Two sizable not-for-profit health systems, Intermountain Healthcare and Sanford Healthcare, said Monday they plan to merge to form the country's seventh-largest not-for-profit health system by revenue.
Salt Lake City-based Intermountain and Sioux Falls, S.D.-based Sanford signed a letter of intent to form a 70-hospital system with about $15 billion in annual revenue. The CEOs of both systems said their boards unanimously approved the move last week, and they expect to close the deal by summer 2021.
The proposed system, called Intermountain Healthcare, would be led by Intermountain CEO Dr. Marc Harrison and would keep Intermountain's headquarters in Salt Lake City.
"This is in many ways a match made in heaven," Harrison said of the deal on Monday.
Playing the theme song that's often used to promote such deals, both CEOs said joining forces will help them achieve their missions of lowering costs while boosting access and quality. They sought to thwart any suggestion that the merger will drive up prices, as other hospital mergers have been shown to, and instead claim it could do the opposite, given both systems' track record of lowering costs.
"Most of those mergers are not mission driven, they're financially driven," Harrison said in an interview, "and they often are organizations that are relatively distressed coming together trying to save their hides. That is not us. We are exceptionally strong."
Sanford drew almost $7 billion in total revenue in 2019 and produced a 3.1% operating margin in the six months ended June 30, 2020. The system drew almost $100 million in operating income in the first half of 2020 on $3.1 billion in revenue.
Intermountain is a big player, too. It drew $374 million in operating income on $7.6 billion in revenue in 2019. The system has been cutting hundreds of jobs as it works to streamline operations, an effort it said will ultimately lower the cost of care.
Both CEOs said they don't anticipate job cuts under this deal.
The merger would produce a sprawling network of hospitals and clinics, pairing Intermountain's 24 hospitals with Sanford's 46. The system, which would employ more than 89,000 people, would have 435 clinics across seven states.
The CEOs said their systems have no overlapping service areas. Sanford operates in North Dakota, South Dakota, Northwest Iowa and Western Minnesota, while Intermountain is in Utah, Idaho and Nevada.
M&A experts said they think that puts the system in relatively safe territory from an antitrust perspective.
In order to prove anticompetitive harm, the Federal Trade Commission would need to analyze a broad geographic market, which could undermine the work the agency has done over the past 15 years, said Kevin Hahm, a partner in Hunton Andrews Kurth's antitrust group and former assistant director of the FTC's Mergers IV division. In merger cases like the one proposed by Advocate Health and NorthShore University Health System, for example, the FTC won because it was ultimately able to convince the court that hospital markets are local in nature.
Jordan Shields, a partner with Chicago-based healthcare M&A advisory firm Juniper Advisory, agreed that the likelihood of regulatory interference is low.
"Typically where systems run into trouble is when they have geographic overlap, either acute-care facilities or, increasingly, issues with physician employment overlap," he said
Sanford and UnityPoint Health in Des Moines, Iowa, called off their $11 billion merger just under a year ago because of differences in vision. That illustrates to Hahm that the bigger hurdle could be cultural.
"It just goes to show: That common vision, culture clash, those things really matter when it comes to the combination of big systems for it to work," he said.
Sanford CEO Kelby Krabbenhoft said the systems will apply for FTC review in December, with a decision expected in mid-January. North Dakota's Attorney General also has a 90-day review process.
Krabbenhoft said he believes in the future, given the increasing pressure on the federal budget, the Medicare and Medicaid programs are going to ask insurers and providers to bid to serve populations in certain states. A big driver behind this merger is to amass the physical assets to prove the heath system can care for patients across a large geography, he said.
"Everyone seems to miss that point and I think that's the elephant in the room," he said. "That is the most significant reason why we come together, so that we can deliver on the future promise that we think we're going to be expected to make."
One oft-touted benefit of hospital mergers is the ability to cut costs by consolidating serving lines and administrative duties. Harrison said in this case, the systems are far enough apart that they're unlikely to drop service lines for any of their geographic areas.
"What are we going to do, get rid of heart surgery in the Dakotas and send everybody to Intermountain?" he said. "That's just crazy."
The Sanford-Intermountain marriage is one of several significant health system merger announcements during the pandemic among providers that received federal coronavirus relief grants. Some business groups and lawmakers have tried to ensure that money doesn't fuel predatory consolidation by large systems. One group sought unsuccessfully to preclude healthcare providers from engaging in M&A for 12 months as a condition of receiving the grants.
Sanford received $240 million in federal grants under the CARES Act, of which it has recognized $192 million. Harrison said he did not know how much Intermountain received.
The resulting system would insure 1.1 million people with the systems' combined health plans. Intermountain has long touted the benefits of using value-based payment models to lower the cost of care. Starting in January, Intermountain will treat about 40,000 UnitedHealthcare members under a full-risk contract, Harrison said.
Harrison called the Sanford merger "transformational" and hinted at growing even larger once the deal closes.
"Our hope is we create a home across the interior west of the U.S. for hospitals and health systems that are tired of driving volume and want to keep people well," he said, "and they recognize that a new model is necessary for that, a model empowered by insurance products designed to keep people well."