The University of Minnesota has proposed taking over Fairview Health Services in a move that would pre-empt a possible merger between Fairview and South Dakota-based Sanford Health.

Fairview has controlled the U's medical center since 1997, and the prospect of a Sanford-Fairview merger could put the flagship hospital under new authority out of state. But in a letter to Fairview's top executive, University President Eric Kaler has proposed a deal in which the university would assume all of Fairview's assets and liabilities, putting it in control of the Twin Cities' second-largest hospital and clinic chain.

The Jan. 28 letter, obtained by the Star Tribune, said an alignment excluding Sanford would be the "best choice for our patients and communities, our state, and our physicians, staff and students." The letter also says the university would use its financial resources to help the U and Fairview expand and "invest to meet community needs." Because Fairview is a nonprofit organization, there would be no cash outlay.

The letter sheds new light on a complex set of negotiations that have drawn scrutiny from Minnesota Attorney General Lori Swanson. She is scheduled to hold a public hearing Sunday at the State Capitol to examine the negotiations and what is at stake for Minnesota. Swanson said Thursday there is "deep concern" among university physicians and others that Sanford could assume control of "one of the most renowned institutions in Minnesota."

In an interview Thursday, Kaler said Fairview hasn't provided much response, but said he is scheduled next week to discuss the option with Fairview's board of directors.

Chuck Mooty, Fairview's board chairman and acting chief executive, said Thursday that Fairview's board is considering all options and isn't close to a decision. He simultaneously released a statement to Fairview employees and medical staffs, disclosing the university proposal for the first time.

"Last week you heard about exploratory discussions with Sanford Health," the memo said. "In addition, there are conversations about deepening our partnership with the University of Minnesota."

Kaler's letter to Mooty said the U envisions a growth-oriented "Minnesota-based health care organization with a regional reach and national impact." With the U in control, Fairview would have access to the school's excellent credit profile, financial liquidity and fundraising ability, it said.

The letter also said the U is prepared to appoint a "core transaction team," including legal and financial advisers, to conduct due diligence with the goal of executing a letter of intent.

Linda Cohen, chair of the University's Board of Regents, said the board "is very excited about this idea." In its partnership with Fairview, the U's Medical School "has not been performing at the level we all hope it would," Cohen said. If the university were to acquire control of Fairview, it could mean "more revenue for the Medical School," as well as renewed focus on education and "those missions which are so unique to the university."

Cohen said she does not have a good sense of how the board feels about a Sanford-Fairview merger, and declined to give her own view.

"The thing I would be looking for is: What is going to enhance our ability to make the Medical School — our education, our research, our outreach — even better than it is now?" Cohen said.

National trend

Having the U in charge of Fairview wouldn't be unusual. Academic health centers nationwide are buying up hospitals, clinics and medical companies to boost market share and spread overhead costs.

"You'd be hard-pressed to find a teaching hospital that's not having this conversation now," said Dr. Joanne Conroy, chief health care officer for the Association of American Medical Colleges. "Many university hospital systems are either leading the charge for acquisitions or looking for other ways to create strategic partnerships."

Recent examples include the University of Colorado growing from one hospital to four and the University of Michigan negotiating to acquire a stake in MidMichigan Health, a nonprofit four-hospital health system. Elsewhere, the University of Pennsylvania has announced a tentative deal to acquire a struggling county hospital, while Stanford University Hospital and Clinics in California has been buying clinics, physician practices and a private care company.

Mooty said Fairview won't merge with Sanford if the U objects. All he wants, he said, is for Fairview and the U to consider all options "without putting up stop signs."

"I don't think anybody feels that enough has been developed on any of the options to know a preference at this point," Mooty said.

Three-pronged mission

Kaler said the U's proposal doesn't preclude consideration of going along with a merger between Sanford and Fairview. In fact, he was scheduled to have his first meeting with Sanford officials this week to learn more about it. Kaler said he canceled the meeting in part because of the attorney general's inquiry and because the Legislature returned from its spring break.

"We're interested in what the Sanford deal might look like," Kaler said. "We should explore all the options we can think of to get the best outcome for the people of Minnesota."

But, he added, any alignment must protect the institution's three-pronged mission: to train doctors and other medical personnel, conduct medical research and deliver health care to patients.

John Kralewski, professor emeritus at the U's Department of Health Policy and Management, said it would be a "terrible mistake" to let Sanford take over the university hospital because it would blur the school's distinct brand as an academic and research institution that provides high-quality patient care. "How about a linkage with Mayo?" Kralewski said.

Dr. Russell Luepker, a faculty member in the U's School of Public Health, said the university's decision to sell its hospital to Fairview in the first place was "not a good idea." He said the university's educational and research missions would benefit if the U regained control of the clinical operations.

Sure, "some universities are really lousy health care system managers," Luepker added. "But I think there's a lot of potential upside for this. There's enormous, enormous potential."

Tony Kennedy • 612-673-4213