And the winner of the high-stakes race to build a new hospital on the Eastside is ... no one. In a surprise move, the state Department of...

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And the winner of the high-stakes race to build a new hospital on the Eastside is … no one.

In a surprise move, the state Department of Health denied approval yesterday to both Swedish Medical Center and Overlake Hospital Medical Center to build a full-service facility in Issaquah for residents along the fast-growing I-90 corridor.

The two health-care providers have been locked in a heated tug-of-war for nearly a year to expand their market share on the Eastside.

But the state found that the Issaquah region has “more than enough beds to serve the area for the next decade,” said Laurie Jinkins, assistant secretary of health-systems quality assurance for the state Department of Health.

“If you put a point in the center of Issaquah, there are three hospitals within 12 miles,” she said, referring to Overlake in Bellevue, Group Health Cooperative in Redmond and Snoqualmie Valley Hospital.

Before a new hospital goes up, the state must issue what’s called a “certificate of need” to a provider after a complex process determines whether the number of beds in a community is adequate.

The state calculations showed the area will have 677 available beds by 2007 among four area hospitals, including Evergreen Hospital Medical Center in Kirkland. With Swedish and Overlake proposing to have their hospitals running by 2009, a new hospital would “create a significant surplus for approximately eight years,” according to the state’s analysis.

Both hospitals were considered quality caregivers and financially strong, but failed to prove a need for a new center, Jinkins said.

Part of the reason there are certificates of need is to control costs for consumers by avoiding duplicate services, she said.

In health care, an increased supply of services doesn’t translate into savings. Prices rise when competing hospitals duplicate expensive services — for instances, cardiac centers — because the cost is passed on to patients.

Both Swedish and Overlake officials took issue with how the state calculated the number of estimated 2007 beds.

The sticking point, they say, is that the state included 132 beds from Group Health — which may or may not shut down in three years. Group Health has said its Eastside plans after mid-2008 are undecided; it has partnered with Overlake to build a specialty center on Overlake’s campus and to transfer its acute-care patients to that hospital in April 2008.

Swedish officials say they will appeal based on inclusion of the Group Health beds.

“Group Health is an HMO that the majority of people in Issaquah can’t access,” said Kevin Brown, a Swedish vice president. “It’s unclear how [those beds] have anything to do with serving people in Issaquah.”

Overlake CEO Ken Graham said he would opt for a wait-and-see approach before deciding whether to appeal. Both sides have 28 days to file with the state.

“It’s too early to think about that yet,” he said.

Officials at Snoqualmie Valley Hospital had lobbied against a new hospital, arguing it was unnecessary and would threaten their patient volumes. That hospital is licensed for 28 beds and has struggled financially since it opened in 1982. It closed twice, in 1992 and 1997, but reopened again in December 2000.

Evergreen CEO Steve Brown said yesterday’s announcement took him “a bit by surprise,” but he called the decision “prudent.”

“It’s pretty clear that [the state] feels the [existing] hospitals are already servicing the Eastside,” he said.

Swedish, nearly since its inception, has seen growth as key to survival. Since 1910, when it opened in a renovated apartment building in Seattle, the hospital grew from 24 beds to 1,245, with expansion — primarily through acquisition — as its hallmark.

Eyeing the Eastside as an important area of population growth in 1997, Swedish pursued, but ultimately dropped, a merger with Evergreen Hospital.

Swedish sought to build on its own, buying options on 15 acres at Issaquah Highlands for a 175-bed facility that would have included a pediatrics unit, 10 operating rooms and a neurology department. Overlake proposed to build a 120-bed hospital at the Meadow Creek/Lakeside office park.

Competition flared up when Overlake opened an urgent-care center in Issaquah in February. Two weeks later, Swedish opened a $20 million, free-standing emergency room, the first of its kind in the state, less than three miles away.

Sonia Krishnan: 206-515-5546 or skrishnan@seattletimes.com

Staff writer Carol Ostrom contributed to this report..