Pediatric powerhouse? Big hospital merger shelved between University of Minnesota, Children's Minnesota

An attempt to merge two prominent Twin Cities children's hospitals into a national powerhouse of pediatric know-how has been shelved because of reported differences over control, medical staffing and finances.

The University of Minnesota and Children's Minnesota pursued an agreement last year to combine their competing hospitals into a "new, independent pediatric care system," according to e-mails and documents reviewed by the Star Tribune. Key management disagreements scuttled the discussions, though, as they have in prior merger talks.

"The University thinks they should be in control, and the Children's administration felt they should be in control," said one pediatric specialist familiar with the negotiations, who spoke on the condition that his name not be published. "It always comes down to money. It would cost a lot to merge. Who would pay and who would be in control?"

The U's Masonic pediatric hospital and Children's twin facilities are respected nationally, but health care analysts say they lack the size to compete for patients and research dollars with larger providers in Houston, Philadelphia, Boston and Columbus, Ohio.

Cincinnati Children's Hospital Medical Center has 625 staffed beds, according to the Children's Hospital Association, while Children's Minnesota operates 430 beds between its two campuses, and the U's pediatric hospital staffs 212 beds. Neither Minnesota institution ranks on the nation's list of 30 largest pediatric hospitals or the U.S. News and World Report's pediatric hospital honor roll.

"I've talked to people over the years who say that Minnesota will never have a nationally prominent pediatric hospital with Children's and Masonic going their separate ways," said Allan Baumgarten, a local health systems analyst.

Leaders of both organizations declined interviews but provided a joint statement along with Allina Health, which would be affected by a merger because of its hospitals' proximity and partnerships with Children's.

"Despite strong support to improve the integration of communitywide pediatric care services, the complexity proved too difficult to resolve at that time," the statement said. "However, it does not change our desire to continue to collaborate to improve the health and well-being of our region's children and families."

A merger could offer pros and cons to health care in Minnesota. On one hand, a larger, unified hospital would offer more specialized services for local children and more treatments of rare conditions. It could also save money by reducing administrative redundancies. On the other, a united hospital system would have a local monopoly on inpatient pediatric care and could command higher prices, which could translate into higher costs for health insurance.

Hospitals with monopolies in their markets charged 15% higher prices, on average, according to a recent study by the respected National Bureau of Economic Research, though it focused on general hospitals and not pediatric facilities.

Similar mergers and partnerships have taken place across the country. Hospitals in Cleveland and Columbus combined pediatric heart programs in 2016. Three pediatric hospital groups in Chicago announced a partnership last fall. And talks to unite New Mexico's two pediatric hospital providers are ongoing.

One reason is the wealth of studies suggesting that pediatric hospitals with higher patient volumes tend to do better at everything from diagnosing simple appendicitis to fixing complex heart defects. Another is that high volumes help pediatric hospitals to attract patients, recruit doctors and invest in costly technology, according to a 2017 report by health care analysts with McKinsey & Co.

"Greater clinical scale can support a virtuous circle: the additional revenue it brings in can enable the hospitals to invest in new capabilities, which would then allow them to increase the efficiency of their operations, permitting them to provide specialized care to more children," the analysts wrote.

A memo to Children's staff in April 2018 indicated that both sides were pursuing a deal to unite the Twin Cities' pediatric clinical, research and academic programs. The tone changed by January of this year, though. A staff memo from Drs. Marc Gorelick and Jakub Tolar, the respective leaders of Children's and the U's academic health system, made no reference to a new system. Instead, it cited the need for the two sides to form partnerships.

"Working together will strengthen the healthcare ecosystem in the Twin Cities," they wrote. "We also believe that getting it done right is more important than getting it done fast."

Complications in merger talks included whether one of the organizations would have to move or relocate services. Allina also had substantial interest because its flagship hospital, Abbott Northwestern in Minneapolis, has a high-risk childbirth program that benefits from its across-the-street proximity to Children's and its neonatal intensive care unit. Abbott and Children's also created a holistic mother-baby birthing center together.

Pediatric merger talks have taken place before and were a political issue in the 2006 race for Minnesota's governor. Dr. Maureen Reed campaigned as an Independent Party candidate for lieutenant governor on health care efficiency and encouraged the merger of the two pediatric organizations before they built or upgraded separate hospitals.

Since that time, Children's and the U have collectively spent $600 million on the renovation and construction of separate hospitals.

The recent talks initially included Gillette Children's Specialty Healthcare, a St. Paul-based provider of pediatric rehabilitation services. However, Gillette leaders delayed their involvement until after the two larger systems came to an agreement — or failed to.

"Core discussions related to the structure and purpose of the proposed venture needed to be clarified before we engaged in the process," said Barbara Joers, Gillette's president and chief executive, in a statement. "In the end, the effort disbanded before the parties involved were able to agree on those items."

Jeremy Olson • 612-673-7744