December 11, 2013

A Case Statement for Privatization of Publicly-Owned Hospitals

Publicly-owned hospitals across the United States are facing hard times. 

Federal and state health reform is placing ever greater emphasis on quality, bundled or population-based payment methodologies while reimbursements overall continue to shrink. While private for-profit and nonprofit systems prepare to meet these challenges by integrating with physicians and payors, many publicly-owned hospitals face structural limitations that hamper similar partnerships.

As health systems continue to expand geographically, publicly-owned hospitals are typically constrained by statute, ordinance or potential taxpayer revolt to their traditional political boundaries. Worst of all, many publicly-owned hospitals are forced to face these challenges with outdated, multi-tiered systems of governance devoid of physician leadership and prone to political tinkering.

Certainly not all publicly-owned hospitals fit this description. Many—particularly state-run academic medical centers—have defied the odds and their own bureaucratic weight to succeed, at least to a point. 

Nevertheless, surveys have shown that in the last 15 years, for every publicly-owned hospital that has survived, one has closed and another has escaped public status through merger or independent privatization. While these transitions are sometimes driven by local factors, they often share common themes: 

  • The desire for greater access to capital of the sort large-scale systems can provide, "risk-free" to taxpayers
  • The need to strategically re-position the hospital with a dominant health system
  • The avoidance of public levies and/or increased debt backed by levy pledges
  • Occasionally, the desire by cash-strapped county or municipal governments to "cash-out" their health facilities in order to re-deploy current and future resources elsewhere

What options do publicly-owned hospitals and their community stakeholders have in these circumstances? 

Some will cling to the status quo, allowing tradition and emotion to dictate direction, come what may. Stakeholders in this camp too frequently forget that most public hospitals have their roots in innovative state or local legislation and community-representative governance structures that were ideally suited for the post-war, self-pay, primary care-dominated, Hill-Burton financed world. Public ownership was merely a means to an end.

Others will argue—often joined by members of the local business community—that only a sale of the facility to a larger, private system can save the hospital from its own inadequacies while ensuring that the public is "repaid" for its decades of perceived "investment" in the hospital. Those in this camp often overlook the fact that any tax or levy support that historically may have been provided to their hospital pales in comparison to the service revenues the hospital raised—not to mention the substantial returns achieved through community development, growth of the tax base, skilled jobs and numerous other returns on the taxpayers' investment.

Hospital management, regardless of its talent or past success, is frequently relegated to the status of prophets in their own land, ignored or even suspected of self-dealing if it presumes to oppose the "sale" forces. And public hospital boards feel increasingly torn between their fiduciary duty to preserve the institutions they serve and the increasingly vocal self-interest of the tax-payers who directly or indirectly appointed them.

This is the first of a series of articles designed to help management and boards of publicly-owned hospitals assess their options, engage stakeholders in honest discussions concerning them and choose a clear path based on commonly-held, objective criteria. Most importantly, this series will help publicly-owned hospitals explore whether they have another option other than the status quo and sale/merger—one which preserves local autonomy, opens the door to physician leadership at the highest levels, eliminates many of the legal impediments accompanying public status, and positions the hospital for the current and future waves of health reform.   

This "third option" may be independent privatization. The next article in this series will focus on the key attributes of this model of privatization.

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