Privatization of Hospitals

1
Privatization of Hospitals

• By Rodney Barnett, Jr.

2
Hospital Privatization Trends

• Public hospitals have been declining for 20
  years.
• Between 1985 and 1995 public hospitals have
  declined by nearly 14
• State and local public hospitals make up only 22
  of all hospitals
• Federal hospitals make up only 17 of all
  hospitals

3
Reasons for Privatizing

• Increased competition from private hospitals
• Managed-Care Plans (ie. Medicaid) prefer the use
  of Private hospitals
• Local governments having trouble financing public
  hospitals
• Government regulations on public hospitals
• Regulations lower public hospitals ability to
  compete
• No funding for advertising

4
How Hospitals Privatize

• Sale A direct sale of assets by the public
  institution
• Lease A lease of the assets by the public
  institution
• Joint Venture A partnership, government
  retaining some rights
• Management Contract Management is from an
  outside existing institution

5
How Hospitals Privatize (cont.)

• Consolidation Combination of two or more
  institutions
• Closure Assets are sold and institution is
  closed
• Affiliation An association between two or more
  groups

Source Summary of Findings Privatization of
Public Hospitals. Economic and Social Research
Institution. January 1999. http//www.esresearch.o
rg/Documents/PHExSum.pdf
6
Who Benefits from Privatization?

• The patients benefit directly from privatization.
• Increased competition for patients
• Private hospitals have lowered prices to attract
  lower income patients
• Managed-Care Plans prefer private hospitals
• Private hospitals have overall newer innovative
  systems

Source Tradewell, R. Privatizing Public
Hospitals. Policy Study No. 242. August 1998.
http//www.rppi.org/ps242.html
7
Economic Justification

• Increased competition
• More efficient market in health care
• Better services for patients
• Elimination of certain taxes by the government to
  fund these hospitals

Source Tradewell, R. Privatizing Public
Hospitals. Policy Study No. 242. August 1998.
http//www.rppi.org/ps242.html
8
Economic Factors Concerned With Privatizing

• Anti-Trust Policies Does the privatization of
  public hospitals violate current anti-trust
  policies?
• Patients Preferences Typically a patient will
  want to attain the highest level of health care
  given their budget
• Cost-Benefit Analysis Will the costs associated
  with privatization be lower than the benefit?

9
Anti-Trust Policies

• Anti-trust policies are one of the leading
  factors slowing down privatization
• In many rural or smaller areas, a very low number
  of hospitals exist
• The FTC may view some mergers or acquisitions of
  public hospitals as violations of anti-trust
  policies
• Costs associated with anti-trust legalities may
  be greater than the private institution may be
  willing to pay

Source Tradewell, R. Privatizing Public
Hospitals. Reason Public Policy Institute. August
1998. http//www.rppi.org/ps242.html
10
Patient Preferences

• If patients are given a choice, they will likely
  prefer to be served by a more specialized
  institution
• This is especially true if the costs are incurred
  by insurance or any other indirect way of payment
  by the patient

Source Holcombe, R. Public Finance Government
Revenues and Expeditures in the United States
Economy. 1996. http//www.randallholcombe.com/book
.htm
11
Graph of Patients Preferences
D Demand for Public Hospitals D
Demand for Private Hospitals
12
Patient Preferences Graphical Analysis

• In the graph, if patients are given the choice,
  and they are to pay for the services, then they
  will demand D and pay P.
• However, relevant to todays trends, if patients
  are given a choice with their insurance companies
  and managed-care plan providers, then they will
  demand the the slightly more expensive service,
  and demand D and pay P, where they will receive
  the highest MSB.

13
Patient Preferences Intended Effects

• Higher competition
• Lower prices for services
• Better technology for patients

Source Tradewell, R. Privatizing Public
Hospitals. Policy Study No. 242. August 1998.
http//www.rppi.org/ps242.html
14
Cost-Benefit Analysis

• Policy makers must perform a cost-benefit
  analysis in order to see if the investment is
  sound
• What are the costs associated with privatizing?
  Are they lower than what the private institution
  is willing to pay?

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Cost-Benefit AnalysisCosts to Private Hospitals

• Assigning a mergers and acquisitions expert to
  investigate the privatization
• Resolve legal issues if they arise (i.e.
  anti-trust policies)
• Taxes, such as property taxes previously not paid
  by the public institution

Source Tradewell, R. Privatizing Public
Hospitals. Policy Study No. 242. August 1998.
http//www.rppi.org/ps242.html
16
Cost-Benefit AnalysisBenefits to Private
Hospitals

• Increased patients
• Integration of managed-care plans to pay for
  lower income patients

Source Tradewell, R. Privatizing Public
Hospitals. Policy Study No. 242. August 1998.
http//www.rppi.org/ps242.html
17
Conclusion

• The market for health care is becoming more and
  more competitive.
• The existence of private hospitals are the
  reasoning behind the higher competition
• In a more competitive market the consumer
  benefits, in that higher quality services are
  provided for a lower price

18
Works Cited

• Anthony, S. et.al. Summary of Findings
  Privatization of Public Hospitals. Economic and
  Social Research Institution. January 1999.
  http//www.esresearch.org/Documents/PHExSum.pdf
• Holcombe, R. Public Finance Government Revenues
  and Expeditures in the United States Economy.
  1996. http//www.randallholcombe.com/book.htm
• Tradewell, R. Privatizing Public Hospitals.
  Policy Study No. 242. August 1998.
  http//www.rppi.org/ps242.html