POLICY BRIEF FROM AMERICANS FOR TAX REFORM

By Peter J. Ferrara

In this brief

• Saving the Hospital
• Increasing Capital Investment
• Reducing Debt
• Participation in Networks
• Attracting Top Professional Management
• Reducing Costs
• Improved Quality
• Increased Charity Care
• Reduced Health-care Costs
• New Tax Revenues
• Private-Sector Workers

Historically, most hospitals in the United States have been established and owned by either nonprofit institutions or state and local governments. Today, out of 5,200 acute-care hospitals in the United States, 60 percent, or about 3,100, are owned and run by nonprofit institutions. Another 25 percent, or about 1,350, are owned and run by state and local governments. Only about 15 percent, or about 750, are owned by private, for-profit enterprises.In recent years, however, there has been an accelerating trend towards conversion of nonprofit or government-owned hospitals to private, for-profit hospitals. These conversions are highly beneficial to the general public, substantially improving both health care and the general economy.Specifically, the conversions improve health care in the following ways:

• Saving the Hospital. In many cases, the conversion is necessary simply to save the hospital from bankruptcy. In other cases, the bankruptcy may not be imminent, but the nonprofit directors believe that the only way to keep the hospital viable over the long run is to sell it to a for-profit enterprise and gain the advantages of increased access to capital, top management, and health-care networks, among others. In all these cases, the hospital is preserved to serve the public.
• Increasing Capital Investment. For-profit conversions generally result in increased capital investment in the hospital by the new owners. This new capital investment is used to purchase new health technology and equipment for the hospital, renovate, upgrade or replace existing facilities, provide new services and care, and attract new physicians and specialists to the facility. All of these factors increase the hospital’s service to the public.
• Reducing Debt. The conversion to for-profit status also generally reduces the hospital’s debt sharply. The buyer will often pay off the old outstanding debt as part of the initial purchase transaction. The substantial resources formerly used to pay interest and principal on that debt are then freed up to finance hospital services.
• Participation in Networks. The conversion to for-profit status often involves the sale of the hospital to a broader, for-profit, health-care network of doctors, specialists, clinics, other hospitals, and other health-care providers and services. This broader network reduces hospital administrative costs, reduces the cost of obtaining medical supplies and equipment, and attracts a reliable stream of patients. The reduced costs and stabilized income enable the hospital to devote more resources to providing better services and care for patients.
• Attracting Top Professional Management. Conversion to for-profit status enables the hospital to attract top professional management. Such new management has been shown to reduce administrative costs, increase hospital efficiency, increase worker productivity, improve financial practices, and take better advantage of market opportunities to participate in broader networks, attract new doctors and specialists, and provide new services.
• Reducing Costs. By utilizing the above factors and others, conversions substantially reduce hospital costs for consumers.
• Improved Quality. With the above factors and others in place, conversions also improve the quality of care for patients. This results in particular from the increased capital investment, participation in broader health networks, and new and improved services offered by the hospital.
• Increased Charity Care. Finally, for-profit conversions ironically increase, rather than reduce, charity care. Studies show that after conversions, for-profit hospitals maintain at least the same level of uncompensated charity care for the poor as previously provided by the nonprofit hospital. Moreover, they maintain the same low-profit, and even money-losing, services that are valued by the local community, such as 24-hour emergency room services, pediatric care, obstetric care, neonatal intensive care, trauma services, and burn units.

• Reduced Health-care Costs. The conversions would produce significant reductions in health-care costs, which would benefit consumers, effectively providing an increase in national income and general prosperity. It would also reduce health costs for employers, which would likely result in increased jobs, wages, and employment.
• New Tax Revenues. Converting all hospitals to private, for-profit status would produce over $17 billion per year in new federal, state, and local tax revenues, as the formerly nonprofit and government hospitals were tax-exempt, while the newly for-profit hospitals are not.
• Private-Sector Workers. Converting all hospitals to private, for-profit status, the 3.4 million workers now employed by nonprofit and government hospitals would become fully productive participants in the private economy.