Between Sanford Health and T. Denny Sanford, deep ties

Since 2007, T. Denny Sanford has donated more than $600 million to the South Dakota health care company that now bears his name, helping it quadruple in size and pursue an ambitious acquisition strategy.

So when Sanford Health emerged in March as a suitor for Fairview Health Services and the University of Minnesota's flagship hospital, Minnesota Attorney General Lori Swanson wanted to know more about the relationship between the sprawling health system and its billionaire benefactor.

David Link, a Sanford Health executive, acknowledged at a public hearing last month that the company gives business to Denny Sanford's companies. But, he said, such work is not believed to be a "material part" of their business.

"Denny is a pure donor to us," is the way Sanford Health CEO Kelby Krabbenhoft has described the relationship.

Public documents and interviews reveal a more complicated picture — a web of connections showing that Sanford's companies have multiple and beneficial ties to the nonprofit health care network he endowed. And while Sanford Health has dropped its bid for Fairview, Swanson's office continues to scrutinize the relationship because outstate Minnesota is already home to extensive Sanford Health operations, including clinics or hospitals in more than 30 communities from Bemidji to Worthington.

The Star Tribune has found:

• Sanford Health employs Rushmore Service Center, a company owned by Denny Sanford, for a portion of its debt-collection business, and uses First Premier Bank and Premier Bankcard, also owned by Sanford, for banking, check processing and a "limited number" of corporate credit cards, the company said.

• Sanford Health has committed millions of dollars for naming rights at civic arenas that promote Sanford's name and bank brand, and millions more to buy a Sioux Falls commercial building from Premier Bankcard, according to documents and company statements.

• Although Denny Sanford holds no board or management positions at Sanford Health, his longtime personal lawyer joined its senior executive team in August 2010. Dave Knudson, a former majority leader in the South Dakota Senate, still works as an attorney for Denny Sanford and is listed as vice chairman at the Denny Sanford Foundation. He also is a director at First Premier Bank and Premier Bankcard, and received $80,000 from Denny Sanford's political action committee starting in 2007 while running for public office.

In an interview with the Star Tribune, Krabbenhoft said the hospital is proud of its association with a donor of such magnitude and has invested appropriately to honor him. Spending money on athletic facilities and other civic projects is not uncommon in the health care industry, he said, and benefits the company. Such spending accounts for only one-third of 1 percent of the nonprofit's expenses, he added. Any business dealings with Denny Sanford's companies are done at arm's length, the company has said.

"That's one gentlemen who doesn't need any favors," said Krabbenhoft.

Denny Sanford declined to comment for this story.

"I strategize with them in long-term finance, but that's all," he told the Star Tribune in an earlier interview.

Whether such ties violate industry norms is a matter of opinion. It's not uncommon for a major donor to bid for business contracts from a hospital, said Bill McGinly, president of the Association for Healthcare Philanthropy. And nonprofit hospitals often solicit donations from their bigger vendors.

As long as any bidding process is competitive, at market rates, there is nothing improper, McGinly said.

But a former staff attorney for the Minnesota Hospital Association sees potential red flags.

"You are not supposed to use nonprofit resources to benefit private parties," said attorney David Feinwachs. "That's a legitimate question that could impact [Sanford Health's] tax-exempt status."

Three cases shed light on the ties between Sanford Health and its benefactor.

In 2008, one year after Sanford gave his first $400 million to Sanford Health, the hospital chain paid $3.75 million to Sanford's Premier Bankcard company to purchase a commercial building in Sioux Falls. The health company said the sale price was within the range of a third-party valuation for the property, which now houses Sanford Health support services.

In 2009, two years after Sanford's first donation, a branch of Sioux Falls Federal Credit Union was evicted from the lobby of the chain's flagship hospital in Sioux Falls. Kevin Kavanaugh, then a vice president at the credit union, called the event a "shocker" and said the credit union was replaced by a branch of Sanford's First Premier Bank.

Then last year, Sanford Health pledged $7 million toward a new 12,000-seat civic center in Sioux Falls. Two of Denny Sanford's companies were partners in that naming rights deal, which will advertise Denny Sanford's Premier Bankcard and his First Premier Bank. The building will be called the "Denny Sanford PREMIER Center."

Krabbenhoft said the Sanford name is synonymous with the health system and that the civic center deal includes displays of the Sanford Health brand inside the building. Besides, he said, it was a chance to honor a major donor and fulfill an obligation to the community.

"I like it when we can get two or three points of value out of one deal," Krabbenhoft said.

Feinwachs said he hasn't seen another case with so many levels of relationships between a tax-exempt health care system and a donor. "You can't go overboard, you can't go nuts," he said.

In Minnesota, Sanford Health paid $2 million to put Sanford's name on a public arena in ­Bemidji, where it owns the hospital. In Sioux Falls, it is spending $27 million to build and own a youth basketball "Pentagon" and a fieldhouse in a sports complex. A private hospitality company, TMI Inc., owned by Sanford Health's board chairman is building a hotel next to the complex in a deal subsidized by Sanford Health.

Krabbenhoft said the athletic endeavors tie in to the company's orthopedic health business, which is profitable and helps fund emergency rooms and other hospital units that are not self-supporting. The projects also serve broader economic development goals that are vital to growth, he said.

Swanson, whose office regulates charitable hospitals and other nonprofits, called the naming rights deals and sports investments a concern.

"The extraneous spending by Sanford Health seems inconsistent with a charitable hospital's mission of delivering high-quality patient care at the lowest cost," she said.

Swanson also questioned a letter that Krabbenhoft wrote to federal bank regulators in 2008. The public had been asked to comment on proposed anti-gouging rules that would have limited bank fees on credit cards — a major line of business at Denny Sanford's finance companies. Sanford Health appears to be the only health care company to comment on the regulations.

"What in the world is a hospital doing lobbying federal banking regulators to let credit card companies charge higher fees?" Swanson asked.

Krabbenhoft said Denny San­ford did not ask him to write the letter. Financial services are important to the Sioux Falls economy, he said, and the last-ditch, "subprime" credit cards sold to struggling consumers by Premier and other card issuers can help some Americans restore their credit.

Cindy Morrison, Sanford Health's executive vice president of marketing, said the hospital network chooses its vendors, including Denny Sanford's companies, based on their ability to deliver quality service at a fair price.

Rushmore Service Center, for example, is one of about a dozen firms serving Sanford Health's large-scale debt collection needs. According to the American Collectors Association, hospitals' bad debts normally are 4 to 6 percent of gross revenue. That means Sanford Health could be sending more than $125 million a year in unpaid bills to its collection vendors.

Krabbenhoft pointed out that Denny Sanford holds no management positions at the health company. As for having Sanford's attorney as an executive, Krabbenhoft called it a "wonderful coincidence."

"He serves both of us," Krabbenhoft said. "but we keep those things so distinct because of both parties' desire to do that."

Krabbenhoft said Sanford Health hired Knudson because he had worked for decades as its outside legal adviser, a relationship that proved key to Denny Sanford's historic introduction to the hospital.

In 2003, Knudson said, he played a "modest" role when Denny Sanford tried to make a $35 million cornerstone donation for a new Gophers football stadium. The U ultimately rejected that deal, saying too many strings were attached, including naming rights.

"It was Dave Knudson who said, 'Hey Kelby, I know a guy who isn't feeling very good right now about how he has been treated over a football stadium at the University of Minnesota,' " Krabbenhoft recalled.

tkennedy@startribune.com • 612-673-4213

jbjorhus@startribune.com • 612-673-4683