Sanford, Fairview agree to $14B merger

Sanford Health and Fairview Health Services have signed a letter of intent to form a $14 billion health system, the Midwestern nonprofit companies announced Tuesday.

Sioux Falls, South Dakota-based Sanford Health, which operates 47 hospitals and medical centers predominantly in the Dakotas and Minnesota, would gain access to a major metropolitan market in Minnesota's Twin Cities, including the University of Minnesota Medical School. Minneapolis-based Fairview Health, which runs 11 hospitals in Minnesota, would join one of the nation's largest rural healthcare systems in Sanford Health, which also covers 220,000 health insurance members.

“We are confident that we can bring together an organization with a deeply rooted level of expertise around providing rural healthcare with an organization with a deep level of expertise around providing care in metro and urban committees to better serve patients,” said Sanford Health President and CEO Bill Gassen.

Gassen would be president and CEO of the combined company, which would assume the Sanford Health name. Fairview Health CEO James Hereford would be co-CEO for a year after the transaction closes. Each company would retain its regional presence, leadership and regional boards in their respective markets. The CEOs declined to share details on other leadership changes.

The transaction is slated to close next year. The companies don’t expect opposition from regulators because virtually no geographic overlap exists between the two health systems, executives said.

This is Sanford Health’s second attempt to join forces with Fairview Health. In 2013, then-Minnesota Attorney General Lori Swanson (D) criticized the deal, arguing that it wasn’t in the best interest of consumers in the North Star State.

Health system executives often pledge that mergers allow them to reduce costs related to purchasing and administrative expenses. But this transaction was spurred by “economies of innovation,” Hereford said.

“It’s not about finding economies of scale in the form of fewer people. Our problem is we can’t find enough people,” Hereford said. “What we have to be able to do is challenge our conventions about how...we deliver care and those care models, how we support caregivers, so we can continue to provide excellent care.”

The deal would also bring expertise to rural areas in the form of intensive care physicians and hospitalists, in addition to virtual services, the companies said. Gassen said he hopes to maximize the benefits of last year’s $350 million donation from billionaire banker Denny Sanford—the company's namesake—to launch a virtual care center serving the Midwest.

Sanford Health reported $367.6 million in operating income on operating revenue of $7.14 billion last year, up from a $311.4 million operating income on operating revenue of $6.61 billion in 2020.

Fairview Health reported a $132.6 million operating loss on operating revenue of $6.43 billion in 2021. The health system posted a $208.8 million operating loss on operating revenue of $6.08 billion the year before.

There are limited data on the effects of mergers between hospitals in different states. The Federal Trade Commission is often hesitant to challenge cross-market mergers because federal antitrust law focuses on in-state hospital mergers.

One of the few studies on the subject found that hospitals in separate service areas may be able to negotiate higher rates with insurers because of common customer bases, particularly large employers with presences in more than one region, according to researchers from Northwestern, Harvard and Columbia universities who published their findings in 2018.

Another analysis of hospital merger data from 2000-2010 by the RAND Corp. and Bates White Economic Consulting researchers found that the prices charged by hospitals acquired by health systems in another market increased 17% more than non-acquired hospitals in those areas.

Fairview Health's commercial inpatient and outpatient prices in Minnesota were 263% of Medicare rates for the same services, below the state average of 297%, in 2020, according to RAND data. Although the research firm adjusted the data for patient acuity and labor costs, hospitals argue that the conclusions are incomplete and misleading.

Sanford Health’s commercial prices in South Dakota were 191% of Medicare in 2020, below the state average of 218%.

In 2020, Sanford Health planned to merge with Salt Lake City-based Intermountain Health to create a 70-hospital system with $15 billion in annual revenue. 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 Health proposed to merge with Des Moines, Iowa-based UnityPoint Health in 2019, but that transaction was scuttled after UnityPoint backed off.

Caroline Hudson contributed to this story.