State approves financing plan for Southridge hospital

By Michelle Dupler, Tri-City HeraldOctober 3, 2012 

As the steel skeleton of the new hospital at Southridge began to take shape this week, Kennewick Public Hospital District officials received a welcome bit of news from the state -- their financing plan for the hospital was approved.

Kennewick General Hospital CEO Glen Marshall received a letter from the state Certificate of Need Program on Tuesday giving its OK for the new hospital, with the conditions that any other changes to the project will require a new certificate of need application and that KGH agrees to provide hospital care to the poor, known as charity care, at or above the average rate for the region.

"Those are normal conditions put on all certificates of need," Marshall told the Herald. "It was not a surprise. We obviously are fine with the conditions."

A manager for the state program could not be reached Tuesday about the decision.

Any hospital needs a certificate of need from the state before it can expand, or in the case of KGH, build a new hospital.

The process includes an application in which hospitals present information justifying their need, and a public hearing where supporters and opponents can testify if more beds are needed in a community.

Part of the evaluation includes looking at whether a project is financially viable, and the state wanted to look at the new financing terms for the Southridge hospital to reassess its viability even though a certificate of need was granted for the project in 2010.

KGH filed an amendment to its original application detailing the new financing plan in June, and broke ground on the new hospital June 15. The hospital is expected to open in early 2014.

The amendment was considered under what the state calls an expedited process, which means the response and review time is shortened a little -- and there was no public hearing on the application.

But the state did take written comments on the proposal, including about an 80-page document from Kadlec Regional Medical Center detailing the reasons why the Richland hospital thought KGH's financing plan was a "bad deal."

In the original application that the state approved in 2010, The district planned to finance the $112 million, 74-bed hospital with a loan from the Department of Housing and Urban Development.

But district officials abandoned that plan in January 2011 after HUD asked the district to consolidate its operations to one campus instead of leaving some beds at the existing KGH on Auburn Street, as hospital officials wanted to do.

Their next step was to go to the private sector, a process that culminated in unanimous approval by the hospital district board April 20 to enter into an agreement with Wisconsin-based C.D. Smith Construction to build the 168,000-square-foot hospital and lease the building to the hospital district.

Under that arrangement, the hospital district will retain the hospital license and continue to own everything that makes up the hospital's day-to-day operations.

The plan calls for the hospital district to pay rent of about $800,000 a month once the hospital is finished, with a requirement to buy the building for $110 million after 10 years. The lease term is 30 years.

Kadlec's written comments questioned the amount the Kennewick hospital district is paying to the private developer, arguing that over 10 years it amounts to $196 million -- or about double the $100 million cost to build the Southridge hospital.

Kadlec questioned the hospital district's financial projections and claimed that KGH's estimates for growth in patient volumes exceeded historical trends at the hospital, the document said.

Kadlec also raised concerns that because C.D. Smith Construction will own the Southridge hospital building, the construction company could feasibly sell the hospital to another operator -- possibly a for-profit hospital -- if KGH can't buy the hospital back.

Kadlec officials Tuesday declined to comment on the project's approval because they hadn't yet read the decision.

The decision issued by the Certificate of Need Program said that the Kennewick hospital district's financial position has shown improvement since 2007 when the project first was reviewed.

"As a result, the department concludes that KPHD as presented has the sources to meet its financial obligation during the construction of the Southridge campus," the decision said.

The decision said historical data supported Kadlec's claim that KGH has had little growth in hospital patient volumes, but that the hospital district overall shows growth in its outpatient clinics.

The outpatient growth coupled with KGH's inpatient projections -- if projections hold -- were enough to convince the certificate of need program that the hospital district can meet its financial obligations after the hospital is finished, the decision said.

"This is a great day for KGH to get this approval and continue to get this moving forward," Marshall said. "To finally see (the new hospital) come to fruition is a great feeling of satisfaction for everyone."

-- Michelle Dupler: 582-1543;

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