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We all know by now that entering into a merger discussion does not mean that a merger will occur. Issues of misalignment, or unclear long-term viability, or lack of community support can crop up in odd places. That’s why it’s worth examining both consummated and unconsummated merger talks for lessons that can be gleaned. In this case, two massive health organizations may have misunderstood the degree to which their publics needed to be kept informed and assured that their interests came first.

Mergers involving multibillion-dollar corporations can be big news. Even in the nonprofit healthcare industry, where hospitals are merging with increasing frequency, some mergers are more significant than others. When the public learned in late March that Sioux Falls, SD-based Sanford Health was in merger talks with Minneapolis-based Fairview Health Services, it was big news across the Upper Midwest. The news was almost as big when Sanford Health abruptly halted the merger talks in early April, within days of the published reports.

Why did Sanford pull out of the talks? The prospect of the two $3 billion hospital systems merging alarmed some Minnesota leaders. The Minnesota Attorney General, Lori Swanson, called a press conference in late March to express concerns about Fairview assets remaining in Minnesota after a merger, and speculated about the future of the University of Minnesota’s teaching hospital, operated by Fairview, after a merger with an out-of-state entity. She convened a public hearing on short notice, on a Sunday in early April, and promised additional inquiry into the proposed merger. Two Minnesota state legislators introduced a bill to slow or stop the merger. Facing public suspicion and politicians intent on slowing, if not stopping, the merger, Sanford Health decided to cease merger discussions.

It’s easy to blame the Minnesota AG and politicians for the failure of the two nonprofit hospital systems to complete their exploration of a merger. After all, the AG jumped in before there was a deal to evaluate. When a business decision becomes a political issue played out in the media, business considerations become overwhelmed by politics and public opinion. It’s also easy to blame Sanford, a hospital system that had been in an eager acquisition mode for many years. However, Fairview Health was all but silent, leaving little known about its viewpoint and motivations. Effectively, Fairview left its out-of-state partner, Sanford Health, to defend its presence rather than acting to explain the perceived benefits to its own citizens. Fairview’s silence may not have been benign, either, as it had been approached by the University of Minnesota as a potential merger partner.

The story is complex, and does not allow for easy scapegoats. It involves issues of governance, conflicts of interest, regulation, public relations, politics, the changing healthcare marketplace, and even anti-trust considerations. All nonprofit organizations contemplating merger face similar questions, but in few cases do they become so public or so passionate.

The Merger’s Cast of Players

Sanford Health, based in Sioux Falls, South Dakota, is a healthcare system with $3 billion in revenues from 35 hospitals, 140 clinic locations and 1,360 physicians in eight states, primarily in South Dakota, North Dakota, and western Minnesota. It has its own insurance products, fitness centers, a real estate construction operation, and a supporting foundation with $130 million in assets. Formerly known as Sioux Valley Hospitals and Health System, the name was changed when billionaire philanthropist T. Denny Sanford gave $400 million to the healthcare system to achieve domestic research and international clinical goals collectively called the “Sanford Initiatives.” Interestingly, it was current Sanford CEO Kelby Krabbenhoft and Sioux Valley officials who requested the name change. They knew that the Sioux Valley name was geographically limiting; they needed a name that could travel regionally, nationally, and even internationally to build the healthcare system they believed would be required to achieve preeminence and compete effectively in the increasingly competitive healthcare marketplace.

Fairview Health Services, based in Minneapolis-St. Paul, Minnesota, is a $3 billion healthcare system that includes more than 40 primary care clinics, 1,400 physicians (split evenly between employed and affiliated), and a $13 million foundation. Fairview’s holdings include the University of Minnesota Medical Center and its affiliated children’s hospital, which merged with Fairview in 1997. Fairview is currently led by its board vice-chair, Charles Mooty, who acts as Fairview’s interim CEO. Fairview’s previous CEO, Mark Eustis, resigned under pressure in 2012 after a third-party collections service with which it contracted was cited for improper and coercive collection tactics. Mooty’s business resume includes service as chairman of International Dairy Queen, and his volunteer service includes serving as chairman of the University of Minnesota Foundation Board of Trustees.

Not all conflicts of interest are inappropriate, much less legally impermissible. However, good governance principles dictate that conflicts should be disclosed in advance and that steps must be taken to avoid any conflict of interest to negatively influence the organization or organizations involved. The Sanford-Fairview merger talks included several significant relationships at the highest levels.

Sanford Health and the University of Minnesota share a close relationship with T. Denny Sanford: Sanford is an alum and major donor to the University. Kelby Krabbenhoft is also a U of M alumnus, telling Minnesota president Eric Kahler in a 2013 letter that he was a “Gopher forever” and ready to discuss a board seat for Kahler after a Sanford-Fairview merger. Fairview and the University are also linked through Mooty’s service as a current trustee and past board chair at the U of M Foundation.

There was speculation that Denny Sanford would make a gift to the University of Minnesota that would help support the university’s teaching hospital and children’s hospital, allowing those units to be reacquired by the U of M while the rest of Fairview would be merged with Sanford Health. The U of M issued a statement in late March that no such gift was being contemplated and, further, that no gifts of any type would be accepted from Denny Sanford while the Sanford Health-Fairview merger talks were taking place.

Attorney General Concerns

Many people, including those with significant nonprofit experience, are unaware that each state’s attorney general acts not only as the state regulator, but also as the ultimate trustee, steward, and protector of the assets entrusted to nonprofit organizations in the state. It’s rare for the attorney general to become involved in legal operations of a nonprofit, but the potential for nonprofit assets to be moved out of state is a ready cause for action. The prospect of a $6 billion Sanford-Fairview merger, with out-of-state Sanford Health seen as the more active player, would be more than enough to cause Minnesota Attorney General Lori Swanson to monitor the merger talks closely and question any decisions the two hospital systems might be prepared to make. Swanson’s interest in Fairview was nothing new: when Fairview had its problems with the collection agency Accretive in 2012, it was Swanson who helped publicize the issue and pressure Fairview to drop its contract with Accretive. When Fairview CEO Mark Eustis stepped down in the wake of the controversy, Fairview’s board told Swanson that it would begin a search for a new CEO, and that the search was expected to take approximately one year.

Swanson’s office received informal word in 2012 that Fairview and Sanford were beginning to discuss the possibility of a merger or other collaboration. However, it appears that the AG’s office did not receive any updates on the progress of the merger talks until the story became public in March 2013, despite rumors in healthcare circles that a merger was in the offing. Swanson’s public statements were laced with surprise that merger talks could have advanced so far without her being apprised of it. Her call for public hearings was a deliberate attempt, she said, to slow down the process and assure that Fairview, the University of Minnesota, and the state’s citizens would not be harmed by a potential merger, or “takeover,” as many viewed it. The appearance of a takeover was reinforced by observing that Sanford Health’s CEO would likely become the CEO of the merged entity and that the merged system would likely retain the Sanford Health name. To address some of these concerns, Krabbenhoft, in a letter to Swanson, offered the possibility that Sanford Health might be open to transferring its nonprofit incorporation from North Dakota to Minnesota.

Sanford Health already has a significant presence in Minnesota, where it has acquired several small and mid-sized hospitals. However, the proposed Fairview merger was different. Most of Sanford’s prior acquisitions were hospitals under $100 million in revenue in rural parts of the state; Fairview was a giant in comparison. In addition to its size, Fairview is located in the state’s capital, owns and manages the state’s teaching hospital, and was recently under political scrutiny for its collection practices.

For these reasons and others, Sanford Health suffered greatly in the public relations arena as the merger reports circulated. At Swanson’s public hearing, Sanford Health sent two of its key leaders, but Krabbenhoft himself did not appear. The hearing featured harsh questioning by Swanson and heart-rending testimony from Minnesota citizens frightened that their healthcare costs would rise while Sanford Health spent patient revenue on the kind of aggressive multimillion-dollar sports-related branding and sponsorships that it had pursued in its current markets under Krabbenhoft.

Sanford Health’s representatives reiterated what healthcare professionals have been seeing for the last decade or more: Hospitals need to become integrated healthcare delivery systems. These systems must grow to a size sufficient to have a large potential patient population while also achieving the economies of scale that tighter revenue margins require. In addition, the Affordable Care Act envisions a healthcare marketplace where providers are paid for value received by patients, rather than for procedures performed on patients. This approach to healthcare, described as “capitation” or “covered lives,” requires providers to build an integrated system of healthcare that provides all kinds of preventative and wellness care as well as injury and disease treatment.

Dealing with the Public Stake in Nonprofit Hospital Mergers

The problem with Sanford Health’s focus on the needs of the healthcare marketplace and the importance of assuring the sustainability of an integrated provider network was that Sanford Health never explicitly referenced a stewardship and care for Minnesota’s citizens and Minnesota’s nonprofit assets. The merger talks also involved the state’s premier teaching hospital and eponymous university—what would become of the state’s capacity to train doctors if the teaching hospital were owned by an out-of-state health system with its own teaching hospital?

Sanford Health and Krabbenhoft missed several key opportunities that would have reduced public tensions and, perhaps, mollified Attorney General Swanson. First, they should have publicly acknowledged what was privately gossiped about for months: Sanford Health and Fairview were talking to each other. Second, Swanson should have been informed about progress in the talks and consulted as to what issues and concerns would need to be addressed to assure the state’s approval of a change in ownership. Third, Sanford Health’s representatives needed to cast all its public statements in the light of how any potential merger would benefit ordinary Minnesotans and preserve or strengthen the resources and care they already receive.

Some have argued that Sanford Health and Fairview had no obligation to communicate with the attorney general, legislature, or media. While this is technically true, it ignores the prudence of recruiting allies who might otherwise be able to thwart your plans. The lack of disclosure and communication made the talks appear secret, with the nefarious connotations the word implies. The connections and conflicts of interest between Sanford Health, Fairview, the University of Minnesota, and T. Denny Sanford become suspect when discovered rather than disclosed.

What’s next? Fairview Health is still a potential merger or takeover target. In January, the University of Minnesota’s president, Eric Kahler, sent a letter to Charles Mooty at Fairview. Kahler offered to enter into talks with Fairview to bring Fairview, including the U of M teaching hospital and children’s hospital, into the U of M. This offer was made public not long after the Sanford Health-Fairview talks were. The relationship between Kahler and Mooty (that is, Mooty’s past leadership of, and current membership on, the U of M’s foundation board) was not well reported. How the U of M and Fairview can negotiate while avoiding the appearance of a conflict of interest between their respective leaders will be a delicate exercise.

The two major players in Minnesota healthcare, Allina Health and the Mayo Clinic, may have interest in Fairview, but there are anti-trust issues to consider. The US Federal Trade Commission (FTC) has successfully challenged some hospital mergers and acquisitions when the resulting entity has a monopoly on the healthcare market. Attempts by either Allina or Mayo to expand their presence in Minneapolis may face stiff resistance from federal regulators, and might also attract attention from Minnesota AG Swanson.

Sanford Health has choices to make. They may choose to play a waiting game, watching Fairview and gauging the potential for resuming merger talks when the political and media climate becomes calmer. They are likely to continue to acquire rural hospitals in the Upper Midwest, adding to their claim as the nation’s largest rural hospital network and following their plan to adapt their healthcare model to the changing healthcare marketplace. The question is, will they also adapt their communications and media relations? Will they develop the skills and sensitivity to more successfully navigate larger mergers and acquisitions in states that jealously guard their healthcare assets?

Swanson and the Minnesota legislature have choices to make, too, in balancing state stewardship of Minnesota’s nonprofit healthcare delivery system with the requirements of a changing healthcare marketplace. Regulation of nonprofit organizations and their assets is necessary and appropriate. However, if regulation is applied too rigorously or arbitrarily, stewardship efforts may backfire by reducing healthcare options, as some hospitals are forced to close, or by increasing the state funds required to subsidize hospital services and healthcare for the state’s citizens.—Michael Wyland