With the collapse of the Sanford merger, what's next for Fairview and University of Minnesota?

With Sanford Health now out of the picture, Fairview Health Services and the University of Minnesota must decide if, and how, they can repair their fraught relationship.

Debate over the proposed Fairview-Sanford merger exposed acrimony and discord over financial matters between the university and its health system partner, Minneapolis-based Fairview. The two face a deadline in just five months to iron out disagreements as they negotiate another long-term affiliation.

Analysts question whether Fairview can afford its current level of financial support for the U and its academic medicine mission. At the same time, it's not clear how the university would operate if the health system reduced its payments.

"They did say nasty things about one another," said Allan Baumgarten, an independent health care analyst in St. Louis Park. "And yet, I think there still is sort of this co-dependence."

After Sanford walked away from the merger in late July, Fairview and the U are left in the same place — with each other.

The current affiliation between Fairview and the U runs through the end of 2026; if they want to terminate the relationship at that point, either side must give notice by Dec. 31. While the funding deadlock might look like a prelude to divorce, analysts point to a long list of reasons why Fairview and the U might opt to simply try working things out.

"The Fairview system without a tertiary care hospital [like the U] is not a strong system," Baumgarten said, noting the Fairview-owned university hospital is strongly influenced by U physicians. "And the university without partnerships that will feed it patients and revenues is a weak academic medical center."

Fairview's proposed merger with Sioux Falls-based Sanford Health, which surfaced late last year, faced opposition from various groups in Minnesota, including the University of Minnesota over concerns of its teaching hospital in Minneapolis would be owned by an out-of-state entity.

Behind the scenes, Fairview and the U began trading harsh words over their financial fates, with the health system linking its financial woes to extra profits for the U. The university shot back by alleging poor management at Fairview.

"It's a dilemma because [the relationship is] not working and the obvious solutions have already been talked about," said Larry Jacobs,a political scientist at the U who does research on health policy. "The less obvious heavy lifts, like Sanford, have been tried and sunk."

Fairview acquired the university's financially struggling teaching hospital in 1997. They've been partners ever since. "The U got into this because it couldn't really afford the hospital. We've played that out. And it's been a very troubled relationship," Jacobs said.

The health system provides funding for the U's three-part mission of training medical students, conducting research and caring for patients, particularly those who need specialty care — the hallmark of academic medical centers.

The affiliation got closer in 2018 as Fairview agreed to increase annual payments to the U. While launching the M Health Fairview brand for marketing services, the partners also became more interdependent in terms of managing hospitals, billing health insurers and hiring doctors.

"I'm honestly not sure what their options are ... because divorcing those facilities and the way they're integrated right now is pretty hard," said Stephen Parente, a health finance expert at the U's Carlson School of Management.

"They are left at a point where they really have to figure out if they can get along or not. It could be that maybe things are just so bad, it just can't happen. But boy, if that's the case ... Fairview is in a weaker position because of what they're losing. And the U has a lot of stuff it's got to figure out [like a new university president]," he said.

The U tried to leverage political fear about a South Dakota company's looming control to win more financial support for academic medicine, said Jacobs, the U political scientist.

It was a "clever" attempt, he said, but added: "I think the Capitol has been pretty clear this is just not a top priority." With Sanford no longer a threat, a special session at the Legislature to help chart a future for the U in health care seems unlikely, Jacobs said.

On the financial impasse, both sides have their points, Jacobs said. Trying to get funds out of Fairview is like "squeezing resources from a stone — it's not like they're sitting on a lot of money," he said. But the U's resources are crimped as well.

"Are you going to ask students and professors in the College of Liberal Arts to pay more and take lower-level salaries to pay for this?" Jacobs asked. "There's not like a hidden bucket of gold here."

Baumgarten said he could still imagine the state providing more funds, although the U would need to do a better job of selling its vision for the future, which was first revealed in January.

That ambitious plan included regaining ownership of University of Minnesota Medical Center from Fairview and building an expansive new hospital facility on its East Bank campus.

"Those plans sounded kind of half-baked," Baumgarten said. "I think if the university wants to get support from the Legislature ... it needs a much more fully-baked plan."

It's critical for an academic medical center like the U's to be connected to a large network of hospitals and clinics to access a pool of patients — and it's not clear, Baumgarten said, that any of the other large health systems in Minnesota would want to try replacing Fairview.

In May, Fairview told bondholders it expected to lose about $150 million on operations this year, bringing the collective operating loss to about $900 million over a five-year period, according to a Star Tribune analysis.

During that time period, the health system has significantly increased annual support for academic medicine at the U to a little more than $90 million per year. Fairview has called the increased financial support unsustainable and asked last year for relief.

The U rejected the idea of reduced payments.

University leaders have said they can't figure out why Fairview is having such money troubles and point out that the health system's losses are greater than the value of the annual academic support payments.

It's a difficult argument for the public to evaluate because there's not full transparency on all the financial transfers between Fairview, the U and the University of Minnesota Physicians, said Joe White, an accounting professor at the University of St. Thomas' Opus College of Business.

The stakes for the public are high, White said, because a healthy partnership between the two is vital for the future strength of the medical school.

"If we can attract ... the best medical students, they tend to stay in the area where the medical school is," White said.

Following a closed-door meeting of the U's Board of Regents on Tuesday, Myron Frans, the U's senior vice president for finance and operations, told the Star Tribune the university is not currently considering a reduced financial contribution from Fairview.

Given the collapse of the Sanford merger proposal, the U is re-assessing, Frans said, the goal for any special session of the Legislature as well as the amount of additional state financial support for academic medicine.

"We have a relationship through 2026, and so, can we make that work even better now?" he asked in an interview. "And then what about the future — how do we come to terms on a future after 2026."

In a statement to the Star Tribune, Fairview's chief executive James Hereford said any new partnership with the U must also address the competitive challenges the health system faces from rivals like Allina and Mayo Clinic.

"That's what we seek — a partnership that equally benefits our people, the patients and communities that rely on us, and academic medicine — as we look at the potential of a partnership beyond our current 2026 agreement," Hereford said. "We can't set the path for the University. They must decide for themselves what their future looks like, and recommit to the concept that in a partnership, we either succeed together or we fail together."