Q&A: Sanford Health CEO Krabbenhoft discusses growth, acquisition of Good Samaritan
Kelby Krabbenhoft has guided Sanford Health with a steady hand for the past two decades. During that time, the Sioux Falls, S.D.-based integrated delivery system has grown its footprint to become one of the dominant players in the upper Midwest. The 2009 merger with Fargo, N.D.-based MeritCare led to an organization that now boasts $4.5 billion in revenue. And just this month, Sanford closed on its acquisition of the Evangelical Lutheran Good Samaritan Society and its 200-plus post-acute, skilled-nursing, hospice, assisted-living, rehabilitation and home-health facilities. That gives Sanford a presence in 26 states, not to mention Sanford World Clinic's expansion into nine countries worldwide. Krabbenhoft recently spoke with Modern Healthcare Managing Editor Matthew Weinstock. The following is an edited transcript.
MH: What does Good Samaritan do for your portfolio? Why bring them in?
Krabbenhoft: Nothing gets done like that unless you have a shared vision of where you've been and where you're going. In our case, Dave Horazdovsky (CEO of Good Samaritan Society) and I went to college together. We went through the same rigor to get our degrees. There was always trust and without that none of this happens. No matter how beleaguered the finances are, if you can't trust the people across the table, you don't do a deal.
The trust is personal, but it's heritage-driven too because we are by, coincidence, an outgrowth of the Lutheran church. And obviously Good Sam is too. So that served as a real core root between us.
Everything's been on the front end for us. So whether it's IT systems, economic incentives through our health plan, bringing the might of a combined organization to their cost structure—it's really just modern reality that is causing all kinds of consolidation.
MH: How do you blend Good Samaritan into your network?
Krabbenhoft: This is the very beginning of what I think will be about a 25-year rollout. Jim Cain of (New York City-based investment firm) Cain Brothers is on my board and we talk about Sanford in terms of 25-year horizons and what we want to do over that span of time. I believe on that platform and in that kind of time frame, Sanford and the Good Samaritan Society can emerge as an organization that's accomplished something that nobody else really has in terms of the continuum.
MH: A 25-year rollout?
Krabbenhoft: We're a nice, good operation. It already took about a quarter of a century to create an organization that really blankets western Minnesota and the Dakotas. I think that will just continue because the relationships will continue to build. It's not an urgent call to arms to grow. But I think relationships will begin to be established. There's a lot of stress in the industry, and people are looking for others who have the component parts and solutions.
MH: Good Samaritan faced some financial challenges. Are you looking to consolidate some of those operations?
Krabbenhoft: Yes. They had a plan already underway assessing which parts of their organization were going to be part of that plan going forward, and which parts were going to be magnetized to actually grow. So it was a give-and-take kind of strategic plan. We embraced it and will give that fuel.
MH: What parts of that sector are ripe for growth?
Krabbenhoft: The connectivity to acute care. It's become very apparent to me that small and rural hospitals, as well as the midsized hospitals and even the tertiary-level organizations, need a place to offload patients. We are under a lot of pressure not keep them in the hospital. This is a vital component now and in the future.
MH: Some rating agencies have looked skeptically on these types of mergers, including ProMedica's move with HCR. Do you have any worry that they will have similar concerns about your growth in this area?
Krabbenhoft: On an annual basis, the financial burden that Good Sam has now is one-half of 1% of our expenses. Shame on me and my colleagues if we can't figure out how to overcome one-half of 1% cost issues.
The other part to remember is that Good Sam had an execution plan in place. They needed the resources and they needed the horsepower to execute on that, and we needed them. They're bringing something to Sanford that's really brought us back home and humbles us. Long-term care is a humble service.
MH: How so?
Krabbenhoft: There are no TV shows about long-term care organizations. It's humble. You've got shows about emergency rooms and the new one, “New Amsterdam.” It's sexy stuff. When you get close to long-term care, you see the gravity of what's involved for people and the lives they're affecting.
MH: Let's circle back to growth. Sanford has expanded internationally, why is that good for the organization?
Krabbenhoft: This country beats itself up so badly on the periphery, and we don't pay attention to the quality that exists here.
So No. 1, we wanted to be a voice, but one of substance. We didn't want to just open one hospital somewhere in Arabia. We wanted to go about it quietly, and then emerge with many countries, many clinics and be able to talk about, not only clinical issues and business issues, but also issues of comparability between our country and what we're seeing out there. We've been at it now for a decade, in nine countries with 45 clinics. It's working. People want what America has in terms of primary care. Ghana is slated to some day have 300 Sanford clinics. We'd like to be involved when they create a national health plan there.
There were three goals: We wanted to learn; we wanted to assist our research, because there are things that are going on in the rest of the world that don't happen in the Dakotas; and the last thing we wanted to do was get some street credibility. We wanted our reputation to be one of substance.
MH: Could you have done all of that domestically?
Krabbenhoft: No. The world is smaller now and the things that are going on in the European Union and the European (regulatory) infrastructure allowed us, for example, to get involved in stem cells and bring that kind of thing back to the U.S. and use it as evidence, in terms of safety and efficacy.
MH: Are there other big lessons from your international work?
Krabbenhoft: Telemedicine. When you go out into the bush in Ghana and you're able to use iPads and iPhones to communicate with a doctor in the urban settings, now you've accomplished something.
The clinical stuff is just gigantic for us. Advising them and them advising us. It's really collaborative.
MH: This leads into the idea of innovation. You made a splash by hiring former Veterans Affairs Secretary Dr. David Shulkin. What are you expecting from him?
Krabbenhoft: He brings that cachet or celebrity value to the organization, I guess. But more than that is we got to know him as a person and he has some great ideas. He knows how to navigate through some gantlets that we wouldn't have in terms of our work with the government. We have an agreement with the VA trying to provide precision medicine to veterans.
It's in its infancy, but we are moving forward with Sanford Imagenetics (the integration of genomics and primary care), another area we're trying to carve out.
MH: Are there a handful of areas where you're expecting growth in the next year or two from the innovation center?
Krabbenhoft: We set a goal of taking 10% of our reserves (to the center). We just took an equity stake in a company out of Israel. We have an equity stake in Germany in a hospital there. It's those kinds of things that are coming forward all the time.
MH: And Profile by Sanford, the weight-loss venture, is expecting pretty big growth, right?
Krabbenhoft: It started as just an idea. (Philanthropist) Denny (Sanford) and I were trying to lose weight. He said “Why don't you just buy a company?” He liked one and we started looking at it and said “Why don't we create our own?” And so six years ago we started. We didn't have a name for it and today we have 82 stores with plans to open about 320 more.
We've actually had people interested about acquiring it, because it was one of the most successful franchises. But, at least while I'm here, I'm going to stay true to what we said—to see it be a $1 billion business.
MH: How do you decide on setting limits for these investments?
Krabbenhoft: I wanted to get 25% of our revenue coming from things like Profile, the world clinics, medical devices. I just don't think the industry is going to be a healthy one when you can only get 2% margins or 3% margins.
MH: So where are you now on that 25% goal?
Krabbenhoft: I haven't taken inventory. We were a $4 billion enterprise two years ago.
MH: Where are you in terms of your appetite for risk and taking on risk contracts in your provider space?
Krabbenhoft: We're a full-fledged insurance company, Sanford Health Plan. Have been for 22 years. We bid against Blue Cross and Blue Shield and everybody else and have been very successful in those bids. Right now, 25% of our revenue is at risk.
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