Utah Report Gets it Wrong on Hospital Privatization

Despite finding cost savings and expanded care through privatization, report relies on faulty logic to recommend against it

A recent article in the Deseret News—called attention to a report prepared by the firm Public Consulting Group on behalf of the Utah legislature’s Executive Appropriations Committee, which assessed the feasibility of privatizing certain units within the Utah State Hospital (USH) and the Utah State Developmental Center (USDC), state-run facilities that provide residential care for patients with severe mental illness and mental retardation, respectively. Despite finding that privatization would lower costs to the state, the consultants recommended against it, relying on dubious logic and red herrings.

Though a lengthy report (149 pages), this extract from the executive summary sums up the findings (emphasis mine):

Throughout our analysis, the major hypothesis was whether the units within USH and USDC could be operated by a private entity for the same or less cost, at the same or higher level of service. In the sections that follow, PCG has provided research and modeling that suggest private entities can provide the same level of service at the facilities for the same cost. PCG also found that private firms could provide additional therapy hours to patients at the facilities for a cost savings or at the same cost. However, PCG believes that the cost savings could come with an adverse impact to quality of care for patients, and therefore this may not be an option that the state wants to pursue.

PCG’s analysis shows that the primary driver for cost savings may stem from a reduction in overall staff compensation, specifically related to the benefits to salary ratio paid to employees. This reduced ratio of benefits to salary, however, may correlate to staff turnover, which could potentially have a negative effect on the level and quality of the services provided to patients at the units studied. While PCG’s report modeling focuses on the quantitative level of services provided, through increasing the quantity of therapy hours to patients, this does not model the quality of the staff or the therapy hours. Quality is not something that can be modeled like cost or hours. Our report, however, strives to get at the underlying question of what quality is. It is important to understand that wholesale staff turnover within these units may come at a risk to the quality outcomes and continuity of care for the patients within the Forensic Unit at USH and the TLC and Woodland units at USDC.

However, a full review of the report reveals several flaws and unsubstantiated leaps of logic. Let’s start with the key findings:

  • For the USH Forensic Unit, the report found cost savings in three of the four privatization scenarios that were modeled, ranging between $700,000 and $1.7 million annually according to the estimates. The fourth “breakeven” scenario held overall costs constant and found that the private sector could “reinvest” cost savings into an additional 29 hours of treatment to each patient per month. In short, the report finds that the private sector could lower the costs and improve the quantity of care.
  • The report then analyzed two semi-secure USDC units and found similar results. One scenario identified annual cost savings of approximately $117,000 through privatization, and another “breakeven” scenario held overall costs constant and found that a private operator could reinvest their direct care cost savings into an additional 220 hours of treatment to patients per month.

While technically accurate, the report’s statement that “private entities can provide the same level of service at the facilities for the same cost” is a bit misleading. What the researchers really found was that the private sector could lower costs in any scenario and that they could redirect those savings towards increasing the quantity of services.

Here’s where things begin to break down. With regard to how they interpret the term level of service, the researchers made a distinction between the quantity of care and quality of care. While this makes some degree of intuitive sense, it effectively opens the door to broad interpretation and selective reporting that serves the research poorly and calls its analysis and recommendations into question.

While finding the private sector could lower costs and increase quantity, the researchers make a dubious leap of logic—namely, that because the private sector would have a lower benefits-to-salary ratio than the public sector, then there might be higher staff turnover, so then there might be adverse impacts on the quality of care. By ultimately recommending that the state should not pursue privatization, the researchers make an implicit judgment that the nebulous risk of reduced quality of care is so high that the privatization concept should be shelved.

The problem is they fail to substantiate that risk in a meaningful way. The researchers reference eight other studies linking the phenomena of staff turnover with the quality of care—in the abstract, not on the subject of privatization—and while there are a few academic and government studies in the mix, there are also reports undertaken by labor and other groups that advocate for higher spending on public sector employees.

Regardless, let’s take the argument at face value and assume this research is correct on the impacts of staff turnover on quality of care. What the researchers really failed to ask—and which seem to be central to the overall purpose of the report itself—are two critical questions:

  • Does the feared staff turnover actually happen in the real world of privatization?
  • Even if turnover has been an issue with earlier privatizations, could you design a privatization initiative structured to address that concern and mitigate that risk?

A discussion about what could happen if one makes a variety of unsubstantiated assumptions detached from real world privatization is irrelevant. Rather, the discussion should center on how things do and can work in practice.

For example, the bulk of the USH Forensic Unit privatization scenario modeling is based on comparing this facility to just one privatized facility, South Florida State Hospital (SFSH). Given that, one would reasonably expect that the researchers would just pick up the phone and call SFSH to ask them about staffing levels, retention and turnover in order to assess whether this is a high-level risk, low-level risk or something in between. This could have provided some important context for policymakers.

Unfortunately, the researchers failed to take this basic step, so I did. Here’s what I found. SFSH, which has been privately operated for over 12 years, has no nursing or psychiatrist vacancies, and one-third of its current staff used to work at the hospital as a state employee before it was privatized in 1998, and subsequently rebuilt. Further, the facility has not had a psychiatrist position turnover in almost 2 years, which seems to be a noteworthy accomplishment by any standard — public or private sector. In hospitals as with many other government services, privatization does not automatically imply a “wholesale staff turnover,” as the Utah report suggests. Rather, the bulk of public employees (often over 80 percent) tend to transfer to the private company, regardless of any shifts in pay and benefits.

Further, the researchers mistakenly claim that the results of a Florida legislative study on privatization of SFSH had “not yet been released as of July 2010,” yet this report was already issued earlier this year and provides even more relevant evidence suggesting that privatization does not compromise quality of care. In February 2010, the Florida Legislature’s Office of Program Policy Analysis and Government Accountability (OPPAGA) issued a report finding that SFSH’s per bed costs were 6 to 14 percent lower than two state-run facilities and that the quality of care was similar. Because of better utilization SFSH was 39 to 48% less costly per person served than the two state-run facilities, even though the public facilities have significant economies of scale, with 46-83% more beds. The disparities in cost and quality had previously been larger but Florida’s state-run hospitals have improved considerably since competition was introduced via the SFSH partnership in 1998. Indeed, introducing privatization into one facility seems to have had a positive effect on costs and quality of care throughout the state system—a predictable result of competition.

This is just one example where state hospital privatization has been successful, and the results are quite relevant considering that (1) it’s the same benchmark facility used in the report, and (2) it offers real-world evidence that the risk of major staff turnover and quality of care issues doesn’t necessarily rise to a level that justifies squelching the idea of privatization outright. However, there are certainly more examples.

For instance, MHM Correctional Services (MHM)—a contractor for public mental health programs in 18 states—has a company-wide vacancy rate of approximately 3%, a rate significantly lower than any state operated system, according to MHM CEO Michael Pinkert. In 2007, MHM was awarded a contract to provide mental health and medical services at the Bridgewater State Hospital in Massachusetts, services which had previously been provided by state employees (University of Massachusetts). Before privatization, there were significant staffing vacancies in psychiatry, nursing, and management staff; after the first six months of the contract, MHM had reduced the psychiatry vacancy rate from 73% to 6%, eliminated the 60% vacancy rate for nurse managers, and lowered the staff nurse vacancy rate from 25% to 1%.

Given real world examples like this, it’s ironic that the Utah report implicitly contrasts privatization with an idealized public sector scenario in which staff turnover is not an issue, as if things were perfect in Utah’s state hospitals today and privatization would upset the apple cart. But there is ample evidence that staff turnover and retention have been actually been significant challenges for Utah State Hospital in recent years—for instance (emphasis mine):

  • According to a 2007 report by Utah’s Office of the Legislative Fiscal Analyst on USH appropriations: “The request for additional funding is because USH has experienced a difficult time recruiting and retaining psychiatrists. Currently there are three vacancies that the USH has been unable to fill. Of the 12 psychiatrist interviewed since 2005, the USH was only able to hire one. The most frequent answer for refusing the position was compensation. [—] The USH has indicated that because of the three vacant psychiatrist positions, they were temporarily unable to open 24 adult beds.”
  • In the minutes of a March 2007 Utah State Board of Substance Abuse and Mental Health meeting: “[Staff] reported for the State Hospital and updated the Board on recruitment and retention issues. There are 18 vacant nursing positions, which makes it difficult to operate the Hospital and creates supervision and safety issues and presents [morale] problems. It is hopeful that the Recruitment and Retention Plan submitted to the Department will be approved shortly and will result in more nurses being hired.”
  • In the minutes of a September 2007 meeting of the same board: “Nursing recruitment and retention continues to be a dilemma for the Hospital and nursing vacancies remain high. [Staff] noted that a long-term strategic plan is being developed for the Department which includes specific ideas on how to address the ongoing issues and concerns.”
  • Utah Department of Human Services Director Lisa-Michelle Church commented on a recent staff survey in a 2007 department newsletter: “A whopping 83% of employees were satisfied with their job. But you also raised the high turnover rate, high workload and continuous program changes as big concerns.”

Failing to provide real world context on staff turnover—in either the private sector or at the state-run Utah facilities—is one of the primary problems with the report, but there are others. First, the cost savings to the state are admittedly underestimated. According to the report (pg 21), “Long-term, less quantifiable savings, such as future reductions in state pension spending, were excluded from the analysis.” Since the private sector’s costs inherently capture pay, benefits and the full range of operational and administrative costs, the report is tacitly admitting it’s not an apples-to-apples analysis, and that they left some important public sector costs out of the analysis.

The researchers also neglected to discuss any of the methods used by the private sector to improve quality while reducing costs. From the very outset, the report makes two implicit—and faulty—assumptions: (1) that a private vendor can only reduce costs by cutting employee benefits, and (2) that quality can only be improved by adding staff. This is like the familiar red herring in education—the false belief that pouring more money into lowering teacher-student ratios will drive student improvement, despite abundant evidence to the contrary.

In reality, private companies find savings in nearly every area of a state hospital’s operation and—although counterintuitive—good business practices often lead to better quality. Examples range from less overtime and fewer workers’ compensation claims to better pricing on medications/supplies and utilizing state-of-the-art technology (e.g. electronic medical records systems and the like) to improve staff effectiveness and efficiency. Additionally, private companies have much more operational flexibility and can nimbly respond to what is best for the patient today and not be bogged down by bureaucratic red tape. Lastly, the U.S. Department of Justice has found patterns of neglect and abuse at state hospitals in North Carolina, Oregon, New Jersey and Delaware, yet these states have facilities that are much more heavily staffed than Utah State Hospital. More staff does not equal higher quality, and this should not have been used as the only measurement of how quality could be improved through privatization.

Last, outside of the one Florida benchmark facility, the report failed to offer any real insight or perspective into the success of state hospital privatization in states like Massachusetts, New Hampshire and Kentucky. It’s not as if there’s only one comparable facility or service in the entire country that has been privatized. The study also did not include examples of bad state hospital privatization experiences in other states, yet it asserts that privatization has had “mixed results” and that “[the] results of privatization vary greatly across the country.”

If Utah policymakers really want an accurate view of what opportunities privatization could offer, then they should just initiate a procurement and test the market. Nothing would obligate them to actually move forward with a privatization in the end, but with solid bids in hand, they would at least have a real world gauge of what’s possible without the dubious assumptions and faulty logic seen in the consultant’s report.

If they were hoping for a robust analysis of the potential for privatization, the Utah legislature does not appear to have gotten its money’s worth from this report. The private sector has a strong track record of lowering costs and improving quality at the same time, and policymakers should not be left with the sense that there’s some inherent trade-off between the two.

Leonard C. Gilroy is director of government reform at Reason Foundation.