Proposed Sanford-Fairview merger raises financial questions in Minnesota

The financial well-being of Fairview Health Services is a central element of merger talks with Sanford Health, even as executives downplay it as a motivation and industry trends make the urgency difficult to assess.

Minneapolis-based Fairview reported an operating loss of $248.5 million through the first nine months of this year. The hospital operator has plenty of company, however, as many health systems are struggling financially due in part to rising labor costs.

Fairview's arrangement with the University of Minnesota is unique and adds to the complexity, because the U plays a significant role both in the health system's financial results and its quality of care.

Sioux Falls-based Sanford Health now says that if the merger goes through as hoped next year, it is prepared — absent a new agreement — to keep funding academic medicine at the University of Minnesota until the current long-term deal between the U and Fairview expires in 2026.

What happens after that is one of the big unanswered questions with the proposed health system mega-merger.

Nancy Kane, a hospital finance researcher at the Harvard T. H. Chan School of Public Health, said that despite Fairview's recent losses, bond ratings from fall 2021 suggest financial health.

Like many institutions and investors, Fairview has lost money on its investment portfolio with this year's market downturn, Kane said, yet it still had just over $2 billion in cash and investments at the end of September.

"They need to do something — you don't want to keep losing money every year," Kane said. "But it's not urgent that they be acquired by a larger organization that may or may not make them more efficient."

Joe White, a health care accounting expert at the University of St. Thomas, said a merger is "probably a good thing for both organizations." Sanford needs to get bigger in the Minnesota marketplace, White said, while Fairview's balance sheet has been deteriorating even while selling off key assets like the PreferredOne health plan and minority ownership at Maple Grove Hospital.

"They still have plenty of cash on hand but need to turn operations around," he said. "This is hard to do in the current environment of inflation, recession potential, nursing strikes and staffing shortages. … Sanford has a stronger balance sheet that would help in that turnaround."

Simmering in the background is the Fairview-U partnership. The two sides are scheduled to decide next year whether to continue the affiliation agreement beyond 2026. Those conversations are ongoing, Fairview said, adding: "Our sincere hope is that the university will join us in creating this new, combined system with Sanford."

In a statement to the Star Tribune, Sanford Health officials said, "We hope the university will continue to partner with the combined system to advance health care for the communities and patients we serve. Our discussions about what that affiliation might look like are still in the early stages."

Sanford officials aren't commenting on the current level of funding that Fairview provides to the U, a sum that increased significantly beginning in 2019.

The jump in funding has corresponded with weakened financial performance at Fairview, though an array of factors are at play making causation difficult to ascertain. University officials say the investments have been worth it, with the health system now providing expanded services and improved quality of care.

"Because of our active participation now since the definitive agreement was signed in 2019, our physicians are really involved in all levels of the organization," said Dr. Bevan Yueh, chief executive officer of University of Minnesota Physicians. "We're getting to have a say in it, and we're making a difference."

This year, Fairview is providing more than $83 million to support medical education, research and patient care at the U.

The affiliation between Fairview and the U dates back to 1997 when the health system acquired the university's teaching hospital, which was then struggling financially. Monetary terms have changed several times over the past two-and-a-half decades.

Fairview's annual academic support payments to the U jumped from nearly $16.7 million in 2018 to $68.8 million in 2019 under the current agreement.

"Absent a new agreement, Sanford Health would be willing to assume the obligations in the current agreement following close of the merger," the health system said in a statement to the Star Tribune. "We're still in preliminary discussions and have not addressed current or future funds flows."

In November, Sanford and Fairview announced merger plans, nearly a decade after state political concerns blocked a similar deal. With about 78,000 employees, the combined system would be based in South Dakota and operate more than 50 hospitals, including the University of Minnesota Medical Center.

On Friday, U officials voiced concerns about the merger and insisted a deal to help Fairview financially can't diminish the university's interests. Fairview owns the U's teaching hospital in Minneapolis and jointly markets health care services with university doctors under the brand M Health Fairview.

"That's really what we're focused on," said Myron Frans, senior vice president for finance and operations at the U, in an interview. "How do you provide the flagship assets of the University of Minnesota — which are the teaching, research and innovative care — how do we support that across the state with this new proposed merger? We just need more details about how that can happen."

Following the 2019 agreement, some of the increased funding for the U stems from Fairview taking responsibility for certain payments previously provided by the University of Minnesota Physicians (UMP) group.

Additionally, Fairview and the physicians group have jointly adopted a growth strategy where UMP has hired more than 330 physicians and advanced practice providers, such as nurse practitioners and physician assistants..

With the current agreement, Fairview started billing health insurers for services provided by UMP across the health system and paying the nonprofit group for the doctors' time and work. That's a big reason why payments to UMP jumped from $278.7 million in 2018 to $688.5 million by 2021, according to a Star Tribune review of tax filings by Fairview.

UMP has reported higher annual profits under the current affiliation agreement, according to a Star Tribune review its tax filings. That increase, however, is from federal funds given health care providers to confront the COVID-19 pandemic, the physicians group said.

New hiring at UMP ramped up just before COVID hit. It was, in a sense, unfortunate timing as the pandemic sapped demand for elective medical services being offered by UMP's expansion. This added expense for professionals contributed to Fairview's weak financial results during 2020 — the worst in a three-year run of annual operating losses when the health system lost about $216 million on $6.12 billion of revenue.

"UMP provider patient encounters have increased 26%," the physicians group told the Star Tribune in a statement. "UMP does not have sufficient insight into Fairview operations to understand why Fairview is not realizing the increase in net income and market share that would be expected from that increased provider production within its system."

Financial arguments in favor of mergers often focus on gaining business efficiencies — industry parlance for shaving off redundant costs. The most efficient mergers are the ones that can reduce some of the management, maybe close of some of the buildings and merge/concentrate clinical services in one location.

"These two systems are spread across a big region — the Dakotas and Minnesota," said Kane, of the Harvard T. H. Chan School of Public Health. "They are not overlapping much geographically, which limits those types of efficiencies."