Analysis: What’s Next After Collapse of Fairview-Sanford Merger Deal?

Fairview Health Services may want to file divorce papers against the University of Minnesota at the end of 2023, but Minnesotans would benefit if the two organizations could solve their problems and remain partners.

The financial consequence of a longstanding business relationship between Fairview and the U of M was one of the drivers in Fairview’s desire to combine with Sanford Health, which has had strong financial results.

After Sanford Health’s board pulled the plug on the deal Thursday, Minnesota opponents of the merger deal breathed a sigh of relief. Because Fairview owns University of Minnesota hospitals, key Minnesota stakeholders marshaled their energy to stymie the South Dakota-based system from controlling the U of M facilities.

The sudden termination of the Fairview-Sanford deal was a dramatic development. It happened eight months after the merger deal was unveiled and before Minnesota Attorney General Keith Ellison decided whether he would sue to block the merger.

The South Dakota control issue is now off the table. So it’s imperative for Minnesota leaders to forge creative and pragmatic solutions to the serious financial challenges facing Fairview and the U of M.

The stakes are high, and the issues are complicated.

Sense of urgency on cooperation agreement: Fairview and the University of Minnesota entered into a 30-year agreement in 1997 when Fairview purchased the U of M hospitals. It also has a partnership with the University of Minnesota Medical School and the University of Minnesota Physicians Group.

Fairview supplies patients to university physicians and it also makes annual payments to the U. While their operating agreement runs through 2026, either party could give notice by the end of this year that they don’t want to extend the agreement.

Fairview leaders have said they believe their annual payments to the U of M are too high. During recent months as Fairview CEO James Hereford advocated for the Fairview-Sanford merger, Dr. Jakub Tolar, dean of the University of Minnesota Medical School, and Myron Frans, the U of M’s senior vice president for finance and operations, spoke regularly in opposition to the merger. Tolar and Frans serve on the Fairview board.

It’s now incumbent for the two sides to bridge the differences in their relationship. Unless they can find more common ground over the next five months, one of the parties could indicate by year’s end that they want to withdraw from the partnership when the contract expires at the close of 2026.

Fairview’s financial struggles: Fairview recorded a net operating loss of $315.4 million for calendar 2022, a year in which it generated $6.7 billion in operating revenue. Its net operating loss was $132.6 million for 2021.

“Due to inflationary pressures on wages and supplies, operating costs have risen by 6.4% year over year, while revenue only increased 3.6%,” Fairview Health Services said in a report on its 2022 financial performance.

Fairview said it was taking decisive action to “ensure fiscal health and stability,” and it named four focus areas for action. Those are labor management; performance of the University of Minnesota Medical Center and community hospitals, including the length of stay for patients; service line performance, including access and improving volumes; and revenue cycle improvements.

“Management is committed to improving the financial condition of the organization and getting back to profitability, but expects this will be a multi-year process,” Fairview concluded in its report analysis.

A major impetus for merging into the Sanford system was that Fairview would have combined with a large health organization that’s on sounder financial footing.

Lacking the merger, Fairview must address its financial problems on its own.

Management, leadership challenges: As Fairview and the University of Minnesota dissect their immediate problems and craft long-term visions, the organizations will need to engage in self-examination about who can best serve in major executive roles and on governing bodies.

Twin Cities Business contacted a veteran health care leader in Minnesota to weigh in on this topic. The person identified concerns with both organizations.

“Fairview needs to get its act together, perhaps with new leadership, to stop their financial losses and figure out a way to survive in today’s health care environment,” the leader said.

“Somebody should ask why University [of Minnesota] management would be any better at operating a major medical center now than they were in the ’90s when they decided to sell to Fairview,” the leader said. “University management is not very adept at operating in areas outside of their academic expertise.”

The Covid-19 pandemic, inflation, and workforce shortages across Minnesota have made it much more difficult to lead major organizations. The health care sector also is beset with dealing with a myriad of revenue streams to try to fully fund operations.

But at this critical juncture in the history of the Fairview-U of M relationship, it’s prudent to identify who are the leaders who can produce the transformational change that’s needed.

Enhancing the U of M’s capabilities and reputation: About 70% of the doctors who work in the state of Minnesota are educated at the University of Minnesota Medical School. Among public medical schools, the U of M ranks eighth in the United States for securing National Institutes of Health (NIH) funding.

Under the banner of M Health Fairview, in a 2018 agreement, the U of M, University of Minnesota Physicians and Fairview defined the terms of their joint clinical enterprise. For 11 medical specialty service lines, leadership is provided by academic physicians.

For Minnesota health care consumers, the U of M medical facilities and physicians are tremendous assets, especially if people need treatment for rare diseases and want to access innovative care to save their lives.

In January, University of Minnesota leaders introduced the MPact Health Care Innovation vision, which includes building a state-of-the-art medical center on the U’s east bank campus.

“Seven of the top 10 hospitals in the U.S. are directly associated with a medical school because that’s how you improve care quickly,” U of M medical school dean Tolar said at the time. “You streamline the process of bringing groundbreaking therapies to patients. You improve the practice of medicine by changing it in real time. We want these benefits for Minnesota and to serve Minnesotans in ways that only a hospital associated with a leading research university can.”

While it’s paramount to plan for first-class facilities at the U of M, it’s also important to think about attracting top physicians to Minnesota and for the U to have a well-functioning affiliation with a health care system for patient referrals.

State investment in health care: During the heart of winter and the 2023 Minnesota legislative session, University of Minnesota leaders on Feb. 24 made a special request for $950 million in state money to defend itself against South Dakota-based Sanford Health.

The U of M’s news release said: “The University must acquire and operate the flagship health care facilities before a Fairview-Sanford merger to prevent out-of-state control of Minnesota’s academic health system.”

The U of M wanted $300 million to buy back its health care facilities from Fairview and pay for associated workforce costs. It requested $650 million for operating capital and funds to “provide time to turn around operating losses and begin generating positive financial results.”

Despite a record state budget surplus, no action was taken during the legislative session. Gov. Tim Walz and legislative leaders left the door open for a 2023 special session if the need arose.

Since Sanford voted to drop plans for a merger, what some viewed as a merger-related crisis has subsided.

But big issues remain that could involve state funding. Fairview has had operating losses over multiple years, Fairview and the U of M need to make decisions about their cooperation contract by year’s end, and the U of M faces huge decisions about building a new research and teaching hospital.

State leaders have been part of ongoing dialogue over the summer, and they need to remain part of the conversation because they have an obligation to represent Minnesota’s health care consumers and taxpayers.

Enlisting prominent Minnesotans in finding solutions

In the world of diplomacy, we often hear the phrase that two nations are engaged in bilateral talks or negotiations. If the countries have been at odds for many years over complex issues, often little progress is made when the talks occur.

In the case of Fairview and the U of M, the relationship has been strained over accountability on financial issues and conflicts over the proposed Fairview-Sanford merger.

What’s needed now are talks and decisions that resolve whether Fairview and the U can work together over the long haul, how Fairview can stem its losses, and how the U of M should address the need for a new hospital.

Fairview and the U of M could benefit by enlisting the help of well-respected Minnesotans who’ve led major organizations and could help them identify and reach solutions. If the two sides are willing to invite prominent Minnesotans to play a mediation role on these important health care topics, then Minnesotans would be the ultimate winners. The state’s residents need Fairview and the U of M to be successful.

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Four people immediately come to mind, who could serve in a problem-solving and mediation capacity. They are:

Doug Baker, who served as Ecolab’s CEO for 16 years. He adapted his business model to a changing marketplace and had hospitals as customers. Baker’s personality would help the two parties set aside personal conflicts and focus on the facts and solutions. Baker worked with Gov. Walz and other businesses to secure personal protective equipment at the pandemic’s outset.

Kathleen Blatz, former chief justice of the Minnesota Supreme Court. After leaving the bench, Blatz has served as an arbitrator. She’s handled tough assignments before. During the 2011 state government shutdown, she served as a special master. In 2017, former Gov. Mark Dayton asked her to clean up problems within the public authority that runs U.S. Bank Stadium.

Mary Brainerd, who served as CEO of HealthPartners from 2002 to 2017. HealthPartners is a large, consumer-governed nonprofit. Because she understands both health care delivery and insurance, Brainerd could walk into Fairview-U of M discussions with decades of knowledge that address the financial challenges of Fairview as well as several U of M issues.

Former Gov. Tim Pawlenty, who testified at the Legislature against Sanford controlling U of M medical facilities but has a strong interest in solving the problems that Fairview and the U of M must address. As a former legislator and two-term governor, Pawlenty has the ability to help people reach solutions that will strengthen the two organizations and serve Minnesotans.

A Fairview-Sanford merger is no longer a financial solution for Fairview, so it’s time to concentrate on addressing the underlying problems within Fairview and the Fairview-U of M relationship.

If the two parties invite other people to help them—such as Baker, Blatz, Brainerd, and Pawlenty—fresh perspectives and options are likely to emerge, which should lead to amicable agreements between Fairview and the U of M.