Fairview Health Services is expanding its presence in northern Minnesota with an affiliation agreement that makes Grand Itasca Clinics and Hospitals in Grand Rapids a wholly owned subsidiary of the Minneapolis-based health system.

No cash was exchanged as part of the deal announced this week. It essentially transfers ownership of the nonprofit Grand Itasca system to Fairview, a nonprofit that already operates six hospitals in the state including a medical center in the nearby Iron Range community of Hibbing.

Fairview has agreed to make investments in clinical services such as oncology and cardiology in the Grand Rapids area, said Mike Youso, the chief executive at Grand Itasca, during a Tuesday interview. Plus, Fairview will help the smaller hospital negotiate better payment rates with health insurers, Youso said, and better contracts with vendors.

"We've had a loss in the last three years," said Youso. "With their size, expertise, resources … we will have the ability to continue to be sustainable, and reinvest in our clinical needs within the community."

The deal helps Fairview grow its network of providers in the Iron Range, rather than let Grand Itasca join with the growing systems at Duluth-based Essentia Health and South Dakota-based Sanford Health, said Allan Baumgarten, an independent health care analyst in St. Louis Park.

The affiliation also continues the trend of community hospitals surrendering independence to merge with larger hospital systems. Just 38 of the state's 147 hospitals are independent, according to data from the Minnesota Hospital Association. The remainder are connected with larger health care systems via ownership, management, lease or affiliation.

Mergers offer economies of scale to small free-standing hospitals. They also can benefit from financial and technical assistance in adopting electronic health record systems that have become central to operating health care systems.

Baumgarten called it "very possible" that Grand Itasca was approached by, or had sent out feelers to, the Essentia and Sanford systems. Essentia has a clinic in Grand Rapids, he said, and a hospital about 20 minutes away in Deer River. Sanford, meanwhile, has a large hospital to the west in Bemidji.

With the affiliation agreement announced this week, no staffing changes are planned at Grand Itasca, which will keep its name and local board of directors. Fairview will add three representatives to the hospital's existing 12-member community board.

"The fact that we have that relationship with [the hospital in] Hibbing, we have an interest in continuing to develop collaborative relationships with providers like Grand Rapids and others in that northeast part of Minnesota," said John Doherty, system executive for business affiliations and partnerships at Fairview Health Services.

"There's a capital commitment made to support development of a specialty center," Doherty said, "but no purchase price."

Without a merger, Grand Itasca would lack the financial wherewithal to make needed investments in facilities and personnel, said Youso. Fairview's operations in nearby Hibbing means both hospitals will have access to specialty physicians who live and work in the community, he said, rather than visiting from afar for just a few days each week or month.

Grand Itasca Clinic and Hospital is a multi-specialty clinic with more than 60 health care providers, a 50-bed hospital and a pharmacy. In 2015, Grand Itasca was the 54th largest nonprofit in Minnesota with $76 million in revenue, according to a Star Tribune analysis. Expenses exceeded revenue that year, however, by $8.6 million.

Fairview is one of the state's largest operators of hospitals and clinics, including the University of Minnesota Medical Center in Minneapolis and Fairview Southdale Hospital in Edina. In 2015, Fairview posted $140 million in operating income on nearly $3.9 billion in revenue.

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck