Kadlec Regional Medical Center is challenging whether the Kennewick Public Hospital District should get state approval for its Southridge hospital project.
Kadlec officials this week submitted a 34-page document, plus about 50 pages of supporting documents, to the state's Certificate of Need Program arguing that the hospital district entered into a "bad deal" with its current financing plan for the new hospital at Southridge.
Kadlec spokesman Jim Hall told the Herald that Kadlec recognizes Kennewick General Hospital's importance as a public hospital in the community and supports the Southridge project, but that Kadlec's analysis of the hospital district's amended certificate of need application raises concerns about KGH's continued viability under the financing plan.
"It's a time of real uncertainty in health care and organizations are doing all we can to contain costs and function in a dramatically changing environment," Hall said. "This (application) seems to assume a scenario that's totally the opposite and is unsustainable."
KGH CEO Glen Marshall responded that he believes Kadlec's actions defy its pronouncements of support for Southridge.
"I do think one thing here is very clear -- despite public statements to the contrary, Kadlec is not in favor of KGH building our new state-of-the-art facility to support our community," Marshall told the Herald on Thursday.
The comment document, provided to the Herald by Kadlec, was a written response to the Kennewick hospital district's amended application for a certificate of need, basically permission that any hospital must obtain from the state before it can expand, or in the case of the Kennewick hospital district, build a new hospital.
Although the district won approval for the project in 2010 from the state's Certificate of Need Program, a change in the way the Kennewick hospital district is paying for construction means the state wants to take a second look.
The hospital district filed an amendment in June to its original application detailing the new financing plan.
"Obviously, we believe the application we submitted is really a strong application and we believe consistent with other projects approved by the Department of Health where amended applications were submitted based on a change of financing," Marshall said.
"We believe our application will be approved because we have met all of the requirements," Marshall said. "We are confident the construction project will be built on time and within our budget."
Officials from KGH and C.D. Smith broke ground on the new hospital June 15. The hospital is expected to open in about two years.
The certificate of need process includes an application in which a hospital presents information justifying its need for a certain number of beds in an expansion or a new facility, and the public has an opportunity to comment.
Part of the evaluation includes looking at whether a project is financially viable, and the state needs to look at the new financing terms for the Southridge hospital to re-assess its viability.
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 federal 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, with an option to buy the building for $110 million after 10 years. The lease term is 30 years.
Kadlec submitted written comments to the state Monday that 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 also questioned the hospital district's financial projections, including estimates that it will see a 4.5 percent increase per year in patient volumes when KGH's historical trend has been 1.5 percent annual growth, the document said.
"In our opinion, KPHD will not be able to meet its proposed financial obligations under this deal," the Kadlec document said.
Hall said Kadlec officials believe the current financing plan for Southridge could leave KGH and the community vulnerable if KGH can't meet its payments, particularly if KGH can't come up with the $110 million to buy the hospital in 10 years.
The written comment Kadlec submitted to the state said 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.
Marshall told the Herald that won't happen, and that it was KGH that asked to have the 10-year buy-back provision in the agreement.
"One of the reasons we want to have the option to buy this out is we believe we will get our balance sheet improved dramatically (once the new hospital opens)," Marshall said. "We believe we will be able to refinance at better terms than we have now."
He added that the numbers in Kadlec's document reflect only patient volumes at the existing Auburn hospital, and don't account for the rising volumes at KGH's physician clinics -- which are seeing dramatic increases and bolstering KGH's bottom line.
The 2012 budget adopted by the hospital district board in November projected nearly 216,000 patient visits to its clinics this year, up 11 percent from 2011's forecast of about 194,000 visits, which was based on actual numbers through September and projections for October through December. The clinics had about 178,000 patient visits in 2010.
Marshall said current projections for the clinics are at 225,000 patient visits this year.
"The outpatient business is where most of the growth is happening," he said. "There's a lot more to KGH than just a building at Southridge."