Health services represent a growing segment of state budgets. A variety of privatization techniques can streamline operations in a number of health-related areas (see Table 10).

Table 10

ACTIVITIES PRIVATIZED THROUGH CONTRACTING HEEALTH

Activity

Profiles of Respondents

% Responsible Agencies that Privatize

Administration

100%

37%

Clinics

49%

88%

Community Health

55%

67%

Hospital Operation

49%

62%

Mental Health

42%

69%

Mental

36%

57%

Medicaid

39%

75%

Public Policy

61%

8%

Public Regulation

61%

20%

Other

24%

n/a

Source: State Government Privatization 1992, Apogee Research, Inc., p. 24.

MEDICAID

Medicaid costs to state governments are growing exponentially. In North Carolina, Medicaid spending grew by 20 percent a year in the 1980s. States' share of Medicaid, a joint state/federal program, is increasing at twice the rate of overall state spending. Medicaid now consumes 14 percent of the average state budget.

Privatization is one way to slow down the rise in Medicaid costs. One privatization option is contracting out the administration of medicaid to a health insurance organization (HIO). HIO's do not actually provide medical care. They simply act as financial intermediaries between medicaid recipients and health care providers. Texas and Indiana, for example, contract out Medicaid to private insurers.[69] Blue Cross and Blue Shield provide comprehensive health services to medicaid recipients in Indiana, rather than the state operating the program itself. Blue Cross and Blue Shield have an incentive to keep costs down because their contract with Indiana establishes a fixed per-capita premium for each Medicaid recipient.

Another approach is to eliminate Medicaid as it is currently administered and, instead, provide Medicaid recipients with vouchers that could be used to purchase private health insurance.[70] The vouchers would be equal to the average medical expenditure for a family of equal size as the Medicaid recipient's family. These vouchers could be pooled by individuals and families to purchase group policies.[71] The voucher could also be used to join health care service organizations such as Health Maintenance Organizations (HMO's).

MEDICAID PROCESSING

Fifteen states contract out Medicaid processing to private contractors. California and Louisiana have performance-based contracts with private contractors allowing the contractor to keep a percentage of the money they save the state.[72]

HOSPITALS

For over a decade, states have looked to privatization as an alternative to closing state general hospitals in hard economic times. (see Table 11) Two state hospitals in Pennsylvania, for example, were rescued from imminent closure in 1991 when they were sold to private firms who took over their operation.[73]

Table 11

HOSPITAL OPERATIONS PRIVATIZED

Operations

% Responsible that Privatize

Ancillary

62%

Building

38%

Data Processing

25%

Dietary

38%

Housekeeping

31%

Nursing

38%

Management

44%

Other

13%

Source: State Government Privatization 1992, Apogee Research, Inc., p. 24.

Over 200 public hospitals have been turned over to private for-profit interests since the late 1970s and many more to nonprofit organizations. States receive a one-time windfall from the sale, a new source of tax revenues (if sold to a for-profit hospital), and divest themselves of a deficit-generating activity.

Opponents of hospital privatization often assert that for-profit hospitals will not treat poor patients.[74] This claim seems to be refuted by the available evidence. A 1985 study found that for-profit chains provided the same amount of free care to the poor as voluntary, nonprofit hospitals.[75]

MENTAL HEALTH INSTITUTIONS

Another area ripe for privatization is state mental health facilities. By contracting with private firms and transferring patients to private, community-based settings, states can realize substantial cost savings. Furthermore, patients may benefit by being placed in more humane settings. Due to the nature of the service, however, great care must be taken in contract monitoring to assure that patients receive quality care.

Florida, Kentucky, and Massachusetts have all privatized at least one mental health institution. Kentucky saved 60 percent by contracting with Res-Care for the management and operation of the Outwood Mental Retardation Facility.[76] Considerable privatization in mental health has been carried out in Michigan since 1991.

Massachusetts has recently closed four state mental health hospitals and plans to close five more. Patients have been transferred to private, community-based residential care settings. According to the Massachusetts Department of Health, closing the state hospitals and contracting out care to private contractors will result in annual cost savings to the state of $60 million.[77]

The privatization of mental health care in Massachusetts has not been without controversy. Critics have challenged the state's numbers on projected cost savings and questioned the competitiveness of the bidding process. Two lessons have emerged from the Massachusetts privatizations:

  • Accurate, presentable numbers on cost savings are crucial. The numbers should preferably be generated by an outside accountant and should stand up to close scrutiny.

  • A fair, open and transparent bidding process is critical to the long-term success of privatization. Any appearance of inside deals could doom privatization prospects.