A $62 million mental health hospital in St. Paul cleared a crucial hurdle Monday with state regulators determining the new site is in the public interest.

The Minnesota Department of Health's decision grants Fairview's proposal an exception to the state's moratorium on building new hospital beds.

But state health officials also raised concerns that Fairview isn't fully offsetting the loss of comprehensive mental health services at nearby St. Joseph's Hospital, which recently was closed by the Minneapolis-based health system.

Significant gaps in inpatient care will persist, the department said, because the new facility won't have an emergency department and will lack a "full complement of medical care" — meaning it will treat just a subset of mental health patients.

"The hospital is in the public interest despite the significant concerns raised by our analysis and in the community about the project as proposed," state Health Commissioner Jan Malcolm wrote in a letter to Minneapolis-based Fairview Health Services. "The sole reason for finding the hospital in the public interest is the substantial need for hospital beds for mental health patients."

Fairview wrote in a statement that it's heard the concerns before and tried to address them in plans for a hospital that's "fully integrated and designed to care for patients' whole health." Construction is planned at the site of the old Bethesda Hospital just north of the state Capitol, in conjunction with Tennessee-based Acadia Healthcare.

"As the largest provider of mental health and addiction care in the region, we have a responsibility to innovate across the continuum of mental health and addiction care," Fairview wrote.

"We're thrilled the new hospital will expand the state's capacity to meet large acute mental health needs and create a new center of excellence for inpatient mental health care. We are confident that this is the right step to take as we continue to evolve our system's mental health services and meet the long-term needs of our patients and community."

Before Monday's decision, the Health Department last backed a psychiatric-only hospital in 2014 when it approved a 16-bed facility in Thief River Falls. Since then, other sites that already operate mental health beds have been allowed to expand their counts.

In May 2022, the Health Department counted 879 available inpatient mental health beds across Minnesota. Officials say the new hospital would add 120 available beds, an increase of 13.7% to the statewide total, but the gain doesn't fully compensate for other recent bed closures.

Not all available beds are staffed every day. The counts also don't include mental health beds in facilities run by the state's Department of Human Services.

Normally, public interest reviews by the Health Department are a precursor to final decisions by the Legislature. For the psychiatric hospital, however, lawmakers flipped the process, giving the final word to the state agency.

It held a public meeting on June 9 and received 67 written public comments — most recognizing the need for more inpatient mental health beds, the state said. Supporters called Fairview a trusted community partner and agreed the new facility will help patients who struggle to find needed services.

But the most common concern was that the facility "would not serve all patients in need, based on limited medical capabilities and limited access with no emergency department," the Health Department said Monday in a news release.

Earlier this year, patient advocates and competing hospitals questioned whether access would be limited for low-income patients and those with the most complex care needs since the site won't include an emergency room.

In June, lawmakers responded to these access concerns with legislation that requires monitoring to ensure the new hospital treats Medicaid patients and takes transfers from other facilities. The Health Department said the ongoing scrutiny was a key element to finding the project to be in the public interest.

The new hospital for inpatient adult psychiatric patients will be licensed for 144 beds — 120 new beds plus 24 being held for future use. While that's "badly needed" capacity, Malcolm wrote, the facility "would not fully compensate for decisions by Fairview between 2019 and 2022 to close psychiatric units at two facilities with 123 inpatient beds, a dedicated chemical dependency unit with close to 40 beds and an emergency department that was a key entry point to accessing mental health care."

The staffing model that Fairview and Acadia are proposing for the new facility, Malcolm added, "is dramatically leaner than local and national norms [and] raises some concerns, supported by the literature, about patient outcomes and staff safety. … While we appreciate the need for innovation in care delivery, this model will need to be carefully evaluated to see what outcomes are actually produced."

Fairview stressed that all patients, regardless of income or insurance status, will be able to receive care. The health system already treats some of the state's most underserved residents as well as those with the most complex health needs, Fairview wrote, and the "new hospital will enhance our ability to do so."

"For years, we've collaborated with partners in St. Paul, the Twin Cities and across the entire state to meet our communities' most urgent health crises, including access to mental health and addiction care," Fairview wrote. "The need for innovation and new approaches in solving such persistent and urgent crises as this cannot be overstated."

The new hospital follows a series of changes by Fairview in the east metro. This summer, the health system closed St. Joseph's Hospital in downtown St. Paul, which was Minnesota's oldest inpatient hospital. It was reopened in August as a wellness center that offers food, medical, aging and other services to help people overcome barriers to good health.