Schafer: Pressure to grow drives talks at Fairview

Fairview Health Services interim CEO and board Chairman Chuck Mooty is sure to face tough questions at a hearing Sunday about why Fairview is exploring a merger with Sanford Health.

If he wanted to be bluntly honest, he would simply say that Fairview is vulnerable.

Mooty seems too sophisticated to put it that way, of course. But it's clearly fear driving these talks of merging, not hope of capturing new opportunities.

It's the fear of being too small at even $3 billion in annual revenue to remain competitive in an industry that's shifting so fundamentally. The leadership of Minneapolis-based Fairview gets that, and it correctly knows that doing nothing is the biggest risk of all.

All of the anxiety in the industry really comes down to how best to respond to changes underway in the market for health care services, and what's going to be driving change more than anything is how health care is paid for.

The model had been for hospitals and doctors to provide a service, such as a medical procedure, and then bill for it. Increasingly providers will instead be held accountable, and paid, for the outcome of everything that happens to a patient. The provider will be rewarded for keeping people well.

To be most competitive in attracting pools of patients, an accountable health care provider needs to be big enough to efficiently deliver nearly any service a person may need. It needs to be big enough and sophisticated enough to have its services tightly integrated, for people to move through a system and easily get care at different points. It needs to be big enough to have convenient clinics throughout a market.

Stephen Parente, a professor of health care finance at the University of Minnesota's Carlson School of Management, said an organization could develop a broad and integrated system much like an industrial company has its supply chain, through good supplier contracts and seamless exchanges of information, but the information sharing has proved to be difficult to execute in health care.

Executives of providers seem to be convinced that the survivors will be the providers that can control and manage that whole delivery system, he said, and "the goal of having a super-regional organization is the feeling of what is going to be required to compete."

As accountable care raises the bar on patient care while making revenue growth tougher to come by, health care companies also have to consider mergers to get more efficient. Bigger organizations get purchasing power and enjoy the opportunity to spread big-ticket items like information management systems over a larger revenue base.

"These hospitals don't agree on much nationally, but every single hospital in the country believes it needs to reduce expenses," said Bob Valletta, the U.S. health care provider leader for the accounting and consulting firm PricewaterhouseCoopers. "I've heard numbers as high as 30 percent that they think they need to take out of their expense base."

And the fear, in this industry or any other that is rapidly consolidating, is that you may not find a merger partner that works well financially or strategically before competitors announce that they have linked arms. And then they become even tougher competitors.

That's the reality for Fairview. It is far from alone in being in that situation.

And as for Sanford, Cindy Morrison, its interim executive vice president of marketing, describes Sanford's view that health care provider consolidation will keep rolling until there are just a few major health care systems in a market. But she doesn't mean in a market like the Twin Cities, she means a broader economic region like the Upper Midwest, with the Twin Cities as its hub.

"And yes, we aspire to be" one of the few major systems, Morrison said.

Joining forces with Fairview is not the only opportunity in the Twin Cities. Sanford, with headquarters operations in both Fargo, N.D., and Sioux Falls, S.D., went pretty far down the road with Minneapolis-based Allina Health, and there's no reason to think Sanford hasn't talked with the leadership of every health care provider in the region. All of them would have to at least take a meeting.

A University of Minnesota offer to essentially acquire Fairview that came to light last week reflects maybe another sort of fear — a fear of Sanford. However challenging it's been to run academic and research programs in health sciences with a hospital owned by Fairview since 1997, the university seems to suspect, it can only get more difficult with the Sanford people in charge.

Whatever its motivation, the university has an optimistic tone in its proposal about the potential for the U to build the Fairview system into one with a regional reach. What wouldn't change under university control, of course, is Fairview's challenge in a market that is undergoing consolidation.

The university may yet reach the same conclusion it did in the mid-1990s, that it would be great if the U's hospital and its mission would be taken over by an organization big enough and capable enough to be a long-term survivor.

lee.schafer@startribune.com • 612-673-4302