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Peter Harriman, Argus Leader, Published June 21 2009

Growing pains drive merger

SIOUX FALLS, S.D. – The pressure driving a possible merger between Sanford Health of Sioux Falls and MeritCare of Fargo may be a looming giant in Minnesota: the Mayo Clinic.

That’s because on today’s health care landscape, size is important, say industry insiders and observers in the region. Bigger systems can provide a wider range of services without sending patients to other locations such as Mayo, the world-renowned clinic in Rochester, Minn.

Also, a Sanford-MeritCare merger, which could result in more than 17,000 employees and nearly $2 billion in 2008 revenue, might create an entity too large for anyone else to swallow.

“It is grow or die,” says Dick Howard, vice president of business development for Fairview Health Services, headquartered in the Twin Cities with 10 hospitals and 40 clinics throughout Minnesota.

“You want to have a large enough system with enough services to manage all illnesses. You do not want to send out patients to somebody else.”

Officials with the Dakotas hospital systems announced last week they were discussing a possible merger. The talks began, they said, in April when Sanford took in patients when Red River flooding prompted evacuations.

Roger Feldman, the Blue Cross professor of health insurance at the University of Minnesota School of Public Health, looks at the potential merger and sees the shadow of the Mayo Clinic.

“There are mergers that prevent or forestall market entry,” he said. “This smells an awful lot like a merger to prevent market entry.”

Few details of the merger have been announced, and the two sides are still in the early stages, officials said.

But Sanford Health CEO Kelby Krabbenhoft said last week that a combined system would be able to better recruit doctors and specialists. Also, he said there are possible costs savings.

But because Sanford and MeritCare are hundreds of miles apart and do not share the same patient base, Feldman doubts a merger would result in noticeable economies of scale and increased efficiency.

“Those only come about when you eliminate duplication of services. I don’t see what services would be eliminated,” he said.

The Mayo Clinic has an aggressive expansion strategy. For both Sanford and MeritCare, a merger may be a matter of “looking over your shoulder because Mayo is coming,” he said.

Like Howard, Feldman thinks a merger goal could be to create a health care system large enough to treat any illness or injury.

“It’s possible the merger is going to keep patients in the combined Sanford MeritCare system rather than feed them into Mayo,” he says.

Sanford and Mayo already have a relationship, though, that is not adversarial. They collaborate in pediatrics research and share a prominent donor.

T. Denny Sanford has given the Mayo Clinic at least $15 million, and his $400 million gift to Sanford Health in 2007 transformed the former Sioux Valley Hospital. In addition to a change of name, the businessman’s donation spurred the building of a new children’s hospital, a research initiative that includes the ambitious goal of curing juvenile diabetes, and national and international outreach with new children’s clinics.

Krabbenhoft was not in Sioux Falls on Friday and Saturday. When reached by Sanford employees, he declined to comment on whether a merger with MeritCare is designed to fend off Mayo or another health care system.

Mayo Clinic officials, as well, declined to comment about strategic plans.

Michael Myers, who teaches both law and health care economics at the University of South Dakota in , and who was formerly an administrator at the Mayo Clinic, suggests that Sanford and MeritCare are discussing a merger because getting bigger is simply what businesses try to do.

“Like any other organization, you want to grow your system and grow your market. The drive for this is one that persists for all entities,” he says.

MeritCare eliminated about 200 jobs last year and closed a clinic to cut costs and save about $9 million. It continues to have a strong presence in western and northwestern Minnesota, with 19 clinics and a regional hospital, and is well regarded in that state, according to the UM’s Feldman.

“My impression is the hospital is pretty strong financially,” he said.

Sanford has 18 clinics and seven hospitals in Minnesota. However, neither Feldman nor Myers could see any immediate advantage for Sanford in a dramatically increased presence in the state if it merges with MeritCare.

Feldman also thinks the timing is wrong for merger talks between Sanford and MeritCare to have been driven by impending federal health care reform. No reform package has yet taken shape. If health care reform was driving a merger, “they’d start talking about a merger a year from now,” he said.

A combined Sanford and MeritCare might be large enough to get more favorable terms for capital. It could give Sanford an improved competitive advantage with Avera, the other health care system in Sioux Falls, said Myers and Feldman.

But Myers did not think this would dramatically shift the competitive balance.

Avera has 235 clinics, nursing homes and hospitals in South Dakota, Minnesota and three other states.

Hospital mergers began increasing nationwide in the 1990s, according to Feldman. As that wave grew, the U.S. Department of Justice and Federal Trade Commission brought lawsuits to restrain it under anti-trust statutes. Most court rulings were in favor of the hospitals, however.

States also review anti-trust matters. But South Dakota Attorney General Larry Long declined to comment on anti-trust issues that might affect a Sanford-MeritCare merger.

Fairview’s Howard points out that because both Sanford and MeritCare are not-for-profit organizations, joining them would be comparatively easy.

“There is no exchange of stock, no purchase price,” he said. “It would be a relatively clean merger.” From the perspective of regulators, “the question becomes how much territory are they controlling?”

Peter Harriman is a staff writer at the Argus Leader in Sioux Falls, S.D.