Hospitals are caught in the crossfire of a worldwide debate. 

Should healthcare be completely privatized - or should a segment 
of it be left in public hands? As the debate infects countries adhering 
to the "social model of capitalism" (e.g., Scandinavia and France) and 
spreads to countries in transition in Central and Eastern Europe -it is 
worthwhile to study the experience of the bellwether in privatized health 
care: the USA.

The Sickly State 
of Public Hospitals

Copyright 2005
by Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"

Of the many mutations of the hospital, most people experience the Public Hospital. These are all-purpose, universal, and all-pervasive (inpatient and outpatient) institutions, which service even the indigent, criminals, illegal aliens, and members of the minorities.

Public hospitals are the descendents of almshouses, poorhouses, correction facilities, and welfare centers. Like other modern fixtures - the university, the school, the orphanage - most hospitals were originally run by the church and included a medical school.
Later on, local communities established their own hospitals. As the functions (and area) of these initially modest facilities expanded, hospitals were gradually taken over by regional authorities and state governments. Federal funding for hospitals - in the form of Medicaid and Medicare - is relatively new and dates back only to LBJ's (President Lyndon B. Johnson) Big Society in 1965.


Hospitals are now reverting to communal management. Bruce Siegel, President and CEO of Tampa General Hospital, notes in "Public Hospitals - A Prescription for Survival" that between 1978 and 1995 the number of government-owned acute care public hospitals declined by one quarter.

Sam Vaknin  is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Central Europe Review, 
PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Most hospitals were or are being transformed into small, 
communal, suburban or rural facilities. In the USA, less than 
one third of hospitals are in inner cities and only 15% have 
more than 200 beds. According to the American Hospital 
Association, the 100 largest hospitals averaged a mere 581 
beds in 1995.

Public hospitals are in dire financial straits. Even in the USA, one third of their patients do not pay for medical services (compared to less than 5 percent in private hospitals). Medicaid barely - and belatedly - covers another third. Yet, the public hospital is legally bound to treat one and all.

In other countries, national medical insurance schemes, the equivalents of Medicare/Medicaid in the USA, (e.g., the NHS in Britain), or mixed public-private ones (e.g., Kupat Kholim or Maccabbee in Israel) provide fairly extensive coverage. Community medical insurance plans are on the rise in both the USA and Europe. Corporate plans cover the rest.
Still, uniquely in the USA, many potential patients remain exposed. More than 40 million Americans have no medical insurance of any kind. A million new disenfranchised join their ranks annually. This despite sporadic - and oft-unsuccessful - initiatives, on the state level, to extend insurance - in lieu of charity care - to the uninsured.

This kind of deprived patient often consumes less profitable or loss leading services such as trauma care, drug-related treatments, HIV therapies and obstetrical procedures. These are lengthy and costly. Private healthcare providers corner the more lucrative end of the market: hi tech and specialty services (e.g., cardiac surgery, cosmetic surgery, diagnostic imagery).
In "Our Ailing Public Hospitals - Cure them or Close Them?" published in "The New England Journal of Medicine", J.P. Kassirer mentions that public hospitals provide "culturally competent care". This fashion is the bane of public medicine. Providers are expected to deliver to their patients a politically correct package of social services and child welfare on top of the inanely expensive - and frequently unpaid for - medical treatment.

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"Essential Community" hospitals are heavily dependent on public funding. 
State governments foot the bulk of the healthcare bill. Public and private 
healthcare providers pursue this money. In the USA, a majority of consumers 
organized themselves in Healthcare Maintenance Organizations (HMOs).

The HMO negotiates with providers (=hospitals, clinics, pharmacies) to obtain volume discounts and the best rates. Public hospitals -under-funded as they are - are not in the position to offer an attractive deal. So, they lose patients to private hospitals.

Public hospitals derive more than half their revenues from federal insurance schemes such as Medicaid. This is five times the national average for all types of hospitals. They also benefit from state and local matching funds tied to their Medicaid receipts. This addiction to dwindling - and unreliable - federal and state financing spells doom.
Medicaid Managed Care programs - intended to optimize the use of Medicaid funds - had the dual effect of reducing the coverage rate of public hospitals (i.e., their income per patient) and diverting business to ferociously competitive private ones. Public facilities are closing at a torrential pace.

In some states, one in twenty calls it a day every year. Many states (e.g., New York) and municipalities (e.g., Los Angeles) seriously considered the abolition or privatization of all public hospitals. In some states, private hospitals now enjoy almost as much 
Medicaid business as public ones. HMO's (Health Maintenance Organizations) have discovered Medicaid as well.

Yet, private, for profit hospitals, discriminate against publicly insured (Medicaid) patients. They prefer young, growing, families and healthier patients with Medicaid, Blue Cross/Blue Shield, or commercial medical insurance. These clients gravitate out of the public system, transforming it into an enclave of poor, chronically sick patients.

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This, in turn, makes it difficult for the public system to attract human and 
financial capital. It is becoming more and more desolate, under-staffed, 
and poorly-qualified. 

But public hospitals are partly to blame for this sorry state of affairs.

There are striking similarities between these decrepit institutions all over the world. Public hospitals in New York are often indistinguishable from their counterparts in Ljubljana, Moscow, Tel-Aviv, or Skopje. Their bloated management and heavily unionized staff are opaque and non-accountable. They refuse to measure up to performance targets lest their revenues and remuneration be linked to the results.
No one can tell how (in)effective and (non-)productive public hospitals are. There are no reliable statistics regarding the most basic parameters of service quality, such as wait times. Financial reporting and network development are dismal. As even governments are transformed from "dumb providers" to "smart purchasers", public hospitals must reconfigure, change ownership - privatize, lease their facilities long term - or perish.

But privatization is far from being a panacea.
It is difficult to imagine the private sector - private hospitals and HMO's - assuming the full load of patients now treated by the public sector. To start with, existing laws would have to be changed in constitutionally dubious ways. It is even more difficult to conceive of the government as a ideal and long-term "smart purchaser" of healthcare services from the private sector. Additionally, to cover all the uninsured would cost a fortune. The communities that phased out public hospitals in favor of Medicaid managed care suffered greatly according to various studies.

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Siegel notes that there is no data to support the contention that public hospitals 
provide inferior care at a higher cost - and, indisputably, they possess unique 
experience in caring (both medically and socially) for low income populations.

He poses the 
following questions:   

What are the costs and quality of public hospitals relative to their non-government peers in selected cities? These data would need to be adjusted for case mix, socioeconomic status, degree of teaching activity and other variables. What segment of the public hospital market has been "captured" by competing HMOs and non-government hospitals? What are the risk profiles of these segments? What are the legal obligations of health care providers to treat indigent patients in selected states? 

Where public services have closed or been privatized, what is the impact on access to care for the Medicaid and uninsured populations? What is the impact on remaining providers? a.. What lessons can be learned from major cities and counties that lack publicly owned health care systems? In the absence of factual answers to these questions, the arguments boil down to differences in worldview and politics. Is healthcare a fundamental human right - or a commodity? Should healthcare be left to the invisible hand and distributive justice of the market? 

Should prices serve as the mechanism of optimal allocation of healthcare resources - or are there other, less quantifiable, but pertinent parameters?

Whatever the philosophical predilection, healthcare should be reformed. Siegel and Altman and Brecher ("Competition and Compassion - Conflicting Roles for Public Hospitals") survey the landscape of hospital reform in the USA:

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Public hospitals are increasingly governed by healthcare management 
experts who are likely to emphasize clinical and fiscal considerations - 
and not by politicians. This is coupled with the vesting of authority with 
hospitals, taking it back from local government.

Some hospitals are organized as (public benefit) corporations with 
enhanced autonomy (e.g., Memphis Regional Medical Center). Others 
organize themselves as Not for Profit Organizations with 
independent, self perpetuating boards of directors.

This is often coupled with increased transparency and 
accountability. Clear quantitative criteria are applied to the use 
of funds. Some hospitals started by revamping their compensation 
structures to increase both pay and financial incentives to the 
staff and thus attract talented people. In these reformed 
institutions, pay is linked to objectively measured performance and 
skills-related criteria. A system of bonuses, incentives, and - more 
rarely - penalties has been applied to senior management.

The management of many public hospitals is trained now to use 
rigorous financial controls, to improve customer service, to re-
engineer processes and to negotiate agreements and commercial 
transactions. In some cases, staff is employed through employment 
contracts with clear severance provisions that allow the management 
to take commercial risks.

All this cannot be achieved without the full collaboration of the 
physicians employed by the hospitals. Their very profession is being 
revolutionized. Siegel:

"Most major public hospitals obtain a majority of their physicians 
through affiliations with nearby medical schools ... But the nature 
of these contracts and of health care has changed. Public hospitals 
are now under intense pressure to improve continuity of care, expand 
primary care capacity, reduce lengths of stay and meet a host of 
managed care and budgetary constraints. It will be impossible for 
them to do this so long as the physicians who make the bulk of the 
clinical decisions practice in ways that are not aligned with the 
imperatives of managed care and capitation. Physicians must adapt 
their styles of practice and accept an emphasis on absolute 

Some hospitals in the USA (e.g., Cambridge Hospital in 
Massachusetts) formed business joint ventures with their own 
physicians (PHO - Physicians Hospital Organizations). They benefit 
together from the implementation of reforms and from increased 
productivity. Scheduling of patient-doctor appointments, laboratory 
tests, and surgeries are computerized. Obsolete information systems 
replaced. Long turnaround times and redundant lab tests and medical 
procedures eliminated.

According to various studies published in "Modern Healthcare", 
public hospitals have been downsizing for well over a decade now. 
They reduced their labour costs from more than 70 percent of their 
budgets 8 years ago - to less than 60 percent today. Many cut their 
labour force by half. Union membership is on the decline.

Public hospitals all over the world are 
transforming themselves into outright businesses.

They lease to their physicians - for use in their private, after-
hours, practice - space (e.g., operating theatres) or time slots, or 
underutilized equipment. This kind of arrangement cropped up in 
countries as diverse as Israel and Macedonia, Russia and Germany. 
The lessee physician pays the hospital - either in the form of fixed 
fees or in the form of revenue sharing (franchise arrangement).

In some countries, the physician also commits himself to provide 
community-oriented, non profit or pro bono services in return for 
the right to use what is, essentially, community property.

Another method of using the hospital's excess capacity is to sell 
it, rent it, or lease it to entrepreneurs who are not members of the 
hospital staff: small laboratories, specialty medical services, 
primary care, and specialist practitioners. All these make use of 
the superior infrastructure of the hospital under a concession, a 
franchise, or a rental arrangement.

The hospital provides these professionals with a "captive market" of 
patients. This is very much like the relationship between an "anchor" 
in a shopping mall and the small retail shops surrounding it.

Hospitals - mainly in eastern Europe - also sell medical - and, 
sometimes, non-medical - products and services to the community on a 
commercial, competitive basis. Some hospitals offer for-pay medical 
legal services, or print jobs by the hospital's print shop. They 
operate the hospital's social services as a profit centre, offer 
medical consultancy on a fee per service basis, and even sell food 
from the hospital kitchen through a catering service, or data to 
researchers from its archives.

A hospital is a galaxy of small (to medium) size businesses 
operating under one organizational roof. Laundry, cleaning services, 
the kitchen and its attendant catering functions, the provision of 
television sets and telephones to patients, a business centre for 
the inpatient businessmen - these are all profit or loss centers.

"Internal privatization" (or intrapreneurship) transforms the 
hospital into a holding company. This holding company owns and 
operates a host of business entities. Each such entity constitutes a 
separate contractor which provides the hospital with a service or a 

Thus, all laundry is done by a company which charges the hospital 
for its services. The same goes for the kitchen, the print shop, the 
legal services department and so on. These corporations employ the 
former staff of the hospital. This way, institutional knowledge and 
experience are preserved.

These corporations, owned by former employees, usually maintain 
a "right of first refusal" in the first five years following the 
transformation. They are allowed to match the best offers obtained 
in yearly tenders conducted by the hospital. They are also allowed 
to offer their services to other customers. Thus, they reduce their 
dependence on one client, the hospital. They become truly 
entrepreneurial entities, competing for profits in a market 

A part of the re-engineering process is to determine which of the 
roles of the hospital are "core competencies". All "non-core" 
functions are outsourced in a tender to the most competitive 
bidders. The hospital is likely to benefit from the transfer of 
these functions, in which it has no relative competitive advantage, 
to expert outsiders. This is somewhat akin to international (free) 
trade, where each nation optimizes its resources and passes the 
(beneficial) results to its trading partners.

To control this kind of transformation, medical information 
management systems need to be introduced. These improve both the 
quality and the quantity of data available to the management of the 
hospital and, as a result, the decision making process.

This makes it easier for the management to pinpoint which areas 
require doing what - for instance, what kind of incentives should go 
to which members of the staff, where could costs be cut, and where 
and how could productivity be improved.

Finally, a novel concept is emerging. Universities and hospitals are 
two important repositories of human knowledge and experience. 
Virtually every hospital somehow collaborates with an academic 
institution, or with a medical school.

But, during the last two decades, hospitals have re-cast themselves 
in the role of partners to the commercial exploitation of the 
results of research conducted within their premises or with their co-
operation. Hospitals now collaborate in pharmaceutical, medical, 
genetic and bioengineering studies. Hospitals believe that by 
refraining from getting commercially involved - they give up money 
which really is not theirs to give up in the first place.

Large hospitals also entered the managed care market - where laws 
permit it. Some have established MCOs (Managed Care Organizations of 
patients). Others insure patients outright and market their services 
directly. Most hospitals now maintain their own network of 
suppliers. HMO's are inevitably less than thrilled with the 
emergence of these new competitors - but this process of 
disintermediation is thought to have increased both the profit 
margins and the absolute profits of public hospitals.

Public hospitals also pool resources to benefit from advantages of 
scale. They relegate services - from auditing and accounting to 
political lobbying - to commonly owned or merely centralized service 
providers. These providers also negotiate contracts with suppliers 
and specialists on behalf of the hospitals.

Some observers decry the apparent convergence between public 
hospitals and their private brethren. Such derision is misplaced. 
Public hospitals still treat the destitute and the immigrant. They 
still provide a medical safety net where no alternative exists. They 
are just doing it better, more rationally, and more cheaply. They 
should do more to open up to scrutiny. They should spin doctor. They 
should streamline. But one thing they should not do is regress to 
where they have been in the early 1990's. This is what the doctor 

Sam Vaknin (  ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International
(UPI) Senior Business Correspondent, and the editor of mental health
and Central East Europe categories in The Open Directory and

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam's Web site at


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