State Health Department Fines Saratoga Hospital $10,000 for Unauthorized Construction, Financing of Regional Outpatient Surgery Center

ALBANY, June 25, 2004 - The State Health Department today announced that it has fined Saratoga Hospital $10,000 for the construction and financing of an ambulatory surgery center in Saratoga Springs without appropriate State authorization.

"We found it appropriate and necessary to fine Saratoga Hospital for what we determined to be the hospital's inexplicable failure to adhere to well-established State regulations regarding the financing and construction of the project," said State Health Commissioner Antonia C. Novello, M.D., M.P.H., Dr.P.H.

"While there was a clear need for this expansion it was a critical error to fail to gain the necessary approvals to carry it out. Health care providers across the state are fully knowledgeable of New York's rules governing the approval process for Certificate of Need (CON) applications and, frankly, there is no excuse for a breach of those requirements."

A State Health Department investigation, which concluded in March 2004, determined that Saratoga Hospital started the construction of a new outpatient ambulatory surgery center, incurred additional debt and closed on the financing of the project without appropriate State authorization.

The Department also indicated it was troubled by the failure of the hospital's legal and financial advisors to follow the regulatory requirements.

The construction of the Saratoga Hospital surgery center, located at 3040 Route 50 in the Town of Wilton (Saratoga County), has since been completed and has just recently received final appropriate State approval. The approval was possible only after the Department compelled the hospital to correct numerous deficiencies in the financing plan, detailed below, to bring it into compliance with regulations.

As part of the State's investigation, Saratoga Hospital was cited for its failure to disclose the following to the Department for review and approval:

  • Started construction of the project in the spring of 2003 without appropriate State approval. The hospital first received recommendations for contingent approval from the State Hospital Review and Planning Council (SHRPC) in October 2002. However, the hospital proceeded with construction of the new facility prior to submitting additional information to the Department to meet the contingencies set forth by the SHRPC;
  • Amendments related to the cost and financing of its original 2002 CON proposal for the construction of a new ambulatory surgery center. The original application submitted to the Department for consideration projected a cost of $10.3 million. Subsequent estimates by the hospital determined that the project cost would total more than $12.8 million when construction was completed. The Department was not aware of the additional cost of the project until after the construction of the facility was substantially complete in December 2003;
  • The restructuring of its finances through the establishment of an obligated group. The obligated group, which includes Saratoga Hospital, Saratoga Care, Inc. and Benedictine Community Health Center, will share the debt incurred from the operations of the new outpatient ambulatory surgery center. Under State regulations, the hospital cannot take on the debt of others without receiving prior State authorization for such financing;
  • The creation of an obligated group for the financing of a State licensed health care facility requires the prior approval of both SHRPC and the State Public Health Council (PHC). The hospital failed to seek appropriate State approval for the obligated group until after the facility was constructed; and
  • The significant restructuring of refinancing components of the project loan, extending the terms of the mortgage to 30 years. The terms of the loan, which far exceeded state standards, included a deferral of principal payments, as well as the refinancing of both operating and equipment expenditures for a 30-year period. The State does not allow 30-year mortgages for capital projects.

In addition to the State fine, the hospital was required to and has since submitted a written Plan of Correction (POC) that was approved by the Department on April 2, 2004. The POC highlights the actions the hospital has taken and will take to comply with State regulations, including full disclosure of its loan agreement and the financing structure for the project, as well as the steps they have taken and continue to pursue to meet all remaining contingencies prior to receiving final State approval.

As part of the POC, the Department has imposed restrictions on future debt financing of capital projects by Saratoga Hospital, including mandatory accelerated payments on loans. This requirement will help balance the excessive terms of the financing in this enforcement case.