After the combination attempt between Fairview Health Services and Sanford Health fell through Thursday, consultants and advisers said the organizations are likely to seek other merger partners or acquirers. But new state legislation that bolsters merger oversight may create additional hurdles for Fairview in its search.
The nonprofit health systems had faced concerns from Fairview's University of Minnesota Medical Center, Minnesota lawmakers and Minnesota Attorney General Keith Ellison (D) about an out-of-state entity controlling the university’s healthcare facilities. University of Minnesota executives previously said they were excluded from merger talks, which heightened their worries that Sioux Falls, South Dakota-based Sanford would cut services.
Fairview did not immediately provide a comment. Sanford President and CEO Bill Gassen said in a statement that "we remain open to the right opportunities in order to best serve our patients."
Fairview, which continues to report operating losses, will be compelled to find another partner to stabilize its financial situation, industry observers predicted.
“It puts them in a position of having to sell themselves in a buyers’ market,” industry consultant Paul Keckley said. “They may have to concede some things they might not want to concede."
Any deal that Fairview considers would have to pass a stringent review from state officials. Gov. Tim Walz (D) signed a bill on May 26 that, in most cases, would prohibit an out-state or for-profit entity from controlling University of Minnesota healthcare facilities. Under the legislation, merging parties would have to outline any potential effects related to the combination, and Ellison could veto any transaction that would substantially limit competition.
“The state has demonstrated that they feel pretty strongly about maintaining some semblance of control over the university hospitals,” said Rick Kes, a Minnesota-based healthcare senior analyst at accounting firm RSM. “Now that it is officially a law, that is a whole new level of a hurdle.”
Fairview owns the University of Minnesota Medical Center and has a partnership with the University of Minnesota Medical School and University of Minnesota Physicians. The partnership is slated to end in 2026, and the organizations must decide by the end of this year whether they want to extend the affiliation for 10 years.
Meanwhile, Fairview recorded a $94.8 million operating loss through the first quarter of 2023, including $7.8 million in expenses incurred on recent transactions, according to its unaudited financial statement—the most recent available—for the period ended March 31. That builds on operating losses of $282 million last year and $128.8 million in 2021.
The discontinued merger may continue to drag Fairview’s finances. A number of sunken costs are associated with failed combination proposals, such as legal fees and the executives’ time commitment. But many multibillion-dollar organizations view the price of shaping a proposal for a definitive agreement as relatively small and a worthy investment, said Kevin Holloran, senior director at credit ratings agency Fitch Ratings.
To Holloran, it’s not surprising to see proposed deals get scrapped, including this one.
“We hear about [letters of intent] and [memoranda of understanding] all the time, and we don’t get excited about them,” Holloran said. “It’s not the first time Sanford has almost merged with somebody and gone through that process, and it hasn’t quite come to fruition.”
The scuttled Sanford-Fairview proposal marks Sanford’s third merger attempt over the past four years. In 2020, Sanford planned to merge with Salt Lake City-based Intermountain Health, but that deal collapsed after Sanford's then-CEO, Kelby Krabbenhoft, said he didn't need to wear a mask because he couldn't transmit COVID-19 after contracting the virus. Sanford also proposed to merge with Des Moines, Iowa-based UnityPoint Health in 2019, but that transaction fell through after UnityPoint backed off.
“It’s hard enough to operate a rural health [system]," Keckley said. “What makes it more difficult is trying to marry that to another system, like Intermountain or UnityPoint, or trying to marry it to an academic organization in a blue state. Those things just don’t sync up very easily.”
Leemore Dafny, an economist and business administration professor at Harvard Business School who studies cross-market mergers, said the deal failed because a host of opponents raised different concerns. She said health systems looking to merge can't gloss over issues resulting from state agendas or differing ways of running an operation.
Sanford may pause on another merger pursuit for now. Holloran said he thinks it may take some time to regroup and, at this point, the system is likely not out looking for its next deal.
But Sanford has a board that has consistently looked at growth as an imperative, so it’s likely it will eventually resume the search, Keckley said.
“Every time there is an announcement followed by someone pulling the plug, everyone takes a step back,” he said. “There will be internal questions of how much money they spent with lawyers and consultants before everything became unglued.”