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Penelope Lemov

In the increasingly competitive world of hospitals, turning a publicly run facility over to the private sector may be practical, but it's not always popular.

Talk about temptations. The city of Cookeville, Tennessee, with its population rising rapidly over 25,000 and a multimillion-dollar convention centre on its wish list, is being offered $113 million in cash - $52 million this year with the rest to follow over the course of the next five years.

All the city has to do to claim the money is something several other towns in this rural part of Tennessee have already done: turn its public hospital over to the private sector.

Under the proposal, a private healthcare company would lease the 227-bed hospital that, last year, toted up profits well in excess of $6 million. The company would continue most of the $23 million expansion programme the city has already started and plough other funds into making the hospital a top-notch regional facility.

The $113 million would be enough to fill plenty of potholes, to say nothing of building the convention centre and other public works projects. And the city could do so without raising local taxes by so much as a penny. It could even think of doing away with property taxes for the foreseeable future.

That's how the mayor and other Cookeville officials sized up the situation this spring [1996]. But once the idea of privatisation went public - some of the original proposals were to sell the facility outright - the plan went from a straightforward business deal to an emotionally charged issue. "It's torn the town in two," says City Manager Jim Shipley.

Cookeville General Hospital is a point of pride in this part of central Tennessee - a home-grown facility that is poised to rival the big hospitals in Nashville and Memphis. It's also a symbol of the city's ability to take care of its own - Cookeville General is where indigent residents, no matter how sick and whether or not they're covered by health insurance, can go and be treated. But there's more than hometown boosterism at work. There's also a lot of fear and trembling. Residents are concerned that, if a big healthcare company comes in, it will skim off the hospital's profits and send Cookeville cash to Knoxville, Nashville or even to a corporate headquarters somewhere beyond Tennessee's borders. Then there are the nurses, technicians and orderlies who work at the hospital and have been public employees for years. They and their families see privatisation as a direct threat to their livelihoods.

The $113 million offer has become such a touchy issue on so many levels that, while the city continues to explore the lease option and write guarantees of employment for existing staff into the proposed agreement, the city council will go only so far. Before any signatures are inked onto a contract, the proposal will be put on the ballot and the citizens of Cookeville will make the final decision.

Clearly, if anyone in Cookeville thought privatising the public hospital would be an easy sell, they were wrong. Or at least out of date. Four or five years ago, with healthcare costs multiplying faster than the rate of inflation, several small towns cashed in and out. Dickson, Tennessee, for instance, sold its hospital for $80 million and has been using the proceeds to build a host of facilities, from a sports training complex to a computer training centre.

But today, as healthcare companies grow more powerful, more national and more tied to Wall Street and stockholders, hospital privatisation is political dynamite. Even in big cities such as New York and major urban counties such as Los Angeles, where public hospital subsidies are bleeding budgets of millions of dollars in tax revenue, proposals to privatise the facilities raise firestorms of public protest. This spring, when New York Mayor Rudolph W. Giuliani tried to sell three of the city's 11 public hospitals, he was hit with lawsuits to halt those efforts and a host of grassroots protests that have set back his privatisation plans. Neighbourhood groups were concerned about jobs, about the loss of a neighbourhood centrepiece and about services for the poor. As Assemblyman William Scarborough said of the proposal to privatise Queens Hospital Centre, "There is no guarantee that the poor will not be refused hospital care. With downsizing and privatisation, you have the potential for a crisis that could hurt every segment of civil society."

Nonetheless, it's easy to see why overburdened localities would risk the political heat of a privatisation attempt. Of the 1,300 or so public hospitals in the country - a decrease of some 400 in the past fifteen years - about one-third are in danger of failing, according to a hospital expert at the Robert Wood Johnson Foundation. Many of the most fragile hospitals are in the largest urban areas where, although committed to providing care to anyone who arrives at their doors, they are beset by declining federal aid to pay for the uninsured and increased competition from other hospitals for the Medicaid patients who have been their bread and butter. Local government subsidies often make up the difference, and the drain on the public purse is immense.

When these subsidies become more than a financially shaky locality can bear - as is the case right now in Los Angeles County, New York City and Washington, DC - privatisation becomes an attractive alternative. But this is not the situation in Cookeville, or in other places such as Austin, Texas and Denver, where privatisation is also on the active agenda. If there's no financial haemorrhage, why would a locality take on a privatisation fight?

The answer runs like a current through inner-city, suburban and rural public hospitals alike, whether robust or impoverished: the issue is governance. The sunshine laws, procurement rules, civil service regulations, restrictions on raising capital, decision-making processes - all the rules and regulations that government institutions must operate under - are a dead weight for a hospital that has to act quickly and work efficiently to survive in the super-competitive and fast-changing healthcare market.

"The fast eat the slow in this business. If it takes you a long time to accomplish something, you may not be a player," says Patricia Gabow, who manages Denver's Department of Health and Hospitals and has explored various privatisation options for Denver General Hospital. Running a public hospital is not, she points out, like other government services. It's at risk in a competitive market. "If people in your community don't like the police force, they don't go and use the police in a neighbouring community," she says. "If we're not operating our hospital well, our patients will go elsewhere."

One of the biggest drawbacks to operating well is the speed with which key decisions can be made, often having to wend their way from hospital administrators to legislative councils and the mayor or county executive. "Actions and decisions are often made not only in a business or healthcare context but in a political one as well," says Anne B. Camper, corporate counsel to the National Association of Public Hospitals. In one example Camper recounts, a NAPH-member hospital had to make a personnel decision that required approval by the city council and the mayor. Hospital administrators had briefed the council and mayor on the issue but, before a decision could be made, elections took place. A new mayor and council took over, and they had to be brought up to speed on the question at hand. "It would have been irresponsible for the newly elected officials to approve an action without understanding it," Camper says. "No one was being careless, but the process itself required an unreasonable amount of time."

Decision-making within the hospital itself is often slowed by sunshine laws, which most states have and which mandate advance public notice before boards of trustees can meet. According to Shipley, a key reason why Cookeville wants to privatise its hospital is Tennessee's open-records laws. They require that any such meetings be publicly announced in advance and open to the public; any record made by a municipality - including hospitals it owns - is open to public scrutiny.

The meeting rule makes it difficult for the board of trustees, which is made up of city residents, to conduct business, especially at a time when managed care is changing the environment and hospitals may need to make strategic moves without alerting their competition.

In many states, when sun shines on a hospital's internal records - the rates it is charging different insurance companies, for instance - that information is available for all to see. Some of this is data that private and nonprofit hospitals guard closely and teat as proprietary information. While most states offer exemptions for confidentiality, such as for an individual patient's records, there are not usually any exceptions for strategic or competitive information.

That was certainly one of the motivations when Austin privatised Brackenridge Hospital last year. "All of our records are public," says Betty Dunkerley, Austin's finance director. "Any entity could get our payroll records, our agreements with physicians and [health maintenance organisations]. If you're trying to compete, the HMO market is one you have to deal with, and it's very difficult to make good business deals and agreements when you know they're going to be public."

Public meetings can also make growth strategies difficult to implement. It's not surprising - just frustrating - that private health care groups use information made available at open meetings to their competitive advantage. For instance, if a public hospital is planning to buy land to set up a new neighbourhood clinic, the competition can hear all about it and beat the public hospital to the punch.

On top of all this, there are public procurement rules that must be adhered to, which are typically more geared to buying pencils rather than healthcare equipment and supplies. In some localities, the rules prevent hospitals from participating in the efficiencies of cooperative purchasing groups.

Civil service regulations also lump hospitals in with the rest of government in terms of collective bargaining. Even though public hospitals are vying with the private sector for employees, they are unable to tailor their salary and benefits packages to meet the competition's.

Individually, each governance issue makes it incredibly trying to run a public hospital efficiently. Taken together, they can make it almost impossible to be competitive. They also make it difficult for the public hospital to do what most private and nonprofit facilities do: affiliate with private groups to provide services, cut risks or create efficiencies. Every state has some legal constraints on the use of public funds for private benefit. In some, these constraints are so tight they preclude any alliance with a private entity. But over and beyond the legal points, private groups are reluctant to go into business with public hospitals. They are concerned that sunshine laws will make their contracts and managed-care-utilisation information public information or that politicisation and delays in decision making may keep a venture from being successful.

Privatisation is an end run around these obstacles. Obviously, the outright sale of a public hospital to a private corporation would remove that facility from "governance" rules and local control. But it also breaks all ties to the public sector and the accountability that brings. Given this, and the political price tag attached to a hospital sale, there are several lesser steps localities are taking to get out from under some of the "governance" burdens.

The least radical of these is to establish a hospital authority - a public benefits corporation or its like - to run the facility. Board members can still be appointed by elected officials, but the entity has the operational flexibility to create its own personnel, purchasing, legal and other systems.

Feeling the pressure to keep its hospital competitive in a fast-changing healthcare environment, Denver chose the authority route. "That permits us to create something that uniquely serves healthcare delivery as opposed to fitting a hospital in with all the other dimensions of city government," Gabow says. "But we still get to keep our public persona."

The bylaws of an authority can be drafted to meet the sensitivities and contingencies of a locality. For example, the authority might be exempted from open-records laws so strategic or competitive information can remain proprietary, but still be required to hold open meetings and be accountable to the public - an important point, NAPH's Camper notes, if public assets are involved.

New York City's 11 public hospitals (including Bellevue, the oldest public hospital in the country) are already under a separate authority, and Washington's D.C. General will soon be under a public benefits corporation that is intended to free the hospital from government constraints and enable the city's only public facility to reshape its workforce, keep medicine and supplies in stock and borrow money for renovations.

The more dramatic privatisation move is to lease the hospital to a private group and write enough safeguards into the contract to maintain some control.

Last year, Austin city officials signed a 30-year lease that pairs its Brackenridge Hospital with Seton Health Care Network, which is affiliated with the Daughters of Charity. Under the terms of the deal, Seton bought out $10 million worth of city hospital equipment. In addition, Seton will pay the city $2.3 million a year to lease the facility. For its part, Austin will pay Seton $17 million a year to cover services the hospital will provide for the uninsured.

This latter provision effectively puts a cap on the city's exposure for care for uncompensated patients. "Brackenridge was the safety net for the entire county," says Dunkerley. "We were at risk for all the uninsured and underinsured. Now, we're paying what we normally pay but there's a cap, and if expenses go beyond it, Seton has to provide those seervices at their expense."

Had the city not moved to align its hospital with a partner, Dunkerley says the public facility would have "been the odd man out. By forming a partnership in lease, we are better able to compete but we still retain ownership."

Cookeville debated between a sale and a lease and entertained offers on both options. Although a sale would bring an immediate infusion of cash, the city was reluctant to surrender control, fearing, for example, that new owners might send the best doctors and insured patients to a flagship hospital in Nashville or Knoxville and downgrade the hospital to little more than a clinic.

"If you sell your house to somebody, they can paint it pink and there's nothing you can do about it," Shipley says. "With a lease, you can write in penalty provisions so the city has some recourse if the private corporation doesn't live up to the agreement."

Why didn't Cookeville lean toward the authority approach? Shipley says officials looked at the increasing role of managed care and concluded that a hospital owned by the city wouldn't - at least without partners - be able to compete in a managed-care environment.

There was one more reason as well: An authority might solve governance problems, but it wouldn't put $113 million in the city's pocket.

Source:Governing, September 1996.

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