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Sanford and Fairview take second stab at Upper Midwest hospital merger

South Dakota-based Sanford Health and Minnesota-based Fairview Health Services will take another shot at merging, nearly 10 years after a previous attempt ran up against a political roadblock.

The two systems Tuesday signed a non-binding letter of intent to combine and create a new health system.

The systems would each retain their own regional presence, leadership and regional boards in the markets they serve.

“As a combined system, we can do more,” said Sanford Health President and CEO BIll Gassen, on the left, pictured with Fairview Health Services President and CEO James Hereford.

Sanford Health

The name of the parent company would become Sanford Health and Sanford chief executive officer Bill Gassen would take the helm as president and CEO with Fairview Health Services CEO James Hereford in the role of co-CEO for one year post-closing.

“As a combined system, we can do more to expand access to complex and highly specialized care, utilize innovative technology and provide a broader range of virtual services, unlock greater research capabilities and transform the care delivery experience to ensure every patient receives the best care no matter where they live,” Gassen said in the announcement.

Sanford is the largest rural health system in the United States and is headquartered in Sioux Falls with 47 medical centers, more than 200 Good Samaritan Society senior care locations, and world clinics in eight countries.

Fairview is based in Minneapolis and operates 11 hospitals, has more than 80 primary and specialty care clinics, 36 retail and specialty pharmacies, rehabilitation centers, a physician network, senior care housing and long-term care facilities, and a medical transportation service.

The University of Minnesota hospitals and Fairview signed an affiliation agreement in 1997.

The systems’ governing boards have approved proceeding with due diligence with the goal of closing on the transaction next year pending antitrust and other necessary reviews and closing conditions.

The two entered into talks to merge in 2013 but ran up against public and political pushback.

Minnesota’s attorney general at the time, Lori Swanson, along with some state lawmakers and others, raised concerns over an out-of-state system taking control of the University of Minnesota Medical Center and Clinic.

The two ultimately canceled merger talks. This time around they are attempting to highlight the independence that Fairview would retain.

The not-for-profit hospital landscape has also shifted dramatically since then. Various forms of consolidation are being pursued as a strategy to leverage scale and improve operations that benefit balance sheets as hospitals recover from the COVID-19 pandemic while struggling with an ensuing nursing shortage and supply and inflationary cost pressures that have dragged margins back down to negative territory this year.

The merger will face stepped-up federal antitrust scrutiny under a directive impacting a broad range of industries last year from President Biden.  

The systems did not disclose their future plans for their municipal bond debt.

Fairview had about $1.5 billion of bonds outstanding and $6.1 billion of revenues in 2020. Moody’s Investors Service affirmed its A3 rating and negative outlook in October 2021.

S&P Global Ratings downgraded the system to A from A-plus in September 2021 and assigned a stable outlook.

The downgrade “reflects Fairview’s operating losses in 2019 and 2020, and through the first six months of fiscal 2021. While the system budgeted a loss for fiscal 2021, we anticipate operating results at year-end may be below budgeted expectations, and further note that operating pressure will likely continue into 2022 and beyond,” S&P said.

Sanford has about $1.6 billion of debt and operating revenues of $6.7 billion in 2020. Fitch Ratings raised its rating to AA-minus and stable from A-plus in March 2021 and affirmed the rating last November. S&P affirmed its A-plus rating and stable outlook in October 2021.

The rating reflects “Sanford’s leading inpatient market share in multiple markets and strong financial profile. Sanford has maintained margin stability following its acquisition of Good Samaritan (a national provider of senior care services), demonstrating its track record of past operational improvements,” Fitch said.

Ponder & Co.’s quarterly review., published in October, reported 10 merger and acquisition transactions in the combined for-profit and not-for-profit healthcare sectors in the third quarter, down from 12 in the second quarter and in Q3 of 2021.

Ponder attributed the slump to the residual effects of the pandemic in terms of lag in volume rebound for certain services, labor shortages and contract labor, inflation pressures on expenses, buyer delays in acquisition decisions due to own challenging results, and a high degree of regulatory scrutiny.

“Ultimately, health systems need to generate additional revenue growth to withstand cost increases and coming reimbursement pressures and must also fortify their regional relevance. Therefore, despite the headwinds outlined, M&A and strategic options will be a key consideration for virtually all health systems for the remainder of 2022 and into 2024,” Ponder said.

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