Sanford-Fairview merger in jeopardy due to new Minnesota law

Minnesota lawmakers haven’t been shy about their concerns over the proposed merger between Fairview Health Services and Sanford Health, most recently crafting a new law that could doom the $14 billion deal.

Gov. Tim Walz (D) signed a bill on May 26 stipulating University of Minnesota healthcare facilities may not be controlled or owned by a for-profit entity or an out-of-state entity unless the attorney general determines it is in the public interest. The legislation, which took effect immediately, would apply to transactions formed prior to the bill’s enactment. 

The closing date for the deal, announced in November, has been delayed twice.

The University of Minnesota entered into a joint clinical agreement with the university’s physician group and Fairview in 2018 to form M Health Fairview. The historic deal combined academic medicine and clinical trial innovation with community healthcare, reorganizing operations based on service lines instead of geography in an effort to transform care delivery. At the time, executives touted the new model as a step forward in reinventing healthcare.

Dr. Jakub Tolar, dean of the University of Minnesota Medical School and vice president for clinical affairs, said the joint agreement has created great momentum for the school, but he worries some of that could be lost if the merger happens. 

The new law gives Walz more latitude in bringing litigation intended to stop a merger, said Beth Vessel, a partner at law firm Holland & Knight who focuses on healthcare antitrust issues. 

“It is likely to slow things down even more,” Vessel said. “I think the only way to get the deal done will be to try to comply as quickly as possible with the notice requirements and answer the AG’s remaining questions about the deal.”

The systems agreed to give a 90-day notice before closing the transaction, a request from the attorney general’s office following the second postponement as Fairview addresses financial challenges and its relationship with the university.

Sanford, based in Sioux Falls, South Dakota, said in a statement it remains confident in the significant benefits of the merger, is optimistic about its ongoing discussions with the university and that it will comply with the new requirements of the legislation. Minneapolis-based Fairview said in a statement the law will not deter the proposed merger because the deal meets its requirements.

Federal regulators have not objected to the merger.

Time can kill such combination attempts. For example, California-based Cottage Health and Sansum Clinic called off their proposed merger in 2017 after battling regulatory concerns for years. In these cases, the merging parties’ expenses typically increase the longer it takes to move from a letter of intent to closing, potentially diluting the value of the transaction. 

The Minnesota legislation was designed and passed amid concern from the university that it once again was being excluded from discussions. Sanford and Fairview hoped to merge in 2013, and then-Minnesota Attorney General Lori Swanson (D) said she was concerned the out-of-state Sanford would cut services in Minnesota and put the university’s teaching hospital at risk. Sanford pulled out of the deal when state legislators introduced a bill, which never advanced, to delay or kill it altogether. 

“We were essentially told that … they will do this with or without us,” Tolar said, referencing the latest proposal. “My goal is not to be anti-Fairview, not to be anti-Sanford. It’s just pro-Minnesota. … These horizontal mergers, what they typically do is that they create the monopoly, they increase costs, they increase burnout for the physicians, they decrease jobs, decrease access and decrease services. That’s the opposite of what I am after.”

Déjà vu

Fairview bought the University of Minnesota Medical Center from the financially distressed school in 1997. M Health Fairview has since grown into an organization with 3,300 providers covering more than 100 specialties, in addition to having extensive research projects and clinical trials.

The current agreement expires in 2026, but Tolar said now is the time to make decisions about the medical program’s future.

In many ways, the situation is a déjà vu experience from 10 years ago. 

The legislation spurred by the latest merger attempt would require most healthcare entities to provide a written notice to the attorney general and health commissioner at least 60 days prior to a transaction’s closing, giving Ellison the authority to rebuff any deal that would substantially limit competition or create a monopoly. The parties must include any potential areas of expansion and plans to close facilities, reduce workforce or cut or eliminate services, among other merger-related impacts. 

In addition, if an out-of-state entity acquires a university health system, the organization would have to repay any “charitable assets” it received from the state, essentially ensuring any tax breaks are paid back to Minnesota’s general fund. 

Punish or permit?

While Minnesota has fortified its regulatory oversight, other states like North Carolina are loosening their grip. 

On May 1, the state Senate passed a bill that would exempt Chapel Hill-based UNC Health from federal and state antitrust lawsuits, allowing the system to merge with any domestic, nonprofit entity. The state House is reviewing the bill, which the Federal Trade Commission opposes. Greenville-based ECU Health would be afforded similar exemption via a state Senate budget proposal.

In March, Mississippi Gov. Tate Reeves (R) signed a bill that would shield hospital mergers and acquisitions from state antitrust oversight. 

“Most states are acting to insulate hospitals and hospital transactions from antitrust scrutiny,” said Barak Richman, a law professor at Duke University who focuses on healthcare antitrust policy. The Minnesota law “seems to buck the trend, and the state should be commended for it.”

Minnesotans are left to weigh the benefits and drawbacks of the proposed Sanford-Fairview tie up. University physicians stand to benefit from an expanded referral network, said David Johnson, CEO at advisory firm 4sight Health.

“Why they would fight that is beyond me, but there are issues related to jurisdiction and control and so on that obviously are playing out here,” Johnson said. “It feels like there’s a gigantic game of chicken going on between Fairview and the University of Minnesota.”

Fairview’s agreement to operate the teaching hospital has been advantageous for the university. But the dynamics are different this time as Fairview is the one struggling financially, he said.

The health system reported a $466.5 million net loss in 2022, compared with a $26.4 million gain in the prior year. Operating losses exceeded $315 million last year.

The University of Minnesota derives its clout from being a large employer and economic engine for the state. It also trains 70% of the state’s physicians.

“I just think you’ve got privilege and this warped view of reality on display at the University of Minnesota, but it’s not just there. … [Academic medicine in general] is used to having society pick up the tab while it gets the control,” Johnson said.

Adding to the complexity of the issue is the university’s expansion plans, including a $1 billion replacement hospital on its East Bank campus—a project that will require public funding. The university, which will install a new interim president July 1, is also looking to buy back four facilities from Fairview:  the University Medical Center East and West Bank operations, Masonic Children’s Hospital and the Clinics and Surgery Center. 

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