Fairview made money on its health care services for the first time in six years

Fairview Health Services is reporting an operating profit for 2024 that shows a major financial turnaround, including increased hospital admissions and surgery volumes as well as strong performance in its pharmacy business.

Minneapolis-based Fairview has had a string of annual operating losses dating back to 2019. The red ink has been the financial backstory to the health system’s ill-fated merger attempt with South Dakota-based Sanford Health and long-running negotiations for a new affiliation agreement with the University of Minnesota.

On Wednesday, however, Fairview said it has seen nine consecutive quarters of year-over-year operating improvements. This comes as two other large hospital and clinic operators in Minnesota — Mayo Clinic and Allina Health — also have posted better financial results this spring following leaner years with the COVID-19 pandemic.

Fairview, which acquired University of Minnesota Medical Center in a financial bailout in 1997, is the state’s fourth largest employer with an in-state headcount of 34,673 people.

“I couldn’t be more proud of the leadership this organization has demonstrated by accomplishing what amounts to about a $600 million turnaround in 2 and a 1/2 years, if you account for inflation,” Fairview’s chief executive, James Hereford, said in an interview.

“The challenge is — it’s nice to make a profit, that’s great, and we use those margins to reinvest in the organization," Hereford said. “But this is a very capital-intensive industry. We have big hospitals and expensive equipment and [many] people, and that has to be continually invested in.”

Fairview provides about $100 million of financial support each year for the U of M’s academic health program, which trains doctors and health care professionals while providing advanced specialty care for patients.

Fairview gave notice in November 2023 that it would not renew the current U of M affiliation.

“I don’t think it’s sustainable to continue to do what we’ve done in the past to support the university,” Hereford said.

Negotiations for a new deal are private, and so their status is unclear. But indications point to continued challenges in a Fairview-U of M relationship that’s been fraught for many years.

They’ve been unable to reach a definitive agreement for the U to reacquire its teaching hospital campus from Fairview, which the university announced as a top priority in February 2024.

There’s been public disagreement in recent months over the future of a joint venture at a large clinic and surgery center on the U’s East Bank campus between Fairview and University of Minnesota Physicians, the group practice for faculty doctors.

And in January, the U proposed creating a new nonprofit health system that would merge together Fairview and Duluth-based Essentia Health without securing Fairview’s support for the idea. Later, the health system announced opposition to a merger, saying it could support instead a “strategic partnership.”

In the interview, Hereford declined to say exactly what Fairview is proposing as an alternative.

Earlier this month, Minnesota Attorney General Keith Ellison named former UnitedHealth Group executive Lois Quam as “strategic facilitator” to find a path forward for Fairview, the U of M and Essentia Health.

“I promised the AG and Lois Quam that we won’t discuss these matters in public,” Hereford said.

Fairview Health Services is Minnesota’s fourth largest nonprofit group with operations including Fairview Southdale Hospital in Edina, St. John’s Hospital in Maplewood and Ridges Hospital in Burnsville. Fairview and the U jointly market health care services under the brand M Health Fairview.

Last year, Fairview posted $51 million in operating profit on just over $8 billion in revenue, for a margin of less than 1%. It was better than the previous year’s operating loss of $189 million.

Inpatient admissions grew from just under 84,000 in 2023 to nearly 90,000 in 2024. At the same time, Fairview treated fewer patients during “observation” days, a lower-paying category of care at hospitals where visits don’t qualify as inpatient admissions.

Total surgeries increased from 83,163 in 2023 to 85,570 last year. In clinics, the tally for “relative value units,” which is a measure for the intensity of health care services provided to patients, increased by 6%.

Overall revenue grew by nearly 10% while most expense categories grew at a slower rate, said Joe Gaylord, the health system’s chief financial officer. Premium pay for hospital workers was down by about $59 million as Fairview didn’t rely as much on high-cost “traveling” nurses and agency labor.

“The improvement’s really been across-the-board,” Gaylord said. “We’ve seen higher leverage on our overhead expenses, so while revenue goes up overhead expenses are still well under control.”

The Minnesota Star Tribune uses the term “profit” to describe net earnings at the state’s largest nonprofit groups to reflect the significant capacity of these organizations to make money, even as these funds are reinvested in nonprofit operations. For-profit companies, by contrast, generally make at least some earnings available to outside investors.

Fairview operated for five years without operating income due to the health system’s significant financial reserves and investment portfolio.

Beyond the operating profit in 2024, Fairview reported investment gains of $137.4 million, according to a filing this month with bondholders, plus additional unrealized gains on interest rate swaps.

Overall, Fairview last year posted about $185.2 million of revenue in excess of expenses, a metric that combines operating profit and investment gains.

“Over the past several years,” Hereford said in a statement, “we made a deliberate choice to keep investing in our people, our communities, and the care our patients need — even when margins were tight or negative.”

In February, the board of directors at Fairview approved a two-year contract extension for Hereford, extending his leadership through the end of 2028.