University of Minnesota seeking $950 million to acquire, operate hospitals in Minneapolis

The University of Minnesota plans to ask state lawmakers for $950 million to acquire and pay for initial operating costs at its on-campus hospitals, a move that would fundamentally change its relationship with Fairview amid the health system's proposed merger with Sanford Health.

The funding request, which university officials released Friday, includes $300 million for the transfer of University of Minnesota Medical Center back to the U from Fairview while also covering the cost of certain workforce needs.

The university wants another $650 million to run the massive hospital complex and turn around its losses. The complex includes four somewhat distinct operations that span the East Bank and West Bank campuses in Minneapolis.

U officials say the spending is necessary to make sure control of the medical center — the primary teaching hospital for many Minnesota physicians — doesn't shift to an out-of-state entity. The combined mega health system would be based in Sioux Falls, S.D., Sanford's current home, once the merger is complete.

"Control of Minnesota's academic health care assets by a South Dakota-based entity is a nonstarter," said Dr. Jakub Tolar, dean of the University of Minnesota Medical School, in a statement.

Fairview Health Services bailed out the U's teaching hospital with an $87.5 million acquisition in 1997. Since then, the Minneapolis-based health system has invested about $911 million in capital expense plus "millions in academic support for the university's teaching mission," Fairview said in a Friday statement.

"Many important details from the announcement today remain unclear," Fairview said. "We're disappointed that the university did not share anything about their new proposal when we met just a few days ago. ... Negotiating the university's proposal through the news media doesn't allow for the thoughtful dialogue we need."

Once the merger is complete, the new health system would honor Fairview's existing agreements to fund academic medicine at the U through the end of 2026, Sanford Health said in a Friday statement.

Regional oversight at legacy Fairview facilities would come from "a local, Minnesota-based board," the health system said. "Post-close, both Sanford Health and Fairview Health Services will remain nonprofit entities, each with their own regional presence, leadership and regional boards in the markets they serve."

In November, the nonprofits announced plans to create one of the largest health systems in the Upper Midwest with more than 50 hospitals and about 78,000 employees. Taking back the Minneapolis hospitals is a necessary response, university officials say, because they fear the merger will harm the U's academic medicine mission.

"It is our belief that the university should control, operate and govern the university flagship assets on the university campus," said Myron Frans, the senior vice president for finance and operations at the U, in an interview.

The requested sum is a preliminary figure that must be formally approved by the U's Board of Regents at its March 10 meeting. The university would resume running the medical center by March 1, 2024, Frans said. The $650 million in funding for operations includes an injection of 90 days of operating capital.

In January, Sanford and Fairview officials floated the idea that the U might want to repurchase the hospital if it couldn't support the combination. Health systems leaders say any purchase of the University of Minnesota Medical Center would be subject to a fair market valuation of the facility.

Frans, however, said a different analysis is required because of "the complicated nature of this public asset being moved from one entity to another nonprofit organization." The U has made millions of dollars in payments to Fairview over the years, he said, adding that any valuation would have to factor in how the hospital "is, in fact, losing money."

The request for $300 million does not attach specific values to the distinct pieces of the University of Minnesota Medical Center campus.

Fairview owns the large inpatient hospital on the East Bank as well as two sizeable West Bank operations — Masonic Children's Hospital and the old Fairview Riverside hospital.

The U owns a large clinic and outpatient surgery building on the East Bank that's the fourth primary component of the University of Minnesota Medical Center.

"There's a complicated formula that we're going to have to come around to for each one of the assets, which will be different," Frans said. "So, the $300 million is not attached to any one particular asset. It's the amount that we feel is what we need going forward to begin that process."

As the merger proposal now stands, the U opposes the combination in part because it would result in out-of-state governance for the university's teaching hospital operations. For months, the U has consistently questioned the merger proposal for not focusing on the impact to academic medicine.

But Frans said the U will need to partner with a community health care system if it regains ownership of the on-campus medical centers. And despite all the friction over the merger, Tolar said the university is not looking to replace Fairview, although there could be additional partnerships with other regional hospital operators.

"There's a way to negotiate ourselves out of this sort of situation to a mutually agreeable spot," Frans said. With control of its hospital, the university "can partner with and will have a relationship ongoing with Fairview or Sanford, but it will also provide us the partnership to connect with other systems around the state."

He added: "It relieves Sanford of the burden of running an academic health center that they've never done before. It helps relieve the burden of maintaining some of these campus assets and gives them the opportunity to focus on community health delivery."

Frans said the U will have an additional request for the state to fund improvements across the hospital campus. Longer term, the university wants to build a replacement hospital on the East Bank, which Frans has said likely would cost more than $1 billion.

Sanford agreed this month to push back the target date for completing the merger by two months to May 31. Minnesota Attorney General Keith Ellison says his office continues to seek information about the proposal.

Frans, however, said he believes the new deadline is not realistic.

"It's going to take six to nine months working hard to come up with an agreement that the university could agree to going forward ...," he said. "The Legislature has to weigh in. The attorney general needs to weigh in. And until those folks weigh in, I'd say nothing is certain."