The council has proposed to invest in the site, expanding the aged care facility to add to its existing Blue Haven aged care portfolio.

The beds would continue to provide transitional care for those recovering from treatment or waiting to be moved into a nursing home, while some community services staff would move to the site to make services more integrated.

General manager Michael Forsyth said it was a way of keeping the site in community hands.

"It will be a one-stop shop because there will be aged and disability services on the site, as well as access to home-based care," he said.

He said patients would not have to be Blue Haven clients to access the upgraded facility.

Illawarra Shoalhaven Local Health District Board chairman Denis King said he had spoken to the council three weeks ago and the board supported the proposal.

"We like it, it's one we think will be of great benefit," he said.

"Part of the proposal is that all existing services will be maintained with the enhancement of some."

Kiama Hospital currently has 20 beds including six nursing home respite beds caring for 220 people a year.

Pulmonary rehabilitation, dental and geriatric clinics, speech pathology, counselling, sexual health, podiatry and family care are also provided at the site.

NSW Health Minister Jillian Skinner is considering whether to allow the council to continue its planning and negotiations - the proposal would require federal funding.

It follows a report to the board last year, saying the hospital's buildings were "at the end of their practical life".

The report recommended working with the Federal Government and the private sector to redevelop the facilities.

Planning is still at the concept stage at the moment, but Kiama Council will need to include 52 extra low-care bed licenses it was recently awarded - 26 of them for dementia patients.

"There are no waiting lists associated with aged care generally," Mr Forsyth said.

"We've worked out there is future demand due to the growth in population and the growth in aged care."

If the minister goes not give the green light, the council will have to find another site.