University of Minnesota Medical Center, Fairview in Minneapolis.

Joel Koyama, Star Tribune

Health merger motivations remain strong despite Sanford-Fairview failure

  • Article by: Jackie Crosby and Jeremy Olson
  • Star Tribune staff writers
  • April 14, 2013 - 10:07 PM


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.

That was part of the allure of a deal between Fairview with Sanford Health, the nation’s largest nonprofit rural health provider, according to executives on both sides.

University medical ­students and residents would gain more-varied training opportunities at Sanford’s hospitals and clinics, and patients with more complex illnesses could get directed to the University of Minnesota facilities for care.

This need for a strong “hub-and-spoke model” won’t go away as Fairview and the university move forward.

“With HealthPartners and Park Nicollet being a single entity, they now are breathing down Fairview’s neck in terms of market share,” said health care market analyst Allan Baumgarten. “At least in the Twin Cities, scale and size definitely matters.”

University President Eric Kaler continues to push for more integration, even though a proposal he made to block a Sanford Health deal and have the U take over Fairview is no longer under consideration.

Quest for efficiencies

The next challenge comes as Fairview and the university physicians try to work out the revenue-sharing kinks in their joint effort to build a $182 million outpatient medical center on campus.

These discussions will play out with a long-simmering sense among some doctors and administrators that promised synergies with Fairview still haven’t come to pass decades later.

It’s not an unusual complaint, and it remains unclear whether consolidation will ultimately be able to deliver better quality at a lower cost.

“When you integrate two systems, it can be challenging,” said Chris Hoffman, senior director in charge of marketing at TripleTree, a health care investment firm and consultancy. “It takes time, it takes investment. There’s a lot of complexity in the health care IT component in the hospital systems. Hospitals may not see all those great benefits — having more resources to do more for the populations they serve — right away, given the integration challenges.”

And then there’s the promise of lowering costs.

“Here’s the $64,000 question,” said Alwyn Cassil of the Center for Studying Health System Change. “If hospitals and health care providers are able to improve integration, there’s little doubt that’ll be better from a quality standpoint. The question is, will those efficiencies and savings get passed on to you and me, or will they keep it?” • 612-673-7335 • 612-673-7744

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