(a) The department, after consultation with an organization of interest, shall select two strategically located, high-risk rural hospitals to plan and implement rural alternative hospital demonstration projects. To the extent possible, the department shall choose two demonstration sites, with one site serving an isolated mountainous area where access may be impeded by adverse weather conditions, and one site located in a rural agricultural community. Hospitals shall be selected on the basis of their interest in becoming a demonstration site and on their suitability as model rural alternative hospitals. The demonstration projects shall include, but not be limited to, identification of the following:

1. (1) Appropriate mix and type of services to be provided locally and obtained on referral.
2. (2) Types and numbers of personnel required.
3. (3) Probability of, and the amount of, reimbursement under current regulations.
4. (4) Statutory and regulatory changes necessary to license the facility and maximize reimbursement.

(b) In administering the rural alternative hospital demonstration project, the department shall do all of the following:

1. (1) Establish two demonstration sites on or before January 1, 1990, and operate the projects for a period of up to 18 months.
2. (2) Grant exceptions to the licensure requirements for general acute care hospitals that are necessary to serve the purposes of this section when the granting of the exceptions do not jeopardize the health and welfare of patients.
3. (3) Convey to the Federal Health Care Financing Administration its intent to establish the rural alternative hospital demonstration project and seek any necessary appropriate waivers.
4. (4) Consider requests for grant funds made by demonstration site hospitals pursuant to subdivision (a) of Section 1188.86 as meeting criteria for priority funding.
5. (5) Monitor and evaluate demonstration site projects as to the applicability of these models for statewide application.

(c) The department, based on interim findings from the demonstration projects, shall do either of the following:

1. (1) Prepare and adopt regulations establishing the rural alternative hospital as a licensed health facility by January 1, 1992.
2. (2) Submit to the Legislature by that date a report detailing why a category of health facility should not be established.