City Journal

William Eimicke and Anne Lenhard Reisinger
Privatizing HHC
New York's public hospitals are expensive to operate and provide care that is often substandard. By turning its hospitals over to private hands, the city could save hundreds of millions of dollars a year and improve the quality of cam for the poor.
Spring 1993

New York City’s public hospitals are in crisis, charged with wrongful deaths, inefficiency, waste, and lax monitoring of staff and patients. A recent series of highly publicized cases presents a picture of poor management with sometimes deadly results. At Harlem Hospital, a psychiatric patient wandered off unnoticed and was later found dead in an air shaft. At Bronx Municipal Hospital, one patient’s cardiac monitor was disabled and the patient later died; another died of cardiac arrest because an anesthesia machine was set up incorrectly. And at Kings County Hospital, the case of Yankel Rosenbaum, the Crown Heights stabbing victim who died in the emergency room, prompted a State Health Department review, which concluded that disorganization at the hospital had led to two unnecessary deaths, including Rosenbaum’s, and played a role in two others.

The city’s municipal hospital system is the largest and most complex in the country, encompassing 11 acute care hospitals, five long-term care facilities, and six diagnostic and treatment centers. The system has 10,500 beds, more than 45,000 employees, and an annual budget in excess of $3 billion. In recent years, the public hospitals have faced a dramatic increase in demand for care, brought on by the growth in poverty, the numbers of the uninsured, substance abuse, AIDS, and homelessness.

But the city’s hospital system, created to ensure that the poor would have access to medical care, is the product of a bygone era. Today, private hospitals are reimbursed through state and federal programs for virtually the entire cost of caring for indigent patients. Therefore, the time has come to consider divesting the city of its responsibility for hospital care. Several of New York’s private hospitals have publicly indicated a willingness to take over some city facilities, and those hospitals that are not suitable candidates for privatization would be better managed by the state.

While complex accounting practices make it difficult to determine exactly how much such a reorganization would save, conservative estimates indicate that the city could free up between $250 million and $400 million, and perhaps more—while likely improving the quality of care for low-income New Yorkers.

Hospital History New York City’s public hospital system was set up during the nineteenth century to provide medical care for the poor. It was originally run by the city’s Department of Welfare and later spun off into the Department of Hospitals. With the advent of the New Deal, the LaGuardia administration, and the economic recovery spurred by World War II, the Hospital Department expanded its facilities, but after the war its funding was cut and its physical facilities deteriorated.

During the 1950s, voluntary (private not-for-profit) hospitals expanded substantially, prompted by an increasing demand for medical care and the spread of group health insurance. Many working-class patients and medical workers moved from the public to the voluntary hospitals. But the poor, forced to rely on the city system, overwhelmed the public hospitals, resulting in a severe staff shortage.

The city solved this problem through affiliation agreements with medical schools and teaching hospitals. These institutions, part of the voluntary hospital system, provided medical staff for the city hospitals. In exchange, voluntary hospitals were paid a reasonable fee and got the use of the public hospitals, with their diverse mix of cases, to train residents.

In 1965, the Federal Government established the Medicaid and Medicare systems, which provided the city hospitals with a massive infusion of new funds. That year, the public hospital budget was $242 million, two-thirds of which came from city taxes; by 1971, the budget had swollen to $663 million, half of which came from Medicaid and Medicare. With the availability of a new dedicated revenue stream, Mayor John Lindsay embarked on an ambitious program of building new, better-equipped hospitals and initiating a network of community-based family care centers.

Lindsay also attempted to address the poor quality of care in the public hospitals. In 1966, he created the Commission on the Delivery of Personal Health Services, which concluded that “conditions in the city hospitals and clinics are not only deplorable but also, as a practical matter, irredeemable under existing conditions.” The commission recommended that the system be reorganized as a public benefit corporation. The corporate structure, the commission members believed, would free management from the constraints of city bureaucracy and provide better accountability, while preserving the city’s control of public health policy and its role as the health care provider of last resort. On April 26, 1969, the State Legislature created the New York City Health and Hospitals Corporation (HHC).

Virtually from its inception, however, HHC has experienced a shortage of working capital, which has had to be made up by city subsidies. With the onset of the fiscal crisis in 1975, the city’s Office of Management and Budget took very tight control of the HHC budget. In the ensuing years, the State Health Department adopted a policy of reducing the number of city hospital beds. HHC expenditures were virtually frozen, staff levels were reduced, inpatient care declined, and the city and state exerted even greater control over HHC policy and operations.

This trend slowed during the 1980s. Improved financial conditions and the efforts of Stanley Brezenoff, first as president of HHC and later as first deputy mayor, led to a nearly 50 percent increase in HHC expenditures between 1984 and 1990. A $1.5 billion capital program was established to rehabilitate and upgrade Kings County, Queens, Elmhurst, Coney Island, and Bronx Municipal hospitals.

The State Health Department continued to use its regulatory and rate-setting authority to shrink the city’s public hospital system. HHC, which had supervised 19 acute care hospitals in the early 1970s, was reduced to 11 during the 1980s; the number of public hospital beds was cut by 27 percent. Meanwhile, the city’s direct financial responsibility for HHC was diminished as Medicaid revenues rose, and in 1982 the state established a bad debt reimbursement pool, which now pays both public and voluntary hospitals 90 percent of the cost for patients who cannot pay. By 1990, city subsidies accounted for only about one-fourth of the HHC budget. But both the Koch and Dinkins administrations expanded the city’s political control over HHC—most recently, in 1992, by creating the position of deputy mayor of social and health services, who oversees HHC directly from the mayor’s office.

The Continuing Crisis In the past few years, the crisis at HHC has become acute. In addition to the aforementioned deaths at Harlem, Bronx Municipal, and Kings County hospitals, problems have arisen involving affiliation arrangements with voluntary hospitals, and three hospitals have been denied full accreditation.

In December 1991, Long Island Jewish Medical Center, a voluntary hospital, announced it was ending its 26-year relationship with HHC’s Queens Hospital Center, claiming the city hospital was not a good training ground for medical specialists. At issue was a conflict that exists in all the affiliation agreements between HHC and voluntary hospitals: To remain competitive, medical schools must provide training for specialists and surgeons, while HHC patients are most in need of general practitioners.

In April 1992, Mayor Dinkins announced that Mount Sinai Medical Center had agreed to take over the contract with Queens Hospital. Mount Sinai, already affiliated with HHC’s Elmhurst Hospital in Queens, anticipated that the combined operations would create economies of scale, freeing up the resources needed to provide poor patients with personal physicians. Mount Sinai also agreed that the majority of new doctors would be general practitioners and pediatricians rather than the specialists that predominated under the old contract.

The city says it intends to use the Mount Sinai deal as the model for a master contract which will ultimately apply to all 11 HFIC affiliation relationships. But it remains to be seen whether the other medical schools will be as willing as Mount Sinai to commit themselves to training more general practitioners.

In March 1992 the Joint Commission on the Accreditation of Health Care Organizations stripped Woodhull Hospital in Brooklyn of its accreditation because the hospital did not have adequate procedures to prevent unnecessary surgery and other mishaps. Conditional accreditation was restored five months later. In April, the accreditation commission voted to strip HHC’s Lincoln Medical and Mental Health Center in the Bronx of its accreditation and to grant only conditional accreditation to Kings County Hospital Center in Brooklyn, in each case citing hazardous conditions in the hospital’s physical plant. The denial of accreditation jeopardizes Lincoln’s participation in the residency programs that supply most of the doctors who work at the hospital. (New York is the only state in which nonaccredited hospitals are permitted to receive Medicaid funds.)

Reforming HHC The Dinkins administration has made several proposals for reform of the city’s health care and hospital system. In April 1992, the mayor called for a family doctor for every poor New Yorker, a goal pursued unsuccessfully by many past mayors, and a system of managed care for city hospital patients, already a requirement under state law.

In July 1992, the administration announced a plan to grant budget autonomy to HHC. While the details have yet to be finalized, the approach suggests the type of independent hospital corporation that was envisioned when HHC was proposed in 1966, but never realized. The city budget division has agreed to let HHC keep any revenues it raises beyond its projections, giving the corporation an incentive to generate new revenues, to qualify patients eligible for third-party payments, and to improve the quality of its care. HHC would continue receiving its current city subsidy (about $220 million a year, not counting Medicaid payments) as well as an annual payment to compensate it for the care of police officers, firefighters, city prisoners, and the uninsured poor. Otherwise, HHC would operate as if it were a voluntary system.

In December 1992, a mayoral commission headed by Dr. Jeremiah Barondess, president of the New York Academy of Medicine, issued a report that recommended strengthening the powers of the board of directors and president of HHC and the executive directors of the individual hospitals. The commission also called for expansion and tighter oversight of the affiliation agreements with voluntary hospitals.

All these proposals contain some worthy ideas, but all ignore the fundamental question: Should the city be in the hospital business at all?

The city’s public hospital system was created to provide care for the indigent who had no other health care option. This rationale no longer exists. Federal and state programs and private insurance cover the vast majority of medical costs. While private hospitals once sought to avoid caring for Medicaid clients, they now aggressively pursue those patients, because New York State reimbursements are quite generous. Indeed, when the State Legislature was debating its managed care initiative for Medicaid, HHC officials voiced fears that it would cause them to lose Medicaid patients to private hospitals.

For those patients covered by neither Medicaid nor private insurance, the state’s bad debt and charity pool covers 90 percent of the cost of care. By HHC’s own estimate, the current net cost to the city for indigent care is only $100 million of the $3 billion public hospital budget. In many cases, care for the indigent could be provided more efficiently and economically by private hospitals reimbursed by the government.

Therefore, the city should seriously consider turning its public hospitals over to the private sector. Across the country, public hospitals are converting to not-for-profit status so that they can better compete for private paying patients, mix public and private funds, operate for-profit enterprises such as laboratories and home health care services, and, by cutting red tape, help underwrite the costs of caring for the indigent. Between 1983 and 1986, for example, 128 public hospitals converted to private or not-for-profit status, with 80 choosing the nonprofit model. Large cities such as Kansas City, St. Louis, and Detroit have successfully moved hospitals out of the public domain.

New York State’s broad Medicaid coverage and high reimbursement rates, combined with the bad debt and charity reimbursement system, ensure that the city hospitals would be able to continue providing care to the poor even under private control. The affiliated medical schools and teaching hospitals that already provide the professional staff for most HHC facilities have the capacity and experience to operate one or more HHC hospitals more effectively and efficiently than the existing public corporation.

Privatization would make it easier to control costs, particularly labor costs. It would provide for more direct decision making by hospital executives, leading to greater efficiency and less bureaucracy. Many health care experts believe that employees would perform better if they could escape the stigma of public hospital employment.

Objections to Privatization The Barondess Commission examined the possibility of privatization, and even identified several hospitals as likely candidates. Yet the mayoral panel ultimately rejected privatization as a serious option, offering several arguments against it, all ultimately unpersuasive.

First, the commission maintained that the primary argument for privatization is that the private sector is more efficient than the public sector because it responds to competitive pressures. The report then noted that the institutions most likely to acquire HHC facilities are nonprofit corporations, which, it argued, may not behave like for-profit companies. The nonprofit status of private hospitals, however, is not evidence that they do not function as competitive, private-sector entities. HHC’s frequently expressed fear of losing Medicaid “market share” to these competing institutions undermines this argument.

Second, the panel reported that HHC said its costs are similar to those of comparable voluntary hospitals and therefore savings might not be achieved by privatization. But mergers could produce substantial administrative savings in the individual hospitals and in HHC’s central bureaucracy.

Third, the commission worried that a privatized HHC hospital’s mission to serve all who need care, regardless of ability to pay, would erode over time and that it would be difficult to hold hospitals accountable for that commitment. This premise—the strongest argument against privatization, according to the Barondess Commission—has little validity. The State Department of Health is nationally recognized for the excellent job it does in monitoring and correcting deficiencies in public and private hospitals across New York State, as evidenced by its recent reports on the failings of several HHC facilities. Moreover, private hospitals throughout the city and state are already caring for large numbers of indigent patients, paid for by the state’s bad debt and charity pool. The federal, state, and city governments channel enormous amounts of money into the city’s private hospitals through Medicaid and Medicare, giving government agencies substantial leverage in dealing with these institutions. Well-crafted agreements with the organizations that take over HHC facilities could give regulators even more influence over these newly private hospitals. And the state and city health and social service agencies, the state and city comptrollers, and the federal Department of Health and Human Services continuously monitor the cost and quality of care provided to Medicaid and Medicare patients.

Finally, the report concludes that privatization is not viable because the strongest hospitals are the most likely candidates, and HHC would ultimately be left with only the weakest institutions. But if those weak institutions are indeed necessary and are also unable to operate independently, then they are exactly the type of service that government should provide. If HHC could devote its full attention to those weaker institutions, there would be a better chance that they could be improved and strengthened. In addition, there is another option besides city responsibility for the weaker hospitals: The state could take them over.

A Privatization Plan Six of HHC’s 11 acute care hospitals seem strong candidates for privatization. The most obvious such opportunity, as the Barondess Commission noted, is the transfer of HHC’s North Central Bronx Hospital to Montefiore Medical Center, its not-for-profit affiliate. The two corporations occupy adjacent, virtually inseparable facilities; the potential economics and efficiencies of a merged staff and physical plant are clear. The commission also reported that New York Medical College has expressed interest in taking over both Lincoln and Metropolitan hospitals.

Confidential discussions over merging Kings County Hospital Center and its affiliate, SUNY Health Science Center (also known as Downstate Medical Center), are currently at an advanced stage. Further, since Mount Sinai now staffs both Elmhurst and Queens hospitals, a consolidation of those three operations under the Mount Sinai banner is quite feasible. (Most experts also agree that Bellevue could easily be merged with the New York University Medical School, but privatizing what many view as the flagship of public hospital care in the United States may be politically infeasible.)

Following the examples of many public hospital conversions across the country over the past decade, HHC could lease its facilities to their not-for-profit affiliates for a renewable multiyear term. The lease would specify methods of accountability and minimum levels of care for the indigent. If these six hospitals were successfully privatized, only five acute care hospitals would remain in the city’s direct control—Bellevue, Harlem, Bronx Municipal, Coney Island, and Woodhull.

These five hospitals should be taken over by a state-owned corporation. State control would distance the public hospitals from the vagaries of city politics and free the city from some of the financial burden of caring for the poor. The city would still contribute its share of Medicaid reimbursements, but it would no longer be required to supply direct subsidies to the public hospitals.

State control would permit city hospitals to benefit more from the widely recognized expertise of the New York State Department of Health in regulating hospital care. The department already regulates the quality of care and sets Medicaid rates for all hospitals across the state, so it has a broad base of knowledge about hospital access, governance, finance, and staffing. A state hospital corporation would necessitate more direct Health Department involvement in management of the public hospitals—a logical extension of the state’s current activities, and one that would likely improve the quality of care.

The transfer from city to state management must include real changes in management structure that would allow the individual hospitals to operate more flexibly and efficiently. The Metropolitan Transportation Authority provides a good model of how a state hospital corporation might be designed. A prestigious, relatively independent board of directors is appointed by the governor and the mayor but controlled by neither; quasi-independent subsidiaries for each of the operating units (in this case, for each hospital) combine the best attributes of both centralization and local control.

Hospital administrators should be given wide discretion to manage their own facilities, for they know better than anyone the communities they serve and the particular problems facing their hospitals. The mayor’s new budget arrangement, the essential elements of which should be carried over into the state hospital authority, will provide HHC hospitals with financial incentives to operate more efficiently. In order to accomplish this, however, they will need greater autonomy in decision making.

More than two decades ago, the Health and Hospitals Corporation was formed in an attempt to free the public hospitals from the inefficiencies and politics of municipal management. HHC has never lived up to its promise. The plan outlined here—privatization of some city hospitals, state takeover of others, and greater autonomy for the individual hospital managers—would allow the city to achieve the reform of its public health system that it allowed to slip away twenty years ago.

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