During a special work session between the City and Borough Assembly and Wrangell Medical Center, director Michael Congedo of the BDO Center for Healthcare Excellence and Innovation presents feasibility findings for the hospital's financing a new facility. Of two different building methods considered, a newly built and equipped hospital could cost between $41 million and $52 million, which with interest over 30 years could cost more than double that figure.
In a special workshop at City Hall on Monday, administrators at Wrangell Medical Center and members of its governing board met with the City and Borough Assembly to discuss the cost of a new facility.
The municipally-managed hospital has been interested in constructing a new facility for at least a decade, with its current building in use already for the past four decades posing a number of maintenance and compliance issues. The Assembly had directed WMC staff a year ago to seek architectural and financial consultation for a replacement facility.
Plans for the proposed facility were drawn up by architectural firm Jensen Yorba Lott. WMC CEO Robert Rang explained the new facility would encompass around 55,000 square feet of space, almost double the present facility's 27,000 square feet. The building's size was also considerably larger than estimates given to the WMC Board last November, where around 40,000 square feet had been suggested.
A new facility would be larger to both improve patient flow and to meet new codes, making restrooms more accessible and providing separate rooms for patients. While no new services are being considered, the addition of four new beds to long-term care would bring its total capacity to 18 under the proposed design.
LTC is a significant earner for the hospital, already costing around $780 a day for residents. Speaking Monday, Rang anticipated reimbursement for those facilities would be increased with a new facility – at the moment, he estimated WMC's program is the second lowest paid nursing home in the state, due to a lack of depreciation to draw on.
More than its size and number of rooms, prospective costs for a new facility would also be larger, increasing significantly since the previous concept was abandoned in 2012. At that time, a price tag of $26 million had been expected for the building, and at last November's meeting Rang had been hopeful a more streamlined design could bring down costs.
Mike Congedo, director of BDO Center for Healthcare, presented his firm's cost estimates for the new facility on Monday. Based on the Jensen Yorba Lott project design, it provided estimates for two construction models. A "stick-built," on-site construction model would cost around $52 million, while a modular option meeting the same design specifications would cost $41 million.
"Both options seem to be feasible," Congedo said of the designs. But of the two, the modular options would be "more financially advantageous, both for the hospital and the town."
For the modular option, BDO assumed that at a 6.25-percent rate of interest the hospital would need to repay around $3 million a year on both the principal and interest, over a period of 30 years. The projection also assumes that WMC would preserve cash throughout the life of the loan, particularly in the initial half of its life when reimbursements include compensation for depreciation on the new facility's value. He pointed out that Wrangell's hospital is a critical access facility, with its primary reimbursement coming from federal coverage such as Medicare and Medicaid.
Congedo explained a 1.25-percent portion of the hospital's earnings before interest would likely be allotted to cover its debt payments. In the BDO feasibility study's projections, the building's debt service coverage ratio – a measure of an organization's cash flow available to pay current debt obligations – would most likely be tripped in 2036. At that point, discussion with the lender could be taken to renegotiate financial covenants or restructure the debt for the loan.
Alternatively, the more expensive stick-built option would see annual repayments of closer to $4 million, with the debt service coverage ration tripped in 2031. Wrangell's financial position in that scenario would likely be weaker than with the modular option.
Congedo pointed out that many factors and assumptions could change over such an extensive period, and there are additional considerations that would be explored in greater depth should a next-phase evaluation be pursued.
Rang explained these estimates also included costs for new equipment and other hospital necessities to replace most of the ones currently in use. Speaking Monday, he said estimates for a modular design and equipment a decade ago had ranged from $32 million to $35 million.
"We have outlived the life expectancy of every piece of equipment in that facility," he said, save for pieces bought within the past two years.
Total costs for both interest and the principal amount over 30 years would be more than double the construction estimates, Congedo added. Over the life of the loan the modular option would end up costing around $90 million, while the stick-built one would total $115 million.
Because it is an entity of the city, Wrangell's municipal government would be on the hook for any debts in the event of a default, a fact which was not lost on members of the Assembly. The ability of the hospital to continue paying its bills at the present has also been a source of recent concern, with WMC approaching the city's assembly on October 18 for an emergency advance of $250,000 to make its payroll and other operating expenses.
Though its financial situation has stabilized since, and the hospital anticipates federal reimbursements to the tune of a quarter-million dollars in January, slight cuts to Medicaid spending and a freeze on LTC rates leave room for continued concern.
Assembly member Dave Powell raised the question of whether the city ought to consider either seeking a partner in the hospital's management, or to leave the healthcare business altogether.
"Given the hospital's financial situation, it seems the word 'feasible' wouldn't even fit," commented fellow member Patty Gilbert.
Assembly member Stephen Prysunka likened pursuing a loan for the new hospital independently to a "$90 million bet," one which depended on a financial model which will likely change in unforeseeable ways.
City manager Lisa Von Bargen said Southeast Alaska Rural Health Consortium had expressed some interest in possible partnership. The regional healthcare provider has already had a presence in the community, which expanded significantly earlier this year when it acquired Wrangell-based provider Alaska Island Community Services. She mentioned that SEARHC is already a close partner with Wrangell's public hospital. Retaining its name after the merger, AICS has subsequently continued its arrangement of sharing medical practitioners and services with WMC. Maintaining four doctors of its own would likely cost the hospital $1.5 million, and Rang reported the arrangement saves WMC about two-thirds that amount.
At Monday's meeting, SEARHC chief operating officer Dan Neumeister confirmed the non-profit provider was indeed interested in the hospital's future. In exchange for a non-binding letter of intent to collaborate, he offered financial support for planning a unified facility. Assembly members seemed agreeable to the suggestion, and Von Bargen requested from the hospital board what direction its membership would be amenable to take as far as possible partnerships or divestment is concerned.
"Whatever we do we've got to act fast. I feel we're already five years behind," Gilbert commented. The next hospital board meeting is set for November 15, and the Assembly is next scheduled to meet on December 12.
For his part, Rang said he appreciated the change in view among assembly members, which had been strongly in favor of maintaining an independently managed hospital when he was hired two years ago.
"I think the end is near," he said of that model. "Mostly, it's because the building itself is aging."
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