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Reason Foundation

Privatizing Public Hospitals

A Win-Win for Taxpayers and the Poor

Francois Melese
November 1, 2005

Executive Summary

Hospital expenditures accounted for almost a third of the $1.6 trillion the United States spent on health care last year. According to the U.S. Department of Health and Human Services, over the ten-year period from 1990 to 2000 the average cost of an inpatient stay at a public hospital increased nearly 50 percent, compared to only 20 percent at private for-profit hospitals. By 2001 the $7,400 cost of a stay at a public hospital was 24 percent greater than at a private for-profit ($5,972). Why are costs rising so rapidly? In the case of public hospitals, a conflicting mix of social, political, and business objectives results in weak incentives to control costs. Cost burdens come from inefficient accounting, restrictive government personnel and procurement regulations, a tangled web of bureaucracy, and a general lack of accountability.

Bureaucracy, red tape, and outdated medical reporting and accounting systems not only inflate costs, but can also jeopardize lives. By one estimate, shoddy quality control costs Americans $500 billion per year in avoidable medical costs, or roughly 30 percent of all health care spending. Of course lives lost are more important than money lost. Medical errors claim anywhere from 44,000 to 98,000 American lives every year, roughly 15 to 30 times the death toll from the terrorist attacks on September 11, 2001. Two potent antidotes to medical errors are investing in new diagnostic devices and harnessing the latest advances in information technology. The inherent inefficiency of publicly run hospitals and their limited access to capital ensures that most will continue to lag behind the technology curve. Restricted in their ability to raise taxes to pay for new technology, governments must decide whether they can continue to afford to own and operate a public hospital.

Many attractive alternatives exist that benefit both taxpayers and the poor. Municipalities throughout the country and around the world have demonstrated they can serve indigents more efficiently and effectively by selling public hospital assets and turning to the private sector. In the United States, communities often receive a cash payment to retire debt and establish trust funds for community health care. Since 1994, over 100 charities have emerged from hospital sales that control a combined total of nearly five billion dollars. Even strong advocates of socialized medicine now acknowledge the growing scrutiny of public hospitals has “raised the level of the discussion…[and increased] focus on the need for care by uninsured citizens…on the services required, and on how to finance and deliver those services.”

Besides crowding out private insurance, when well-meaning state and local governments run public hospitals and pass well-intentioned regulations and mandates, evidence suggests they inadvertently raise health care costs and lower performance. It is time to reengineer our safety nets. Carefully crafted deregulation and privatization, combined with subsidized medical savings account vouchers (MSAVs) and a high-deductible insurance policy for indigents, can bring us the best of all worlds: lower taxes and better services.


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