Sanford Health and UnityPoint Health nixed their proposed merger that would have formed an $11 billion, 76-hospital system, the organizations said late Tuesday.
The not-for-profit health systems announced their letter of intent to merge in June. The combined entity would have ranked among the top 15 not-for-profit health systems by revenue, with operations across 26 states and more than 83,000 employees.
Kelby Krabbenhoft, the president and CEO of Sanford, said in a statement that the UnityPoint board failed to embrace the vision of a new health system of national prominence.
"We were excited at the opportunity our combination would have provided to create a new health system of national prominence," he said. "The executive management teams and physicians worked diligently for 18 months to provide a merger recommendation to the boards. We are disappointed that the UnityPoint Health board failed to embrace the vision. Our focus now is on the patients and communities we serve and the 50,000 people working tirelessly to support them."
Vision represents a long-term view of how the business will operate and how the culture will manifest both within the organization and as it faces patients and stakeholders, said Joe Lupica, chairman of Newpoint Healthcare Advisors.
"When one party says visions don't align, this means it is not a failure that happened in the trenches," said Lupica, explaining that it's something more fundamental than disparate IT systems or fragmented supply chains.
Executives hoped that the merger would have allowed the combined organization to become a world leader in personalized primary care.
"Our organization concluded we can most effectively fulfill our mission by maintaining our existing corporate structure," Kevin Vermeer, president and CEO of UnityPoint Health, said in a statement." As a leader in the delivery of value-based care, UnityPoint Health remains strong and competitively positioned for the future."
It is hard to imagine spending a year and a half on a transaction and having it fall apart, said Robert Creighton, managing partner at Farrell Fritz.
"It makes me think that the preliminary work maybe was not as thorough," said Creighton, adding that they may have never come to an understanding of what the vision was.
The deal may have been related to a culture clash, mismatched or unmet expectations when it comes to estimated savings benchmarks, their relationships with physicians or other labor-related issues, he said.
"These are incredibly complex (and costly) transactions," Creighton said. "You have to get all the pieces to fit, and it is not surprising that some deals will fail."
Sioux Falls, S.D.-based Sanford reported an operating income of $117.1 million on $4.59 billion of operating revenue through the first nine months of fiscal year 2019, up from $92.3 million of operating income on operating revenue of $3.53 billion over the same period last year, according to Modern Healthcare's financial database.
Last month, Sanford agreed to pay the federal government $20.25 million to settle allegations that one of its neurosurgeons received kickbacks for using implantable devices distributed by his physician-owned distributorship. The settlement also involved hiring a compliance officer and setting up a compliance committee, implementing a risk-assessment program and hiring an independent review organization to oversee Medicare and Medicaid claims at Sanford Medical Center. Sanford denied any wrongdoing.
Des Moines, Iowa-based UnityPoint reported an operating income of $49.4 million on revenue of $2.26 billion through six months of fiscal year 2019—the most recent financial statement available. That was up from $32.8 million of operating income on $2.19 billion of revenue over the same period the year prior. UnityPoint recorded a $21.5 million operating loss in 2017.
While this dismantled deal may throw up a caution flag to other providers exploring mergers, Creighton still expects significant consolidation in the hospital sector given the potential cost and quality benefits of a smaller organization joining a bigger system, he said.
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 mergers and acquisitions have seemingly cooled in 2019 after several years of significant activity, possibly in part because the projected synergies of scale have not met expectations, hospital M&A experts said. In some cases, health systems rushed into a letter of intent, they said.
Baylor Scott & White Health and Memorial Hermann Health System called off their merger in February, about five months after the Texas-based health systems signed a letter of intent.
M&A experts expected there had been some concern regarding the alignment of their academic missions as well as a mismatch of their physician-management models.
Atrium Health (formerly Carolinas HealthCare System) and UNC Health Care scuttled their deal last year, about six months after the letter of intent was signed.
Cone Health and Randolph Health, also based in North Carolina, called off their deal in May 2018 after more than a year of talks as Cone Health was unwilling to "scale back projects or put them on hold," Cone Health executives said.
"The savings executives thought they were getting from eliminating redundancies haven't panned out," Lupica said.