight, Stacey said he understands the economic benefit to the state, but he still thinks it should have come with an agreement to treat a certain level of low-income patients.

“I think the state has every right to help a unique brand like Mayo, but I think simultaneously they have every right to ensure that Mayo participates on equal footing,” he said.

Of the roughly 28,000 residents in Olmsted County covered under Minnesota’s Medicaid program, about 9,000 receive most of their primary care from Mayo, according to the state’s Department of Human Services, although the agency said that number may not include all Mayo locations or Medicaid patients.

It’s also possible that Mayo’s positioning in Rochester is keeping the county healthier. Olmsted County is the third-best performer out of 87 Minnesota counties, according to the Robert Wood Johnson Foundation’s County Health Rankings.

Rochester’s Olmsted Medical Center, which runs a roughly 60-bed hospital, drew more than $8 million in operating income on $215 million in operating revenue in 2018, Modern Healthcare Metrics data show. CEO Tim Weir said he has found Mayo accepts “any and all patients” whenever his providers need to refer out. He said his practice and Mayo work in collaboration to treat the local Medicaid population.

“From our perspective, the relationship is superlative,” he said. “We have no issues at all with the care our patients need.”

Public officials’ support for the DMC development hinges on the idea that what’s good for the state’s largest private employer will inevitably benefit the city of Rochester and state of Minnesota.

Norton often hears people complain that the DMC is all for Mayo. “And certainly it is to benefit Mayo Clinic,” she said. “But if Mayo Clinic thrives and our downtown becomes more beautiful and walkable and livable, everybody should be able to benefit. That’s what I want to happen.”

A recently approved circulator bus will—in five years, if all goes according to plan—replace a lane of car traffic in the city’s congested downtown.

Not everyone is in favor. Norton voted against it, arguing the city’s residents aren’t ready to eliminate a lane of traffic, at least not until its population grows much larger. She said she often hears from constituents who agree with her.

DMC EDA officials say not planning ahead for the anticipated growth would be disastrous. They estimate commuters into downtown will grow from 35,000 today to more than 60,000 in 2040.

“When you’re not in a crisis, sometimes I think it takes a bigger push,” Clarke said. “DMC is that disruptor and that push that helps us get ahead of the game.”

Before DMC, there wasn’t any real momentum to improve the city’s public transit, said Jerome Ferson, CEO of United Way of Olmsted County.

Ferson said he can understand why residents feel the DMC projects haven’t been directed at them, but he doesn’t see that as a problem. To the extent the additions attract visitors, they benefit the community, he said. “The benefits may be after those amenities are in place and the visitors are occupying them and spending money,” Ferson said. “It’s secondary benefits, which are less visible.”

That’s a common argument in support of using tax dollars to attract private businesses. In developing a package of billions of dollars worth of tax incentives to attract Amazon’s second headquarters, Maryland estimated the project would support 101,000 total jobs and contribute $17 billion per year in additional activity to the state’s economy.

But there are ways in which some argue development isn’t good for everyone. Indeed, some research has connected government incentives to attract private businesses to higher income inequality. A 2018 analysis by Governing magazine found the 100 cities and counties with the highest levels of income inequality also reported the biggest tax abatements. And a Brookings Institution study the same year of four cities’ tax incentives found that industries receiving incentives paid above-average wages, but that black and Hispanic workers were underrepresented in those industries.

The DMC has poured more than $13 million in public funding into infrastructure to support new hotels, including a high-end Hilton whose website lists rooms typically starting at around $300 per night during the workweek and a presidential suite with two king beds costing around $4,000 per night. A steakhouse in the hotel serves steaks for $33 to $80.

“The conversation was always about, ‘We need to attract the affluent,’ ” said Dave Beal, a Rochester resident active in community groups monitoring the DMC’s impact. “We want patients who will pay cash.”

Property values are rising rapidly, although locals debate how much of that is because of the DMC. Mark Krupski, who oversees property records and licensing for Olmsted County, said multiple factors are driving the increase, and that the trend started before the DMC legislation was passed in 2013.

And while rising property values are generally viewed as a good thing, the trend has exacerbated the need for affordable housing.

Olmsted County struggles to offer adequate housing for its poorest residents, said County Commissioner Sheila Kiscaden. The county directs its limited housing vouchers to residents at 30% of area median income or below, to meet the demand and federal rules, she said. That’s a much lower threshold than the DMC’s stated designation of 60% area median income or below in order for units to be considered affordable.

Rochester’s area median income is about $72,300, according to a 2019 community assessment, compared with $70,300 in Minnesota and $62,000 nationwide.

Few housing units are being built even at 60% of area median income, Kiscaden said. “Some of the units they point to, we have some documentation, there are very few units going in that are 60% of AMI,” she said. “There’s a few. And there’s almost nothing below 60%.”

John Edmonds, co-founder of local not-for-profit Project Legacy and a Rochester resident for 23 years, said he doesn’t believe the housing being created under DMC is geared toward people with low or moderate incomes. “What seems to be operating is a lack of attention—other than just lip service—to this lower strata of our economic community,” he said.

Data provided by the DMC EDA show that of the 1,090 housing units under construction or completed in the DMC district since 2015, 116 are designated as affordable, or 60% of area median income or below. Fewer than half of those units are in projects that received DMC funding.

“It’s in Mayo’s best interest to say, ‘We’re going to build affordable housing so we can house people who work at Mayo,’ but regular people still can’t afford it,” said Julie Tackett, a local resident who said her income is closer to 20% of Rochester’s area median income.

Some argue that even 60% of Rochester’s area median income—about $43,000—is not affordable. That’s because Mayo’s presence in the city pushes its median higher than in both Minnesota and the U.S.

“With the inflated rates here, that is still not an affordable rate for people who are, let’s say, a family with two service-level jobs,” said Sabol, of Rochester’s Diversity Council.

Some locals say they worry the lack of affordable housing options is making it more difficult for restaurants and other small businesses to hire workers. The city is already experiencing a shortage; Olmsted County’s unemployment rate hovers around 2%.

“When you have fast-food places offering $15 an hour, that tells you that there is a labor shortage,” Kiscaden said. “When fast-food places are putting in kiosks so you self-order and then they hand you a cup and you fill the cup, that tells you there’s a labor shortage.”

Mayo announced in 2017 it would contribute $4 million over two years toward a collaborative local effort to address affordable housing in Rochester. Erin Sexton, Mayo’s director of community relations, said the system has been distributing the money in different ways, with investments focused on housing that’s at 60% of area median income or below. Sexton said Mayo has a long-standing, collaborative relationship with the community, including on housing issues.

Rochester City Council member Michael Wojcik said the $4 million helps, but it’s “a bit like trying to turn a ship by firing pingpong balls at it.” In reality, it has to be a collaborative effort between the city, Mayo and a number of organizations, he said.

In any case, Wojcik said the problems associated with growth are much preferable to the problems associated with being in a community that doesn’t have a future. In the end, he said, Mayo needs Rochester and Rochester needs Mayo.

“I very much understand that Mayo is such a critical and important part of this community and I’m grateful to have it here,” he said, “but most of the complaints stem from Mayo and DMC and most of the good things that are happening stem from them as well.”