New documents reveal fracture between University of Minnesota and Fairview on eve of Sanford merger

Correspondence obtained by the Star Tribune through a public records request shows significant infighting between leaders of the University of Minnesota and Fairview Health Services in the weeks leading up to the health system's merger announcement with South Dakota-based Sanford Health.

In an Oct. 27 letter, Fairview's CEO said the U "appears to be profiting significantly" from its patient care collaboration with the health system while Fairview wasn't receiving the intended financial benefits from the partnership.

James Hereford, the Fairview chief executive, requested that in 2023 the health system trim its annual academic support payments to the U by $65 million until a new agreement could be negotiated. The university objected to the request, saying the health system's financial problems were not due to the university, while blasting "the depth of mismanagement by Fairview leadership."

"It is alarming to the University that a highly-compensated CEO of a $6 billion-a-year nonprofit health care enterprise cannot articulate a multi-step plan to bring Fairview back to good health," the U's senior vice president for finance and medical school dean wrote in a joint Oct. 31 letter to Hereford. A tax filing shows Hereford made some $2.78 million in 2021.

The documents show a serious breakdown in the working relationship between the partners while also offering greater detail on the financial challenges at Fairview, which has posted significant operation losses during each of the last four years. They also suggest significant disagreement over the productivity of doctors at University of Minnesota Physicians (UMP) who provide services within Fairview facilities.

Since 2018, Fairview and UMP have jointly operated a clinical enterprise known as M Health Fairview, one of the state's most prominent networks of hospitals and clinics. Fairview owns the U's primary teaching hospital in Minneapolis, as well as much of a sprawling health care operation that spans the university's East Bank and West Bank campuses.

"Your letter makes no claim or acknowledgment of shared responsibility for the operational and financial performance of the care system — the same system that your team, faculty and executives are running with Fairview," Hereford wrote in a Nov. 14 response to Myron Frans, the finance and operations chief at the U, and medical school dean Dr. Jakub Tolar. "We find this framing disappointing."

The next day, Minneapolis-based Fairview and Sanford Health went public with plans for a merger that would create one of the largest health systems in the Upper Midwest with more than 50 hospitals and 78,000 employees.

The Star Tribune obtained letters, emails and documents after a records request to the U.

They include an Aug. 17 correspondence from Frans saying university leaders learned of the merger talks on Aug. 7. The U needed more information about the proposed merger, Frans wrote, while cautioning against repeating mistakes that doomed a proposed Sanford-Fairview merger in 2013.

"The University (and UMP) cannot accept more or less fully baked transaction terms as a fait accompli at the eleventh hour," Frans wrote. "That will not lead to success."

Hereford, Frans and Sanford Health CEO Bill Gassen met along with other executives on Aug. 30. The U's general counsel followed up with a letter saying a meeting with university President Joan Gabel was "premature" and requesting the health systems "reconsider" plans for Fairview's board to authorize a letter of intent to merge on Sept. 8.

After another high-level meeting in October, Hereford requested the financial relief. He said the 2018 agreement to form the joint clinical enterprise upped Fairview payments over the next three years to $2.5 billion for academic support, physician and administrative expenses.

While Fairview was paying more to UMP in clinical and administrative expense, Hereford said almost all health specialties were consistently below median productivity levels.

"Fairview cannot sustain the current level of funds flow to the University of Minnesota and the University of Minnesota Physicians at this time," he wrote on Oct. 27.

"It appears from financial analysis of University of Minnesota financial disclosures that there is an estimated $70-$100 million dollars of 2019-2021 revenues exceeding funds spent," he wrote. "In other words, the University appears to be profiting significantly from the increased $2.5 billion in funding from Fairview, without Fairview receiving the increased financial benefits intended in our M Health agreement."

On Oct. 31, Frans and Tolar wrote a joint letter objecting to the idea of reduced funding, calling it "disturbing" and saying Fairview had ignored for months the U's offer to help with financial challenges.

"When at a June 15, 2022, meeting you and the Fairview Board Chair described Fairview's financial situation as a 'four or five-alarm fire,' the University responded with an offer to assist Fairview in developing a workout plan for presentation to the credit rating agencies," Frans and Tolar wrote. "... Fairview steadfastly refused to accept our offer."

Hereford's letter, they wrote, failed to mention that about 70% of the $2.5 billion in payments from Fairview to the U and UMP "are fair market value payments by Fairview for contracted patient care, clinical services and clinical management services provided by UMP employees." They called it "disingenuous" for Fairview to suggest its financial problems stemmed from the payments.

"Despite Fairview's poor financial performance, UMP has delivered substantial and enduring improvements in its realm of responsibility — quality of care and patient safety," Frans and Tolar wrote. UMP was doing "more than its part" to meet goals at M Health Fairview, they said, even though university doctors' "ability to see more patients is hindered by Fairview's systematic lack of investment over the last decade."

They also said Fairview was trying to avoid "an uncomfortable truth" by citing industrywide challenges for health systems.

"Other health systems in the Minneapolis-St. Paul market are recovering while Fairview is faltering," they wrote. "Fairview's current financial state is the result of more than a decade of poor operations and decision-making."

Hereford responded on Nov. 14 in a letter saying Fairview was making better progress on financial performance than other health systems in the metro. And he made reference to "substantial" investments at University of Minnesota Medical Center, where Fairview says it has recently invested more than $150 million of strategic capital.

Frans and Tolar asserted that U doctors were "as productive as possible" given the limitations created by Fairview. In fact, they wrote, U physicians were outperforming those employed directly by Fairview.

But Hereford maintained that Fairview payments to the U relative to productivity were "at a premium," pointing to a consultant's report suggesting Fairview's funds flow to the U was more than $100 million above average compared with peer academic medical centers.

"UMP performance is below median productivity; and yet, Fairview's payment floor is currently set at a minimum 50th percentile payment despite UMP production being below 50th percentile," he wrote. "As you are aware, many specialties are also compensated at 75th percentile, thus exceeding the 50th percentile payment floor for years 2019-2022 for below-median production."

The new documents indicate Sanford and Fairview executives were caught off-guard by the U's Feb. 24 announcement that it would request $950 million from the Legislature to take back from Fairview the university's teaching hospital.

"I am having a hard time reconciling the conversation our teams had last week with the content of the press release," Hereford said in an email to Frans that morning. "This will be, in my view, a set back to the work that we need to do to craft a new partnership."

Frans said in a March 2 email to Hereford and Gassen that "the reason for any friction is not the result of the University's commitment to its public health vision. It is that Sanford and Fairview ... continue to insist on a line-in-the-sand deadline that does not fit with the discussions required to do this right."