Edward A. Stolzenberg

The mission of the public hospital continues to be an essential element of the nation’s healthcare system. In order to relieve the government-operated hospital of its inherent structural defects, and to preserve this vital safety net system and its public mission, governance change represents the most viable strategy to accomplish these goals.

Preface
This paper will examine the status of the governmentally-operated public hospital with a view towards understanding the social, economic and operational factors that are contributing to the mounting number of institutional failures within this system. This paper will further attempt to explore the question of whether there is a continuing need for these hospitals, and if there is, how the system can be preserved through change of governance.

The study will examine these questions at a general level and then move to a focused review of this process as it occurred at one specific public hospital.

Hospitals throughout the United States are being confronted with new and critical challenges occasioned by a changing marketplace characterized by intense competition, decreasing rates and healthcare reform. These dynamics have changed the landscape of healthcare delivery; mergers and acquisitions, new business development and joint venturing are commonplace activities of the emerging healthcare environment. These dynamics have also, in many respects, created significant doubt as to whether the public hospital as it is presently constituted can survive, and, if it cannot, the question remains as to how the mission can be preserved.

The public hospital as a directly managed component of state and local government is anachronistic in an environment dominated by competition and business driven imperatives. The Medicaid population, once considered the major target population of the public hospital, because of Medicaid managed care, is becoming a target for both the for-profit and not-for-profit systems.2 In order to preserve its mission, the public hospital will clearly need to reinvent itself within the construct of an alternative governance structure and define a market position that is coequal with its colleague institutions in the private sector. It must also retain its mission as a safety net to ensure that at-risk and vulnerable populations will never be disenfranchised. This seemingly impossible task is being achieved through governance change.

The public hospital of tomorrow will evolve around a model that is free of the operational constraints that currently characterize its structure and will include, at least the following elements of autonomy:

• A corporate structure free of government controls
• Extraction from the body politic
• Financial management autonomy
• Access to capital
• Capacity to network and joint venture

From a public policy standpoint, new governance structures for public hospitals must include a mandate for public accountability. It is only through such a mandate that the public mission will be preserved. This is perhaps the most difficult balance to achieve in addressing the issues of governance change. Absence of accountability will unequivocally jeopardize the mission of the public hospital. As competitive and bottom-line related issues assume an organizational priority, lack of mission-based accountability may result in the erosion of public purpose. On the other hand, too much accountability will unduly constrain the hospital and inevitably compromise its capacity to perform competitively and efficiently. The proper balance can and must be maintained.

In short, public hospitals will need to evolve a bifurcated mission. On one side it must retain its mission as the safety net provider. On the other it must restructure itself to allow for efficiencies of operations and costs so as to be competitive. It must be able to create meaningful networks, joint ventures and partnerships that will promote both a public and a business strategy. Finally, it must have the capacity to offer high quality services, making it attractive to all patient populations.

These two missions, in place, side by side, will be the hallmark of the public hospital of the future. In order for this to occur, governance change is an absolute requirement.

History
The evolution of the public hospital can be traced to its origins as the almshouses or workhouses of America’s emerging large cities, where the poor were beginning to congregate. New York City’s Bellevue Hospital Center can trace its history to such beginnings in 1736 as a Bronx Almshouse.3 From this single almshouse evolved not only Bellevue Hospital Center, but also the entire New York City public hospital system.

These institutions were operated by local governments to meet the needs of those referred to as the worthy poor. As an adjunct to the activities of the workhouse, small and very rudimentary infirmaries developed to meet the medical needs of the residents. These health-related services were gradually expanded and offered to the poor who resided outside of the facility itself. Eventually, the infirmaries themselves separated from the almshouse and, as such, became the forerunners of the public hospital system.

While the infirmaries were no longer part of the system of poorhouses they continued to be funded by public dollars. Conditions in those facilities were unimaginably poor, serving as little more than warehouses for the mentally and physically ill who had no alternative. It was during the early part of the nineteenth century that the social reform movement prompted an improvement in these facilities. Local and state governments began directing more support to public hospitals and the system dramatically expanded through the latter half of the nineteenth and early twentieth century. It was estimated that by 1943 there were 655 public hospitals nationwide containing approximately 10% of all hospital beds and accounting for approximately 11% of all hospital admissions.4

The emerging vitality of the public hospital system was particularly bolstered by the fact that medical schools recognized their value as teaching and research facilities. This recognition attracted prominent physicians and researchers, and public hospitals frequently became sites for development and utilization of cutting edge technology. As an example, much of the early work leading to the development of cardiac catheterization was done at Bellevue Hospital Center, earning Drs. Andre Cournand and Dickenson Richards a Nobel Prize. It was Dr. Richards’ acceptance speech where he lambasted New York City for deplorable conditions at Bellevue Hospital, that gave impetus to the construction of the new Bellevue Hospital.

Progress achieved by the public hospitals however, began to steadily erode during and after the 1950’s. This decline was attributed to four principal factors cited by William Shonick, as follows:

1. The population served by the public hospital became increasingly poor. This was occasioned by the growth of private insurance and the exodus of the middle class population to the suburbs, leaving the public hospital with only the poorest and most needy populations. Additionally, the public hospital tended to be situated in inner-city areas where these populations were growing dramatically.
2. Local governments experienced an erosion of their own tax base, placing increasing constraints on their capacity to support public hospitals. These constraints, in turn, gave rise to deteriorating physical plants, inadequate staffing, and declines in quality of care.
3. Large research and teaching grants to major medical schools and private teaching hospitals, along with deteriorating conditions in public hospitals, began to drive outstanding researchers, clinicians and other professionals into the private sector. This often left the public hospital with a second rate medical staff and an inadequate professional support infrastructure.
4. A shift in patterns of hospital care to more ambulatory-based services left public hospitals with a disproportionate burden for providing these services to inner-city populations where insurance coverage was either inadequate or non-existent. Furthermore, the advent of the Medicare and Medicaid programs adversely affected utilization of the public hospital by giving enrollees, particularly Medicare beneficiaries, options for care outside of the public hospital system.

Other factors contributing to the overall decline of the public hospital system include the following:

• Many local governments began providing special funding to private institutions to encourage them to offer services to the poor. This was particularly true in New York City where a charitable institution’s budget was established for this purpose.
• A movement to improve conditions at public hospitals through affiliation contracts often had the opposite effect. In many instances this drew important funding away from the public hospital and benefited the private sector hospital or medical school to the detriment of the public hospital.
• The phenomenon of "dumping" patients from the private to the public sectors frequently became a pervasive practice, particularly in large cities. Financially and medically undesirable patients were often moved from the emergency room of private hospitals to public hospitals until anti-dumping legislation was established.
• Finally, the advent of managed care, particularly for Medicaid and Medicare patients, as well as other health insurance options for the poor, are making these populations more attractive to the private sector. As these patients are shifting out of the public sector the public hospital is being left with the increasing burden of providing expensive care to those least able to pay for it through any source.

Many of the above issues will be reviewed in greater detail later on. Suffice it to say that these factors have left the traditional public hospital in a precarious position. A recent feature article in a local newspaper, detailing the problems associated with the privatization of Nassau County Medical Center, noted the following:

"It’s clear that the safety net is diminishing," said Larry Levitt, Director of the Changing Health Care Marketplace Project at the Kaiser Family Foundation. "The number of public hospitals has been declining steadily."6

Characteristics of the Public Hospital
In developing an understanding of the status of the public hospital, it is important to understand the existing characteristics of the system and how they relate to new features of our emerging healthcare system.

Exhibit 1

Comparison of the Average National Association of Public Hospitals (NAPH) Member to the Average Hospital in the 100 Largest Cities 7

The above exhibit suggests that the average public hospital, as compared to the average non-public hospital, provides more care at the inpatient, outpatient, and emergency room level. It also suggests a disproportionate reliance on Medicaid as payor source. This indicates that while demand for service is high, it is, not surprisingly, most focused on poor populations. Exhibit 2 displays utilization characteristics between 1989 and 1996 for NAPH members. The major trend here is that discharges are down by almost 21%, while in comparison non-public hospitals, discharges are virtually flat. This precipitous decline in utilization represents a foreseeable, but nonetheless, singularly adverse trend for the public hospital.

This same trend holds true for deliveries, where between 1989 and 1996, public hospital deliveries dropped by 26%. This is shown in Exhibit 3.

Public Hospital Births, 1989 – 1996 9

With respect to outpatient care, the average NAPH hospital provides approximately 56% more visits than the average non-public hospital. While this can be interpreted as a favorable trend, again an examination of payor source demonstrates a disproportionate reliance on Medicaid and self-pay, which is often no pay. Exhibit 4 displays payor source for inpatient discharges and outpatient visits, and Exhibit 5 shows net revenues by payor source.

Exhibit 4

Discharges and Outpatient Visits by Payor Source 10

Exhibit 5

Net Revenues by Payor Source 11

Again, it is clear that a very disproportionate share comes from government insurers and subsidies. It should be noted that the subsidies referred to are directly from local government tax levy.

Finally, with respect to Graduate Medical Education, 44 public hospitals responding to an NAPH survey represented an average number of 300 residents per institution. Forty percent of these residents were in primary care, and 60% were in specialty care. Approximately one-third of the residents in responding institutions were international medical graduates.

The 1996 NAPH Hospital Characteristics Survey provides a detailed breakdown of individual public hospital characteristics relating to inpatient utilization, outpatient utilization, payor sources and uncompensated care.

In reviewing the history and characteristics of the public hospital, the following general conclusions can be drawn:

• The patient population of the public hospital is becoming increasingly focused on the underinsured and the uninsured.
• The public hospital is disproportionately dependent on government insurance and subsidies.
• As more insurance options develop for the poor and elderly, they tend to migrate into the private sector.
• Public hospitals tend to have older and more outdated physical plants.
• The ability of the public hospital to be competitive is hampered by a variety of political and structural constraints.
• The professional staff associated with the public hospital has tended to degrade over the past several decades.
• The public hospital relies almost exclusively on inpatient and outpatient revenue. There are few examples of major non-patient revenue sources flowing into the public hospital (i.e., fund-raising, business development).
• Public hospitals tend to invest heavily in Graduate Medical Education. This is at a time when funding for these activities is in significant jeopardy.
• Patient care patterns in public hospitals are shifting from inpatient to outpatient care, again with an underinsured population. This is having a severe adverse impact on occupancy levels in public hospitals.

These financial trends and characteristics do not bode well for the future of the public hospital in its traditional form. While the system continues to deliver significant levels of service, financial, social and political factors are working against it at an ever-increasing pace. Government-based reimbursement, on which the public hospital disproportionately relies, is progressively declining. Local governments are increasingly constrained in their ability to subsidize the system and funding for Graduate Medical Education is in a declining mode. If these factors are not addressed and counter-balanced by new sources of revenue, the demise of the public hospital now operated by local government is inevitable.

CHAPTER 3

THE IMPERATIVE FOR GOVERNANCE CHANGE

Public hospitals that continue to be operated as an arm of local government are faced with challenges to their future survival which may in fact be insurmountable. These institutions face not only the same problems that all hospitals are experiencing in today’s dynamic healthcare marketplace, but also an entire array of special issues peculiar to their own structure that set up unique barriers to successful competitive operation and business development. Today’s successful hospital must be able to offer high quality services in an attractive environment. It must be able to compete for new patient markets and capture managed care contracts through highly competitive pricing. It must also be able to participate in networks and integrated delivery systems so as to appropriately position itself in a market that favors providers who can offer a vertically integrated package of services. The traditional public hospital is not appropriately structured to do any of the above.

In an environment that encourages mergers, acquisitions and network development, the traditional public hospital must generally stand alone or integrate only with other publicly owned entities. Within the context of government operations, mergers are not possible unless the parties are all public. However, at a more subtle level, the traditional public hospital cannot even fully participate in a network except to the extent that it is a contract provider. Archaic structural limitations prevent the public hospital from capitalizing a network and thereby taking an equity position. Many state constitutions including New York State’s, contain special provisions which preclude "gift of public funds." These provisions were originally designed to prohibit local jurisdictions from gifting funds to private railroads to encourage them to run track to emerging commercial centers. This has since been interpreted to preclude public hospitals from co-mingling funds with private entities. Thus, the public hospital is not only prohibited from participating in mergers, it is also precluded from network participation. These constraints leave the public hospital isolated and shut out of many potential opportunities for business development.

In addition to the above legal constraints, there are further limitations imposed through the public hospital’s scope of powers. Monte Dube has observed,

In effect, the above limitations on the capability of the public hospital to do business in an environment which demands that public hospitals develop an effective business structure is in itself a critical issue demanding change in governance. As hospitals progressively lose revenue through managed care incursion and price erosion, this revenue must be replaced through expansion of new business ventures. The public hospital does not have this option.

Limitation on access to capital represents another critical issue. The existing environment in which healthcare is delivered creates significant pressures on hospitals to be able to acquire capital. Antiquated physical plants and outmoded technology places a hospital at a very significant disadvantage in competing for patient populations. It is no longer simply quality and cost that are necessary to attract patients, it is also hotel services and the ability to offer the most cutting edge diagnostic and therapeutic modalities that entice patients to use a specific facility. While many hospitals experience problems with these issues, the public hospital is at a particular disadvantage. First, the public hospital begins with a physical plant that tends to be older and generally less attractive than its counterpart in the private sector. Second, the public hospital lacks the capacity to secure capital, independent of the government that controls its operations.

As was pointed out earlier, the public hospital, as an agency of government, must compete with its sister agencies for a relatively small piece of the government’s limited capital budget resources. All too often, urgently needed equipment, modernization plans or major repairs for the public hospital lose the budget battle to more politically popular and appealing capital projects dealing with parks and recreation and highways. Unfortunately, hospital problems often do not get focused attention until they are the subject of media exposes or become the center of regulatory attention. Consequently, many public hospitals are operated within dilapidated physical plants which themselves are cost intensive to maintain. Additionally, the level of technology available to the public hospital is below that which is available in the private sector.

The public nature of the institution itself represents another major disadvantage. Public hospitals as an arm of government are subject to the same provisions of law relative to public scrutiny as are their parent governments. Some of these specifically include:

• Freedom of Information Laws (FOIL). Under these statutes, any member of the public, a competing facility, or the press may secure detailed internal documents or reports relative to the operations, plans or internal finances of the public hospital. Only a limited amount of written material is protected from access through this mechanism.
• Public Meeting Laws. Most public hospitals are subject to public meeting laws. Accordingly, all board meetings and board committee meetings must be publicly announced and open to the public. It is only for a very defined purpose, such as personnel matters and ongoing contract negotiations, that a board or a committee can adjourn to Executive session.
• Public Officers’ Law. The officers and directors of many public hospitals are individually subject to the Public Officers’ Laws. Under such statutes, board members and administrators are often subject to detailed and extensive background investigation and annual financial disclosure reports. When the writer was appointed Commissioner of Hospitals in Westchester County it was necessary to complete a fifty page background report and undergo a police investigation which included direct contact with family and neighbors. The writer also completes a ten-page financial disclosure report each year.

Imagine the difficulties associated with operating a competitive business under these mandates, particularly when your competitors have no such requirements. Each monthly board meeting may easily be the subject of a headline the next morning, each memorandum written in the course of business is relatively easily accessible to the media or others who desire it for their own purposes. Consider further the difficulties associated with recruiting senior level staff and board members when they are confronted with the requirements of financial and personal investigations. Clearly, these are all very significant deterrents to the public hospital being a competitive business enterprise. These are nonetheless the circumstances under which the public hospital must operate.

The traditional governance of the public hospital, where it is operated as an arm of government, is yet another critical issue that compromises the viability of those institutions. The traditional hospital board in the private sector is composed of community leaders who have a fiduciary responsibility to the hospital. These boards also tend to be self-perpetuating. Board members are focused on the best interests of the hospital and are frequently the source of financial and community support to the hospital. On the other hand, the true governance of a government-operated public hospital is vested in the executive and legislative branches of local government. These branches of government are often in conflict with one another, and more often in conflict with the interests of the hospital. The holders of legislative and executive offices are elected politicians who may be more sensitive and responsive to the needs and demands of private sector constituents than they are to the public hospital they have stewardship over. Consider the conflict that might occur when a public hospital proposes a business that might be competitive to a private community hospital venture, where that private hospital is represented by legislators who also represent the governance of the public hospital. Even if that initiative was demonstrated to be economically beneficial to the public hospital, it may well be thwarted by a political process.

In some instances, the above issues were partially abated by vesting limited authority in a Board of Managers for the public hospital.13 This form of governance has been employed in such facilities as:

• Boston City Hospital
• Denver General Hospital
• Erie County Medical Center
• Hurley Medical Center
• Nassau County Medical Center
• North Oakland Medical Center
• San Francisco General Hospital

This form of governance may abate the problem to some degree, but more often than not, it does not solve the problem. Evidence of this is that a number of the above institutions, including Nassau County Medical Center and Boston City Hospital, have moved on to other more governmentally-separated forms of governance and still others are in the process of doing this.

Effective governance requires that the Board be vested with sufficient authority to determine the course of hospital operations and policy, that it be focused on the interests of the hospital, and that it be as free as possible from political intervention.

Government control of hospital operations is in and of itself anathema to efficient and effective management of the facility. The list of reasons as to why a government cannot appropriately operate a hospital in a competitive environment could go on for many pages. The most salient, however, might be summarized as follows:

• A public hospital, as a department of government, often does not have control of many of its most significant operations. Services such as purchasing, engineering and maintenance, personnel and information systems are often delivered under the jurisdiction of other government departments. These departments are generally slow to react to the needs of the hospital and do not always deliver a quality service. Most frequently, a government department of purchasing cannot distinguish the special needs of a hospital from the general purchasing needs of the governments as a whole. Further, the purchasing systems of a government are often multi-stepped, inflexible and incapable of taking advantage of emerging group purchasing arrangements widely used throughout the hospital industry. Similar examples can be given for almost any activity of this kind. Government-based operating systems are simply insensitive to the requirements of a modern hospital.
• Public hospital employees are generally civil service employees. As such, these employees are selected through examinations that often do not relate to the hospital environment. Job descriptions and compensation are arrived at through inflexible classification systems; promotion is accomplished again through examination; and removal is accomplished through a quasi-judicial disciplinary process. Suffice it to say that all of this is contrary to effective business operations, and re-engineering becomes almost an impossibility. These civil service requirements may extend up to the Chief Executive of the hospital. Finally, the rigidity of the system tends to increase the cost of operating the hospital.
• Collective bargaining agreements extend to the hospital from the government as a generic bargaining unit (i.e., the hospital is not a separate bargaining unit). Therefore, contracts are not always bargained while being mindful of the special needs of the hospital, and economic terms are concluded in the interest of the government as a whole. Again, this usually means that hospital issues such as reimbursement trend factors, recruitment priorities, and work rule issues are overlooked.
• Hospital construction projects are most often controlled from outside the hospital management structure and in accordance with statutory or procedural requirements that significantly add to the time and cost of a project. An example of this is New York State’s Wicks Laws14 requiring any construction contract over $50,000 be bid out as four distinct and uncoordinated contracts. These are the general contractor, plumbing contractor, heating contractor, and electrical contractor. Any contract management accountability is precluded by this system.
• Another issue deserving some consideration is that public hospitals are not always in the best position to fund-raise. Public hospitals do not have boards that provide the types of leadership necessary for fund-raising, and large donors frequently do not look at tax-supported institutions as the best candidates for gifts. Other community-based not-for-profit organizations may exert political pressure to stop public hospitals from fund-raising in an effort to limit competition for gifts.
• Financing public hospitals often depends on local government subsidies to support operations. The National Association of Public Hospitals and Health Systems Hospital Characteristics Survey, conducted in 1996, listed 68 public hospitals with their local subsidies as a percent of total revenues.15 The average hospital receives a subsidy equal to 12% of total revenue. As government tax bases become smaller, and there is less political will to support these subsidies, appropriations are shrinking. This comes at a time where there are more uninsured and underinsured who are demanding service of the public hospital.

These conflicting forces are placing increasing financial burdens on the public hospital which, if not addressed, will eventually force many of these institutions into closing.

Impediments to Change
It should be obvious that there are many compelling reasons to change or modify the structure and governance of the public hospital so as to ensure its ability to survive. The question may legitimately be asked as to why local governments are not all aggressively pursuing this course. The answer can be found in at least three basic issues.

1. Governments often do not want to lose control of a significant component of their operations that support the overhead of the government as a whole, which is a source of both patronage and political influence.
2. Major labor unions which are important political constituencies do not want to lose their political influence on the collective bargaining process for the public hospital.
3. Private hospitals in the same community may exert political pressure to keep the public hospital tied to government where competitive inclinations can be more easily managed and controlled.

A final issue deserving comment is that there are those who would argue that the public hospital system is not in fact necessary at all, and that rather than change, it should be permitted to die. Perhaps in a social environment where healthcare is truly a guaranteed right, where there is truly universal health insurance for all people, citizen or not, and where specialty programs like trauma centers, burn centers and AIDS centers exist in response to need and without regard to economics, there would not be a need for the public hospital. However absent such a healthcare utopia, there continues to be not only an existing need but apparently a growing one for a safety net system.

At-risk populations, the uninsured and the medically disenfranchised continue to demand service of the public hospital system, which continues to step in to fill the vacuum where other components of the system remain unavailable. If this mission is to be preserved, this can only be accomplished by giving the public hospital the capacity to compete and to operate effectively without a disproportionate reliance on tax subsidy.

This objective can only be accomplished by changing the governance of the traditionally organized public hospital to relieve it of the inordinate business constraints imposed by government operations. At the same time, however, the mission of the system must remain in tact by ensuring that the new governance is structured to ensure public accountability for the inherent public purpose. This seemingly incompatible set of objectives is achievable and will protect a critical component of this nation’s responsibility to its most vulnerable populations.

Footnotes

1 Jerome P. Kassirer, "Our Ailing Public Hospitals: Cure Them or Close Them?" The New England Journal of Medicine, 333 (November 16, 1995): 1348-1349.

2 Raymond J. Baxter and Robert E. Mechanic "The Status of Local Health Care Safety Nets," Health Affairs, 16 (July/August 1997): 7-23.

3 Bruce Siegel, Public Hospitals-A Prescription for Survival, (New York, NY: The Commonwealth Fund, 1996).

4 Stuart H. Altman, Charles Brecher, Mary G. Henderson and Kenneth E. Thorpe, eds., Competition and Compassion: Conflicting Roles for Public Hospitals, (Ann Arbor, MI: Health Administration Press, 1989), 4-12.

5 Roni Rabin, "Complex Sale of NCMC is No Cure-All," Newsday, 15 March 1999, p. A5, A20-21.

6 Ibid, p. A5.

7 National Association of Public Hospitals and Health Systems, Findings from the 1996 NAPH Hospital Characteristics Survey, (n.p.: April, 1998), p. 2.

8 Ibid. p. 2.

9 Ibid. p. 3.

10 Ibid. p. 4

11 Ibid. p. 5

12 Monte Dube, "Restructuring Public Hospitals to Meet Marketplace Demands," Healthcare Financial Management, Journal of the Healthcare Financial Management Association, Westchester (February, 1996).

13 National Public Health and Hospital Institute, "The Organization, Structure and Governance of Urban Public Hospitals," (Atlanta, GA: Powell, Goldstein, Frazer and Murphy, 1993), p. 12.

14 New York State General Municipal Law, Article VIII, Local Finances, Section 1, pp. 361-362.

15 National Association of Public Hospitals and Health Systems, Findings from the 1996 NAPH Hospital Characteristics Survey, (n.p.:April 1998).

16 Jerome P. Kassirer, "Our Ailing Public Hospitals: Cure Them or Close Them?" The New England Journal of Medicine 333 (November 16, 1995): p. 1349.