Kodiak Daily Mirror - Analysis Care center lease is matter of balancing risk
Analysis: Care center lease is matter of balancing risk
by James Brooks/ editor@kodiakdailymirror.com
Feb 07, 2013 | 288 views | 0 0 comments | 3 3 recommendations | email to a friend | print
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The floor plan of the proposed Kodiak Island Borough long-term care facility is seen in this architectural drawing.
(Image courtesy Kodiak Island Borough)
The floor plan of the proposed Kodiak Island Borough long-term care facility is seen in this architectural drawing. (Image courtesy Kodiak Island Borough)
The deciding vote comes tonight as the Kodiak Island Borough assembly decides whether or not to commit the borough to a $15.375 million nursing home next to the borough-owned hospital on Rezanof Drive.

The borough will build and own the facility, formally called a long-term care facility, while Providence Alaska will operate and lease it. The core document in this agreement is a 20-year lease between Providence and the borough, and in the week since the lease was formally presented to the borough assembly, figures on both sides have said the document is a balancing act between risks for Kodiak taxpayers and for Providence.

“I don’t know if you’re ever going to have a project without some risk,” said borough manager Bud Cassidy. “We manage risk. We say, ‘That might happen, but what’s the probability of that?’”

For Kodiak taxpayers, the biggest risk is that Providence could simply walk away. In addition to tonight’s vote on a lease, the borough assembly will vote whether or not to seek $20 million in revenue bonds for the project.

The project’s budget has been set at about $18.5 million: $15.375 million for construction and the rest for other costs. The remaining $1.5 million is a buffer in case costs rise, and additional bonds will not be issued if the project stays within budget.

The bonds will be repaid over 20 years, about $100,000 per month, assuming the project stays within its $18.5 million budget.

A clause within the lease says Providence can break its lease with the borough if it gives one year of advance notice.

Don Rush, the CEO of Providence in Kodiak, was surprised when asked why that clause is in the proposed lease. “I haven't even thought about why we would cancel the long-term care lease,” he said.

The idea for the care center originated with Providence, which operates a smaller care facility within the existing hospital. It is not likely to simply walk away from a project it inspired.

Providence’s lease of the borough-owned hospital is set to expire within the decade, and the care facility lease will be combined with the hospital’s lease when the larger facility’s agreement is renewed.

The hospital and care center will share staff and equipment, and — pending the details of a future agreement — combining the leases may make it more difficult for Providence to walk away. “It's important to realize that the long-term care facility doesn't really operate on its own; it's not a standalone service,” Rush said.

The risk to Providence is that federal Medicare and Medicaid reimbursement policies may be reduced during the next 20 years.

Alaska, because of its higher cost of living, receives larger reimbursement amounts for similar procedures in the Lower 48. Providence is relying upon Medicaid reimbursements for the financial foundation of the care center, and Rush said he does not expect reimbursement policies to change.

“They could, but if they did, they would have a lot of (Alaska) facilities in jeopardy if they changed it drastically,” he said. “The best predictor of the future is the past, and it hasn't changed in the past 30 years.”

If Providence were to run into financial problems and defaulted on its lease, Cassidy said the borough is protected. “Providence is on the hook to pay back the bonded indebtedness that is incurred in construction,” he said. “If they default, we can call all the bonds due.”

Maintenance is another element of concern within the proposed lease. Providence is liable for any maintenance projects worth less than $25,000, but the borough is responsible for projects above that amount.

The maintenance clause is similar to one in the existing hospital, and in recent years the borough has replaced a portion of the hospital’s roof and repaired a portion of its kitchen.

“The $25,000 is a pretty typical amount,” Cassidy said.

As Cassidy explained, hospital facilities are generally built to last for 50 or 60 years, and after the proposed building is paid off, a renegotiated lease could include different maintenance standards.

“The rental and lease rates can then be set for a 20-year building,” he said, but added, “certainly there's a level of risk that if something major happens in the 20-year period, we'll be on the hook.”

Rush said that it’s important for Kodiak residents to remember that the proposed agreement isn’t the first between Providence and the Kodiak Island Borough. Since 1997, Providence has leased the borough-owned hospital with few problems, and he sees the long-term care facility as another portion of an already successful hospital campus.

“I think what the community needs to understand is that we've really had a great collaborative effort with the borough since 1997,” he said. “It's been a good relationship with the borough and to Providence.”

The borough assembly meets at 7:30 p.m. tonight in the borough building on Lower Mill Bay Road.

Contact Mirror editor James Brooks at editor@kodiakdailymirror.com.

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