MeritCare, Sanford Health set to combine Monday

SIOUX FALLS, S.D. - The merger of MeritCare with Sanford Health will require blending management expertise, linking sophisticated information systems and a melding of corporate cultures.

It also will involve a lot of bus trips.

The merged health system, expected to be completed Monday, will operate its own fleet of two buses to routinely shuttle staff and physicians between medical campuses in Fargo and Sioux Falls, where Sanford is based.

The buses, equipped to allow traveling staff to work on the road, are emblematic of the logistics that will be required in meshing two health systems combining nearly 14,000 full-time employees and $1.9 billion in assets.

When needed, managers and other staff, not patients, will do the traveling, said Kelby Krabbenhoft, who is Sanford's chief executive and will take the helm of the merged organization.

"These markets are so separate and unique," he said. "It's not a shuttle health service. You can't do it. What you can do is shuttle leadership."

The merger will cap eight months of talks between the two large health systems - each dominant in its service area.

The united system will be called Sanford Health & MeritCare, with the separate names continuing in their traditional service areas for the foreseeable future.

"Our priority has been uninterrupted service," Krabbenhoft said. He added: "I don't see any bumps" in the road leading toward a completed merger.

Sanford Health & MeritCare will have a coverage area of 130,000 square miles, encompassing parts of five states, with a service area that is heavily rural - perhaps the most rural in the nation, administrators believe.

One of Krabbenhoft's first steps will be to name his management team. "I'm playing a lot of the cards that were dealt to me," he said.

For now, he's keeping those cards close to his vest, although an announcement is possible Monday. Dr. Roger Gilbertson, MeritCare's chief executive, will remain as a consultant until his contract expires at the end of 2010.

Krabbenhoft said floor plans have been drawn up for new executive offices in downtown Fargo, with a site yet to be announced that offers a visible presence.

Strategic planning will begin immediately, and Krabbenhoft has already said he envisions a $250 million to $300 million health complex in five or six years at MeritCare's Agassiz Crossing location in southwest Fargo.

Someday, in fact, those Sanford-MeritCare buses could be parked outside a hotel-convention center connected to the Agassiz Crossing health center.

Layoffs not discussed

Preparations have been under way for months to draft plans to integrate physicians, corporate governance, finances and information systems, among other areas - necessary steps Krabbenhoft said will be mostly invisible to patients.

"It really will be a lot of things that the general public won't see," he said.

Last week, in a decision that cleared the way for the merger, North Dakota's attorney general concluded the merger would be in MeritCare's "best interest."

Attorney General Wayne Stenehjem, who has limited review authority involving ownership changes of major nonprofits, found that a merger would enable expansion of services.

The review also concluded that cost reductions through greater efficiencies through staffing reallocations or reductions, such as combined business operations, also should result.

Still, Krabbenhoft has reiterated earlier statements that no layoffs are planned. In fact, he said, the possibility hasn't even been discussed.

"That topic has not even made it - and I can swear to it - into any of our conversations," Krabbenhoft said.

Instead, the merger will create opportunities for advancement. "The new structure will prompt movement of people around the organization," he added. "That's the sign of a healthy company."

Similarities, differences

Billed as a "merger of equals," the two health systems are of similar size and have much in common, including roots as Lutheran hospitals founded a century ago.

Both are examples of "integrated health systems," that bring together doctors and hospitals to deliver a spectrum of health care.

But MeritCare has placed a greater emphasis on clinics and large group practices of physicians, while Sanford has focused more on a network of hospitals.

Sanford also provides its own health insurance coverage, an option it plans to extend to North Dakota and northwestern Minnesota, pending regulatory approval.

Krabbenhoft's 14-year tenure at Sanford provides a preview of how he will manage a combined health system, his colleagues said.

He inherited a well-funded and established Sioux Valley Hospital, and aggressively expanded services while acquiring hospitals and clinics to form a regional network, said Michael Myers, a law professor at the University of South Dakota who teaches health policy and is a former hospital administrator.

The result, Myers said, is "very sophisticated systems of moving patients through sections" in a way that maximizes revenue.

MeritCare's network of clinics acts similarly to funnel patients to its specialists in Fargo-Moorhead, who also travel to satellite locations.

Recently MeritCare announced it will merge with Union Hospital in Mayville, N.D., and it has a hospital in Thief River Falls, Minn., in addition to its two Fargo hospital campuses.

Further mergers are possible, especially involving unaffiliated hospitals in MeritCare's service area. But Krabbenhoft said alliances evolve by mutual agreement.

"These are things that come when two organizations think it's time," he said. "It's something you never push and never sell."

Sanford expansion

Sanford's network includes 23 hospitals as well as 19 nursing homes, 18 assisted and congregate living centers and 43 clinics.

The Sanford-USD Medical Center west of downtown Sioux Falls occupies two city blocks, dominated by its hospital, with 545 licensed beds.

Construction of a new $78 million heart center, including 58 beds, is the latest in a string of projects that have expanded services and upgraded facilities during Krabbenhoft's tenure.

Other significant upgrades include new orthopedic and cancer centers, trauma center and a new surgery tower - as well as a new $60 million children's hospital, with distinctive castle architecture and story-land artwork theme.

Sanford's medical research program, a partnership launched in 1998 with the University of South Dakota Medical School, started with two employees and no lab space.

Soon, its three labs will be under one roof in a sprawling building that also will house corporate offices. Funding, now

$25 million, is targeted to reach $100 million by 2017, and new researchers are being brought on staff at a rapid rate, Benjamin Perryman, Sanford's research director said.

"We're actively recruiting," he said. Sanford's signature research initiative is its goal to find a cure for childhood diabetes, but it also involves other areas of basic research. By contrast, MeritCare has been more involved in clinical studies.

Market power

Sanford's gross revenues grew more than five-fold during Krabbenhoft's tenure, from $294 million in 1996 to $1.8 billion this year. Total employees almost tripled during that period, from 3,863 to 10,200.

A combined Sanford-MeritCare will have much greater market clout that it can wield in negotiating with public and private health insurers, Myers said.

"They're going to have significantly more market power," he added. "It's pure, raw market power, which converts into political power."

At the same time, as Stenehjem's analysis concluded, the merged organization has economies of scale and greater efficiencies.

The merger did not require an antitrust review, however, because the service areas of MeritCare and Sanford do not overlap, resulting in greater concentration within an area.

Mark Johnston, Sanford's vice president of administration and corporate communications, said the two organizations have not discussed prices and are prohibited from talking about prices in advance of a merger.

Krabbenhoft, a native of Sabin, Minn., said there were some apprehensions when he first took charge at Sanford and started charting a new course. The merger with MeritCare also comes with understandable concerns, he said.

"Early on we had the same questions here," he said. "Where is this new team going to take this organization?"

That will become clear, he added, when his team maps out its strategy and goals.

For months, colleagues of the two health networks have been meeting and talking about how they can preserve "the best of the best" when combining systems, said Becky Nelson, Sanford's chief operating officer.

The medical staffs of the two organizations can teach one another better methods and efficiencies, said Dr. Charles O'Brien, president of the Sanford-USD Medical Center.

"There's things to be learned on both sides," he said. "Ninety-five percent of what we do in Sioux Falls and Fargo will stay the same." O'Brien added that the other 5 percent will involve growth opportunities and new services.

"We're looking forward to that exchange," he said.