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Merger talks -- What's next for MeritCare?

FARGO - A merger uniting MeritCare and Sanford Health would create a sprawling five-state health system with almost 1,000 doctors, allowing patients greater access to specialty care.

That's one of the central factors underlying talks between the two large health providers as their leaders explore the viability of a merger, Dr. Roger Gilbertson, president and CEO of MeritCare, said Thursday.

A combined organization also would help to recruit physicians, he said, particularly specialists, and create a patient base that could enable services neither could offer alone.

MeritCare, for example, provides a kidney transplant program and both organizations offer sophisticated heart-care programs. But neither can offer heart transplants, something a merged system might be able to do, Gilbertson said.

"It will certainly enhance our transplantation program," he said of a merger. "There's a lot of synergies that would come together with two organizations."

Gilbertson's remarks came a day after Fargo-based MeritCare and Sanford, with headquarters in Sioux Falls, S.D., acknowledged they are exploring the possibility of combining operations.

Many details must be worked out in negotiations, but the parties have agreed unofficially on a name. "There's general agreement that the name would be Sanford MeritCare at all locations," Gilbertson said.

Industry observers say health systems, especially hospitals, have incentives to merge to achieve economies of scale and to complement and expand services.

The increase in hospital inpatient admissions is slowing, and more and more services are offered in clinical outpatient settings, said Arnold "Chip" Thomas, president of the North Dakota Healthcare Association.

"For large organizations particularly, they're trying to figure out how to keep things more efficient and effective," he said. "That's going on across the country."

MeritCare, which last year trimmed 210 positions in the midst of a financial crunch, has stressed that the talks are a dialogue among equals, aimed at a possible merger, not a buyout. Sanford is the larger organization, with revenues last year of $1.8 billion, compared to MeritCare's $819 million.

"Both enterprises are strong medically," Thomas said. "It's not a weak and a strong trying to come together."

Dave Hewitt, president of the South Dakota Association of Healthcare Organizations, said the ability to attract a broader medical staff and to benefit from combined resources and economies of scale help to explain the possible merger.

"Access to capital is always an issue," he added.

In addition to being better positioned to recruit physicians, a merger also would create opportunities for new services, Gilbertson said. For example, both Sanford and MeritCare have well-established cancer treatment programs, but neither offers bone-marrow transplants.

"We would have volume that in some cases might be able to support those services," Gilbertson said.

The combined operation would have a higher profile in the health industry. "Our hope is that we would have some national presence, not just in our scope but what we're able to do," Gilbertson said.

Competitors neutral

Both MeritCare and Sanford are so-called integrated health systems, meaning they combine physicians and other health providers with hospitals in offering a full spectrum of health services.

In South Dakota, Sanford and rival health system Avera Health compete head-to-head in many markets. "That has been a healthy and helpful development."

He added: "These kinds of activities float all boats," echoing an Avera spokesman's reaction to the possible Sanford-MeritCare merger.

Dr. Greg Glasner, president of Innovis Health, MeritCare's chief rival, said, "We understand the benefit of an integrated model and an affiliation with a larger regional system - much like our affiliation with Essentia Health back in late 2007."

The reaction also was muted at Blue Cross Blue Shield of North Dakota, the state's largest insurer and payer of health bills.

"We're neutral on this," spokeswoman Denise Kolpack said. "To say anything at this point would be premature."

Talks moving quickly

The merger talks began in April, after Kelby Krabbenhoft, Sanford's CEO, called Gilbertson to thank him for the confidence in sending MeritCare patients to Sanford hospitals when the Fargo hospital evacuated during the spring flood.

That developed into a discussion of mutual opportunities, which quickly became a dialogue about a merger, Gilbertson said. Both organizations hope to have reached an agreement this summer.

"It's actually moved along very rapidly," said Gilbertson, speaking by phone from Sioux Falls.

Executives and board members from both groups have met frequently since talks started, with meetings both in Fargo and Sioux Falls.

Fargo happens to be familiar to Krabbenhoft, a native of Northwood, N.D., and graduate of Concordia College, which also is Gilbertson's alma mater.

Although the practice of medicine in the two Dakotas is similar, reimbursements from Medicare and private insurers are more generous in South Dakota.

In a message to MeritCare employees Thursday, the health system said overall reimbursements to hospitals in North Dakota are 10.5 percent less than in neighboring states, 4.3 percent less for physicians.

MeritCare also disclosed that it is trying to recoup $6 million in losses from the flood, but expects to receive $10 million in federal stimulus money for implementing electronic medical records.

The organization continues to scrutinize new hires, and has no plans for major building projects in the near future, although is finishing projects that already were planned.

A proposed merger would require approval from the Federal Trade Commission and possibly U.S. Department of Justice, to ensure there are no antitrust concerns. A filing with the FTC will be made if an when a letter of intent is signed, Gilbertson said.