The high-stakes maneuvering over ownership of Fairview Health Services ended abruptly Wednesday, with Sanford Health and the University of Minnesota halting discussions about a merger or acquisition.

The CEO of South Dakota-based Sanford, whose merger effort came under intense scrutiny the past two weeks, said Wednesday afternoon that he was ending discussions because Sanford has a policy of “only going where we are invited.”

Shortly thereafter, university President Eric Kaler said Fairview’s board won’t consider a proposal he made in January for the U to take over the hospital system. Instead, the two sides will talk about strengthening the existing arrangement in which Fairview has run the U’s medical center since 1997.

The end of Fairview’s talks with Sanford, which Minnesota Attorney General Lori Swanson brought to light two weeks ago, leaves the Twin Cities’ second-largest hospital system to seek a new path amid rapid changes in the health care industry.

“We understand why they would choose to step back at this time, but the news comes as a disappointment,” Chuck Mooty, Fairview interim CEO and board chair, said in a statement.

Fairview’s merger discussions with Sanford became public March 26, when Swanson started raising questions. At a packed hearing Sunday at the State Capitol, she grilled Sanford executives, saying that the organization had been less than forthcoming about the Fairview talks and questioning the nonprofit’s ties to the business interests of billionaire philanthropist T. Denny Sanford.

Sanford Health CEO Kelby Krabbenhoft said in a letter released Wednesday that “incredibly positive beginnings” to the talks with Fairview had turned sour.

Sanford Health found itself “unwelcome by some interested parties and key stakeholders of our proposed merger partner,” Krabbenhoft wrote. “It is inconceivable and unacceptable to me that we would ever propose a merger without the affirmation of these parties.”

Krabbenhoft, who was out of the country and unavailable for further comment Wednesday, said in his letter that he was concerned that “the good reputation of Sanford may be injured” by continuing discussions.

Fairview’s next steps

Kaler, who declined to comment, said in a memo to employees of the U’s Academic Health System that the university will continue negotiations with Fairview that have been underway for the past 18 months to improve the current arrangement, with Fairview in management control.

A new deal with Fairview could be ready for a review by university regents next month, the memo said. Fairview, meanwhile, will move forward with finding a new CEO. Mooty has been sitting in since May, when Fairview CEO Mark Eustis resigned over a controversy over its hiring of an overly aggressive bill collection agency.

John Kralewski, professor emeritus at the U’s Department of Health Policy and Management, said Sanford Health’s withdrawal presents a golden opportunity for the university and Fairview to chart a new course for their alignment.

One possibility, he said, is to invite the Mayo Clinic into the discussion as a possible collaborator. “If you could get Mayo to take over the medical school, imagine that,” Kralewski said.

Allan Baumgarten, a Twin Cities-based health care analyst, said the turmoil may yet open up opportunities for an improved health system under new leadership.

“The university has expressed that it felt like an unloved child and wasn’t getting the attention and resources that it wanted from the Fairview system,” he said. “Presumably, if it’s not pursuing a reverse acquisition, it may still be pursuing the goal of repositioning itself within the Fairview system.”

Sanford Health and Fairview described discussions as being in the early stages when Swanson took the matter public. She said her office has an interest in protecting Fairview and the university’s relationship as a public asset and charitable trust that receives taxpayer support.

On Wednesday, Swanson issued a statement saying she had not spoken to Fairview or the U since receiving Sanford Health’s letter. She said she appreciates Fairview’s announcement that it will start searching for a CEO and canceled a second hearing, planned for April 21.

“Charitable institutions exist because of public support, and the public has a stake in their outcome,” Swanson said. “Over the last few weeks, the Minnesota public had an opportunity to participate in a dialogue about how a transaction of this magnitude might impact Minnesota patients and citizens.”

Industry consolidation

Fairview is among many hospital organizations locally and nationwide to contemplate a merger or other partnership. The most recent example in the Twin Cities became official in January, when HealthPartners, which operates a health insurance plan as well as hospitals and clinics, completed a merger with Park Nicollet.

Sanford Health, based in Sioux Falls, S.D., is the nation’s largest nonprofit rural health care system and operates mostly in the Midwest. Fueled by more than $600 million in donations from St. Paul native and U alumnus T. Denny Sanford, it has expanded rapidly into Minnesota in recent years, setting up a hub in Bemidji.

State Rep. Joe Atkins, DFL-Inver Grove Heights, chief sponsor of bills that would prevent control or ownership of the University of Minnesota hospitals from transferring to any non-Minnesota-based entity, said he intends to push forward with legislation.

“Sanford just called attention to an issue that we had not previously realized was out there. Until we hear from Mr. Mooty at Fairview that there are no other secret negotiations taking place, it certainly remains a concern I think for most legislators,” Atkins said.

He said his concern was never about Sanford particularly but about, “the investment and assets that are associated with the University of Minnesota hospitals.” Star Tribune staff writers Jenna Ross and Rachel Stassen-Berger contributed to this report.

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