HealthEast merger weighs on Fairview financial results

A big merger with HealthEast, the St. Paul-based network of hospitals and clinics, weighed on the financial performance last year for Fairview Health Services, contributing to a 25 percent decline in operating income.

The effect was not a surprise given the relative profitability of the two health systems and should give way to better financial performance in the future, said Dan Fromm, the Fairview chief financial officer, in an interview Thursday.

Adding HealthEast helped boost annual revenue at Fairview to more than $5 billion, while pulling the Minneapolis-based health system into a debate over whether a proposed expansion at Regions Hospital in St. Paul will hurt nearby St. Joseph's Hospital, which Fairview now owns.

"We knew that we would have this dampening effect as part of our relationship with HealthEast, but we also knew that there was a lot of qualitative and quantitative benefit to that, that would take some time to materialize," Fromm said. "We're still very pleased and think it was the right thing to do strategically, but there was an investment financially in the short term that we needed to make."

Fairview owns and operates 11 hospitals, including the University of Minnesota Medical Center in Minneapolis. The nonprofit also includes more than 100 clinics, more than 40 pharmacies, several long-term care facilities and a health insurer called PreferredOne.

Nonprofit health systems, in general, are under financial stress due to rising labor costs and the need to invest in technology, analysts with Moody's Investors Service said in a report this week. In addition, nonprofit health systems are struggling on the revenue side as more patients have coverage through government health insurance programs that typically pay less than health plans for commercial customers.

All of those factors have been at play for several years now, Fromm said, and contributed to the Fairview results for 2017.

For the year, Fairview posted operating income of $98.5 million on $5.27 billion in revenue, for a profit margin of 1.9 percent. In 2016, Fairview saw operating income of $130.6 million on $4.36 billion in revenue for a profit margin of 3 percent.

HealthEast, which includes hospitals in Maplewood, St. Paul and Woodbury, merged into Fairview on June 1. During the final seven months last year, the former HealthEast system posted an operating loss of $16.5 million on $575 million in revenue. Fromm said he expects the financial performance will improve as Fairview benefits from back-office efficiencies and other merger advantages.

The state Health Department is reviewing a proposed 100-bed Regions expansion to see whether it's in the public interest. Lawmakers expect to vote on the proposal before the Legislature adjourns in May.

While most public comments filed with the state have been supportive of the proposal, concerns have been raised by Fairview, the Minneapolis-based Allina Health System and the Sisters of St. Joseph of Carondolet, the religious order that founded St. Joseph's Hospital in the 19th century.

"I can't speak for Fairview, but our understanding is that this may close St. Joseph's Hospital," said Ann Thompson, a spokeswoman for Sisters of St. Joseph, in a statement about the Regions proposal to the Star Tribune this week.

Asked about the concern, Fromm said Fairview officials "don't have immediate plans to close St. Joe's."

But he added: "We don't think the impact will be favorable, as those patients particularly are redirected from [St. Joseph's Hospital] and elsewhere. So that's going to put pressure on St. Joe's, and we're going to have to react to that."

Regions is owned by Bloomington-based HealthPartners, which is one of the state's largest health insurers. Both Fairview and Sisters of St. Joseph have suggested that with additional space at Regions, HealthPartners will steer people with its health insurance to its own hospital.

In a statement Thursday, Regions said that's not the goal. Patients are selecting Regions, the hospital said, for its quality, affordability and specialty services such as treatment for burns and severe traumatic injuries.

"We don't believe our bed request will negatively impact other hospitals in the east metro given the increase in demand ... in the market," Regions said in a statement.

Christopher Snowbeck • 612-673-4744 Twitter: @chrissnowbeck