Health merger motivations remain strong despite Sanford-Fairview failure

Fairview, Sanford Health and the University of Minnesota all face pressure to get bigger.

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University of Minnesota Medical Center, Fairview in Minneapolis.

Photo: Joel Koyama, Star Tribune

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The abrupt end to merger talks at Fairview Health System last week still leaves complex questions about how the organization will compete and thrive in the years ahead.

The urge to merge, in ways big or small, likely won’t go away, even now that South Dakota-based Sanford Health has pulled out of discussions.

“It’s like musical chairs,” said Martin Arrick, a health care analyst with Standard & Poor’s. “No one wants to be the last one standing.”

Across the nation, hospital systems, doctors’ groups and free-standing clinics are feeling competitive pressure to bulk up to keep costs down and gain access to capital and well-insured patients.

That was the motivation behind the talks between Fairview and Sanford, which attracted intense scrutiny from Minnesota Attorney General Lori Swanson. Sanford walked away last week, with its CEO saying the organization’s policy is to “only go where we are invited.”

One issue Swanson raised was whether it was a good idea for the University of Minnesota’s hospital, which Fairview has run since 1997, to come under out-of-state control. But academic medical centers have not been immune to the consolidation wave.

“All of the university hospitals are saying, ‘What’s the right size? What size should we be?’ ” said Dr. Joanne Conroy, chief health care officer of the Association of American Medical Colleges.

Fairview, the Twin Cities’ second-largest hospital and clinic system, next turns its attention to strengthening its relationship with the U. About 70 percent of the state’s doctors are trained at the U’s teaching hospital, which was in dire financial straits when Fairview took it over in 1997, and the U’s medical center draws billions in grants for research.

But Fairview and its university hospitals face competition from the larger Allina Health, as well as the Mayo Clinic and a newly merged HealthPartners, which brings together an insurance company and a much bigger geographic footprint with Park Nicollet’s Methodist Hospital and clinics.

“Academic medical ­centers tend to be high cost by their very nature,” Arrick said. “Everyone wants to lower costs and improve quality. In a world where the pie is shrinking, you have to get bigger and bigger to do that.”

Yet while prevailing winds may say that bigger is better, the courtships can be rocky and the merger outcomes aren’t always favorable.

Mergers aren’t a bed of roses

A recent analysis of hospital mergers and takeovers by Chicago-based Booz & Co. found that only 41 percent of the hospitals outperformed their competition in the two years after their deals.

Mergers involving academic medical centers were among the least successful.

“They get into these mergers thinking they are going to get a lot of costs out — and they don’t,” said Minoo Javanmar­dian, a partner with Booz’s global health practice.

Many deals are based on outdated assumptions, she said, that merged hospitals can cut administration, add revenue by increasing bed capacity and gain negotiating leverage with health insurance companies.

Academic medical centers are more expensive to run than community hospitals, so they need partner hospitals to funnel challenging and lucrative patients to them.

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