Minn. AG to investigate Sanford's proposed takeover of Fairview

Fairview Health Services, the Twin Cities' second-largest hospital and clinic group, is weighing a merger with South Dakota-based Sanford Health in negotiations that have triggered concerns on the part of Minnesota Attorney General Lori Swanson.

A merger could transfer control of the University of Minnesota Medical Center, a major research and teaching hospital, to a company with no history in Twin Cities health care, Swanson said. In addition, she said, Fairview is a Minnesota charitable trust with obligations to taxpayers and private donors who helped the business grow over the course of a century.

"I am troubled by the notion that a small group of people at Fairview and Sanford would conduct private discussions without the benefit of the public's input regarding a matter of such sweeping consequences for Minnesota,'' said Swanson, who disclosed that the negotiations are underway.

She said her office has learned that Fairview's board is scheduled to meet April 8 for a business retreat, presumably to discuss the Sanford matter. She has scheduled a hearing at the State Capitol on April 7 to give the issue a public airing.

A Fairview spokesman said talks with Sanford are in "very early stages'' and won't move forward unless "we and our partners at the University of Minnesota believe there is merit to a merger.'' But the company also noted that the Fairview board has a responsibility to ensure the organization's long-term sustainability. Several university officials sit on the Fairview board.

Sanford CEO Kelby Krabbenhoft confirmed that the two organizations are engaged in an "exploratory review of each organization'' and that Sanford has agreed to hold discussions with officials at the U "for the purpose of learning more about each organization.''

University General Counsel Mark Rotenberg acknowledged the talks but said the university has many questions and welcomes the attorney general's call for a public hearing. He said the U also has "very strong support'' from Gov. Mark Dayton. "Our concern about having an out-of-state owner come in and take over the management and financial affairs of our longtime Fairview partner raises a number of very important questions,'' Rotenberg said.

The university's chief concerns, Rotenberg said, center on how Sanford would support the school's medical research and clinical training missions, a franchise he said is worth hundreds of millions of dollars a year to Minnesota. Rotenberg said another question is how a takeover by Sanford might affect the current governance system under which university physicians manage campus medical facilities.

Hospital mergers and acquisitions have been accelerating nationally in recent years in reaction to state budget cuts and federal health reforms, which hospital leaders expect will drive down reimbursement rates. About 95 hospital deals were announced nationwide in 2012 — the most in nearly a decade — according to Irving Levin Associates Inc.

Just two months ago, Bloomington-based HealthPartners and Park Nicollet joined forces, and on Wednesday, Mayo Clinic and the Shriner's children's hospital in St. Paul are scheduled to announce a "unique relationship."

A Fairview-Sanford deal would marry the Twin Cities' second-largest hospital and clinic provider with a South Dakota organization that bills itself as the nation's largest nonprofit rural health care provider. Sanford has doubled in size since 2007 with acquisitions of health care facilities in North Dakota and non-metro parts of Minnesota. Sanford is similar in size to Fairview, with net revenues of nearly $3 billion and roughly 25,000 employees.

On Tuesday, Fairview noted the consolidation trend when it responded to the merger talks. "Given the rapid pace of change in our current health care market, it is prudent for our board to be having these kinds of discussions,'' Fairview spokesman Ryan Davenport said.

Fairview was formed more than 100 years ago as a Minnesota charitable trust. Swanson said it has grown into a major health care player in part because it is tax-exempt and has received private gifts of land and money. In exchange, she said, Fairview has community obligations that should be honored and protected.

In a letter to Fairview on Tuesday, she said the assets that Fairview has accumulated over the years with public and private support should not be allowed to benefit Sanford's expansion or other private business plans. Swanson has not filed suit to block the proposed takeover, but said she will weigh all options to protect Minnesota's interests.

Swanson noted that the regulation of charitable institutions is one of the oldest and most important duties of the state's attorney general and that a significant portion of Fairview's assets are "restricted to being utilized for health-related activities for the benefit of Minnesota patients.''

Krabbenhoft's statement alluded to the possibility of a merged Sanford-Fairview organization being chartered in Minnesota instead of South Dakota. He said the timing of the proposed consolidation makes sense in part because Fairview is in the midst of a leadership transition and has not yet replaced CEO Mark Eustis, who was dismissed about 10 months ago.

Fairview is one of Minnesota's largest employers and in its partnership with the U has a role in training about 70 percent of the state's physicians.

Public review of any deal between Sanford and Fairview would be likely to include a close look at Sanford, which fell into noncompliance with the attorney general's office last fall. According to state records, Sanford was notified in September that it failed to file a copy of it 2011 tax return and other financial records with the attorney general's office, which regulates nonprofits. In December, Swanson's office notified the company that its nonprofit registration in Minnesota was no longer in effect.

The Sioux Falls-based organization was known as Sioux Valley Health Care before receiving a series of gifts from T. Denny Sanford, a St. Paul native who earned a fortune in the credit card business in South Dakota. His donations included a $400 million gift in 2007 that was considered the largest ever to a health care organization in America.

Tony Kennedy • 612-673-4213