The Seward Phoenix Log - News of the Eastern Kenai Peninsula since 1966

By Heidi Zemach
For The LOG 

City council probes Providence contract


The Seward City Council was recently brought up to speed concerning the management and operating agreement between the city and Providence Health & Services Alaska. The contract, which expires April 8, is up for negotiation. In a work-session Dec. 10, council members were briefed by City Finance Director Kristin Erchinger on the agreement and how it has been working out in practical terms. Over the next few months the council will be giving the administration guidance and instruction as to the upcoming negotiations.

Providence has managed the local major health care facilities since June 1996 under a variety of operating agreements. The newly constructed Seward Medical Center was opened under lease to Providence Alaska but that was replaced with a management and operations agreement in 2002. Together with the former Seward Wesley Care Center (SWCC), Providence provided management of the co-located medical center from April 2002 until the new long-term facility (SMH) was completed and opened in October 2009. A contract, with the replacement of SWCC by the new facility in mind, was crafted and passed in 2008.

Beginning in 2008, the city reimbursed Providence Alaska an annual fixed periodic fee of $800,000 for assorted costs associated with operating and managing the two facilities. The 2008 fee cap was subject to an escalator that annually adjusted it upward based on the cost price index. That cap also will be a part of the negotiations, said Erchinger.

The periodic fee covers the hospital’s allocated costs, management fee and indirect costs, which are things such as employee health insurance, employee retirement, other employee benefits, facility health insurance, medical malpractice, marketing, information technology services, accounting, payroll/accounts payable, human resources services and other administration.

Providence Alaska contended during prior contract negotiations that the fee it receives from the city does not cover its true costs, as the nonprofit actually spends more than it gains for running the Seward operation. Providence Alaska spent $1.6 million in allocated costs for Seward alone last year, and was reimbursed only $800,000 because of the cap built into the current contract.

Some of the allocated costs are difficult to quantify, however, as they include specialists who also provide services to other facilities, said Erchinger. It is also difficult to estimate the benefits to Providence Alaska from the partnership, since their Anchorage hospital receives some patient transfers from Seward.

Providence manages the Providence Seward Medical & Care Center (PSMCC) and Seward Mountain Haven Long Term Care Facility (SMH) on behalf of the city. But city taxpayers fund those facilities, and are responsible for them financially.

“We pay for everything. They get a management fee essentially. They don’t get anything for the facility,” said Erchinger. “The facility either makes or loses money, and that’s on the backs of city taxpayers.”

The city must cover any shortfalls associated with operating the two facilities. When city funds are insufficient to reimburse short-term operational costs such as hospital employee payroll, Providence Alaska, which fronts the cost of payroll and payables, can elect to require re-payment with interest at prime rate plus one percent.

Under its contract the city has the right to review and approve Providence Seward’s annual budget but it has never approved it before, relying instead on the financial updates it receives. That’s because the city attorneys have advised against approval of the annual budget arguing that exercising greater control over the budget would open the city up to a greater degree of liability. The hands-off approach to the hospital budget also may insulate the health care decisions from being influenced by local politics, said Erchinger.

What if Providence “spends the farm” and really messes things up financially? asked council members. The agreement is written to allow the city to terminate the contract if its terms are breached, said Erchinger. As a precaution, the city hires an independent consultant to review Providence’s annual cost report, providing an outside financial expert’s judgment.

“That second set of eyes has caught some errors that have been fairly material,” said Erchinger. “Providence tends to be very conservative as to what is (claimed) on the cost report, because it all has to be defensible.” The consultant’s job is to confirm that the report results in appropriate reimbursement.

City Mayor David Seaward said members of the community are concerned that the facilities could be run more efficiently with greater oversight by the council along with an audit from outside financial experts. He suggested the city share the financial burden 80-20 with Providence for its operations.

The new contract agreement could be changed to provide specific incentives for Providence to meet in exchange for higher management fees, such as keeping finances in the black, maintaining the long-term care facility census above 36 for a certain number of months, expanding clinic hours, or greater hospital “swing bed” numbers, said Erchinger, adding that the specifics would be up to the council.

Recent improvements should benefit PSMCC’s finances moving forward, Council Members Vanta Shafer and Marianna Keil asserted. The population at Seward Mountain Haven has been increasing to an ideal level, Providence has increased the number of hospital patients cared for with a “swing-bed” system whereby residents who were sent to Anchorage hospitals for care are returned to Seward hospital for their recovery, the hospital is increasing its clinic hours, has instituted a sliding-fee scale, subsidized on-demand “know your numbers” lab testing, and provides administrative support to the community health and wellness program. The new federal health care reforms, when adopted by the state, also should help by assuring that more people are insured, said Keil.

With these improvements the hospital and long-term care center might have been operating in the black, were it not for some ongoing major reimbursement rate disputes with the State of Alaska regarding Seward Mountain Haven, said Erchinger.

At the end of 2011, the council authorized the deferral of payments from the long-term care facility to the city for $2 million, which is still outstanding, pending resolution of an ongoing reimbursement rate dispute with the State of Alaska, said Erchinger. If not resolved in Seward’s favor, and continued over a four-year period, that could eventually amount to an $8 million total shortfall for the facility. A hearing regarding the rate dispute is set for the end of next month, although the parties would prefer to settle the matter.

Within the above dispute, Seward administrators are hoping that the state will “correct” a $1.7 million annual reimbursement shortfall. It relates to the state having chosen to reimburse Seward at the lower rate for residents staying at the old Wesley care facility, since they had spent the first nine months of the year there before moving to the more costly Mountain Haven facility. Erchinger is hopeful that the state will agree to refund Seward at the higher rate after resolving the other issue at dispute, which is related to correction of an error on the initial cost report. If not fixed, the total that the city stands to lose on both issues is between $8 and $12 million.

In 2010 the city advanced $750,000 to PSMCC to fund the implementation of a new federally-approved electronic medical records (EMR) system ($400,000), and $350,000 to cover operational shortfalls due to the rate reimbursement disputes. PSMCC has since received the $400,000 federal reimbursement check for its new records system, but the city has not yet asked our PSMCC to reimburse the general fund for that portion of the funds advanced due to the outstanding shortfalls.

Seward still owes $25.6 million on the bond issue for Seward Mountain Haven, which opened in October 2009, and was bonded for $27 million. It repays the bond with $1.9 million payments annually from facilities revenues. There’s only $722,000 remaining for the city to pay off the $7.5 million hospital bond issued in ’96, which matures next April.


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