Collapse of Fairview merger leaves U casting about for a partner

For months, leaders of Fairview Health Services and the University of Minnesota medical school promoted the blockbuster merger they were negotiating.

The U would reclaim top-tier standing nationally as a research medical center. Fairview would become a cutting-edge academic health system, giving patients highly sophisticated medical care.

Instead, the deal abruptly fell apart last month after Fairview executives claimed the U wanted too much control. The collapse has the U looking for a new partner — and left a string of questions about the future of the medical school, one of Minnesota's flagship institutions, and its status as a leading research institution.

In the mid-1990s, the U ranked 15th in the nation for grants awarded by the National Institutes of Health, a widely watched measure of research prowess; by last year it had fallen to 32nd. Closer integration with Fairview would have given the U the steady flow of patients — and medical revenue — that can sustain clinical research.

"One of the university's goals in coming closer to Fairview was access to capital," said independent health care analyst Allan Baumgarten. "Because that has been a perennial challenge for the university."

With little chance of both sides returning to the negotiating table, the U says it wants make a deal with a different partner.

"University leadership feels very strongly that we need to build a very strong academic health system for the people of Minnesota," said Dr. Brooks Jackson, university vice president for health sciences and dean of the medical school.

Mistake to sell hospital?

On paper at least, Fairview was the most logical partner to extend the U's clinical reach beyond campus. The two have worked together for 20 years, ever since the U sold its hospital and clinics to Fairview.

Now, ironically, that sale could hamper the U's efforts to find a new partner. While the U can offer suitors the clinical expertise of its 750 physicians, it can't bring to the table the facilities where they work.

"The university lost control of their university hospital, which is their primary teaching and research site," said Dr. Robert Wilson, former chief of clinical cardiology at the U, who is still affiliated with the faculty. "It is kind of like you sell your factory but you still make your parts there."

The U sold the hospital to stem financial losses that were cutting its ability to fund research and education.

But Wilson traces the decline in the medical school's research standing to the hospital sale.

"They sold it to a company that really was quite dissimilar in terms of culture and had no academic background," Wilson added. "If you sell it to the wrong party, then the medical school is going to flounder and that is what happened."

Jackson says it's hard to judge the decision in retrospect.

"At the time it may not have looked like a mistake at all," he said. "It could be we [would] be worse off today" if the hospital hadn't been sold. "Obviously in terms of our current vision in what we want to achieve, having sold the hospital makes that vision much more difficult."

Recognizing that the sale resulted in a partial alliance that was falling short of expectations, leaders began negotiations toward a complete merger of Fairview with the University's physician group.

The Fairview name would have been replaced by University of Minnesota Health, or "M Health" for short. All seven hospitals and 42 clinics in the Fairview system would be rebranded.

With top academic physicians on board, the system would offer patients the type of cutting-edge care they couldn't get elsewhere, at the same time generating money that could be invested in new research and education opportunities for the medical school.

But when merger discussions dragged on beyond the self-imposed deadline of March 31, university officials eventually presented Fairview with a set of merger agreements that it had written itself. "It was just continuing and continuing," Jackson said of the negotiations. "We decided that we had to give them the final proposal."

A question of control

After studying the U's final offer, Fairview's interim chief executive knew that it would not get approval from the Fairview board. "It was basically handing over the system to the authority of the university," said David Murphy. "That we could not do."

Although M Health would operate with its own CEO and a board of 14, Murphy said the ability of the new organization to take action could have been hampered by ongoing university oversight. By Fairview's count, the merger proposal spelled out at least 27 provisions that would have curtailed the power of the M Health CEO and its board, either through university veto power, unilateral authority or joint decisionmaking.

"Our issue was that we had to have these safeguards for the academic mission," said Jackson. Because university physicians would be employed not only by M Health as clinicians but also by the university as researchers and educators, the U needed protections to maintain the integrity of its programs, as well as its ability to recruit and retain top faculty, Jackson said.

Both Jackson and Murphy said the two sides at times appeared close to a deal, but ultimately could not reach compromise on the safeguards that the university wanted.

"I do think when all is said and done, the concept of who would be in control of this system was one that ultimately would surface," Murphy said. "It just surfaced later than maybe we would realize."

In the meantime, both Fairview and the university say they will continue working together under several affiliation agreements.

As the U considers other merger possibilities, leaders say new partnerships might focus more on outpatient care, which is replacing extended hospital stays for many procedures.

"Health care is changing considerably," said Dr. Bobbi Daniels, chief executive of the University of Minnesota Physicians. "Thinking about new ways of providing some of our care might be one option."

One example cited by Daniels is the U's relationship with Tria Orthopedic Center, where patients receive outpatient procedures and stay in a Hilton Hotel.

Daniels said potential partners have already expressed interest.

"There are other organizations that are beginning to reach out to us and we will explore those," she said. "These are organizations that have already much more of a focus on academic medicine than Fairview.

Glenn Howatt • 612-673-7192