STATE AGENCY ACTION REPORT ON APPLICATION FOR CERTIFICATE OF NEED

STATE AGENCY ACTION REPORT ON APPLICATION FOR CERTIFICATE OF NEED A. PROJECT IDENTIFICATION 1. Applicant/CON Action Number Baptist Hospital, Inc./CON #9973 1000 West Moreno Street Pensacola, Florida 32501 Authorized Representative: David W. Sjöberg (850) 434-4011 2. Service District/Subdistrict District 1/Subdistrict 1 (Escambia & Santa Rosa Counties) B. PUBLIC HEARING A public hearing was requested by Santa Rosa Medical Center. The hearing was held by Mr. Mike Hill, the Executive Director of the Northwest Florida Health Council, Inc., from approximately 11:00 a.m. to 11.30 a.m., Central Standard Time, on Thursday, April 26, 2007. The location of the public hearing was 9 Harrison Ave., Panama City, Florida 32402. The following organizations were represented: Sacred Heart Health Systems 1 (Sacred Heart) represented by Ms. Denise Barton; Santa Rosa Medical Center ( Santa Rosa MC) represented by Mr. Geoffrey Smith and Mr. M. Pete Gandy and West Florida Hospital 2 represented by Mr. Dennis Taylor. All attendees presented testimony opposing Baptist Hospital Inc. s proposal to establish a 96-bed acute care hospital at 9400 University Parkway in Pensacola through the transfer of 96 acute care beds at its existing Pensacola facility located at 1000 West Moreno Street. No one presented testimony in support of the project. A brief summary of the hearing is described below. A 34 page opposition summary was provided by Dennis Taylor (of West Florida Hospital), with 17 exhibits; this was prepared by Richard A. 1 Sacred Hearth Hospital, operated by Sacred Heart Health Systems is classified as a Disproportionate Share Hospital (DSH), while the applicant, Baptist Hospital, is not. This is relative to fiscal year 2006-2007.

Baehr & Associates. Santa Rosa MC s M. Pete Gandy presented eight consecutive pages of opposition. Ms. Denise Barton presented a seven page document with seven slides on behalf of Sacred Heart. The speakers are presented below in the order in which they were heard. The first opponent to speak against the project was Mr. M. Pete Gandy on behalf of Santa Rosa. Mr. Gandy states this is the applicant s fourth attempt to establish an acute care facility in an area with a surplus of acute care beds and low occupancy in all nearby hospitals. Santa Rosa MC further believes no new or formerly unsubmitted but material information is presented by the applicant to warrant approval. Mr. Gandy notes that West Florida Hospital is less than a three-minute drive from the applicant s proposed site and that hospital has occupancy below 30 percent 3 and approximately 300 empty beds on any given day. The opponent further states that projections of utilization are not reasonable. Payer mixes are stated to be in some cases better for the applicant s existing operations than some other hospitals in the area. Mr. Gandy argues that competition would not be enhanced if the project is approved but does not elaborate on this point; and the project would have substantial adverse impact on Santa Rosa MC. The provision of charity care is discussed in brief, offered as an explanation for why services to the indigent, uninsured and underinsured are being provided by Santa Rosa MC and approval would not likely improve the circumstances for the low-income population. Mr. Gandy states that Santa Rosa MC is the only provider of obstetric services in the area and believes this and other services it provides would be threatened should the application be approved. According to the opponent s financial analysis, approval would result in an annual loss of $2.4 million and that in addition, the nursing shortage in the area would likely be worsened by the approval. Believing that sign-on bonuses might be used by the applicant as an incentive to attract qualified nursing staff, Mr. Gandy states that Santa Rosa MC might suffer even greater nursing shortfalls where there is already a nursing shortage. The second opponent to speak was Mr. Dennis Taylor representing West Florida Hospital. This opponent states the project is located approximately one mile north of West Florida Hospital and is in agreement with the comments of Santa Rosa MC. Mr. Taylor testifies that West Florida Hospital believes the area is highly competitive with three Level II trauma centers relatively near each other 4. West Florida 3 A less than 30 percent occupancy rate at WFH is confirmed by Agency records (Florida Hospital Bed Need Projections & Service Utilization by District) published 01/26/07, for the 12 months ending June 2006. 4 According to page #30, Table 11 of A Comprehensive Assessment of the Florida Trauma System, published February 1, 2005 by the University of South Florida, there are three Level II trauma centers in the Pensacola area. These three centers, combined, have the lowest trauma volume (552 compared to a statewide average of 1,783) and the highest trauma centers per one million residents (3.2 centers compared to a statewide average of 2

Hospital has an occupancy rate of around 34 to 35 percent 5. In addition to nursing staff, Mr. Taylor expresses concern over shortages in other allied health professional along with physicians 6. Physician specialists in the hospital setting are mentioned as particularly in demand. Approval of the project might worsen this situation. Mr. Taylor states that Escambia County has a projected growth rate of around 1.5 percent per year but no data source was stated 7. Ms. Denise Barton spoke on behalf of Sacred Heart and supports the comments of the first two speakers regarding an already competitive market in the Escambia County area. Ms. Barton states the applicant s project would place it in a more affluent area and thereby is designed to improve its financial position and ease its uncompensated care load (as shown later in this report, this statement by Sacred Heart is in fact affirmed by the applicant). Sacred Heart states the applicant has increased its market share in acute care discharges from around 32.6 percent to 34.5 percent, without adding any beds; this has been since the applicant s last application to establish a second hospital in Pensacola. The applicant s financial position is stated by this opponent to be improved, particularly the applicant s cash investments, cash-onhand, net income and operating margin. Ms. Barton also states that Baptist Hospital, Inc. s operating margin is very good, all the above indicating an improved financial position over time for Baptist Hospital, Inc. Staff in the Agency s Financial Analysis Unit indicate that the 1.23 centers) of any trauma region in the state. Language on page #29 of the literature specifically states that the trauma-center-per-population is nearly three times higher in the area (Escambia County) than in the state average due to the misdistribution of trauma centers in Escambia County. 5 A less than 30 percent occupancy rate at WFH is confirmed by Agency records (Florida Hospital Bed Need Projections & Service Utilization by District) published 01/26/07, for the 12 months ending June 2006. 6 According to the Florida Department of Health, Division of Planning, Evaluation and Data Analysis at http://www.floridacharts.com/charts/domain2.aspx?domain='07', the number of licensed physicians to 100,000 residents statewide is 279, in Escambia County, the ratio is 233 to 100,000 residents. However, it should be noted that the number of licensed physicians reported does not account for practitioner specialties, with or without admitting privileges at any given hospital(s), licensed to practice but not in fact practicing, or practicing but not necessarily full-time. 7 According to Agency records (Population Estimates) published September 2006, Escambia County has experienced a growth rate in the last five years (for the period ending July 2006) of approximate 0.42 percent. This lower growth rate than stated by the opponent may be due in part to a population decline between 2004 and 2005 and only 0.11 percent growth between July 2005 and July 2006. 3

applicant s fund balance has improved each year for the past four years. 8 This is expected for each year in which a profit is realized, no matter how small or how low the rate of profit growth. Sacred Heart s fund balance has also grown. The operating margin of Baptist Hospital has fluctuated over the past four years as has Sacred Heart s. It is noted that West Florida s operating margin has consistently gone down each year since 2002. There being no additional speakers and no further comments, Mr. Hill declared the hearing closed at approximately 11:30 a.m., Central Standard Time, Thursday, April 26, 2007. Letters of Opposition In addition to testimony and written materials presented at the public hearing, the Agency received letters of opposition from both Santa Rosa MC and Sacred Heart dated April 9 and April 18, 2007, respectively. These opposition letters essentially restate what opposers presented at the public hearing, described above. Letters of Support Appendix O of the application includes approximately 87 support letters. The approximate breakdown of the letters is as follows: community residents (approximately 45 letters); physicians (approximately 19 letters); community organizations (approximately 17 letters); local elected officials (four letters) and administrative/dental practitioners (two letters). Elected officials that offer support are as follows: Pensacola City Council (J. Nobles) and two board members of the Board of County Commissioners of Escambia County (G. Robinson and M. Young, the latter being the vice chairperson). The fourth and last elected official to provide written support is a member of the Santa Rosa County School Board (E. Gray). Baptist Hospital s reputation, history of serving the medically needy, high quality and their understanding that the project would relocate beds to a fast growth area of Greater Pensacola were all factors in their support of the project. Of the 19 physician letters, five were not dated. One of the physician letters states the relocation of beds will strengthen Baptist s financial 8 For the four-year period ending September 30, 2006, a brief look at the applicant s fund balances (equities over liabilities) received and accepted by the Agency, indicates a rise in each of the four years; the most recent fund balance (2006) was approximately $108.4 million. This was both the most recent and the highest fund balance for the prior four years. The lowest fund balance was approximately $84.4 million (2003). The applicant s poorest operating margin was in 2006, approximately $1.9 million; its best operating margin was in 2005, approximately $11.7 million. 4

position so that it can continue to serve the uninsured and the lowincome population (this claim is restated repeatedly by the applicant in the body of the application). This letter was submitted by the director of the applicant s emergency department physician group. Most of the physician letters are of a form-letter variety and in summary state the move of beds will bring good competition, will strengthen the hospital s financial base and that quality will be extended from Baptist Hospital (downtown Pensacola) to the Baptist Medical Park location (north Pensacola area). Of the 17 community leader letters of support, two are not dated, three are by attorneys and only one seems to be by a health care or health care-related provider, that being from Health First Network. The context of the letters is generally similar to that of the physician letters. For the largest group of support letters (45 by community residents) there are two notable characteristics 23 are not dated and 20 show no place of residence. The letters state generalized support of the project. C. PROJECT SUMMARY Baptist Hospital, Inc. (CON #9973) is a not-for-profit 435-bed Class I hospital located at 1000 West Moreno Street in Pensacola 9. Baptist is parented by Baptist Health Care Corporation and has 367 acute care beds, 42 adult inpatient psychiatric beds, and 26 child/adolescent inpatient psychiatric beds. The applicant proposes to relocate 96 of its existing, licensed acute care beds from its downtown campus (1000 West Moreno Street) to the location of the Baptist Hospital Medical Park (9400 University Parkway). The proposed 96 acute beds will consist of two 32-bed units for general medical/surgical patients, an 18-bed critical care unit, and a 14-bed intermediate care unit. The applicant proposes the following conditions: The proposed new hospital will be located at Baptist Hospital, Inc. s Baptist Medical Park campus, at 9400 University Parkway, Pensacola, Florida 32514. 9 At the time of application submission, the Baptist hospital was licensed for 492 beds; 367 acute, 42 adult psychiatric, 28 child/adolescent psychiatric and 57 hospital-based skilled nursing. In March of 2007, Baptist submitted a hospital licensure application to delicense 57 hospital-based skilled nursing beds. Two sets of pro formas were submitted by Baptist; one for the 96 acute bed satellite hospital and one for a 495-bed hospital. The total facility bed count is an apparent error.. 5

A minimum of 15.7 percent of acute care patient days at the 1000 West Moreno Street location shall be provided to Medicaid/ Medicaid HMO/charity patients on a combined annual basis. The applicant is not offering to condition award of the CON upon providing a percentage of care to the medically indigent population at the proposed new facility. The applicant indicates it is now providing 15.7 percent of its acute patient days in the 367 acute beds. If this project is approved, it has agreed to provide 15.7 percent of its patient days in 271 acute beds to the medically indigent, as 96 beds will be delicensed. 10 Although the applicant has clearly stated that it does not wish to condition award of the CON upon providing any level of care to the medically indigent in the proposed 96-bed facility, pro formas for the 96-bed hospital show that it expects to provide nine percent of patient days in that facility to Medicaid and Medicaid HMO patients and two percent to charity care, for a total of 11 percent to the medically indigent. Upon licensure of the proposed hospital at Baptist Medical Parkway, Baptist Hospital, Inc. will permanently remove 96 licensed acute care beds from its downtown Pensacola Baptist Hospital license. It is noted that unlike other areas of the state, Escambia County meets the statutory definition of a low-growth county and as such acute care beds cannot be added to any hospital without CON review and approval. The proposed project involves a total cost of $145,777,639. Total construction cost is projected at $90,388,447 and involves 241,182 gross square feet (GSF) of new construction. D. REVIEW PROCEDURE The evaluation process is structured by the certificate of need review criteria found in Section 408.035, Florida Statutes and rules of the State of Florida, Chapters 59C-1 and 59C-2, Florida Administrative Code. 10 As of May 16, 2007, Agency inventory shows that Baptist Hospital has a total of 435 beds. At the time of application submission, the hospital had 492 beds. However, pro formas were submitted for a 495-bed hospital in error. 6

These criteria form the basis for the goals of the review process. The goals represent desirable outcomes to be attained by successful applicants who demonstrate an overall compliance with the criteria. Analysis of an applicant's capability to undertake the proposed project successfully is conducted by evaluating the responses and data provided in the application and independent information gathered by the reviewer. Applications are analyzed to identify strengths and weaknesses in each proposal. If more than one application is submitted for the same type of project in the same district (subdistrict), applications are comparatively reviewed to determine which applicant(s) best meet the review criteria. Rule 59C-1.010(3)(b), Florida Administrative Code, prohibits any amendments once an application has been deemed complete. The burden of proof to entitlement of a certificate rests with the applicant. As such, the applicant is responsible for the representations in the application. This is attested to as part of the application in the Certification of the Applicant. As part of the fact-finding, the health services and facilities consultant Steve Love analyzed the application with consultation from the regulatory analyst supervisor Chris Augsburger who reviewed the financial data; architect Scott Waltz who evaluated the architecturals and the schematic; and Chief of Health Facility Regulation, Jeff Gregg who acted as advisor. E. CONFORMITY OF PROJECT WITH REVIEW CRITERIA The following indicate the level of conformity of the proposed project with the review criteria and application content requirements found in Sections 408.035, and 408.037, and applicable rules of the State of Florida, Chapters 59C-1 and 59C-2, Florida Administrative Code. 1. Fixed Need Pool a. Does the project proposed respond to need as published by a fixed need pool? Or does the project proposed seek beds or services in excess of the fixed need pool? Ch. 59C-1.008(2), Florida Administrative Code. Certificate of Need (CON) regulations do not contain an acute care bed need methodology. Therefore, no fixed need pool was published for acute care beds in District 1, Subdistrict 1, Escambia and Santa Rosa Counties. Acute care beds may be added at any existing acute care 7

hospital at any time unless that hospital is located in a statutorily defined low growth county 11. In 2007, the only county in Florida to meet the CON definition of low-growth was Escambia County. b. If no Agency policy exists, the applicant will be responsible for demonstrating need through a needs assessment methodology which must include, at a minimum, consideration of the following topics, except where they are inconsistent with the applicable statutory or rule criteria: Population demographics and dynamics; Availability, utilization and quality of like services in the district, subdistrict or both; Medical treatment trends; and Market conditions. The applicant states that the new site, in the Baptist Medical Park area of Northeast Pensacola is planned to provide a full-range of ancillary and support services, including the following: diagnostic services; surgical, imaging, clinical laboratory and pharmacy. Population Demographics and Dynamics The eight (8) ZIP codes 12 the applicant intends to serve are as follows: 32514, 32526, 32533, 32534, 32570, 32571, 32577 and 32583. The applicant states that it has submitted this application because it is currently serving a low-income population that is not growing and believes it will be better able to serve this low-income population if it is allowed to increase its revenues by establishing a new hospital in an affluent area of Pensacola that is growing. That is why it has not agreed to condition award of the CON upon serving the medically indigent population at the proposed new site and why it has agreed to condition award of the CON upon continuing to serve the medically indigent population at its existing location. Pro formas submitted for the 96-bed satellite hospital show that the applicant expects to provide 11 percent of its patient days to the medically indigent in that facility. It proposes to move 96 of its currently licensed acute care beds to establish the new hospital and argues that although it plans to locate in 11 Section 408.036 (1)(g), Florida Statutes: A low-growth county is defined as a county that has: (1) A hospital with an occupancy rate for licensed acute care which has been below 60 percent for the previous five years; (2) Experienced a growth rate of four percent or less for the most recent three-year period for which data are available, as determined using the population statistics published in the most recent edition of the Florida Statistical Abstract; (3) A population of 400,000 or fewer according to the most recent edition of the Florida Statistical Abstract; and (4) A hospital that has combined gross revenue from Medicaid and charity patients which exceeds $60 million per year for the previous two years. 12 CON #9973, page# 31 8

an area within Pensacola that is within approximately 1.5 miles of West Florida Hospital, an existing underutilized hospital, and serve a population now largely served by three other hospitals, it will not negatively impact West Florida or any other hospital currently serving the residents of the ZIP code area it anticipates serving in the new facility. Below is a map illustrating the location of existing acute care facility locations and the planned site. Source: Microsoft MapPoint 2004 Legend: 1. Baptist Hospital, Inc.; 2. Proposed Hospital Site; 3. West Florida Hospital; 4. Sacred Heart Hospital; 5. Santa Rosa Medical Center. The applicant states 13 traffic flow and count is depressed substantially for Baptist Hospital relative to Sacred Heart Hospital and West Florida Hospital. The applicant believes this means it is currently in an area that is not readily or normally accessed and that this reduced or depressed traffic flow is reflective of a less financially advantageous environment for the applicant. While Baptist Hospital is in a downtown 13 CON #9973, page# 22, Table 2 9

location, it states that the more affluent population has migrated North for the past 25 years. Baptist Hospital, Inc. states that in 2005 it and its sibling facility, Jay Hospital, both part of the parent Baptist Health Care Corporation contributed, in total, more uncompensated care than Sacred Heart Hospital, West Florida Hospital or Santa Rosa Medical Center 14. If the parent s affiliates are all combined, for FY 2006, it is stated the uncompensated care provided is over $139 million. The applicant holds that unless it is able to obtain CON approval for this project, it will have to reconsider its current uncompensated care load. FY 2006 financial Medicaid data is not yet available for Agency review to confirm the claim of $139 million in uncompensated care. However, Agency review of FY 2005 financial data confirms a greater total uncompensated care load for Baptist Hospital, Inc., based on charges, compared individually to Sacred Heart Hospital, West Florida Hospital and Santa Rosa MC. When bad debt, charity care and Medicaid totals are combined, Baptist Hospital s total was approximately $111 million, whereas Sacred Heart s was approximately $91.5 million; West Florida s was approximately $63 million and Santa Rosa MC s was approximately $44.4 million 15. As discussed in E.3.g. at the end of this report, Sacred Heart, although not the highest provider of uncompensated care in the subdistrict, is the highest provider of care to the medically indigent in the subdistrict and is designated as a Medicaid disproportionate share hospital. Baptist Hospital notes that two ZIP codes which it currently services (ZIP codes 32051 and 32505) have relatively high percentages of households with incomes below $15,000 16. The applicant references a study 17 that states a correlation between low-income and poorer health outcomes. The study references counties overall rather than ZIP code areas and states that generally low income is the primary contributor to poorer health outcomes. According to the Florida Department of Health 18, as of 2000 (the latest year for which data is available), the median household income statewide was $38,318; Escambia County s median household income was $35,234 and Santa Rosa County s was $41,881. From the same source, the three-year age-adjusted leading causes of death in Escambia County (2003-2005) were heart disease, cancer and stroke. These three leading causes of death were higher in Escambia County than in the state overall, per 100,000 residents; this correlates with a lower than average median income and helps support that a lower income contributes to poorer health outcomes. The three-year age- 14 CON #9973, page #25, Table 4 15 Ibid, page# 25, Table 4 2005 Comparison of Uncompensated Care Based on Charges 16 Ibid, page# 24, Table 3 17 Ibid and Appendix D - Assessment 2006, also referenced as CATCH Study 18 http://www.floridacharts.com/charts/mapp_report.aspx 10

adjusted leading causes of death in Santa Rosa County (2003-2005) were heart disease, cancer and chronic lower respiratory disease. These three leading causes of death were higher in Santa Rosa County than in the state overall, per 100,000 residents; this did not correlate with a lower than average median income and does not support that a lower income contributes to poorer health outcomes. Therefore other factors must be considered than low-income when considering higher death rates and is a case in point that correlation does not necessarily mean causation. The applicant states that the office of Florida House of Representatives member, the Honorable Dave Murzin (District 2) conducted a telephone survey to poll constituent interest in the proposed project 19. It is stated that 1,645 of 1,965 of those polled were in favor of the project; however, the applicant includes no documentation to confirm this claim. Baptist Hospital, Inc. states that AccessEscambia is a local not-for-profit organization operated by professional staff volunteers from local not-forprofit health systems, including from the applicant s parent Baptist Health Care Corporation. It is further stated this organization is to carry on the objectives of the Escambia Health Care Task Force in seeking quality health care access for uninsured community residents. The application further states that the primary medical home for low-income uninsured patients is Escambia Community Clinics. Gap funding to help defray the costs of uncompensated care is said to be provided by Baptist Health Care Corporation, Sacred Heart Health System and Escambia County. It is noted here that no support letters or other documentation were included to indicate efforts to seek federal funding for the establishment of a Federally Qualified Health Center (FQHC). No FQHCs currently exist in Escambia or Santa Rosa County and none were stated to be in development. Baptist Hospital, Inc. makes particular note that diabetes mortality is trending upward in Escambia County 20 and is a major health concern. Florida Department of Health 21 data confirms this claim, for the period 2003-2005. The age-adjusted hospitalizations and age-adjusted death rates due to diabetes are higher in Escambia County relative to state averages and this trend is worsening for Florida s westernmost county. Again, according to the Department of Health, Escambia County is in the lowest 25 percent of Florida counties regarding diabetes survival rates. The applicant was the largest provider of uncompensated care in the subdistrict in 2005. However, its claim that this project is necessary to 19 CON #9973, page 21 20 CON #9973, page #34 21 http://www.floridacharts.com/charts/mapp_report.aspx 11

allow it to continue to serve this population has not been demonstrated. Data reported to the agency show, as testimony presented at the public hearing by Sacred Heart s representative states, that unlike West Florida Hospital, the applicant s financial position is improving rather than declining. In the case of Baptist Hopsital, an improving financial position is simultaneous with declining profitability (a less steep rise in profits looking forward). The applicant suggests that it, more than other Escambia County hospitals, care for the poor. However, the applicant along with Sacred Heart and West Florida is a member of AccessEscambia, a group committed to ensuring access to the medically indigent. The applicant has not provided information in this application to show how it will use the additional revenue it expects to obtain serving this more affluent area to continue to serve the medically indigent and improve health outcomes. Nothing is presented by the applicant to suggest how this project will affect health outcomes for the medically indigent. The majority of the applicant s comments indicate that the revenue the applicant expects this project to generate will allow it to continue to provide the same level of care it currently provides. A few statements in the application indicate that the condition proposed of 15.7 percent of patient days in the downtown facility to the medically indigent, will allow the applicant to meet or exceed its existing provision of care to this population. The applicant has only committed to guarantee it will provide the same percentage care to the medically indigent population as it currently provides; although as a percentage related to the occupancy of 96 fewer beds. It is noted that although the formal agreement proposed by the applicant indicates that its commitment will decrease, pro forma information submitted for the 96-bed satellite hospital shows that the applicant expects to provide 11 percent of its patient days to the medically indigent. Availability, Utilization and Qualify of Like Services in the Subdistrict For the most recent data available to the Agency and not yet published (as of the year ending December 2006), District 1, Subdistrict 1 had a total of 1,419 licensed acute care beds that experienced an occupancy rate of 46.88 percent. According to the most recently published data (as of the year ending June 2006), the same district and subdistrict experienced an occupancy rate of 46.55 percent. For the same period ending June 2006, this is below the overall District 1 occupancy rate of 49.25 percent and below the statewide average (for the same period) of 58.62 percent. The applicant does not seek to add beds but rather to relocate 96 existing acute care beds within the subdistrict. 12

Baptist Hospital s licensed 367 acute care beds reported an average occupancy of 48.46 percent during the reporting period (the 12 months ending June 2006). The applicant s acute care bed utilization is the fourth highest reported utilization of the six hospitals in Subdistrict 1 (two hospitals had lower occupancy in the subdistrict). Baptist Hospital s bed occupancy was 1.82 percent higher than the subdistrict average for the 12 months ending June 30, 2006. Below is a chart describing the above. District 1/Subdistrict 1 Acute Care Licensed Beds and Utilization As of Year Ending June 30, 2006 Facility Licensed Acute Care Beds Average Occupancy by % Baptist Hospital 367 48.46% West Florida Hospital 400 28.47% Sacred Heart Hospital 403 65.77% Gulf Breeze Hospital 65 58.09% Santa Rosa Medical Center 129 30.49% Jay Hospital 55 48.53% Subdistrict 1 1,419 46.55% District 1 1,873 49.25% Source: Florida Hospital Bed Need Projections and Service Utilization by District, published January 26, 2007 The new site, in the Baptist Medical Park area of Northeast Pensacola is expected to serve the following ZIP code population: 32514, 32526, 32533, 32534, 32570, 32571, 32577 and 32583. That ZIP code population is currently served primarily by three other hospitals: Santa Rose Medical Center, West Florida Hospital and Sacred Heart Hospital. 13

Applicant s Proposed Primary Service Area (32514, 32526, 32533, 32534, 32570, 32571, 32577 and 32583) Percentage of non-tertiary and non-ob 22 patient days from this area seen by Subdistrict 1 facilities Subdistrict 1 Hospital Patient Days % Patients Sacred Heart Hospital 22,847 35.18% West Florida Hospital 14,760 22.73% Santa Rosa Medical Center 14,574 22.44% Baptist Hospital 9,550 14.71% Jay Hospital 578 0.09% Gulf Breeze 1,438 0.22% Hospitals outside of Subdistrict 1 1,195 4.63% Total 64,942 100% Source: AHCA Hospital Discharge data from July 1, 2005 through June 30, 2006. The applicant states that its system captured around 20 to 21 percent of the market from July 2005 through June 2006. As shown above, discharge data indicates that Baptist Hospital captured 14.71 percent of the non-tertiary/non-obstetric (OB) patient days, including obstetric services (OB), from this market. The applicant s proposed facility will not offer tertiary or OB services and so they have been excluded. The applicant expects to capture 25 percent of this market by 2013. Therefore, it does anticipate expanding its market share 23. The chart below shows that 82.9 percent of Santa Rosa Medical Center s total non-tertiary patient population originated from the applicant s proposed ZIP code service area. Occupancy in Santa Rosa Medical Center s 129 acute beds was 30.49 percent during the 12- month period ending June 2006. 54.7 percent of West Florida s total non-tertiary patient population originated from this ZIP code area. Occupancy in West Florida s 400 acute beds was 28.47 percent during the same period. A smaller percentage of Sacred Heart and Baptist s total non-tertiary patient days were from patients who live in these eight ZIP codes. Percentage of Non-Tertiary Patients from selected ZIP Codes as a Percentage of Hospital s Total Patient Population (32514, 32526, 32533, 32534, 32570, 32571, 32577 and 32583) Subdistrict 1 Hospital % Served Santa Rosa Medical Center 82.9% West Florida Hospital 54.7% Sacred Heart Hospital 36.8% Baptist Hospital 26.3% Source: AHCA Hospital Discharge data from July 1, 2005 through June 30, 2006. 22 Excludes DRGs: 103-111, 125-125, 154, 191, 302, 385-389, 424-438, 462, 468, 480, 481, 484-488, 495-496, 504-518, 521-523, 525-528, 535-536, 541-543, 547-559 and OB DRGS: 370-383. 23 CON #9973, page# 54 14

The applicant recognizes that it will absorb some ZIP codes served by other hospitals - five ZIP codes served by Sacred Heart Hospital 24, three ZIP codes served by Santa Rosa Medical Center 25 and is closest to West Florida Hospital, which receives most of this discharges from this area 26. However, the applicant believes that growth toward the North of Pensacola and these hospitals parents have respectable financial positions will compensate them for any loss in patient volume, considering that the applicant provides high levels of uncompensated care. The applicant is apparently referring to Hospital Corporation of America (HCA) as the parent of West Florida Hospital; Health Management Associates, Inc. (HMA) the parent of Santa Rosa MC and Ascension, the parent of Sacred Heart. It should be noted that its parent organization, Baptist Health Care Corporation, according to the financial review of this application, is in the same relative position and is able to support its downtown facility with its medically indigent service. The occupancy table below shows that occupancy at West Florida Hospital has overall trended downward since June 2002. This facility is the nearest hospital to the applicant s proposed site. District 1/ Subdistrict 1 West Florida Hospital Bed Utilization July 2001 though June 2006 Facility 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 Five Year Average West Florida Hospital 33.94% 30.38% 28.95% 28.95% 28.47% 30.07% Source: Florida Hospital Bed Need Projections & Service Utilization by District, for the above indicated years (July 2001 through June 2006). In support of the project, the applicant states that Pensacola downtown area ZIP codes adjacent to the existing hospital are experiencing no growth, are economically depressed and have a large population without health care insurance. It is noted that Escambia County is the only county in Florida to meet the definition of a low-growth county under section408.036(1), Florida Statutes. Baptist provided the following table to demonstrate that these two ZIP codes are economically depressed. 24 CON #9973, page #60 25 Ibid, page #62 26 Ibid, page #61 15

Baptist Hospital Downtown Campus Comparative Profile Baptist Downtown Remainder Adjacent Zip Codes of Escambia 32501 32505 County Escambia & Santa Rosa County Florida Baptist Hospital Share OCT 2005 SEPT 2006 61.3% 43.2% 29.5% 32.2% Percent Households with Avg HH income below $15,000 31.8% 27.0% 13.9% 14.4% 14.7% Source: Baptist Hospital, Inc./CON #9975 page# 24. Market share data from AHCA discharge database. Zip codes and county economic estimates from Claritas, 2007. Florida income data from U.S. Census. The applicant contends that as the largest provider of services to the population in the above ZIP codes, it needs to generate revenue and improve its payor mix from other portions of the service area to be able to continue and expand its service to the medically needy in ZIP codes adjacent to Baptist Hospital. As noted earlier, the applicant s financial position is improving rather than declining. In the application 27, Baptist Hospital states it collects four cents on each dollar of expenditure, regarding self-pay patients those lacking health care coverage. Baptist states further it will not abandon its downtown site 28. The applicant indicates that the primary reason for submitting this proposal is to help fund additional care to the medically indigent population in these two ZIP codes, its condition represents the same percentage but of a facility with 96 fewer beds. The applicant states the primary medical home of low-income, uninsured patients in Escambia County is Escambia Community Clinics 29 and that its parent, Baptist Health Care Corporation, is a partner in covering the costs of care to this underserved population, along with Sacred Heart Health Systems and Escambia County. The applicant goes on to state approval of the project would allow Baptist to realize a new incremental revenue stream to subsidize health care services and initiatives 30. The applicant does not predicate on conditions or state otherwise in the application a sum total or percentage of this new revenue that the applicant will use to support primary care (non-hospital/non-emergency department care), such as that provided at Escambia Community Clinics. There is no discussion of 27 Ibid, page #25 28 Ibid, page #26 29 Ibid, page #41 30 Ibid, page #44 16

how the expected additional new revenue will result in expansion of any given Escambia Community Clinics sites, extended days or hours of operation or other specifics to relieve emergency department demand and costs or preventable hospitalizations overall. The applicant does not state the exact impact that would occur regarding Escambia Community Clinics if the project is denied. It is also noted that, while stating that it will not abandon this population, in other sections of its application, the applicant has noted that it may not be able to continue to support this population if it is not granted the CON to build the satellite hospital in the more affluent area of town, due to its financial position. It is also restated here that the applicant s fund balance has grown each year of the last four (period ending September 30, 2006). Its lowest fund balance in four years was in 2003, with a balance of approximately $74.6 million. Its highest fund balance in four years was in 2006, with a balance of approximately $108.4 million. This indicates the fund balance grew by around $33.8 million over the four-year period and shows an improving financial position. This should be generally the case when a profit is realized, no matter the rate of profit. Considering that Santa Rosa Medical Center and West Florida Hospital discharge more than 50 percent of their nontertiary patients from the planned service area ZIP codes, it is reasonable to determine their financials would be most impacted. Santa Rosa s fund balance has grown linearly in the past four years (period ending September 30, 2005) as has Baptist s. However, Santa Rosa s best fund balance in the four-year period was in 2005, approximately $7.8 million as opposed to Baptist s $108.4 million. West Florida Hospital s fund balance has not grown linearly for the past four years (period ending December 31, 2005). Its best fund balance in the period was in 2003, at $94.9 million. Its 2005 fund balance was approximately $88.3 million (the lowest fund balance it experienced over the four-year period). Though it should be stated that in the case of their average fund balances over their differing four-year periods that have been received and reviewed by the Agency, the best fund balance average was West Florida s $92.5 million, followed by Baptist s $90.0 million and Santa Rosa s $4.4 million. For the year ending December 31, 2005, West Florida Hospital experienced a declining fund balance (from approximately $94.2 million to $88.3 million) and a declining operating margin (from approximately $2 million to a deficit of approximately $5.6 million). Of the three hospitals (Baptist, Santa Rosa and West Florida) only West Florida reported a declining fund balance and a negative operating margin for their most recently received and reviewed four-year 17

periods. Sacred Heart Hospital had the highest fund balance of the four hospitals as of December 2006. This facility parented by Ascension had a fund balance of $217.6 million, with its fund balances increasing for each of at least the prior four years. Baptist Hospital, Inc. indicates that it provided the largest percentage of inpatient care to the residents of the two ZIP code area. Agency data indicate that these two ZIP codes accounted for approximately 15 percent of Baptist Hospital s total discharges during the 12 months ending June 30, 2006 and accounted for approximately 10 percent of Sacred Heart s total discharges for the same period. Sacred Heart is considered a Disproportionate Share Hospital by the Medicaid program. Data show that Sacred Heart discharged 2,043 patients from ZIP code 32505 compared to Baptist Hospital s 1,397 during the 12 months ending June 30, 2006. Baptist Hospital was the largest provider for ZIP code 32501 residents with 1,097 compared to the next highest provider, Sacred Heart, with 710. The following table provides a breakdown of the patients from these ZIP codes during the July 2005 June 2006 reporting period, for all the acute care hospitals in the subdistrict. Acute Care Discharges Residents of Zip Codes 32501 and 32505 Applicant s Existing Service Area Zip code Sacred Heart Baptist West Florida Gulf Breeze Santa Rosa Jay Total 32501 710 1,097 127 35 5 4 1978 32505 2,043 1,397 316 34 14 3 3807 Total 2,753 2,494 443 69 19 7 5785 % of total pts from zips 47.59% 43.11% 7.66% 1.19% 0.33% 0.12% 100.00% Source: AHCA Hospital Discharge Data July 2005 - June 2006. Acute Care Patient Days Residents of Zip Codes 32501 and 32505 Applicant s Existing Service Area Zip code Baptist Sacred Heart West Florida Gulf Breeze Santa Rosa Jay Total 32501 5,735 2,863 809 159 20 17 9,603 32505 6,889 7,455 1,684 121 40 11 16,200 Total 12,624 10,318 2,493 280 60 28 25,803 % of total LOS by zip 48.92% 39.99 9.66% 1.09 0.23% 0.11 100.00% Source: AHCA Hospital Discharge Data July 2005 - June 2006. Baptist experienced 12,624 patient days (July 2005 through June 2006), compared to Sacred Heart s 10,318, Santa Rosa s 60 and West Florida s 2,493. The two tables indicate that patients from these two ZIP codes account for more patient days at Baptist and that Baptist discharges more patients from these ZIP codes as a percent of its total discharges, than any other acute care facility in the area. The applicant also indicates that it is the leading provider of uncompensated care in the market. The applicant includes bad debt and amounts not reimbursed 18

by Medicaid to reach this conclusion 31. Sacred Heart provides more care to the medically indigent if bad debt is not considered. Data reported to AHCA show that during FY 2005, Sacred Heart provided 28.4 percent of its total patient days to Medicaid and Medicaid HMO patients and 2.3 percent to charity care compared to Baptist s 12.7 percent Medicaid and Medicaid HMO and 1.7 percent charity care. Both facilities are high volume Medicaid providers, though Sacred Heart is notably higher, but not to this patient population in these two ZIP codes. The applicant states that it based its need analysis on the following criteria: definition of the target geographic service area for the new facility; the population within the planned service area; actual utilization being generated from the service area; the forecasting of future utilization levels for the service area through the applicable planning horizon 32. In its growth discussion to justify Baptist Hospital North (the planned site also referenced as Baptist Medical Park), the applicant states that over 60 residential projects are under development near the proposed site 33 and when complete, should yield over 8,000 residential units and some 21,000 residents. The applicant defines the service area for the proposed satellite hospital as an eight ZIP code area, which includes ZIP codes 32514, 32526, 32533, 32534, 32570, 32571, 32577 and 32583. In its application 34, Baptist Hospital projects an increase in population in these ZIP codes from 193,567 in 2006 to 210,038 in 2011; this is an incremental increase of 16,471 residents an 8.5 percent growth rate. AHCA population projections show the subdistrict (Escambia and Santa Rosa Counties) are projected to have an approximate 9.9 percent growth rate from July 2006 through June 2011. By age cohorts, the applicant shows the greatest growth among the 65+ age group. While the applicant states this age group is the smallest in total residents, it will experience the greatest rise in growth (around 24.1 percent by 2011). As stated above, the subdistrict population is projected to grow by 9.9 percent during the same time period (July 2006 through June 2011) per AHCA population data. The growth for the continuous ZIP codes that the applicant plans to serve seems reasonably in line with the growth of the subdistrict. In reference to the projected market size for the mix of inpatient services to be provided at the proposed facility, the applicant reviewed AHCA 31 Ibid, page #7 32 Ibid, page #53 33 Ibid, page #49 34 Ibid, page #47 and Table 7 Baptist Medical Park Service Area Population Profile 19

discharge data excluding pediatric, obstetric/neonatal/behavioral health/cardiac catheterization and tertiary care services 35. The applicant determined that 108,180 patient days were generated by residents in its proposed eight ZIP code service area from October 2005 through September 2006 36. After excluding the patient days described above and focusing only on non-specialty/non-tertiary patient days, the applicant reaches the total of 78,591 patient days. The applicant affirms services at the proposed site are to be primary and secondary care, it notably excludes obstetrics, among others listed above. The applicant indicates that it applies age specific use rates with projected population growth by age cohort and concludes that 91,323 patient days will be generated in calendar year (CY) 2011, 94,109 patient days by CY 2012 and 96,979 patient days by CY 2013 37. The applicant s projections indicate a 23.40 percent increase in seven years. Agency population estimates are projected on a county-wide basis and therefore, are not available for the service area, which consists of specific ZIP codes. However, as shown below, the area population trend is a decreasing rate of growth. The table reflects the county overall (which includes ZIP codes not included in the applicant s service area) and also the state overall, as of January 1 of each stated year. Escambia County, District1 and State Population Growth Percentages for January 2002 to January 2007 Year-by-Year (Discreet and Not Aggregated) 38 Total Population 2002 2003 2004 2005 2006 2007 Escambia County 1.009 1.012 1.015 0.994 0.994 1.005 Statewide 1.010 1.023 1.026 1.024 1.022 1.022 Source: Population Estimates, as published September 2006 The graph below is reflective of the above table. In the last five years, Escambia County s highest growth rate was as of January 2004 and the county has not regained it. 35 Ibid, page #52 36 Data reviewed by Agency staff for July 2005 though June 2006 show a total of 64,942 non-tertiary/non-ob patient days in the applicant s PSA. 37 Ibid, page #54 and Table 13 Baptist Medical Park Proposed Hospital Forecasted Patient Days 38 Population growth for 2002 was based on the growth from January 2001 through December 2001. Population growth (or decline) is shown to the third decimal place due to slight changes in population that when rounded may have shown no change. The growth (or decline) is based on the following year population divided by the prior year population for each separate and distinct year (a year-by-year basis). The percentages are discreet and not aggregated because they are not based on a constant (such as the population of a single year) but rather the population change year-by-year. 20

Total Population Growth Discreet and Not Aggregated Percentage Growth/Decline 1.030 1.020 1.010 1.000 0.990 0.980 0.970 2002 2003 2004 2005 2006 2007 Years Escambia County Statewide Source: Population Estimates, as published September 2006 Below is the projected growth for the same geographic areas: Escambia County, District1 and State Population Growth Percentages for January 2008 to January 2013 Year-by-Year (Discreet and Not Aggregated) 39 Total Population 2008 2009 2010 2011 2012 2013 Escambia County 1.017 1.019 1.013 1.010 1.010 1.017 Statewide 1.021 1.020 1.019 1.019 1.018 1.021 Source: Population Estimates, as published September 2006 The table below reflects acute care occupancy at existing facilities this over the five years ending June 30, 2006. 39 Population growth for 2008 was based on the estimated population from January 2007 through December 2007. Population growth (or decline) is shown to the third decimal place due to slight estimated changes in population that when rounded may have shown no change. The growth (or decline) is based on the estimated following year population divided by the estimated prior year population for each separate and distinct year (a year-by-year basis). The percentages are discreet and not aggregated because they are not based on a constant (such as the population of a single year) but rather the population change year-by-year. 21