Nov. 15, 2022

For the second time in its history, Sanford Health is working toward a merger with Minneapolis-based Fairview Health Services.

The two systems signed a nonbinding letter of intent to combine and create a system with more than $13.5 billion in annual revenue, ranking it among the nation’s largest nonprofit health systems.

Post-merger, the system would continue to be called Sanford Health and ultimately result in Sanford president and CEO Bill Gassen retaining the same role in the combined system.

In an interview with SiouxFalls.Business, Gassen describes Sanford as “elated” by the prospect of coming together with Fairview after a similar deal in 2013 failed to materialize.

Neither Gassen nor Fairview CEO James Hereford were at the leadership table then.

They began talking over a dinner table in May after meeting each other over the past couple of years through industry groups.

Bill Gassen and James Hereford

“The conversation was fairly energizing,” said Hereford, who estimates they initially met for nearly three hours and began to see an opportunity “in combining the two organizations as far as what that might provide to be a transformative force in health care.”

The two have developed a rapport and relationship in a fairly short period of time, he added.

“It’s often the egos of the CEOs that get in the way,” Hereford said. “I have every confidence because of the relationship I’ve built with Bill Gassen that that’s not going to be a problem. We see the world in similar ways, what’s important in similar ways.”

The combined organization would serve a broad and diverse geography.

Sanford, based in Sioux Falls, serves more than 1 million patients and 220,000 health plan members across 250,000 square miles. The system encompasses 47 hospitals and 224 primary and specialty clinics.

Fairview includes 11 hospitals and more than 80 primary and specialty care clinics.

Sanford includes 47,000 employees, while Fairview has 31,000. Of those, Sanford has 2,800 physicians and advanced practice providers, and Fairview has 3,300.

Sanford reported $7.1 billion in 2021 revenue, while Fairview reported $6.5 billion.

This is the third large merger Sanford has attempted in the past three years. One with Iowa-based UnityPoint was called off by that system in 2019, and Sanford pulled out of discussions with Utah-based Intermountain Healthcare in 2020 following the departure of CEO Kelby Krabbenhoft.

In the case of the proposed merger with Fairview, neither CEO’s chief objective “was to find a merger and grow,” Gassen said. “Instead, the conversations and resulting letter of intent between our two organizations was really born out of a deep-rooted commitment by James and I … to do everything we can to better meet the needs of our patients we serve today.”

The economic environment in health care is driving such merger and acquisition activity industrywide. It hit a record high of $19.2 billion in the second quarter of this year with 13 transactions, according to Kaufman Hill’s M&A Quarterly Activity Report.

Health systems are dealing with inflation on multiple fronts, including medical supplies and equipment, and significant pressure on wages and hiring. In some cases, expenses are up 25 percent to 40 percent.

“The challenges and opportunities in front of us” were key in Sanford’s discussions, Gassen said.

“As we talked about that, what became clear is we’re stronger together than apart. There’s much more we’re able to do together than alone, and that’s really been the driving force behind where we are today.”

The two organizations “have the same mission but have different capabilities that are very complementary,” he added.

Fairview was established in 1906 and for 25 years has had a relationship with the University of Minnesota. A 1997 affiliation agreement led Fairview to acquire the University of Minnesota Medical Center, and a new joint agreement was reached in 2018 among the university, the University of Minnesota physicians and Fairview to create the brand M Health Fairview.

The three are separate entities, however.

Both agreements run through 2026, with an option for an early renewal in 2023, “and Bill and I are engaged with the university to talk about what this relationship will look like in the future,” Hereford said.

Gassen calls the opportunity to work with the university and the physician group exciting.

“We’re trying to develop that vision together,” he said.

The previous merger attempt between Sanford and Fairview fell apart in 2013 when Sanford withdrew after the Minnesota attorney general voiced concerns about it.

“Just looking at our organization, looking at the industry, looking at the people, it really is a different time and place,” Hereford said, adding “I think this stands on its merit. I think the opportunity for us to describe why this is going to be better for our patients, how we’re going to be able to drive transformation for our patients and caregivers is incredibly compelling.”

He said he’s impressed by Sanford’s investment in virtual care, and “the opportunity to drive the transformation of that, frankly, our entire industry needs … is something unique and something we can’t do individually but can do together.”

As part of the merger, Sanford and Fairview would put together a combined leadership team and combined board of directors, as well as leadership teams and boards for the respective regions. Hereford would serve as co-CEO for one year after the deal closes, which is expected to be sometime in 2023.