New York Gov. Andrew Cuomo has proposed allowing hospitals in the state to be owned and operated by businesses. Though most states already have business-owned hospitals, this will be a major change for New York state, which has one of the tightest-regulated healthcare industries in the nation.
The change would come in the way of a pilot program proposed in the governor's 2013-2014 budget. Up to two businesses will be able to run a hospital or hospitals in Kings County and one other area of the state.
Regulations on the owners would remain tight. According to Cuomo's proposed plan, the businesses would have to be affiliated with an academic medical institution; their ownership would be limited to the designated hospitals; and they will have to consider the public's health when taking any actions regarding the institutions.
Cuomo has said the program will bring needed capital in its healthcare system.
Frank Sloan, the J. Alexander McMahon Professor of Health Policy and Management and professor of economics at Duke University, said it would help bail out failing hospitals in the state and is also a pro-business move in a historically un-businesslike environment.
"Often, businesses didn't want to go there because they had a very tight revenue regulation program," Sloan said. "They had a payer rate setting that was the strictest in the country and historically, businesses wouldn't care that they couldn't go there."
Those regulations changed, Sloan said, in the 1990s, but the initial philosophy in the state that "profits are not good in medicine," has kept the system as-is until now.
Christopher Kerns, managing director of research and insights at The Advisory Board Company, said allowing for-profit organizations to own hospitals will open up lines of credit that were previously unattainable. Since the financial crisis, the cost of capital funds has increased for organizations with low credit ratings. New York has a lot of hospitals in this position, so it "gives them an avenue for credit."
Both Sloan and Kerns said when hospitals change from nonprofit to for-profit, there often isn't a lot of difference seen in the community. But there are some slight differences in the way the two are typically run.
First is location. For-profits tend to open hospitals or purchase failing ones in areas where there is the potential to generate revenue.
Another difference is the kind of services in which they invest their resources. Kern said hospitals likely won't end their emergency or obstetric care (as some worry when for-profits take over), but they usually invest more heavily where there is a greater return.
"They (for-profits) are usually disproportionately invested in services that are highly profitable," he said. "Based on the nature of reimbursement, surgery is far more generous than procedures are ... and there is usually an increase in cardio surgery or ortho."
For-profits are also often run more efficiently, Kerns said. This is the nature of the beast when a company has to answer to investors. For-profits tend to have 2 percent to 4 percent operating margins, whereas nonprofits are closer to 10 percent, he said.
And finally, one of the major changes that Sloan has found in his research is that for-profits tend to "maximize reimbursements" better than nonprofits.
"We don't see a change in quality, not a lot, but in the long run, we did see a difference in the cost to Medicare," he said. "For-profit hospitals are more aggressive in putting people into rehab after discharge and various programs that improve the hospital's cash flow. And they vertically integrate so they have post-hospital facilities they own."
A 2001 study by Sloan and colleagues in the Journal of Health Economics found that, compared to for-profit hospitals, Medicare spent 9 percent to 16 percent less on patients in government facilities and 12 percent less on patients in nonprofit hospitals.
Kern estimates that, especially early on, the heart of nonprofits - their culture - will be retained.
"Most organizations don't want to up-end their cultures and there is a real up-ending that goes with a change to for-profit status," he said.
For this reason, what he often sees is something different than the traditional acquisition. Many for-profit companies are buying less than 50 percent of the organizations - investing capital, taking on managerial roles and improving efficiency and return on investment - but not taking complete ownership.
"This enables hospitals to stay nonprofit and still look at the different types of community concerns," he said.
Under Gov. Andrew Cuomo's proposal, initially, up to two businesses will be allowed run a hospital or hospitals in Kings County and one other area of the state.