The cost has gone up, with the budget now set at $621.4 million, up from the previous estimate of $520 million.
Premier Alison Redford says that extra $100 million was originally earmarked for other projects such as a new police college in Fort Macleod.
But she says the decision reflects her government's commitment to investing in what it believes are the priorities of Albertans, such as health care.
The new hospital will include 200 acute care beds at first with room to add 32 more later.
There will also be an emergency room, cancer centre and room for a nursing and medical careers program.
"This will be a partnership between Grande Prairie Regional College and the regional health centre to ensure we're supporting people that are part of health care profession training, and also nurse training, to get their practicums in northwest Alberta," said Redford.
"We know that very often, if people have the ability to stay here to do their work, then they will continue to stay here later on."