Fairview rescues struggling HealthEast in merger

U of M hospital
The University of Minnesota Hospital is part of the Fairview Health Services system, here in 2015.
Mark Zdechlik | MPR News 2015

Updated: 3:46 p.m. | Posted: 11:46 a.m.

Two Twin Cities health systems are merging. Fairview and HealthEast announced Wednesday that they will combine.

Together, the two health systems would have a broad presence in the Twin Cities metro area and could funnel more patients to the University of Minnesota Medical Center.

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Fairview is much larger than HealthEast, with seven hospitals and 42 primary care clinics. HealthEast has only one-third as many clinics and four hospitals.

The systems say merging will allow them to benefit from greater efficiencies that come with size. Fairview CEO James Hereford will lead the combined organization.

"The geographies are very complimentary. HealthEast is largely centered in the St. Paul area, with Fairview much more centered in Minneapolis and surrounding areas," he said. "So it gives us more complete geographic coverage but it's also the ability to combine the best of the two organizations."

HealthEast CEO Kathryn Correia says the bigger geographic footprint will expand the clinical services available to the system's patients.

"Our patients our employees, those we serve — our employers have people all over both sides of the metro, so to be part of something that has that total complement of services both from a geography perspective but then also from a whole care continuum perspective," Correia said.

Correia predicts HealthEast customers will end up paying less for health care if the merger goes through because of expected efficiencies.

Public documents indicate HealthEast has been struggling financially. A 2014 financial report showed business had declined over 3 years. Last May the company's credit rating was downgraded. Fitch Ratings cited weak cash flows and raised doubts that the finances would improve, noting the company's plan to boost its fortunes by going on a hiring spree and adding hundreds of doctors to its payroll.

University of Minnesota School of Health Professor Emeritus Daniel Zismer says the deal does not come as a surprise. The Twin Cities health care market has an oversupply of services and is ripe for consolidation.

"A number of folks had expected more consolidation in the Twin Cities and one of the two questions that's always been on the table is, which is first?" Zismer said.

The deal would require approval from the Federal Trade Commission and the Minnesota Attorney General. They will scrutinize it for anti-competitive concerns. Hereford says he's confident regulators will not try to block the merger.

"This is a very competitive market with incredibly capable health care organizations with Allina and HeathPartners and Mayo, so I don't think that's really much of an issue and especially given our complimentary geographies," he said.

Zismer said that while such mergers are never an easy sell to regulators, Fairview does have one big selling point.

The larger system would have a bigger referral base. That could send many more patients into its teaching hospital at the University of Minnesota, thereby strengthening the future of that facility and the medical school.

"You need a broader base or a broader market to serve that, and so there could be a strong argument for that," Zismer said.

Neither Fairview nor HealthEast will say whether merging their systems will result in layoffs. More than 32,000 people currently work at the two health systems properties.