Merger between South Dakota, Utah hospitals tips the scale

SIOUX FALLS, S.D. — Dan Liljenquist had two years to get to know Sanford Health in a different kind of setting.

When Intermountain Healthcare launched a national effort, looping in hundreds of hospitals to create generic drugs at the hospital level, Sanford was one of the first to join the call in 2018.

Liljenquist chairs the resulting nonprofit, Civica Rx, and also serves as Intermountain's senior vice president and chief strategy officer.

When the two yet-separate executive teams from Sioux Falls and Salt Lake City, Utah, started coming together for discussions, there was already an air of familiarity, Liljenquist said.

"It's been fun for me to be in the middle of this proposed merger because it feels in many ways like a family reunion," he said.

Hospital mergers have become an increasingly common tool as health care providers look for competitive edges and cost savings in a sector known for large-scale consolidation.

Sioux Falls' biggest health care provider looks poised yet again to participate in the trend, this time giving up its top leadership and headquarters to Intermountain Healthcare, a similarly sized system with a footprint covering Utah, Idaho and Nevada, the Sioux Falls Argus Leader reported.

But large-scale growth through mergers and acquisitions have also become a way for hospital systems to compete against insurance companies and each other as providers push to keep beds filled and patients from paying another hospital for care.

"Sanford has always wanted to be bigger, have a larger geographic presence," said Allan Baumgarten, an independent health care analyst out of Minneapolis, Minnesota. "They always saw themselves as being the acquirer but maybe they decided that the better choice was to hook up with a very highly regarded system like Intermountain."

Growth has been a pillar of Sanford's strategy for years, at least since the name-altering gift that came from credit card billionaire T. Denny Sanford in 2007.

The Sioux Falls-based system absorbed providers in North Dakota and Minnesota, made a run at acquiring one of the biggest health care systems in the Minneapolis area and recently acquired the national network of senior care centers run by the Good Samaritan Society.

Growth through mergers and acquisitions has been a part of the health care industry going back decades, but recent years have brought increases in the scale of consolidation as massive networks of systems join forces to cover more ground, both in terms of services and geography.

The number of transactions has been flat in recent years – about 90 per year -- but the number of mergers between already sizeable health care systems has continued to increase, according to Kaufman Hall, a consulting firm that releases an annual report on hospital mergers and acquisitions.

Kaufman Hall calls these transactions "mega mergers," in which even the smaller system has in excess of $1 billion in annual revenue.

"I think the scale of the activity is bigger," Baumgarten said.

Intermountain has also used acquisitions to grow its footprint, including a deal announced in September to acquire a smaller outfit out of Idaho.

The system is buying Saltzer Health in the state north of its home base. Saltzer runs hospitals in the Boise area with about 80 doctors across eight locations.

"It's part of the same strategy," Liljenquist said.

In 2018, Intermountain spearheaded an effort to make generic drugs at the hospital level as a solution to problems such as drug shortages and price hikes. Providers frequently face shortages of important treatments options from morphine sulfate to amino acids and multi-vitamin infusions.

Intermountain's effort, which became Civica RX, now involves nearly 1,400 hospitals. Civica has developed 40 drugs in the last two years, far outpacing its own expectations, Liljenquist said.

"Really the battle for the future of health care is being waged right now across the country," Liljenquist said. "There are very clear differences in the way that health care is delivered."

Why merge?

He emphasized the Salt Lake City-based system's focus on accountability and providing the best possible care to patients and communities.

"The future of health care needs to be value-focused," Liljenquist said. "We think there is a need for a scaled, not for profit value system in this country."

But large-scale mergers in health care are often borne out of money and competition.

At first, it was the insurance companies.

Consolidation of the industry started ramping in the late half of the 20th Century as independent hospitals run by nonprofits or religious groups started joining together to push back against insurance companies that were using their larger scale to exert force on the industry, Baumgarten said.

Loose networks of community hospitals gradually became more tightly run health care systems.

In more recent years, the focus of those systems has shifted to growing geographical boundaries, revenue streams and capital investment.

Today, systems still compete with insurers, but they also compete with one another.

According to Deloitte's 2017 report on hospital mergers, a survey of leadership teams for hospitals that were on the receiving end of an acquisition showed that the most common reason for wanting the merger was access to capital, most of which was used to upgrade facilities or clinical information systems.

For Sanford, one of the benefits of joining with Intermountain comes with the system's insurance arm, SelectHealth.

Sanford CEO and President Kelby Krabbenhoft told the Argus Leader when the intent to merge was announced that a stronger insurance pool would solve a problem for Sanford.

"It's just a scale issue," Krabbenhoft said at the time.

Joe Lupica is an expert on health care mergers and chairman of consulting firm Newpoint Healthcare Advisors out of Arizona.

Lupica believes one of the big reasons for the merger comes down to the potential to join insurance offerings, giving Sanford the opportunity to combine its 210,000 members with the 900,000 members of Intermountain's SelectHealth.

That takes away any of the complications of having two systems that are geographically divided by hundreds of miles.

Sanford Executive Vice President Micah Aberson said the Sioux Falls-based system would benefit if it had the chance to join insurance products with Intermountain.

SelectHealth has a very highly rated Medicare Advantage plan, and its insurance integrates well with its system, driving quality by paying fixed amounts to incentivize good care, Baumgarten said.

"There's no question that there's opportunity there," Aberson said. "Intermountain has a maturity and sophistication around their health plan offering that I think is very complementary."

Who's affected by a merger?

Leadership for both Sanford and Intermountain stressed their similarities.

"There's no reason to duplicate those types of investments, the more people they touch the more efficient you can be," he said.

So how will Sioux Falls patients be affected by the deal?

For the short term at least, patients shouldn't notice any significant changes.

There are no plans to for cuts or closures as a result of the merger—executives on both said that's not what this merger is about.

"I'm doubting this is a merger driven by efficiencies and cuts, as much as its driven by using their insurance product or really driving business in the market," Lupica said.

"We've had a chance to kind of understand the Good Sam strategy and frankly think it's a good strategy," Liljenquist said. "What remains to be seen is, what is the impact of COVID on the long-term care business?"

While merger participants often mention the potential for improved quality of care, there's little evidence to support that an exchange of best practices results in better care for patients, Baumgarten said.

"Most of the research says the quality gains are not significant and the efficiencies to the extent that they're achieved don't result in lower prices," Baumgarten said. "They result in higher profitability to the health system."

Deloitte's 2017 report found no evidence from the hundreds of mergers it analyzed that there were quality gains for patients after a merger, that improvement or regression depended on the system.

One of the benefits that would come with a merger again comes in the form of Sanford's ability to compete in the insurance sector.

Avera declined requests to be interviewed for this story and sent an emailed statement instead.

"Avera remains committed to our region, and continuing to be the trusted health care partner to offer innovative and quality services," spokesman Cale Feller said in an emailed statement. "We have worked closely with Sanford for many years, especially during this pandemic. We congratulate them and look forward to having a new partner in our market to collaborate with on improving health care disparities."

What are the next steps?

The next steps for Sanford and Intermountain include finalizing the terms of the merger and going through a regulatory process involving state and federal checks and balances.

Liljenquist seemed confident about the Federal Trade Commission and others signing off on the deal.

But coming to terms can also be a complicated and drawn out process.

Last year, Sanford's planned merger with UnityPoint Health in Iowa was called off with little explanation, just before a Monday meeting in Des Moines.

"We are disappointed that the UnityPoint Health board failed to embrace the vision," Krabbenhoft said at the time.

Last year there was a failed $14 billion merger effort between two Texas-based systems, including Dallas' Baylor Scott & White Health and Memorial Hermann Health System in Houston, again abruptly nixed with little explanation.

And again, in October another massive merger attempt failed when Advocate Aurora Health, serving Illinois and Wisconsin, and Beaumont Health in Michigan ended talks on becoming what would have been a $17 billion health care system.