University of Minnesota offered Fairview $600M to buy back its teaching hospital

The University of Minnesota offered $600 million to buy back its massive teaching hospital complex in Minneapolis from Fairview Health Services, but the health system rejected the deal in December as insufficient to cover debts connected with the facility.

The financial details, which were shared with the Minnesota Star Tribune by sources close to the negotiation, help explain how the U moved from its previously stated goal of reacquiring University of Minnesota Medical Center to its current proposal for a new statewide nonprofit health system that would merge Fairview with Duluth-based Essentia Health.

On Wednesday, Minneapolis-based Fairview rejected the U’s merger proposal and suggested it might accept instead a “strategic partnership” to support the university’s academic health program.

Whether the parties could come to any such agreement is unclear, however, as they traded conflicting statements Thursday about which side cut off negotiations on the sale. Their affiliation has been tumultuous for years, dating to Fairview’s 1997 acquisition of University of Minnesota Medical Center in a financial bailout.

“As is widely known, the ... relationship has been fraught with challenges for many, many years,” the U said in a Feb. 10 document outlining the proposed combination between Fairview and Essentia Health in a new nonprofit with partial governance by the U. “There is no solution in sight. ... We look forward to engaging with Fairview to design a practical transaction process [for the merger] ... with the goal of closing on the transaction by the end of 2025.”

The U and Fairview operate the M Health Fairview network of hospitals and clinics through an affiliation agreement that’s set to expire at the end of 2026.

Fairview chief executive James Hereford suggested in a Wednesday letter to employees that the expiration of this agreement would cause only minimal disruptions, but Dr. Rebecca Cunningham, the U president, offered a more pessimistic forecast on Thursday.

“There’s a giant problem and urgency and a future status at the end of 2026 [that] would be, we believe, very disruptive to ... doctor-patient relationships, to patient care and for our ability to train the great workforce we need, to support the health across Minnesota,” Cunningham said in an interview.

The affiliation agreement, as well as the proposals for reacquiring the U hospital and merging Fairview and Essentia, are key factors in the financial support of the U’s Medical School. It’s the largest and only public physician training program in Minnesota, and Fairview each year provides tens of millions of dollars in financial support — funding the health system says it cannot sustain.

About 70% of doctors practicing in the state completed at least some of their training at the University of Minnesota, which helps explain why Gov. Tim Walz in 2023 created a task force to address the sustainability of funding for the U’s academic health care program.

Walz created the task force after the collapse in July 2023 of Fairview’s proposal to merge with South Dakota-based Sanford Health, a deal the university opposed.

The task force considered whether the U should reacquire its teaching hospital, but didn’t squarely offer a recommendation given the complexity of the issue. After the U and Fairview signed a February 2024 letter of intent to negotiate a deal, the university hired consultants to put a value on the U hospital complex.

The sprawling campus on both sides of the Mississippi River includes an inpatient hospital and a clinic/surgery facility on the East Bank campus plus a pediatric hospital and a building for inpatient psychiatric patients near the West Bank.

The independent valuation put the price for University of Minnesota Medical Center at $1.2 billion, sources close to the negotiation tell the Minnesota Star Tribune. The U offered only half as much — $600 million — due in part to the cost of what the university believes is necessary capital expense that’s been deferred by Fairview.

“Fairview refused the offer in one week without sitting down for a fulsome, strategic discussion,” the U said in a Thursday statement. “We asked and expected Fairview to make a counteroffer. They never made one.”

Fairview says it declined the U’s offer during a meeting on Dec. 11 because the bid was not high enough “to effectuate the defeasance” of debt at the hospital — a standard the health system included in the letter of intent. The health system later explained this in correspondence with the U that it “cannot sell its house for less than the mortgage,” according to a timeline Fairview provided to the Star Tribune.

Fairview says it also told the U on Dec. 11 that it “welcomed revised proposals” and reiterated this message on Dec. 16 and Jan. 10. In the Jan. 10 message, Fairview says it suggested top executives meet to discuss the U’s idea about evaluating alternatives to reacquiring the hospital.

But this meeting among executives couldn’t be scheduled, Fairview says, before Cunningham urgently called for a coffee meeting for Jan. 23 with Hereford, the Fairview CEO.

“After requesting [this] meeting the night before, Cunningham informed Hereford that she had begun merger conversations with Essentia and wanted Fairview to be part of the merger,” Fairview said in the timeline. “She also informed him that ... she was publicly announcing her plan the following day.”

In public comments, Fairview has repeatedly suggested it was not given enough time by the U to respond to the Essentia proposal. Asked about this during a Thursday meeting of the U’s Board of Regents, Cunningham said: “The ‘short notice’ period is not as short as it may seem” since the university said in December it had to look for alternatives.

Cunningham says the proposal to combine Fairview and Essentia in a new nonprofit backed by the U is a better approach to securing the future of the medical school, and the entire academic health mission, than reacquiring the teaching hospital. There’s urgency to do something new, she said, because right now Fairview is not engaging in negotiations for a new affiliation agreement.

“Proposals that involve transactions or buildings or the end of contracts ... no doubt impact our front-line workers and our patients and diminish our opportunity to provide great health care and innovations for the state of Minnesota,” she told the Regents on Thursday.

Cunningham said she still wants to find a “transformative solution” with Fairview, yet obvious points of friction remain.

In its Feb. 10 proposal, the U said the average age of facilities within University of Minnesota Medical Center is 15.5 years, “while the rest of Fairview has been ‘refreshed’ with capital so the system’s average age is just 12 years.” Fairview insists it has made capital investments at UMMC as called for in its affiliation agreement.

The most recent proposal to create a new nonprofit health system would give six seats each on the board of directors to Essentia Health, Fairview and the U. But a Feb. 3 version obtained by the Star Tribune offered Fairview just three appointees, so long as they were acceptable to Essentia and the U. This earlier proposal also stipulated an expectation that the new nonprofit would be a “physician-led” organization, a standard that seemingly blocked Hereford running it.

The U did not respond to questions about the Feb. 3 document.

For now, the plan is that the new nonprofit health system would be led by Dr. David Herman, the CEO at Essentia Health, even though Essentia is significantly smaller than Fairview. The U contends there are numerous reasons that Fairview should support the merger plan.

“Fairview was willing to cede control to an out-of-state system, Sanford, for just $500 million,” says the U’s Feb. 10 proposal. “Here, we offer a solution that retains control within Minnesota, and commits twice or more than that amount of funds.”