Sanford Health and Marshfield Clinic Health System said Wednesday they are exploring a combination, following failed efforts of their own to expand.
Under a nonbinding memorandum of understanding, the combined system would be headquartered in Sioux Falls, South Dakota, home to Sanford, and led by Sanford President and CEO Bill Gassen, according to a Wednesday news release. Marshfield interim CEO Dr. Brian Hoerneman would serve as president and CEO of the Marshfield region. Marshfield would maintain its branding and regional leadership.
A deal, if it comes to fruition, would be a victory for Sanford, whose last three efforts to form a sprawling, multistate system failed. Its more recent attempt, to combine with Minneapolis-based Fairview Health Services, ended last July. Meanwhile, Marshfield's plans to merge with Duluth, Minnesota-based Essentia Health fell through in January.
Sanford operates 45 hospitals predominantly in the Dakotas and Minnesota and a health plan. Marshfield operates 11 hospitals and a health plan. Sanford could bolster the finances of Wisconsin-based Marshfield, which has recorded operating losses of more than $650 million since 2021.
A combined system would include 56 hospitals with roughly $10.3 billion in annual revenue and a health plan covering 425,000 members.
Any deal would need to clear the standard regulatory review process.
Regulators, both state and federal, are unlikely to challenge the proposal, mergers and acquisitions experts said. The health systems do not overlap geographically and Wisconsin regulators have permitted a string of recent deals, including Milwaukee-based Froedtert Health and Neenah, Wisconsin-based ThedaCare; Milwaukee- and Downers Grove, Illinois-based Advocate Aurora Health and Charlotte, North Carolina-based Atrium Health; and Green Bay-based Bellin Health and La Crosse-based Gundersen Health.
“Sanford has always been growth-oriented,” said Joe Lupica, managing principal of Newpoint Healthcare Advisors, a merger and acquisition advisory firm, noting that Sanford has expanded across the Dakotas, Minnesota and Iowa without big corporate mergers. “Sanford is very diversified but has wanted to become multiregional.”
The announcement adds to the growing list of health systems that have pursued cross-market transactions. Health system leaders typically say these types of combinations will improve care and help reduce expenses by spreading costs related to IT, supply chain and other shared services over a bigger organization.
Not everyone buys that argument. Some of those savings and clinical improvements are harder to achieve across large, far-flung health systems, research shows.
Cross-market mergers are designed to make bigger players in an increasingly concentrated industry, not reduce costs or improve care, said Lawton Robert Burns, healthcare management professor at the University of Pennsylvania Wharton School. “Achieving economies of scale and coordinating all these assets is harder to do when health systems are geographically disparate."
Also, convincing patients in need of complex care to transfer to Sioux Falls, rather than Rochester, Minnesota-based Mayo Clinic or health systems in larger cities might be difficult, said Matthew Anderson, a senior health policy and management lecturer at University of Minnesota.
The Sanford-Fairview proposal was scuttled after Minnesota Attorney General Keith Ellison (D) rallied against an out-of-state system controlling the University of Minnesota Medical Center. Potential pushback from Minnesota state officials emboldened by a new law that bolsters healthcare transaction oversight may deter dealmaking in the state, experts said.
In 2020, Sanford planned to join Salt Lake City-based Intermountain, but the deal collapsed after the abrupt departure of Sanford's then-CEO, Kelby Krabbenhoft, who said he didn't need to wear a mask because he couldn't transmit COVID-19 after contracting the virus.
Sanford proposed to add Des Moines, Iowa-based UnityPoint Health in 2019, but that transaction was scuttled because UnityPoint “failed to embrace the vision of a new health system of national prominence,” Krabbenhoft said in a statement when the deal ended.
In Marshfield, Sanford may see an opportunity to help a fellow rural health system improve its finances through facility and equipment upgrades, M&A advisers said.
Marshfield has built some financial momentum since January, reporting operating income of $12.6 million for the quarter ended March 31 — its first operating income since the third quarter of 2021, and issued $374.9 million in bonds. It laid off about 360 workers, or about 3% of its workforce, in May. Marshfield reported an operating loss of $250.8 million on operating revenue of $3.05 billion in 2023.
Sanford reported operating income of $402.2 million on operating revenue of $7.23 billion in 2023. The health system can help increase Marshfield’s access to capital, said Brett Norell, a principal at Newpoint and former CEO of Holy Family Memorial in Manitowoc, Wisconsin. There is a favorable payer structure in Wisconsin, where commercial insurers tend to pay better than other states, he said.
Commercial insurers in 2022 paid Wisconsin hospitals 318% of what Medicare would have paid, according to data from the latest RAND report. That was the fifth-highest average across all states, the data from the nonprofit research firm shows.
“On top of the favorable payer structure in Wisconsin, Marshfield is well known for delivering high-quality care,” Norell said. “This makes a lot of sense for Marshfield and Sanford.”
