Sanford-Fairview merger: Minnesota AG Keith Ellison asks for a delay

The $14 billion merger between Sanford Health and Fairview Health Services may be delayed due to concerns from Minnesota’s top regulator.

Nonprofit Health Systems Midwest announced the deal in November, which they intend to close by March 31st. the merger, citing an ongoing investigation into its implications by his office.

The Attorney General’s Office has not yet decided “whether there will be cause for legal action,” Chief Deputy Attorney General John Keller said at a public meeting in Worthington, Minnesota, Wednesday, according to his prepared remarks. The state legislature is also planning hearings, he said.

“It’s more important to get it right than it is to do it quickly, and that’s why the parties’ existing deadlines are about the attorney general’s office,” Keller said. “As a result, we have formally asked the parties to postpone the March 31 closing date and are awaiting their official response,” Keller said.

Sanford and Fairview say they are working to ensure the Attorney General’s Office has the information it needs.

“This merger is about doing more for those we serve, and every day we delay the Sanford-Fairview merger is a missed opportunity to realize significant benefits for our patients, our employees and the communities we serve. This merger also involves taking important steps to ensure the necessary financial sustainability to serve Minnesota communities for generations to come,” the health systems said in a joint statement.

Sanford and Fairview will need to focus on closing the deal as well as working with Allison, said Matthew Anderson, senior lecturer in health policy and management at the University of Minnesota.

Anderson said healthcare systems must act quickly to lower merger costs, maintain momentum and mitigate uncertainty between current or potential employees, insurers, suppliers and other stakeholders. Companies also need to act quickly to get ahead of any other government action, he said. But they need to maintain good relations with the state government and the University of Minnesota, where Fairview owns a hospital, he said.

“Throwing sand in the attorney general’s face would be very risky,” Anderson said. “If AG asks to slow down a proposed merger and the parties say no, does that give the impression that they are trying to hide something?”

According to Keller, the University of Minnesota expressed concern that the proposed merger was moving too fast and that its interests had not been adequately considered. 26 years ago, Fairview acquired M Health Fairview University of Minnesota Medical Center in Minneapolis.

Sanford CEO Bill tried to allay those concerns at a meeting in Worthington on Wednesday. According to his prepared remarks, Gassin said the combined company would honor its agreements with the University of Minnesota and its flagship medical center. The current deal expires in 2026.

“There is more than enough time left for the combined system to work with the university on the buyout of the medical center it sold to Fairview in 1997 and determine what the future clinical relationship might look like,” Gassen said. “Nothing – I repeat, nothing – will change for the University of Minnesota as a result of this merger.”

No facility closures due to the merger are planned, Gassin said. If the deal is approved, he will become president and CEO of the combined system, with Fairview CEO James Hereford becoming co-CEO within a year. The new company, called Sanford Health, will operate more than 50 hospitals and employ about 80,000 people.

Sanford Health and Fairview Health Services tried unsuccessfully to merge in 2013 but faced resistance from Allison’s predecessor, Laurie Swanson (D). Swanson also expressed concern about the implications of the deal for the University of Minnesota Hospital. Sanford pulled out of the deal in response to the Attorney General’s objections.

Both health care systems tout financial stability as a key justification for the new deal, but questions remain whether it could improve their finances.

According to the latest financial report, Fairview posted an operating loss for the first nine months of 2022, leading to a credit rating downgrade this month. Fairview posted an operating loss of $213.8 million on operating revenue of $4.9 billion compared to an operating loss of $120.9 million on operating revenue of $4.75 billion for the same period of the previous year. Cash for the period fell from 158 to 118. The company, with $1.57 billion of outstanding debt, also posted annual operating losses in 2019, 2020 and 2021.

Although credit rating agencies are not involved in M&A approvals, Moody’s Investors Service downgraded Fairview’s rating from A3 to Baa1 and assigned it a negative outlook. According to Moody’s report, the company’s weak operating performance will be difficult to reverse, especially against the background of high labor and material costs and relatively low volumes of inpatient care. Fairview has a strong market position, good scale, an adequate cash-to-debt ratio and strong income from specialty pharmacy operations, but lower investment income would offer less protection from operating losses, Moody’s writes.

Sanford reported an operating income of $32.8 million on operating revenue of $5.12 billion in the first nine months of 2022. This is less than operating income of $284.2 million on revenue of $5.22 billion in the same period the previous year. Cash during this period fell from 154 to 118.