Sanford Health, UnityPoint merger collapses

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South Dakota-based Sanford Health and Iowa-based UnityPoint Health called off a merger that would have created one of the largest health care systems in the nation.

It's a decision that bucks the national not-for-profit health care consolidation trend, while underscoring the difficulties of combining major systems.

The executive management teams and physicians from both health systems had over the last 18 months worked to provide a merger recommendation to both boards. Ultimately the UnityPoint Health board “failed to embrace the vision," said Sanford president and Chief Executive Kelby Krabbenhoft.

“Our conversations regarding a potential merger with UnityPoint Health have ended,” Krabbenhoft said in a statement Tuesday. “We were excited at the opportunity our combination would have provided to create a new health system of national prominence. We are disappointed that the UnityPoint Health board failed to embrace the vision.”

UnityPoint President and CEO Kevin Vermeer said in a statement that the health system seriously explored the opportunity to join together with Sanford Health but “after significant consideration, we will not be moving forward with a formal partnership.”

The statement didn't elaborate on why UnityPoint was halting the merger, but said the company is competitively positioned for the future and will continue to evaluate any avenue that improves the delivery of health care.

The proposed union, first announced in June, would have created a health care systems with more than $11 billion in operating revenue, 83,000 staff and 2,600 physicians in 26 states and nine countries.

S&P Global Ratings analyst Cynthia Keller said that some of the biggest obstacles for mergers of this size are decisions around management and governance appointments as well as issues of control and culture.

“[There can be] differing views on financial/operating/strategic goals — margins, capital spending, synergy and saving opportunities, etc.,” Keller said.

Keller said that Sanford’s move to merge with UnityHealth was a play for size and scale.

“While the impact of UnityPoint cannot be fully factored into the ratings, the two organizations, if combined, would become one of the largest providers in the country, with around $11 billion in operating revenue (on an annualized full year basis),” Fitch Ratings said in a report. “UnityPoint Health would be accretive to the current Sanford Health credit profile, most notably improving key balance sheet metrics, but also expanding the combined organization's footprint and access points throughout the Midwest.”

Last year, Sanford merged with the Good Samaritan Society, one of the nation's largest not-for-profit providers of senior care services. Good Samaritan provides senior care in 26 states and nine countries. Keller said that acquisition was a revenue diversity strategy for the system.

Moody’s Investors Service downgraded Sanford to A2 from A1 largely as a result of the merger. Moody’s rates UnityPoint A1.

S&P Global Ratings and Fitch rate Sanford Health one notch above the Moody’s ratings at A-plus. Fitch rates UnityHealth AA-minus. Sanford has about $1.7 billion of outstanding debt and Unity Point has $1 billion outstanding.

Fitch said that the A-plus bond ratings reflect Sanford’s leading market share in its primary service areas (PSAs) and its strong financial profile.

“Sanford's financial profile has remained strong over an extended period of time, including through the recent acquisition of Good Samaritan and its associated long-term debt,” Fitch said. “The financial profile demonstrates stability and gradual improvement under Fitch's forward looking scenario analysis, even under a potential stress scenario.”

The merger would have been continues a trend of consolidation among health care providers, as well as payers, across the country, as systems look to create great scale and scope to reduce care costs and administrative hassles and operate more efficiently.

CommonSpirit Health formed in February following a merger between San Francisco-based Dignity Health and Catholic Health Initiatives in suburban Denver, creating the largest not-for-profit.

In July Michigan-based Beaumont Health and Ohio-based Summa Health announced plans to develop a strategic partnership. The merger will give Beaumont the opportunity to expand outside of Michigan into Ohio. It will also give the system access to SummaCare insurance. The partnership is expected to be finalized by the end of the year, subject to regulatory approval.

In the Chicago area, independent hospitals have allowed themselves to be scooped up by systems to deal with evolving market trends and lean balance sheets, and two more are poised to follow.

In June the larger and higher-rated Evanston, Illinois-based NorthShore University HealthSystem said it will acquire Swedish Covenant Hospital. Swedish has had its eye on such an acquisition, having been in negotiations with a handful of systems. The acquisition still requires regulatory approval and is expected to be completed by the end of the year.

In July, Peoria, Illinois-based OSF HealthCare and Little Company of Mary Hospital & Health Care Centers, based in the Chicago suburb of Evergreen Park, announced they were in exclusive negotiations to merge. Regulatory and church sponsorship approval is needed from the boards of the two Catholic providers. Financial terms were not disclosed and the union is expected to be completed in early 2020.

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