MEMORANDUM

TO: Ron Long, Assembly President

Members, Kenai Peninsula Borough Assembly

FROM: John J. Williams, Kenai Peninsula Borough Mayor

CC: Kathy Phillips, Chair, Central Kenai Peninsula Hospital Service Area Board

David Gilbreath, CEO, CPGH, Inc.

Craig Chapman, Finance Director

Colette Thompson, Borough Attorney

DATE: April 6, 2006

SUBJECT: Ordinance 2006-20, authorizing the mayor to execute an agreement to purchase the Heritage Place assets

Banner Health, the owner of Heritage Place, has approached the borough and Central Peninsula General Hospital, Inc. to determine if the borough would be interested in purchasing the assets of Heritage Place and having CPGH, Inc. operate it on behalf of the borough. The proposed price is $999,999 including all costs reasonably incurred by the borough for the purchase. It is anticipated that funding would be appropriated from the CPGH Plant Reserve and Replacement Fund for the purchase.

Due to inadequate Medicaid reimbursement rate applicable to the Heritage Place, it is no longer as viable for Banner to operate this facility as previously was the case. However, the Medicaid reimbursement rates for this facility would be greater if operated by CPGH, Inc. in conjunction with the hospital. However, this increase in Medicaid rates would not be available until FY2008. In lieu of an immediate increase in the Medicaid reimbursement rate, the State of Alaska has proposed providing funding through the Disproportionate Share program in the amount of $1,450,000 for FY 2006 and, if made available by the federal government, for the same amount in FY 2007. For these reasons, Banner Health and CPGH, Inc. believe that the purchase of this facility would be financially viable for the borough.

Part of the service area's function is to provide long-term health care services to the residents of the service area. The acquisition of the Heritage Place assets would further that purpose and keep this facility available to the community. The purchase price for this facility is significantly lower than its assessed value, which makes the proposed acquisition more attractive to the borough and service area.

At the time of introduction, the asset purchase agreement has not been fully completed. However, the administration is presenting this ordinance to the assembly at this time to start the process and make the general public and assembly aware of this proposal (copies of the purchase agreement will be made available as soon as it has been negotiated). A preliminary conditional asset purchase agreement, which sets out the preliminary agreement and items to be agreed upon before this deal may be finalized, is submitted to the assembly in a resolution in the packet for the April 18, 2006, meeting for approval. Numerous due diligence items remain to be completed before the parties can finish negotiating and drafting the final agreement. It is expected that the purchase agreement will be completed prior to the public hearing date of May 16, 2006. Time is of the essence as the purchase must be completed before June 30, 2006, to qualify for the FY2006 DSH payment of $1,450,000. Thank you for your consideration.