Sanford Health has had eye on Twin Cities for years

While it was news to many that Dakotas-based Sanford Health was in merger talks with homegrown Fairview Health System, the rural powerhouse has been looking for a toehold in the Twin Cities for years.

Before looking to Fairview, Sanford was in talks with Allina Health for more than a year before parting ways last year, said Sanford CEO Kelby Krabbenhoft.

"The Twin Cities is the economic engine for the entire Upper Midwest," he said Friday. "Eventually, Sanford's evolution, Sanford's growth, was going to engage somebody from the Twin Cities."

The courtship with Fairview began in the fall, and both sides now describe talks as "preliminary" and "early in the game." No letter of intent has been signed.

But after Attorney General Lori Swanson essentially outed the talks this week before they'd been internally vetted, CEOs from the two organizations sought to explain the benefits of exploring a deal.

In a word it's: competition.

"The next five to 10 years is going to be a time of great change and turbulence," Fairview interim CEO and board chair Chuck Mooty said. "If Fairview is to be competitive in a highly competitive marketplace, what is it we need to do to position ourselves appropriately within that horizon?"

Fairview, which includes the University of Minnesota Medical Center and University of Minnesota Amplatz Children's Hospital, is the metropolitan area's second-largest health care system behind Allina Health. But as the nationwide trend toward mergers and alliances sweeps the state, Fairview is under pressure on several fronts.

A merger between HealthPartners and Park Nicollet became final in January, a deal that brings together a large insurance player with a hospital system and creates one of the state's largest health care companies in terms of revenue. The Mayo Clinic continues to buy clinics and create exclusive affiliations for its Mayo Clinic Care Network, most recently adding Minneapolis' Shriners Hospitals for Children this week.

Sanford Health, meanwhile, is the nation's largest nonprofit rural health care system, operating mostly in the Midwest. With headquarters in Sioux Falls, S.D., and Fargo, N.D., it is fueled with more than $600 million in donations from St. Paul native T. Denny Sanford. The organization is sinking millions into biomedical research and pediatric care.

"If Sanford is going to come into this market, they need to do it at a certain scale," said Allan Baumgarten, a Twin Cities analyst who studies health care markets. "You need a system the size of Fairview, and having the university as part of that makes it more attractive."

Fairview and Sanford are about equal in size, with revenues of roughly $3 billion. But Sanford Health is on a $1.4 billion growth march, moving toward its goal of being one of a handful of prestigious national health care players, on par with the likes of the Cleveland Clinic, Johns Hopkins and Mayo.

In the past decade, Sanford Health has more than doubled its presence in Minnesota, with hospitals and clinics mostly on the western border. It's largest move came when it purchased a regional hospital in Bemidji in 2011, which it considered a third hub to complement flagships in Sioux Falls and Fargo.

Mooty said there have been high-level discussions involving University of Minnesota President Eric Kaler, and that the board had seen a two-hour presentation early in the process. But much remains on the table.

"It's unfortunate that the parties that are talking haven't even gotten to a level of solidifying what we're talking about to have open debate and dialogue around," Mooty said.

Aaron Friedman, dean of the U's medical school who also is a member of the Fairview board of directors, said the conversation with Sanford Health has raised concerns about "whether academic programming is an integral part of the thinking here."

The University of Minnesota trains the lion's share of the state's doctors, with about 1,000 residents currently in training.

"It's one thing to have two systems with $3 billion in revenue and they decide they might want to work together," Friedman said. "It's another to subsume and take on the missions that we have as a university. That's not always the case in a significant merger.

"I don't have any idea whether the scope of what we do, the size of what we do, the cost of what we do has been taken into account in a significant way in consideration of this purchase."

Attorney General Swanson is calling for public hearings on a potential merger, concerned that a deal could transfer control of Fairview's partner, the taxpayer-supported University of Minnesota Medical Center, to an outstate entity.

Krabbenhoft and Mooty sought to allay such concerns.

"I can tell you if it's a takeover, it will not go forward," Mooty said.

Both said Sanford's network of rural hospitals could improve training opportunities for university med school students as well as sending patients who need transplants or other complex care to the Twin Cities. Sanford Health already operates medical schools in Sioux Falls and Fargo.

"This is not all about Sanford, quite the opposite," Krabbenhoft said.

"What we're bringing to the table is bringing back the luster and bright light of the University of Minnesota's medical potential. ... The University of Minnesota would be the jewel in the crown."

Fairview was rocked by scandal in the past year after hiring a company that used abusive billing tactics to collect payment from patients. The fallout led to the ouster of Fairview CEO Mark Eustis, who had hired Accretive as a consultant. Mooty, with a background in business and not medicine, remains an interim CEO.

Fairview is "not looking for a deep-pocketed partner." Mooty said. "This is not a weak organization. This is an incredibly viable and economically capable organization with great talent of people and great capability. We want to make sure we continue to position ourselves in the most competitive way, recognizing the market is going to continue to be evolving."

jcrosby@startribune.com • 612-673-7335