Fairview, HealthEast plan merger to form Twin Cities biggest hospital network

Fairview Health Services and HealthEast Care System announced merger plans Wednesday morning to form the Twin Cities' largest network of hospitals and clinics, a move that would combine a strong primary care presence in the East Metro with the medical sophistication of the University of Minnesota Medical Center in Minneapolis.

Leaders of the two health systems said merging would create efficiencies and save money — a particular concern for HealthEast given recent financial losses — and expand the referral base of clinics sending patients with complex needs to the university hospital.

"It allows us to lower cost and create more value and take waste out," said James Hereford, Fairview's president and chief executive, who would lead the expanded organization of 11 hospitals and 56 primary care clinics.

A deal is anticipated in late spring, although it requires approval by the Federal Trade Commission (FTC) and Minnesota Attorney General Lori Swanson, whose public challenge helped scuttle merger talks between Fairview and Sanford Health in 2013.

The lack of overlapping services or service areas makes it less likely that regulators will object on antitrust grounds, said Allan Baumgarten, a veteran Twin Cities health care analyst.

Fairview probably was keen to add a hospital such as Woodwinds in a suburban, upper-income location, he added, while HealthEast needed more specialty care to offer patients. "HealthEast … needed to grow, but is kind of landlocked in its geography," Baumgarten said.

Fairview owns the U's medical center, in addition to Fairview Southdale in Edina and Ridges in Burnsville, among other hospitals. HealthEast owns St. Joseph's in St. Paul, St. John's in Maplewood and Woodwinds in Woodbury. Based on operating revenue of $3.9 billion for Fairview and $965 million for HealthEast in their 2015 fiscal years, the merged system would be the largest in the Twin Cities. Allina Health currently rivals Fairview with 14 hospitals and $3.8 billion in revenue in 2015.

The potential merger makes sense geographically, given how Fairview's network of clinics and hospitals wraps to the west and north around HealthEast's facilities in the St. Paul area. Both organizations also have services beyond clinic and hospital care: HealthEast operates an ambulance service and Fairview operates the Ebenezer brand of long-term care services and owns the PreferredOne health plan.

The merger is likely to give patients more clinic options closer to home and easier access to specialists, said Kathryn Correia, HealthEast's president and chief executive.

"The entire system can give [patients] a clearer path to the care that they need, particularly subspecialties," Correia said. "It allows a greater range of services than HealthEast provides today, to be sure."

HealthEast posted an operating loss of $7.9 million in its 2016 fiscal year, and of $5 million in its first fiscal quarter of 2017 — despite being the leading provider of inpatient hospital care in the East Metro.

Fitch Ratings last year downgraded HealthEast's bond rating because of concerns about its investments in primary care, which isn't a moneymaker compared to other specialties. Correia said the merger is more about improved medical care than her system's financial vulnerability.

"The community benefits from us working together," she said.

Minnesota has seen extraordinary consolidation of hospitals and clinics over the past decade as health systems have tried to widen their patient networks, streamline costs in areas such as electronic record keeping, and fortify their negotiating positions with health insurers.

Sanford Health, Essentia Health, Mayo Clinic and CentraCare Health have swallowed up hospitals and doctor groups across rural Minnesota, while Park Nicollet and Methodist Hospital in St. Louis Park merged in 2013 with HealthPartners and Regions Hospital in St. Paul.

Health insurers have been uneasy about the trend. On one hand, a larger hospital-clinic system allows insurers to offer consumers a health plan that features tight networks of one or two providers with complete lines of medical care. On the other hand, research has shown that larger hospital groups gain market power to negotiate payment rates with insurers, which can drive up costs.

"Of course, mergers are going to happen, but the key question is how it impacts the medical bills that Minnesotans will pay," said Jim Schowalter, chief executive of the Minnesota Council of Health Plans, which represents the state's bigger health insurers.

As with the HealthPartners deal, the proposed Fairview-HealthEast merger will be scrutinized by the FTC and the U.S. Department of Justice to ensure that it doesn't artificially inflate prices and suppress competition. In a written statement, Swanson said Wednesday that she will "participate" in those reviews.

Fairview failed last year in an attempt to merge with the University of Minnesota Physicians group, which co-manages and staffs the U's flagship hospital in southeast Minneapolis. Hereford said the addition of HealthEast should strengthen Fairview's position as a provider of academic medicine, because it will have more clinics referring patients to the U for specialty care.

"The opportunity to combine both the academic and community care delivery systems provides a unique strength," he said.

The proposed deal would maintain Fairview's board of directors but add three members from HealthEast.

Fairview's name was set to disappear in the merger with the University physicians. Hereford said it is too soon to discuss new branding or names, or changes in facilities or jobs for the combined system's 32,000 employees.

Correia said the deal is likely to mirror the HealthPartners merger, in which Park Nicollet retained its brand at its West Metro hospital and clinics.

Jeremy Olson • 612-673-7744

Staff writer Chris Snowbeck contributed to this report.