A revolution is occurring in the way that health care providers meet the needs of the indigent and uninsured. As greater and more cost-effective health care choices become available, governments are finding it less desirable to directly operate their own hospitals and clinics. Privatization of these publicly owned and operated health care facilities has become an important alternative to providing health care to the poor.

The main force driving this privatization revolution, next to the stark reality of dwindling public resources, is the vigorous competition that exists between private, for-profit hospitals and nonprofit hospitals for treating poor patients. In many communities, even those on public assistance now have a choice of providers. The advent of HMOs is leading to a fundamental restructuring of the whole health care system. One offshoot of this is a declining need for hospital beds.

Governments exploring hospital privatization have several options, depending upon the nature of the region's present system and the external market area. They might

a) sell the hospital asset to a private company;

b) lease it to a private management firm;

c) enter into a joint operating agreement (whereby the government relinquishes direct management of the hospital but maintains a presence via board members);

d) begin a joint venture, where both private- and public-sector partners maintain ownership of the hospital;

e) start a public-private partnership (where government sells the hospital, but purchases back bed space for indigents); or

f) engage in comprehensive outsourcing of hospital duties.

The once-public Pontiac General Hospital in Pontiac is now a private-sector, nonprofit health provider. The new hospital has invested millions in upgrading its facilities and services while relieving its management of cumbersome city rules.

The North Oakland Medical Center (NOMC) in Pontiac is just one example of successful hospital privatization. Built by the city in 1980 and christened Pontiac General Hospital, NOMC was renamed and privatized in 1993 with the creation of a "going concern lease" with hospital management. A going concern lease is an agreement that allows the standing management team to continue operation of a going concern, such as a hospital, while converting the hospital's legal status from public to nonprofit.

The new, nonprofit NOMC financed the $50 million deal so that the city of Pontiac could retire its outstanding debt for the hospital, fund retirement plans for city employees and pay for a number of other transactions necessary to convert the government-owned hospital to 501(c)3 nonprofit status. No public funds were used in the transition, and NOMC also agreed to pay the city a lease fee of $1million annually plus $50,000 for the land on which the hospital is located.

Though a nonprofit, NOMC must respond to market incentives and operate as if it intends to make a profit. The "profits" are then reinvested into the hospital's operations: So far, NOMC has been able to afford an $8 million facelift, including an improved emergency room and the addition of a family birthing center with 17 labor/delivery/postpartum recovery suites.

NOMC now has a board of directors recruited from the private sector, and it contracts with North Oakland Medical Center Services, Inc., a for-profit business created by the hospital, to handle medical practice management and billing services. In addition, it is currently developing a new imaging center in Clarkston. Plans for the future include a new medical center located in Lake Orion or Oxford, created in conjunction with McLaren Health Care Corporation, a $1.2 billion, privately owned organization. The profits from these new ventures will help fund NOMC's Pontiac operations.

NOMC's move to nonprofit status had less to do with direct financial needs than it did with the need of hospital staff to avoid the drag of government bureaucracy. Cumbersome procurement and personnel regulations, lack of sound marketing and promotion, and multi-layered management constrained NOMC's decision-making process, as it does for most govern- ment-owned hospitals.

By converting to nonprofit status, the hospital was able to streamline its operations, especially in purchasing. Private management has also allowed the hospital to partner with other medical facilities, something that was forbidden under government management. Since privatizing, NOMC has established partner relationships with the Detroit Medical Center and Karmanos Cancer Institute, which both greatly supplement NOMC's operation and reach.

There are 3,095 nonprofit, 2,421 government, and 752 for-profit hospitals operating in the United States today. The popularity of nonprofit and for-profit hospitals is growingand for good reason: They have a greater ability to outperform their government competitors in an industry increasingly concerned with providing quality care to customers while maintaining prudent use of scarce resources.

Privatization of public hospitals can sometimes be daunting: It involves crossing a minefield of regulations, selecting the best structural arrangement to meet local goals, negotiating the best deal possible, and handling union and sometimes public opposition. But done correctly, privatization has proven it is worth the effort. It can eliminate waste, save resources, reduce debt, and create a better health care system for those who need it most.

Portions of this article are adapted from Privatizing Public Hospitals: Strategic Options in an Era of Industry-Wide Consolidation, a Reason Foundation study by Richard Tradewell.