Champaign TYPE OF PROJECT: Substantive HSA: IV

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1 DOCKET NO: BOARD MEETING: PROJECT NO: PROJECT COST: B - 1 January 15-16, Original: $4,498,500 FACILITY NAME: CITY: Current: $4,498,500 Olympian Surgical Suites Champaign TYPE OF PROJECT: Substantive HSA: IV PROJECT DESCRIPTION: The applicant proposes to establish a multi-specialty ambulatory surgical treatment center ( ASTC ) containing two operating rooms, eight recovery stations and medical offices. The facility will contain 11,507 gross square feet ( GSF ) of space. The total project cost is $4,498,500. The State Agency notes the project received an Intent-to-Deny at the July 25, 2007 State Board meeting. Subsequently, the applicant s submitted additional material dated August 20, The project was scheduled for the October 2007 State Board meeting. Prior to the meeting, the applicant requested a deferral (per 77 IAC (d)). Subsequently, the project was scheduled for the December 2007 State Board meeting. Prior to the December meeting, the applicant requested a deferral (per 77 IAC (d)). The State Agency notes the applicant cannot request another deferral. Any future deferrals of the project must be issued by the State Board (per (e)). The original State Agency Report ( OSAR ) indicated 22 criteria were reviewed by the State Agency. Of these criteria, two were determined to be not applicable. From the remaining 20 criteria, the State Agency determined the applicant met 13 criteria. The following seven criteria were not met: (e) Impact on Other Facilities (f) Establishment of New Facilities (a) Location (c) - Alternatives (d) Need for the Project (e) Size of the Project (a) Financial Feasibility A review of the applicant s supplemental information indicates that the State Agency continues to have negative findings on the above-referenced criteria.

2 I. The Proposed Project SUPPLEMENTAL STATE AGENCY REPORT Olympian Surgical Suites, LLC Champaign, Illinois The applicant proposes to establish a multi-specialty, free-standing ASTC. The facility will have two ORs, eight recovery stations and medical offices. The facility will contain 11,507 GSF. The total estimated project cost is $4,498,500. At its July 25, 2007 meeting, the State Board issued an Intent-to-Deny for this project. Subsequently, the applicant submitted additional material dated August 20, The additional material has been included as part of the application material. The State Board raised several issues during the discussion of the project. The State Board questioned the need for an ASTC specific to Bariatric surgery in East Central Illinois. The State Board also questioned the need for a new ASTC given the excess surgery capacity in the planning area. The State Board was also concerned as to why all health care facilities could not meet the need of the obese patient. State Board members were also concerned of the impact the ASTC would have on the planning area as well as facilities which will be losing procedures as a result of the project. The State Agency also notes the project was scheduled for consideration by the State Board at the October 2007 meeting. Prior to this meeting, the applicants requested a deferral (per 77 IAC (d)). Subsequently, the project was scheduled for the December 2007 meeting. Prior to this meeting, however, the applicant requested another deferral (per 77 IAC (d)). The State Agency notes the applicant cannot request another deferral of the project. Any future deferrals would need to be issued by the State Board (per 77 IAC (e)). II. Summary of Findings A. The State Agency finds the proposed project does not appear to be in conformance with the provisions of Part B. The State Agency finds the proposed project does not appear to be in conformance with the provisions of Part 1120.

3 Page 2 of 15 III. General Information The applicant is Olympian Surgical Suites, LLC. The ASTC will be located at the northwest corner of Interstate Drive and Boardwalk Drive in Champaign (HSA IV). This is a substantive project that is subject to both Parts 1110 and 1120 review. An opportunity for a public hearing was offered, but one was not requested. Also, the State Agency did not receive any letters of opposition to the project. The State Agency notes an issue that may impact area facilities. Per 77 IAC (c), the applicant provided information on projected patient volume. A large percentage of the historic patient volume of the referring physicians was for patients from outside the proposed geographic service area ( GSA ). Specifically, referring physicians had historic volume at Passavant Area Hospital (Jacksonville), Dr. John Warner Hospital (Clinton) and Decatur Memorial Hospital. These facilities are approximately 120 miles (92 minutes), 40 miles (51 minutes) and 48 miles (57 minutes) respectively from the applicant s proposed site. Because a majority of the applicant s historic referral volume originated from outside the GSA, the above-referenced facilities did not have to receive notification of the proposed project (77 IAC (e)). As a result, these facilities may be unaware of the project and of the possible reduction in surgical volume. Project obligation will occur after permit issuance and the appropriate documentation was submitted. The anticipated project completion date is August 1, As noted, the project received an ITD at the July 25, 2007 State Board meeting. In this supplemental State Agency Report ( SSAR ), only those criteria that received a negative finding will be addressed. IV. The Proposed Project Details The applicant proposes to establish a multi-specialty, free-standing ASTC. It will have two ORs, eight recovery stations and space for medical offices. The facility will have 11,507 GSF; 8,045 GSF to the ASTC and 3,462 GSF for medical offices. The total estimated project cost is $4,498,500.

4 Page 3 of 15 V. Project Costs and Sources of Funds The project cost is $4,498,500. The applicant will fund the project with cash and securities and a bank loan. Table One displays the project s cost information. SSAR TABLE ONE Project Cost Information Use of Funds Amount Preplanning Costs 48,000 Site Preparation 132,000 New Construction Contracts 2,680,000 Contingencies 204,000 Architectural/Engineering Fees 209,400 Consulting and Other Fees 48,000 Movable Equipment 717,300 Net Interest Expense During Construction 401,450 Other Costs to be Capitalized 58,350 Total $4,498,500 Source of Funds Amount Cash and Securities 449,850 Mortgages 4,048,650 Total $4,498,500 V. Review Criteria A. Criterion (e) Impact on Other Facilities The OSAR stated: An applicant proposing to change the specialties offered at an existing ASTC or proposing to establish an ASTC must document the impact the proposal will have on the outpatient surgical capacity of all other existing ASTCs and hospitals within the intended geographic service area and that the proposed project will not result in an unnecessary duplication of services or facilities. Documentation shall include any correspondence from such existing facilities regarding the impact of the proposed project, and correspondence from physicians intending to refer patients to the proposed facility. Outpatient surgical capacity will be determined

5 Page 4 of 15 by the Agency, utilizing the latest available data from the Agency's annual questionnaires, and will be the number of surgery rooms for ASTCs and the number of equivalent outpatient surgery rooms for hospitals. Equivalent outpatient surgery rooms for hospitals are determined by dividing the total hours of a hospital's outpatient surgery by 1,500 hours. In addition to documentation submitted by the applicant, the State Agency shall review utilization data from annual questionnaires submitted by health care facilities and data received directly from health facilities located within the intended geographic service area, including public hearing testimony. The applicant provided documentation that it contacted facilities in the GSA, informing them of the project. The only response received was a letter from Carle Foundation Hospital indicating it would be neutral because the project will not have any material impact. Table Four lists the healthcare facilities where referrals will be removed. Central (1) Illinois Surgery Center (Decatur) TABLE FOUR Anticipated Surgical Cases Removed From Other Facilities Facilities Providing Outpatient Surgical Service Decatur Memorial Hospital Provena Covenant Medical Center (Urbana) Dr. John Warner Hospital (Clinton) Carle Foundation Hospital (Urbana) Passavant Area Hospital (Jacksonville) Surgical Specialty Champaign Surgicenter TOTAL General Surgery * Gastroenterology Plastic Surgery TOTALS ,012 The applicant notes that of the 512 bariatric procedures, 100 will be endoscopy related. 1. Facility is 48 miles and 52 minutes travel time from the proposed site (based on Map Quest). As seen in Table Four, facilities (both inside and outside the GSA) will be impacted by the loss of referrals to this facility. Also, several facilities in Table Four are not in the GSA, including: Central Illinois Surgery Center, Decatur Memorial Hospital, Dr. John Warner Hospital and Passavant Area Hospital. Table Five provides surgical utilization data for facilities within the GSA and those that will be impacted by the project. The data in the table is for 2005 and was obtained from the Illinois Department of Public Health s Hospital and ASTC profiles.

6 Page 5 of 15 TABLE FIVE Surgical Utilization Of Existing Providers Within the Proposed GSA or Impacted by the Project HOSPITALS Hours of Facility City Hours of Surgery OP Surgery Number of ORs Equiv. OP ORs ORs Justified Excess OR Capacity Carle Foundation Hospital Urbana 25,640 8, No Decatur Memorial Hospital * Decatur 24,250 14, No Dr. John Warner Hospital * Clinton Yes Gibson Community Hospital Gibson City 4,543 3, No John & Mary Kirby Hospital Monticello Yes Passavant Area Hospital * Jacksonville 5,653 3, Yes Provena Covenant Med Ctr Urbana 11,132 5, Yes Ambulatory Surgery Treatment Centers Multi or Number of Hours of ORs Excess OR Facility Limited City ORs Surgery Justified Capacity Carle Surgicenter Multi Champaign 5 7,729 6 No Carle Surgicenter Multi Danville 2 3,273 3 No Central Illinois Surgery Center * Multi Decatur 3 2,044 2 Yes Danville Healthcare Multi Danville Yes Danville Polyclinic Multi Danville 3 2,625 2 No * Facilities are not in the GSA. As seen from the utilization data there is excess surgical capacity within the proposed GSA to accommodate outpatient surgery hours at two hospitals (Provena Covenant Medical Center and John and Mary Kirby Hospital) and one ASTC (Danville Healthcare). Since there is excess surgical capacity within the GSA, it appears the project may negatively impact other providers. For comparison, the State Agency revised Table Five to include 2006 hospital and ASTC data. This information is in SSAR Table Two. SSAR TABLE TWO Surgical Utilization Of Existing Providers Within the Proposed GSA or Impacted by the Project HOSPITALS Hours of Facility City Hours of Surgery OP Surgery Number of ORs Equiv. OP ORs ORs Justified Excess OR Capacity Carle Foundation Hospital Urbana 25,682 8, No Decatur Memorial Hospital * Decatur 21,072 12, No Dr. John Warner Hospital * Clinton Yes Gibson Community Hospital Gibson City 4,716 3, No John & Mary Kirby Hospital Monticello Yes Passavant Area Hospital * Jacksonville 4,898 3, Yes Provena Covenant Med Ctr Urbana 11,483 5, Yes Ambulatory Surgery Treatment Centers Multi / Number of Hours of ORs Excess OR Facility Limited City ORs Surgery Justified Capacity Carle Surgicenter Multi Champaign 5 7,516 6 No Carle Surgicenter Multi Danville 2 2,270 2 No Central Illinois Surgery Ctr * Multi Decatur 3 2,524 2 Yes Danville Healthcare Multi Danville 3 1,120 1 Yes Danville Polyclinic Multi Danville 2 2,580 2 No * Facilities are not in the GSA.

7 Page 6 of 15 The 2006 hospital profile data indicates there are four hospitals with excess surgical capacity. Three of these hospitals are within the applicant s proposed GSA. Further, the 2006 ASTC data continues to show there is excess surgical capacity at two ASTCs. One of these ASTCs is not in the designated GSA. This data, coupled with the applicant s supplemental information continues to demonstrate that excess surgical capacity exist in the GSA. As a result, a negative finding is still made. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE IMPACT ON OTHER FACILITIES CRITERION. B. Criterion (f) Establishment of New Facilities The OSAR stated: An application proposing to establish a new ASTC must meet one of the following conditions: 1. There are no other ASTCs within the GSA of the proposed project under normal driving conditions; or 2. All of the other ASTCs and hospital equivalent outpatient surgery rooms within the intended geographic service area are utilized at or above the 80% occupancy target; or 3. The applicant can document that the facility is necessary to improve access to care. Documentation shall consist of evidence that the facility will be providing services which are not currently available in the geographic area, or that the existing underutilized services in the geographic service area have restrictive admission polices; or 4. The proposed project is a co-operative venture sponsored by two or more persons at least one of which operates an existing hospital. A) that the existing hospital is currently providing outpatient surgery services to the target population of the geographic service area; B) that the existing hospital has sufficient historical workload to justify the number of operating rooms at the existing hospital and at the proposed ASTC based upon the Treatment Room Need Assessment methodology of subsection d of this Section; C) that the existing hospital agrees not to increase its operating room capacity until such time as the proposed project s operating rooms are operating at or above the target utilization rate for a period of twelve full months; and D) that the proposed charges for comparable procedures at the

8 Page 7 of 15 ASTC will be lower than those of the existing hospital As seen in Table Five there are ASTCs within the designated GSA. As a result, the applicant cannot meet the requirements of subsection 1) of the criterion. Table Five also shows that there is excess surgical capacity at two hospitals and one ASTC within the GSA. The hospitals could provide the proposed surgical services. The ASTC identified (Danville healthcare) is listed as a multi-specialty facility providing: cardiovascular, dermatology, gastroenterology, general, laser eye surgery, neurology, ophthalmology, oral/maxillofacial, orthopedic, otolaryngology and podiatry. This facility provides two of the three surgical services proposed by the project (general and gastroenterology) Danville Healthcare has three ORs but could only justify one OR (based on the State Board's utilization standard). Thus, the applicant cannot meet the requirements of subsection 2) of the criterion. The applicant did not provide adequate documentation to demonstrate its proposed project would improve access to care. The applicant stated it would provide bariatric procedures at the proposed facility. There was no information submitted to demonstrate that this surgical service is not available at existing providers within the GSA. Thus, the applicant cannot meet the requirements of subsection 3) of the criterion. Based on the information presented in the application, the project is not a cooperative venture with an existing hospital. Thus, the applicant cannot meet the requirements of subsection 4) of the criterion. Since the applicant cannot meet any of the requirements of the criterion, a positive finding cannot be made. The additional material submitted by the applicant does not change the original finding made. Specifically, the applicant's supplemental information does not address the excess surgical capacity in the GSA. As seen in SSAR Table Two, there is still excess capacity in the GSA and facilities do currently offer the surgery proposed by the applicant. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE ESTABLISHMENT OF NEW FACILITIES CRITERION. C. Criterion (a) Location The OSAR stated:

9 Page 8 of 15 An applicant who proposes to establish a new health care facility or a new category of service or who proposes to acquire major medical equipment that is not located in a health care facility and that is not being acquired by or on behalf of a health care facility must document the following: 1) that the primary purpose of the proposed project will be to provide care to the residents of the planning area in which the proposed project will be physically located. Documentation for existing facilities shall include patient origin information for all admissions for the last 12 months. Patient origin information must be presented by zip code and be based upon the patient's legal residence other than a health care facility for the last six months immediately prior to admission. For all other projects for which referrals are required to support the project, patient origin information for the referrals is required. Each referral letter must contain a certification by the health care worker physician that the representations contained therein are true and correct. A complete set of the referral letters with original notarized signatures must accompany the application for permit. 2) that the location selected for a proposed project will not create a maldistribution of beds and services. Maldistribution is typified by such factors as: a ratio of beds to population (population will be based upon the most recent census data by zip code), within 30 minutes travel time under normal driving conditions of the proposed facility, which exceeds one and one half times the State average; an average utilization rate for the last 12 months for the facilities providing the proposed services within 30 minutes travel time under normal driving conditions of the proposed project which is below the Board's target occupancy rate; or the lack of a sufficient population concentration in an area to support the proposed project. As noted, the applicant provided four physician letters indicating 1,012 referrals to the facility. Table Three shows the number of referrals provided per physician. There are eight facilities within the GSA (50 minute travel time from the proposed site). Of these facilities, two hospitals (Provena Covenant Medical Center and John & Mary E. Kirby Hospital) and one ASTC (Danville Healthcare) had excess surgical capacity in Table Six list these providers, including their distance and travel time from the proposed facility and whether the facility had excess surgical capacity. Distance and travel times were obtained from Map Quest. The table is sorted based on distance from the proposed facility.

10 Page 9 of 15 TABLE SIX Distance and Travel Time Of Existing Providers Within the Proposed GSA Hospitals Facility City Distance (miles) Travel Time (minutes) Excess OR Capacity Carle Foundation Hospital Urbana No Provena Covenant Med Ctr Urbana Yes John & Mary E. Kirby Hospital Monticello Yes Gibson Community Hospital Gibson City No Ambulatory Surgery Treatment Centers Facility City Distance (miles) Travel Time (minutes) Excess OR Capacity Champaign Surgicenter, LLC Champaign No Danville Polyclinic Danville No Carle Surgicenter II Danville No Danville Healthcare LLC Danville Yes Although the applicant documented that the project would serve patients within the GSA, it also appears the proposed facility will contribute to an existing maldistribution of service. There are three existing providers of outpatient surgical service within the GSA that have excess capacity. Thus, a positive finding cannot be made. As previously stated, there is excess surgical capacity in the GSA. Further, the applicant's supplemental material does not change the fact that there are area providers with additional surgical capacity. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE LOCATION CRITERION. D. Criterion (c) Alternatives The OSAR stated: The applicant must document that the proposed project is the most effective or least costly alternative. Documentation shall consist of a comparison of the proposed project to alternative options. Such a comparison must address issues of cost, patient access, quality, and financial benefits in both the short and long term. If the alternative selected is based solely or in part on improved quality of care, the applicant shall provide empirical evidence including quantifiable outcome data that verifies improved quality of care. Alternatives must include, but are not limited to: purchase of equipment, leasing or utilization (by contract or agreement) of other facilities, development of freestanding settings for service and alternate settings within the facility. The applicant considered the following options:

11 Page 10 of Do Nothing/ Continue to Utilize Hospitals and ASTCs in the area and surrounding areas. The applicant rejected this option and stated that existing facilities are unlikely to meet Center of Excellence certification requirements that will soon dictate whether or not insurance plans will cover their services. Secondly, these facilities are not designed for the needs of the bariatric patient. There is no cost associated with this alternative. 2. Utilize Alternative Hospital and ASTCs in the intended GSA The applicant rejected this option and states existing facilities in the GSA are not equipped to handle the bariatric patient. In addition, the applicant cited travel issues for bariatric patients would be greater since existing providers in the GSA cannot accommodate these patients. perform bariatric and Finally, the applicant states that physicians associated with this project could pursue medical staff members at more hospitals and ASTC within the GSA. However, this is not a feasible option given the location and privilege requirements of these facilities, as well as the acquisition of expensive specialized equipment likely needed to related surgical procedures. The applicant further states that most facilities do not have specialized programs in place and will not meet certification requirements (application page 131). There is no cost associated with this alternative. As previously noted, the establishment of the proposed ASTC may add to an already existing excess surgical capacity in the proposed GSA. Therefore, it appears a less costly alternative would be to utilize existing facilities within the GSA. A review of the applicant s supplemental information does not change the finding in the OSAR. It still appears the most cost-effective solution is to continue to use other planning area facilities. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE ALTERNATIVES CRITERION. E. Criterion (d) - Need for the Project The OSAR stated:

12 Page 11 of 15 1) If the State Board has determined need pursuant to Part 1100, the proposed project shall not exceed additional need determined unless the applicant meets the criterion for a variance. 2) If the State Board has not determined need pursuant to Part 1100, the applicant must document that it will serve a population group in need of the services proposed and that insufficient service exists to meet the need. Documentation shall include but not be limited to: A) area studies (which evaluate population trends and service use factors); B) calculation of need based upon models of estimating need for the service (all assumptions of the model and mathematical calculations must be included); C) historical high utilization of other area providers; and D) identification of individuals likely to use the project. 3) If the project is for the acquisition of major medical equipment that does not result in the establishment of a category of service, the applicant must document that the equipment will achieve or exceed any applicable target utilization levels specified in Appendix B within 12 months after acquisition. The State Board has not determined need for this category of service; therefore, the applicant must document the project will serve a population group in need of the services proposed, and that insufficient service exists to meet the need. While the applicant has provided four physician letters documenting 1,012 procedures will be referred to the proposed ASTC, it appears there is excess surgical capacity within the GSA to accommodate the procedures proposed for the applicant s facility. Therefore, it does not appear the need for the facility has been documented. As noted, the applicant documented sufficient workload for the proposed ASTC. However, the applicant's additional information did not reference the excess surgical capacity that exist in the GSA. As noted, it appears other providers in the GSA offer the surgical services proposed by the applicant. As a result, it still appears that the need for the project has not been established. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE NEED FOR THE PROJECT CRITERION. F. Criterion (e) - Size of the Project

13 Page 12 of 15 The OSAR stated The applicant must document that the size of a proposed project is appropriate. 1) The proposed project cannot exceed the norms for project size found in Appendix B of this Part unless the additional square footage beyond the norm can be justified by one of the following: A) the proposed project requires additional space due to the scope of services provided; B) the proposed project involves an existing facility where the facility design places impediments on the architectural design of the proposed project; C) the proposed project involves the conversion of existing bed space and the excess square footage results from that conversion; or D) the proposed project includes the addition of beds and the historical demand over the last five year period for private rooms has generated a need for conversion of multiple bed rooms to private usage. 2) When the State Board has established utilization targets for the beds or services proposed, the applicant must document that in the second year of operation the annual utilization of the beds or service will meet or exceed the target utilization. Documentation shall include, but not be limited to, historical utilization trends, population growth, expansion of professional staff or programs (demonstrated by signed contracts with additional physicians) and the provision of new procedures which would increase utilization. The proposed GSF for the ASTC is 11,507. The project will contain two ORs and eight recovery stations. Based on the State standard of 2,750 GSF per OR and 180 GSF per recovery station, the applicant can justify 6,940 GSF for the ASTC. The project exceeds the standard by 4,567 GSF, or 65.8% The applicant indicates the ASTC will exceed the size standard due to the additional space required to accommodate the extra large equipment and furniture. In addition, the applicant indicates the ORs and recovery stations are larger than the norm to accommodate bariatric patients. Considering the proposed GSF exceeds the State standard, it appears the size of the ASTC is too large. As noted, the applicant anticipates 1,012 referrals annually to the facility, which represents 1,651 hours of surgical time. This anticipated volume justifies the

14 Page 13 of 15 requested two ORs. Thus, the applicant has documented the facility will be appropriately utilized. However, it appears the proposed ASTC is too large. The applicant did not address this issue in the supplemental material. As a result, a negative finding remains. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE SIZE OF THE PROJECT CRITERION. G. Criterion (a) Financial Feasibility Review Criterion The criterion states: 1) Viability Ratios Applicant (including co-applicant) must document compliance with viability ratio standards detailed in Appendix A of this Part or address a variance. Co-applicant must document compliance for the most recent three years for which audited financial statements are available. For Category B applications, the applicant also must document compliance through the first full fiscal year after project completion or for the first full fiscal year when the project achieves or exceeds target utilization pursuant to 77 Ill. Adm. Code 1100, whichever is later, or address a variance. 2) Variance for Applications Not Meeting Ratios Co-applicant not in compliance with any of the viability ratios must document that another organization, public or private, shall assume the legal responsibility to meet the debt obligations should the applicant default. The review criterion specifies that certain ratios be met as an indication of financial viability for applicant that do not have a bond rating of A or better. Table Seven provides financial ratio information for the applicant. The State Agency notes the applicant is a new entity formed for the purposes of this project. Therefore, it does not have historic ratio information. The applicant also did not provide audited financial statements.

15 Page 14 of 15 TABLE SEVEN Financial Ratio Information for Olympian Surgical Suites, LLC Ratio State Standard Projected (Year 1) Current Ratio >= Net Margin Percentage >=3.5% 62% Percent Debt to Total Capitalization <=80% 76% Projected Debt Service Coverage >= Days Cash on Hand >= Cushion Ratio >= It appears all projected ratios are in conformance with the State standards, with the exception of the cushion ratio. The data contained in Table Seven was obtained from unaudited financial data. The State Agency notes that unaudited financial data contains no assurance that procedures were performed to test the accuracy and reliability of the information presented. This lack of assurance limits the usefulness of the financial information provided. A positive finding cannot be made for these reasons. The applicants supplemental information does not change the finding from the OSAR. As a result, a negative finding must still be made for this criterion. THE STATE AGENCY FINDS IT DOES NOT APPEAR THE APPLICANT MEETS THE FINANCIAL VIABILITY CRITERION. G:\FAR\SAR\2007-sar\07-004, Olympian Surgical Suites Supplemental.doc TS Review completed 11/1/07