To privatize or not to privatize?

As the business of health care continues to evolve, so does the strategic structuring of many health care organizations across the nation. With diminishing funds from local or state governments, reductions in Medicare and Medicaid payments, and intensifying competition, many public hospitals are forced to re-align their already strained resources to provide quality care for all regardless of insurance status or ability to pay. Public facilities are financially backed by government entities and as a result are financially vulnerable under volatile economic and political environments. With such flux in economic and political conditions, the attainability of resources is less reliable for hospitals owned by government entities. As a means to alleviate such financial burden, strategies such as privatization are being employed in order to improve a hospital’s financial performance.

The purpose of this study was to determine if a hospital’s decision to privatize was preceded by increasing financial distress. Privatization presents organizations with a variety of benefits that include enhanced access to financial resources that are necessary to provide products or services. Privatization allows for less dependency on the government, which in turn allows for hospital organizations to adopt various strategies to attain and control other non-financial resources (i.e. updated technology, improved workforce, improved health care quality).

In this study, 147 (31%) of the 588 public hospitals included were privatized and were observed to be in financial distress prior to the conversion. Compared to the hospitals that remained public, the hospitals that privatized tended to be smaller with lower occupancy rates and a higher percentage of Medicare inpatient days. Additionally, they were located in counties with lower per capita income, higher percentage of populations of 65 years and older, and lower Medicare HMO penetration, all of which describe areas that are typically considered vulnerable.

Privatization allows public hospitals to have more control over the strategic planning of securing resources to ensure improved quality of care and relieves governments of the financial pressure of sustaining hospitals that operate continuously at a loss. Privatization will allow these hospitals to remain, ultimately preserving access to care. However, more research is needed in order to better understand its impact on communities.

commentary by Ellana Stinson, MD

 

Abstract

Background: As safety net providers, public hospitals operate in more challenging environments than private hospitals. Such environments put public hospitals at greater risk of financial distress, which may result in privatization and deterioration of the safety net.

Purpose: The purpose of this study was to investigate whether financial distress is associated with privatization among public hospitals.

Methodology: We used panel data merged from the American Hospital Association Annual Survey, Medicare Cost Reports, Area Resource File, and Local Area Unemployment Statistics. Our study population consisted of all U.S. nonfederal acute care public hospitals in 1997 tracked through 2009, resulting in 6,426 hospital-year observations. The dependent variable “privatization” was defined as conversion from public status to either private not-for-profit or private for-profit status. The main independent variable, “financial distress,” was based on the Altman Z-score methodology. Control variables included market and organizational factors. Two random-effects logistic regression models with state and year fixed-effects were constructed. The independent and control variables were lagged by 1 year and 2 years for Models 1 and 2, respectively.

Findings: Public hospitals in financial distress had greater odds of being privatized than public hospitals not in financial distress: (OR = 4.53, p < .001) for Model 1 and (OR = 3.05, p = .001) for Model 2. PMID: 25029510 Ramamonjiarivelo, Z et al. Health Care Manage Rev. 2014; Epub.