Fairview offers to sell University of Minnesota teaching hospital to state

If the University of Minnesota wants to press its billion-dollar plan to take back ownership of its medical center, then it has a willing seller.

Fairview Health's chief executive on Monday endorsed a plan to transfer West and East Bank hospitals in Minneapolis to university control if it clears the way for the health care provider to merge with South Dakota-based Sanford Health.

"We support and formally endorse the University's five-point plan, as we currently understand it, to include the preliminary step of acquiring these assets," said a letter from Fairview CEO James Hereford, which was co-signed by Sanford CEO Bill Gassen.

U leaders responded with appreciation that Fairview was willing to yield control of Minnesota's primary teaching hospital and prevent ownership by an out-of-state entity.

"It is clear that you have a deeper understanding now of why we are opposed to the merger as it is contemplated," said a reply from Myron Frans, a U senior vice president of finance and operations, and Dr. Jakub Tolar, dean of the medical school.

It was a polite but icy exchange, reflecting a fractured relationship between long-time partners, who cooperated on the emergency conversion in 2020 of Bethesda Hospital in St. Paul into one of the nation's only COVID-focused hospitals.

Fairview's letter could urge a quick sale and remove the main obstacle to its merger, or call the U on a bluff if its plan is merely a stall tactic to obstruct the Sanford deal.

The U in its reply reminded Fairview of its strong negotiating position, backed by politicians who oppose any merger that puts South Dakota-based Sanford in charge of a teaching hospital that trains 70% of Minnesota's doctors. Political concerns also upset a prior Fairview-Sanford merger attempt in 2013.

An odd couple of former Minnesota governors — Democrat Mark Dayton and Republican Tim Pawlenty — testified at a Senate committee hearing Tuesday night against out-of-state control of the teaching hospital.

"This is the first time he and I have spoken together publicly, which underscores the great importance we attach to these critical matters," Dayton said.

"As far as I know, there is no precedent for an out-of-state entity owning or controlling a state's flagship … academic hospital," said Pawlenty, wearing a maroon U jumper.

Minnesota Attorney General Keith Ellison told senators that his investigation of the merger has reached a "new phase" of demanding sworn statements from key sources. A merger by May 31 seems rushed as Ellison said he is awaiting requested documents to assess whether the merger complies with charitable and antitrust laws.

"We continue to look at this from the perspective of whether or not this is good for Minnesota," he testified.

Hanging in the balance is the future of a U medical center starting to climb back up national rankings of research and teaching institutions, and a Fairview health system that has struggled financially despite being one of the largest hospital and clinic providers in the Twin Cities. Other hospitals in the system include Southdale in Edina, Ridges in Burnsville, St. John's in Maplewood and Woodwinds in Woodbury.

Fairview and Sanford leaders described their merger as an imperative in a post-COVID world, uniting systems with similar philosophies but different geographic service areas.

"The past few years have tested our nation's health care delivery systems and our caregivers like never before," Hereford said in Senate committee testimony. "Over half the care delivery systems in the country lost money last year, and 2023 doesn't signal a change."

Sioux Falls-based Sanford operates 11 hospitals in western Minnesota, including regional medical centers in Bemidji, Thief River Falls and Worthington. All had operating gains in 2021, other than Sanford's psychiatric hospital in Thief River Falls, according to data posted last month by the Minnesota Department of Health.

The price of the U medical center is likely to be a stumbling block, given that neither side can agree on the type of transaction needed.

The U last week unveiled a $950 million plan that would include a $300 million acquisition of the East and West Bank hospitals, including the Masonic Children's Hospital. U leaders see the transaction as a low-cost "transfer" of charitable, nonprofit assets back to the state.

"It centers on public value rather than a commercial question of fair market value," the U leaders said in their letter.

Fairview leaders see the transaction as more of a traditional sale of assets, and believe the cost will be higher than the U has proposed.

Fairview agreed in 1997 to pay $87.5 million to the university to take over the East Bank hospital and merge it with its Riverside hospital on the West Bank. The university had been struggling at the time with the financial burden of operating a teaching hospital amid the rise of managed-care health plans and their restrictive networks.

Changes in health care since then put the university in better position to take charge, Frans said in testimony Tuesday to the House Higher Education Finance and Policy Committee. The university has more faculty clinicians who refer patients to its hospitals, and the state provides more compensation to hospitals that train doctors, he said.

"That did not exist prior to 1996," he said. "That was one of the reasons why the university was having trouble competing with other systems."

Fairview runs all its hospitals under the M Health Fairview brand, which is part of a joint operating agreement with the university and its physician practice group.

Fairview under the deal gained the cachet of an academic affiliation while the university gained a broad network of clinics and hospitals from which to receive patients and research participants. The agreement also obliged Fairview to provide annual financial support — $50 million in 2022 — for the university's academic programs.

The university as part of its acquisition plan would want clinical partnerships in place with Fairview or other providers to maintain a steady stream of patients to its facilities.