A plan to expand the bed count at Regions Hospital by 20 percent likely overstates the future demand for hospital care in the east metro, according to state regulators, and could pressure nearby competitors to drop services like inpatient mental health care that generate less revenue.

The concerns prompted the Minnesota Department of Health to conclude in a preliminary analysis that a 100-bed expansion plan at Regions is not in the public interest, according to a report released Wednesday.

Even so, aspects of the Regions plan have merit, state officials said, and lawmakers at the State Capitol suggested a more modest proposal might still move forward during the current legislative session, which ends this month.

“There is room to find a solution that works,” said Rep. Joe Schomacker, R-Luverne, the chair of a key health care committee in the House.

Late last year, Regions proposed adding 100 hospital beds by 2040 to add capacity at a facility that officials said is too full to efficiently handle projected growth from an aging population and sicker patients. While the focus of the plan is long-term, Regions said it hoped to address current problems with ambulance diversions and patients backing up in the emergency room, as well.

Since 1984, Minnesota law has blocked construction of new hospital beds due to concerns that overcapacity can drive up costs in health care. Hospitals can seek exceptions to the moratorium, but the process includes a Health Department report about whether proposals are in the public interest.

In the case of Regions, the Health Department agreed that there are “bottlenecks” in delivering some services that result in patients being diverted from the hospital, and might contribute to temporary closures of the emergency department to new patients. Adding a limited number of beds could relieve some of the pressure, according to a letter summarizing the analysis from Diane Rydrych, the director of department’s health policy division.

Adding a limited number of obstetric beds would let Regions compete in a “critical revenue area [obstetrics], with minimal added health system costs,” Rydrych wrote. She added that more beds for mental health patients “would help address related constraints felt across the community.”

“The plain answer to the question is: The full proposal we find not in the public interest,” said Jan Malcolm, the state Health Commissioner, in an interview. “This does not mean we find no public-interest aspects to the proposal.”

Lawmakers have the ultimate say on the proposal. During a joint meeting Wednesday between key health committees of the House and Senate, legislators from both parties suggested that Regions would need to trim the number of beds in its current proposal to win support.

“Maybe 100 [beds] isn’t the right number,” said Sen. Michelle Benson, R-Ham Lake, at the conclusion of the hearing at the Capitol. “I hope that Regions will come forward with some guidance for us, so that we know what the number is … that gives them an opportunity to continue to grow and serve this area.”

Megan Remark, the chief executive at Regions, said the hospital was surprised and disappointed by the overall conclusion of regulators, but suggested a willingness to work with lawmakers. After Sen. Tony Lourey, DFL-Kerrick, urged Regions to consider a more limited plan, Remark said: “We hear you loud and clear, and are interested in more conversation.”

The Regions proposal has enjoyed support among civic and public-safety leaders in the east metro who have noted the hospital’s unique status as a center for burn patients and those who suffer serious traumatic injuries.

But Minneapolis-based Allina Health System, which operates nearby United Hospital, questioned why Regions projected the need for beds over 30 years, saying that’s a relatively long time window. Minneapolis-based Fairview Health Services, which operates nearby St. Joseph’s Hospital, said it was concerned the expansion would cause financial damage to nearby competitors.

In detailed preliminary findings released Wednesday, the Health Department said that forecasting hospital demand is difficult, so studies typically look over five to 10 years. Reviewers also questioned Regions’ focus on demographic trends with only small adjustments for the potential that rates of service use would decline.

“We’re worried that the availability of excess capacity leads to greater number of hospitalizations than would otherwise occur,” said Stefan Gildemeister, the state health economist, in an interview. “Excess capacity has the potential to create excess hospitalizations.”

Over the past five to 10 years, Regions has been slowly gaining market share for procedures that generate relatively high payment rates from insurers, the Health Department found. The proposal for more beds suggests Regions expects to further grow in these areas, and could pull admissions from other east metro hospitals.

Regions is owned by Bloomington-based HealthPartners, which is one of the state’s largest health insurers. “The combination of ongoing enrollment growth for HealthPartners ... and the trend towards single-hospital networks, has the potential to steer a greater share of hospital patients towards Regions Hospital and affect the overall inpatient market share at the facility favorably,” the report states.

The Regions proposal estimates operations and staffing costs of $1.36 billion between 2018 and 2013; the Health Department speculated that other costs “could feasibly raise the project cost to $2 billion.”