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Sanford growth strategy: 'We're not getting big just to get big'

Kelby Krabbenhoft, president and CEO of Sanford Health.1 / 2
The sun rises over the new Sanford Medical Center on the first day of operations on Tuesday, July 25, 2017. David Samson / Forum News Service2 / 2

FARGO—Sanford Health, which has pursued an aggressive growth strategy since merging with MeritCare, is poised to see its revenues more than double in less than a decade to almost $6 billion if it joins as planned with the Good Samaritan Society.

When Sioux Falls-based Sanford and Fargo-based MeritCare merged in 2009, they had combined revenues exceeding $2.6 billion, more than 800 physicians and 17,000 employees. Today Sanford is a $4.5 billion enterprise, with more than 1,400 physicians and 28,000 employees in the Dakotas and seven other states.

If Sanford combines with the Good Samaritan Society later this year as planned, the joint organization will have revenues of almost $6 billion. Good Samaritan Society, also based in Sioux Falls, has 19,000 employees and provides senior care services in 24 states.

At the time of the Sanford-MeritCare merger, analysts said the union probably was intended to make it more competitive against health organizations like the Mayo Clinic, which also has pursued an aggressive growth strategy.

JoAnn Kunkel, Sanford's chief financial officer, said in an interview that Sanford must continue to grow for a variety of reasons to meet challenges confronting health care organizations, including pressures to manage populations of patients and to provide a full spectrum of services.

As Sanford has grown, it has been able to add more specialists and expand services, especially in its major medical centers, Kunkel said. Besides building a $494 million medical center in Fargo, Sanford recently announced plans to invest $200 million over the next decade on initiatives including a new heart center and bone marrow transplant program, and expects to hire 200 more physicians and "hundreds" of nurses and support staff in the Fargo region.

"You have to have financial strength in order to attract" talented specialists and other health professionals, she said. Doing so ensures access to needed services. "It's really critical to the population we serve. Both Sioux Falls and Fargo are fortunate."

Sanford's scale allows it to offer services such as Imaginetics, which delivers genetic medicine in primary care clinics, she said.

Greater size also provides economies of scale, such as bulk purchasing, and allows efficiencies by centralizing support services, such as human resources and marketing, that serve an entire system, Kunkel said.

Even more importantly, health systems have incentives to grow to offer the full spectrum of care and shoulder some of the financial risk—undertakings that are best achieved by large organizations, Kunkel said.

"We're not getting big just to get big," she said. "It is all about being a fully integrated system. It's about being able to care for the patient from cradle to grave and everything in between."

To spur growth, Sanford has an aggressive marketing program. The health system spent $17.5 million on advertising and promotion in its last fiscal year, according to filings with the Internal Revenue Service. That figure, which Kunkel said is half of 1 percent of total expenses, includes money spent on recruiting, she said.

"Everything gets bigger quickly when you're a $6 billion company," she added.

Sanford has expanded into areas not typically provided by health organizations, including health insurance through its Sanford Health Plan subsidiary and Profile by Sanford, nutrition-based weight-loss centers that it owns and offers through franchises.

Profile by Sanford has 52 locations, with another 100 stores in the works, Kunkel said. The enterprise is still in its developmental stages—it was launched five years ago—and Sanford projects it will roughly break even this year, she said.

"We are extremely happy with the results," Kunkel added. Profile by Sanford last year was named the top new franchise of the year by Entrepreneur magazine.

Sanford's growth plans have encountered a few obstacles, however. In December, a federal magistrate judge issued a preliminary injunction blocking Sanford's proposed acquisition of Mid Dakota Clinic in Bismarck. The Federal Trade Commission and Office of the North Dakota Attorney General sought to block the merger, arguing that it would decrease competition. Sanford is appealing the injunction.

Paul Glewwe, a health economist at the University of Minnesota, said studies have shown that medical mergers in areas like the Twin Cities involving formerly rival organizations have led to higher prices.

"It kind of reduces competition in some ways," he said. "When they merge there's less competition and prices tend to go up."

Sanford's pending merger with Good Samaritan Society is not expected to be controversial, Kunkel said, since the two organizations have different roles with minimal overlapping but complementary services.

Sanford CEO got $2.3 million in bonuses, payouts

Kelby Krabbenhoft, the president and chief executive officer of Sanford Health, received more than $2.3 million in bonuses, incentives and payouts in addition to his base salary in its fiscal year ending June 2016.

Added to his base salary of $1.4 million, Krabbenhoft's total compensation that year was $3.9 million, according to filings with the Internal Revenue Service. He also received $717,699 in deferred retirement compensation.

Most of the $2.3 million in extra pay, $1.7 million, involved a one-time payout of money he was owed under "legacy benefits" owed to Krabbenhoft, said JoAnn Kunkel, Sanford's chief financial officer.

Under an agreement, Krabbenhoft accepted the payout in a lump sum that actually would have been larger had the benefit been allowed to keep accruing as originally agreed, she said. The payout was part of an effort to "streamline" Sanford's executive benefit plan.

In 2015, his compensation was near the 75th percentile, "which placed him well within industry benchmarks for similarly situated CEOs," Kunkel said.

Krabbenhoft's total compensation in its most recent fiscal year, which ended June 30, 2017, was $2.2 million, including $629,600 in bonus and incentive pay.

When Krabbenhoft took over almost 22 years ago as CEO of what then was Sioux Valley Hospital in Sioux Falls, S.D., the organization had revenues of $236 million and 35 physicians. Sanford today has $4.5 billion in revenues and more than 1,400 physicians.

"That would equate to exponential growth," Kunkel said. "If you talk about growing your core business, I think we've done that."

Patrick Springer

Patrick Springer first joined the reporting staff of The Forum in 1985. He can be reached by calling 701-241-5522. Have a comment to share about a story? Letters to the editor should include author’s name, address and phone number. Generally, letters should be no longer than 250 words. All letters are subject to editing. Send to letters@forumcomm.com

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