A resolution that would give University administrators the power to finalize the proposed merger between University Hospital and Fairview Health System will be presented today for Board of Regents approval.
If the Regents approve the resolution, University and Fairview officials will likely sign a contract by Sept. 30 and merge Jan. 1. The proposed merger plan calls for Fairview to give the University about $87 million and future financial support for education and research. In exchange, Fairview will take over University Hospital assets and liabilities.
But exactly how the University arrived at the $87 million figure without assessing the marketplace value of the properties and equipment it would transfer to Fairview is unclear.
Typically, you would appraise the assets involved in a large business transaction such as this, said Andrew Van De Ven, professor in the Strategic Management Research Center of the Carlson School of Management.
Van De Ven, who specializes in studying mergers and the Twin Cities health care market, said the lack of an assessment is “unusual,” and added, without appraising it, “how do you know how much something is worth?”
But Jo Anne Jackson, senior vice president for University finance and operations, said not appraising the hospital and its assets is standard business practice in a transaction such as this. “You look at the earning power of an asset to determine its worth, not the value of the asset itself,” she said.
This is not a real estate transaction, Jackson said, “It’s not like buying a house.” If you wanted to sell the buildings, they would be worth little because of their special purpose, she said. “If the property has no other use other than in the business, you value the business, not the property.”
Jackson said the amount of money University Hospital makes is dwindling because it is admitting fewer patients, and because its costs are increasing. In a situation such as this, she said, “you have to ask what is going to happen with this business, and, therefore, what is it worth?”
By examining the hospital’s earnings, financial history and financial forecast, University and Fairview officials arrived at the $87 million price tag.
Jackson said the purchase price would have been higher if the hospital was not in decline. She added that it is only because Fairview believes it can turn around the University Hospital’s financial woes “that they’re willing to pay us anything at all for it.”
The hospital has seen a steady decline in its patient volume and its share of the Twin Cities health care market, said Peter Rapp, general director of University Hospital. Admissions have declined 14 percent in the last five years, and the hospital’s market share has fallen to about 5 percent. These numbers are unlikely to change, Rapp said.
University officials say the merger is essential to preserve the education and research mission of the Academic Health Center, which includes seven health care schools and University Hospital. University Hospital, as it stands today, is not in a position to preserve that mission, said Frank Cerra, the health center’s provost.
Many University officials say they believe that if the merger is not completed the hospital will have to close.
By merging, Fairview would gain University Hospital’s world-renowned specialty care.
According to merger plans, Fairview would assume control of $150.3 million in University Hospital reserves.
Fairview would take possession of the main hospital building, the hospital parking ramp, and certain equipment and fixtures necessary to conduct hospital business. The University would give Fairview about $20 million in working capital, which Jackson said would serve as money “sufficient to start up and run the hospital on day one.”
Fairview would also gain control of five University Hospital-affiliated clinics and a community hospital in Hibbing, Minn.
The University would chip in up to $1 million a month for 32 months to finance education and research at the newly merged hospital. After that, Fairview and the University would split these costs.
In return, Fairview would pay the $87 million, set up an annual education and research grant and assume $64.5 million in University Hospital’s liabilities and long term debt.