Sanford Health and UnityPoint Health have signed a letter of intent to form an $11 billion integrated health system, the organizations announced Friday.
The combined entity would rank among the top 15 not-for-profit health systems by revenue. It would have 76 hospitals across 26 states and nine countries and employ more than 83,000 staff and 2,600 physicians.
"Sanford and UnityPoint are two successful systems intent on controlling our own destiny," Kelby Krabbenhoft, CEO of Sanford Health, said in prepared remarks. "We believe that in the very near future, fully integrated health systems will drive greater value through affordable options for high-quality healthcare to patients, governments and employers. The combination of Sanford and UnityPoint will help both organizations better meet this need, creating a new system positioned for continued growth across a broad geography."
Krabbenhoft would take the helm of the merged institution and UnityPoint CEO Kevin Vermeer would be senior executive vice president. Part of the goal is to become a world leader in personalized primary care, they said.
The organization would form a unified governing board while both organizations would continue to operate their respective fully integrated medical groups and maintain long-standing relationships with independent physicians, hospitals and other healthcare partners, executives said. The deal is expected to be completed by the end of 2019, following customary regulatory reviews.
"We are approaching our discussions very purposefully, with a clear and common vision for success," Vermeer said in prepared remarks. "First and foremost, our focus is on people. Working together, we will find new ways to broaden access to care—beyond the traditional settings—and take greater responsibility for the health of the populations we serve."
As health systems continue to pursue massive regional and national networks in search of the highly touted benefits of scale, economists and policy experts have cautioned about consolidation's tendency to raise prices. Hospital price growth is one of the main drivers of rising healthcare costs, research shows.
Recent Midwestern combinations like the deal that created Advocate Aurora Health, NorthShore University HealthSystem's pursuit of Swedish Covenant Hospital, and the potential merger being discussed by Gundersen Health System and Marshfield (Wis.) Clinic Health System, have embraced a more regional approach.
Some health system executives argue that regional concentration can be more helpful than far-flung tie-ups when negotiating with vendors and payers. Regional systems also have better insight into specific service lines and performance data, and can adapt quicker, they say.
"If they are first or second in their local market, that is more important than being a behemoth," said Joe Lupica, chairman of Newpoint Healthcare Advisors, adding that Sanford and UnityPoint would be an attractive target to employers looking to create narrow networks. They shouldn't run into any antitrust issues, he said.
Organizations like CommonSpirit Health, the result of the merger of Catholic Health Initiatives and Dignity Health, aim to leverage sprawling national networks to boost access and expedite technology and capital investments. But a 2018 working paper produced by Wharton School academics found that actual supply chain savings produced by mergers fell short of expectations. Neighboring systems attained more favorable price negotiations than far-flung organizations, they found.
Although it's typically not the top draw, academic institutions can also add to a transaction's value proposition, evidenced by deals like HCA Healthcare acquiring a majority stake in Galen College of Nursing and the Atrium Health and Wake Forest Baptist Health merger in North Carolina. UnityPoint has four teaching hospitals in Iowa.
There is a labor shortage that's acutely felt in rural areas, and an easy solution is for health systems to merge or affiliate with universities, said Rick Kes, a senior healthcare analyst with RSM.
"I could easily see this model growing because the talent pipeline is such an important factor," he said. "The demographics of the world are changing quicker than ever, and if you continue to have more physicians retire than those entering the workforce, you could run into a big strategic issue."
While Sanford and UnityPoint are similarly sized as far as revenue, Sanford has stood on more stable financial footing.
Sioux Falls, S.D.-based Sanford reported operating income of $172.9 million on operating revenue of $4.82 billion in 2018, up from $151.5 million in operating income on operating revenue of $4.41 billion in 2017, according to Modern Healthcare's financial database.
Sanford and post-acute provider Evangelical Lutheran Good Samaritan Society completed their merger in January. It is also broadening its global presence with new facilities in Costa Rica, Ireland, New Zealand, South Africa and Vietnam.
Des Moines, Iowa-based UnityPoint reported operating income of $40.8 million on revenue of $4.41 billion in 2018, up from a $21.5 million operating loss on revenue of $4.16 billion in 2017.