Sanford Health and Fairview Health Services are trying to merge almost a decade after their first failed attempt. But it is uncertain whether Midwest nonprofit health systems could sway the Minnesota agencies that derailed the previous proposal.
Sioux Falls, South Dakota-based Sanford and Minneapolis-based Fairview predict their tentative agreement announced Tuesday will materialize amid new leadership, additional service networks developing and a more appropriate strategic vision. Executives expect the deal, which would require cleaning up the offices of the Minnesota and South Dakota attorneys general and the Federal Trade Commission, to close next year.
Sanford, which operates 47 hospitals and medical centers primarily in the Dakotas and Minnesota, has doubled in size since 2013 and is rapidly growing its footprint in western Minnesota. By partnering with Fairview, Sanford will gain access to the large metropolitan market in Minnesota’s Twin Cities, complementing its existing network.
Fairview, which operates 11 hospitals in Minnesota, will benefit from Sanford’s higher credit rating and lower their borrowing costs while adding an insurance plan that covers 220,000 members.
“This is a merger that makes complete sense, and it reminds me of Advocate Aurora and Atrium, where two large systems with non-overlapping service areas, but still close enough,” said Kevin Holloran, senior. to find synergies that can work together,” said Kevin Holloran, senior. director at credit rating agency Fitch Ratings.
Downers Grove, Illinois, and Milwaukee-based Advocate Aurora Health and Charlotte, North Carolina-based Atrium Health received key approvals from Illinois officials on Monday, but the merger proposal is still pending. handle.
The Sanford-Fairview transaction represents the latest in a series of major cross-regional mergers, which are expected to continue as the number of smaller systems dwindles and as more local markets have been established. high consolidation. But state agencies worry that bigger may not be better, especially if parent companies outside of the state cut back on services.
What’s changed?
Sanford and Fairview are likely to enter into the agreement a degree of autonomy that Fairview will maintain over their local facilities, experts say.
The proposed 2013 transaction was opposed by then-Minnesota Attorney General Lori Swanson (D), who was concerned that an out-of-state system would cut off services in the North Star State and endanger patients. teaching institute of the University of Minnesota. State lawmakers introduced a bill to delay or cancel the merger, prompting Sanford to withdraw.
Matthew Anderson, a senior lecturer in health policy and administration at the University of Minnesota, said one of the main problems was that the university didn’t know about the negotiations before they were made public.
“One of the differences this time around is that the University of Minnesota is at least aware of the negotiation or is participating,” he said. “With the new entity headquartered in Sioux Falls and headed by the CEO of Sanford, those questions are likely to arise again. Whether they do so with the same enthusiasm remains to be seen.”
A Sanford spokesperson said the latest transaction will close as both health systems have new leadership and their business models and priorities blend well together.
Sanford CEO Bill Gassen will serve as chairman and chief executive officer of the complex system, will take the name Sanford Health. Fairview Health CEO James Hereford will serve as co-CEO for one year after the transaction closes. The systems indicate that each organization will maintain regional presence, leadership and councils in their respective markets.
This is Sanford’s third merger attempt in three years. The proposed partnership with Des Moines, Iowa-based UnityPoint Health in 2019 and Salt Lake City-based Intermountain Healthcare next year did not go beyond a letter of intent. UnityPoint’s board objected to the transaction, which may have been affected by a kickback agreement involving one of Sanford’s neurosurgeons. The Sanford-Intermountain deal stalled due to an unexpected leadership change.
In 2020, Sanford’s longtime CEO, Kelby Krabbenhof, abruptly resigned following controversy over his decision not to wear a mask in public. Former Fairview CEO Rulon Stacey resigned in 2015 after a 15-month term, after which the system brought in Hereford.
A spokeswoman said the Minnesota Attorney General’s Office is reviewing the settlement, assessing the potential impact on competition, and complying with charity and nonprofit laws.
M&A experts say the Federal Trade Commission is not expected to challenge the deal because there is no overlap in the services sector.
Jake Aygun, M&A team director at healthcare consulting firm Ponder & Co., says failed attempts help to better understand the type of partner an organization wants. Health systems are also being more proactive and intentional in merger proposals, he said, creating the prospect of more cooperation among leaders.
Same system, new strategy
Together, Sanford and Fairview can improve their position in the bond market, combining research efforts and promoting risk-based contracts, industry observers say.
Larger systems can negotiate better with payers and access more capital, said Rick Kes, healthcare partner at professional services firm RSM. He said health system executives think scale can better protect them from the challenges of labor, rising supply costs, inflation and rising interest rates.
“Even big health systems like Fairview and Sanford and others are going to have to be bigger in that regard,” says Kes.
Sanford’s rural network will likely complement Fairview’s urban presence, allowing organizations to deliver low-acute care services to community hospitals. Jeff Goldsmith, president of healthcare consulting firm Health Futures, said Sanford may need a larger urban facility to support its smaller operations in underserved areas. For example, urban hospitals are likely to share their specialists with rural hospitals, where it is often more difficult to recruit.
“I suspect that both are under significant financial pressure post-COVID, but you would wonder how combining the two together would alleviate that pressure,” he said. speak.
Marc Miller, director of population health at consulting firm LBMC, said Sanford’s integrated insurance plan and Sanford and Fairview’s network of post-acute, emergency and home health facilities have may promote the contract based on the combined company’s risk.
The University of Minnesota will boost Sanford’s research efforts and potentially increase funding, Anderson said. It can also strengthen the combined entity’s workforce, he said.
The association between Fairview and the University of Minnesota will expire after four years. That includes funding and support for research and training that perhaps the new organization will support.
“It’s an open question about how the new organization will scale the system appropriately and what service routes they plan to expand or reduce,” Anderson said. “All those more strategic decisions can take years to figure out.”
M&A market
The major health system linkages in this region are likely to continue as fewer smaller targets remain and systems are looking to grow their balance sheets.
Advocate Aurora and Atrium proposed their $27 billion merger in May; it will combine 67 hospitals across six states. Salt Lake City-based Intermountain Health and Broomfield, Colorado-based SCL Health completed a $14 billion merger in April.
Jordan Shields, partner at M&A consulting firm Juniper Advisory, said midsize and larger regional systems are realizing they are too small. Some health systems’ outpatient revenue has dwarfed their inpatient revenue, and they will continue to look for merger partners with a wide range of post-acute healthcare services, emergency and home health care.
“For the first time in my career, hospital reimbursements are growing more slowly than costs, and market inflation has exceeded healthcare inflation,” said Shields. “That’s putting a lot of pressure on providers and larger health systems that have proven they can deliver care more efficiently.”
However, healthcare economists do not think that hospital mergers often translate into more cost-effective care. A recent Modern Healthcare analysis of post-acquisition hospital operating costs found the best results to be mixed. Even if the merger reduces costs, those savings won’t necessarily pass on to patients and employers, economists say.
Costs are typically higher for academic medical centers, which often adds complexity to mergers. Health centers, often affiliated with state universities, may have a different view of their operations or have a different relationship with their state, which is not found elsewhere. Health systems often enter into merger agreements with the goal of avoiding any future faculty discord or discord, Kes said.
While the number of hospital transactions has declined in recent years, they are poised to rebound as health systems seek to scale up to overcome supply and labor costs, experts say Higher activity, higher interest rates, lower investment, and reduced repayments.
“Next year is likely to be the beginning of a period of significant increase in hospital M&A activity,” said Shields.
