Analyzing the new hospital project
Our point-by-point analysis of the important questions
At OMHS, we continue to be excited about the potential that a new hospital will bring to our region. The new facility holds the promise to change healthcare in this area, and we are humbled to be part of such an important project.
From the beginning, we have been committed to engaging the public in meaningful dialogue and to be open about our plans and progress. After all, this is a community project, and it's success ultimately depends on all of us working together. The comments and suggestions we have received from the community have already played a major role in shaping the OMHS of the future.
Since our latest series of Community Forums, many people have been seeking additional information about the project. We are grateful for the interest that has been shown, and we are happy to provide answers to some of the most commonly asked questions.
If you have additional comments or questions, send them to us via Town Forum or call (270) 688-1000 to leave a message.
NEW HOSPITAL Q & A
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Q: When announced in 2006, wasn’t the new hospital originally expected to cost $500 million?
A: The August 17, 2006 reported cost was an early estimate without the detailed design analysis conducted later by our architects and consultants, Health Strategies & Solutions, Gresham Smith, HGA and KLMK. In the final report presented on January 10, 2007, by Health Strategies & Solutions (HS&S) and Gresham Smith, the construction cost estimate was $312 million. A copy of the summary from this report was reflected in the presentation to the Owensboro City Commission on September 8, 2009. It was also included in the first community forum at OMHS on September 17, 2009. These presentations provided concise facts and dollar estimates as well as the dates of consideration.
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Q: Wasn’t the estimated cost of building the new hospital later confirmed by OMHS advisors to be $487 million?
A: It was not. The HS&S report dated January 10, 2007, set forth the total construction cost estimate at $312 million. Many of the additional costs referenced in the report, i.e. land and major movable equipment, have already been expended.
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Q: Isn’t OMHS limited to a $385 million hospital because that is all it can afford?
A: The estimate of a reasonable budget for the project was a joint effort between the Project Manager (KLMK) and the core members of the construction team (Turner Construction, HGA Architects, and SSR Engineers). After the original target was set, current efforts have centered on framing the costs within that scope or target. We are exercising reasonable and prudent management decisions to ensure the community receives the most advanced facility for our investment. We are building—at a reasonable price—a state-of-the-art hospital to serve growing needs of our region with a design to ensure future expansion of the hospital and health related services as necessary.
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Q: What is the community receiving for $385 million?
A: A nine-story, 442-bed state-of-the art hospital with soothing patient views of a park-like setting and the Ohio River. The presentation before the Owensboro City Commission on September 8, 2009, and at the OMHS community forums on September 17 and October 8 provided a financial analysis of what the $385 million project included. Briefly stated, we have allocated $268 million for construction, $59 million for equipment and furnishings, $13 million in fees, testing, inspections, $27 million to design and consultants and $18 million in contingency funds. (All represent reasonable costs by industry standards.)
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Q: Will debt for OMHS increase from $168 million to at least $502 million?
A: It will. This number was reflected in the presentation to the Owensboro City Commission on September 8, as well as the public forum on October 8. We believe the more appropriate question to be: Can OMHS afford the debt? The detailed analysis conducted by Kaufman Hall as a highly regarded, professional financial advisor to OMHS supports our organization’s ability to service the additional debt required to construct a replacement hospital.
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Q: Isn’t OMHS paying $155 million in cash as a down payment on top of new bonding?
A: This is the amount identified by our professional financial advisors as being the level necessary to pay off the largest portion of a previous bond issue. This issue of bonds contains limiting covenants inappropriate for today’s financial market.
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Q: Didn’t OMHS provide a report stating that the total package would cost $657 million?
A: The total sources necessary to pay off the old debt—set aside in an OMHS-controlled reserve fund equal to the maximum interest and principal due in any one year of the bond issue—will fund the project. Detailed expenses, including the construction of the building, acquiring furnishings and equipment, and establishing the reserve fund total $657 million. Again, the forecast by our financial advisor considered and included all of these assumptions in the cash flow projections. This analysis was also included in Moody’s and Fitch’s bond rating agency review for the planned financing. (Bonds rated as investment grade by both agencies.)
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Q: If the total package cost is $657 million, why did you request bonding up to $730 million?
A: The maximum authorized level reflected on the bond resolution approved by the state is not expected to be necessary to generate the projected $385 million. Authorization resolutions are purposely structured to allow for changes in market demand to enable the issuance of debt sufficient to meet project fund needs. The hospital has the option to hold off on issuing in such an instance—and realistically would do so—until a better market condition existed to decrease the sizing of the issuance. Our financial advisors also analyzed a number of worse case scenarios on the projection. Results reflected that our hospital would still have the capacity to maintain a solid level of cash on hand and meet the requirements under each instance.
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Q: Aren’t the financial assumptions on financing the new hospital rather aggressive?
A: No. In fact, they are extremely conservative. Financial assumptions are conservative as indicated in the presentations provided by the professional healthcare financing firm Kaufman Hall at both the Owensboro City Commission meeting and the OMHS community forums. Additionally, Moody’s and Fitch’s bond rating agencies tested these conservative projections.
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Q: Is OMHS projecting a 7 percent annual increase in revenue derived from increased patient volume?
A: We are. This percentage is a combination of a conservative estimated one percent growth rate (our current annual inpatient growth is running at 5 percent) through construction and a 3.1 percent increase beginning in 2013 (after the new hospital opens). Also, the adjustment of hospital charges to keep pace with inflation, the cost of goods and materials are key components associated with any projected revenue increases.
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Q: If OMHS has 95% of the Daviess County market share, how can revenue increase 7%?
A: The 2008 (calendar year) market share reports reflect 91.1 percent for Daviess County. OMHS will capture additional market share by providing quality, patient-centered care in a state-of-the-art facility. The location will serve our aging population and medically underserved market outside Daviess County. Growth in the projections reflects an aging population base in Daviess County and continued growth in nearby counties; healthcare utilization is expected to increase as Baby Boomers enjoy a longer life span and require more healthcare in their latter years.
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Q: Is it realistic to project growth in net patient revenue from $363 million in 2009 to $596 in 2016—a $233 increase?
A: According to professional financial advisors and bond rating agencies, the projected increase reflects a reasonable and prudent estimate for OMHS. For the seven years prior to 2009, revenues increased 83 percent. The projected increase for the next seven years is a conservative 64 percent.
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Q: What protection does OMHS have from the billions of dollars in anticipated Medicare cuts now under consideration for healthcare reform?
A: The ultimate cuts in reimbursements and funding for Medicare are truly unknown at the present. OMHS is, however, in the best possible situation to avoid material negative impact from legislation. As a federally designated sole community hospital— coupled with protections afforded rural providers that assure access to healthcare for rural residents—OMHS falls into a protected class eligible for higher Medicare reimbursements. OMHS is in an enviable position to weather any storm. Moreover, OMHS has representation on key federal and state policy-making boards and committees for healthcare. Our health system also provides active input on the very decisions being made as part of healthcare reform.
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Q: Wasn’t there a proposal several years ago recommending construction of a new ICU, CCU, power plant, lab, and patient room expansion on the existing campus and the tearing down of the old outdated structures at a cost of no more than $155 million?
A: There was never a proposal or study recommending construction of a new ICU, CCU, power plant, lab, and expansion of patient rooms on the existing campus (or to tear down the old, outdated structures). A $155 million solution was never considered. In fact, it was HS&S and Gresham Smith’s detailed analysis presented to the OMHS Board on January 10, 2007 that recommended replacing the existing hospital as a solution rather than attempting to renovate the existing campus. Information in this report presented to the Owensboro City Commission in September, 2009 illustrated an estimated construction cost of $305 million for renovation and $312 million for replacement. During the first public forum on September 17, 2009, Gresham Smith officials restated and reaffirmed the conclusion developed in 2007 that attempting a renovation would involve more time and dollars and would lead to patient dissatisfaction.
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Q: Was it necessary to undertake a total renovation in the first place?
A: Healthcare facility and architectural experts who advised the OMHS Board of Directors agreed that a substantial part of the campus would have required replacement. Portions constructed since 1992 would remain functional but would need to be renovated to meet current standards and life safety codes. However, the cost and delays of keeping a campus in a construction phase for seven years was deemed ill advised. In the end, the community would still have a hospital with aging buildings and no room for expansion—coupled with poor access and navigational restraints. The professional recommendation was to build a new, larger campus.
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Q: Does the new hospital budget include $139 million for fees and professional services?
A: Certainly not. The fees and professional services reflected in presentations to the Owensboro City Commission and in the OMHS community forums are $27 million for design and consultants, $13 million for testing and inspections, as well as estimated costs of financing and bond issuance of $7 million, for a total of $47 million. Although a sizeable investment, the costs fall well in line with a project of this size and scope.
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Q: Are you concerned that the risks of building a new hospital may outweigh the rewards?
A: Given the conservative projections—pronounced market share, continued gains in referrals, sole community hospital status and favorable cost advantages over competing facilities—we are confident that the risk remains nominal. Further, the rewards associated with a new facility will continue to enhance patient quality and grow our presence and reputation in western Kentucky and southern Indiana. The professionals and team of expert analysts agree the risk-reward relationship for a new hospital represents the best alternative and remains highly acceptable.
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Q: By taking on a project of this size, does the community risk losing its hospital?
A: We should feel confident that one of the nation’s top-rated hospitals would continue to exist and serve our region. Nowhere in the continental United States are we aware of any primary service area our size (Daviess County 2008 Census, 96,000) that does not have a hospital providing services. In many cases, communities with a service area of our size have more than one hospital. Consider Evansville as an example with two hospitals and five campuses.
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