Privatizing Public Hospitals

Strategic Options in an Era of Industry-Wide Consolidation

Executive Summary

A veritable revolution is occurring in the way that health care is provided to the indigent and uninsured. Because of industry-wide consolidation pressures, it is unlikely that 10 years from now governments will find it strategically desirable to directly operate their own public hospitals and clinics⎯ more cost-effective choices are becoming available.

Besides dwindling public resources, the main force driving this change is vigorous competition for treating the poor from private for-profit and nonprofit hospitals. In most communities, even those on public assistance now have a choice of providers. The advent of HMOs is leading to a fundamental restructuring of the whole health care system. One offshoot of this is a declining need for hospital beds.

In response to these developments, more and more governments are exploring privatization options for public hospitals and clinics. Depending on the nature of a jurisdiction’s present system and the external market in the area, there are several options for governments exploring privatization of hospitals and health clinics.

  • Sale. A sale produces a large cash payment up front, which can be used to retire debts and to establish a trust fund for community health care. Example: When the public hospital in Conroe, Texas, was sold to Healthtrust for $104 million, the profits were used to establish a community health care foundation to meet the ongoing needs of the community.
  • Lease. An alternative to selling the hospital outright is to lease the hospital, clinics, and equipment to a management firm. Example: Austin, Texas, has a 30-year lease with Seton Health Care Network to run its public hospital. All indigents have access, but the subsidy for indigent care is capped at $17 million annually.
  • Joint Operating Agreement. The government turns operation of the hospital over to the private sector but retains a measure of influence by appointing a portion of the board members to the new joint-venture entity. Example: the state of Oklahoma will transfer operation of the state’s teaching hospitals to Columbia/HCA Healthcare Corporation under a 50-year contract. The state of Oklahoma and Columbia will each appoint five directors to the board of directors of the new jointly operated hospital.
  • Joint Venture. Government sells a portion of the public hospital assets for cash, retaining power to appoint a portion of board members. Example: in 1997 California’s Sequoia Healthcare District netted $30 million in cash by affiliating with Catholic Healthcare West. The new CHW management of Sequoia Hospital staged a successful turnaround from previous losses.
  • Service Shedding. Depending on local market conditions, the location of the hospital, the condition of the physical plant, the image of the hospital, and other factors, a facility may not be needed as a hospital at all. In such a case it may make sense for the government to get out of the hospital business and sell the hospital for the value of the facility or of the land that lies underneath the buildings.
  • Community-wide Public-Private Partnership. After shedding its public hospital(s), government purchases from local hospitals and clinics the bed days it needs for indigent care. Example: Orange County, California, no longer owns or operates any hospitals. Instead, it contracts with 28 local hospitals to provide indigent care on a cost-effective basis.
  • Comprehensive Outsourcing. Public hospitals are increasingly contracting out everything from their information systems to business offices to clinical services. Example: Nassau County Medical Center in New York contracted out orthopedic services to a local physician practice group, slicing almost $1 million in salaries and benefits from the county payroll.

Privatization can raise cash, reduce debt, and create a better system for serving indigents. But transitioning from operating the public hospital to a privatized system means crossing a mine field of regulations, selecting the best structural arrangement to meet local goals, negotiating the best deal possible, and handling union and public opposition.

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