Blog Post

Hospital Privatization Increases Profits, at What Cost?

New Study Finds Privatized Hospitals Serve Fewer Patients — Particularly Those on Medicaid — Than Public Hospitals

March 2, 2023

By:

Jen Fisher Wilson

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There is a shrinking number of publicly run hospitals in America. In the past quarter century, the share of all hospital beds at government-owned hospitals has declined by more than 40%. Many of these public hospitals were unprofitable but didn’t close — they were bought by a not-for-profit or for-profit health care system.

Privatizing hospitals in this way may keep their doors open, but how does it affect the provision of and access to care? LDI Senior Fellow Atul Gupta and colleagues studied the effects of nearly 260 privatizations of non-federal public hospitals from 2000-2018 on hospital finances and patient volume across payers.

Their study, recently released as a working paper by the National Bureau of Economic Research, revealed for the first time that while privatization substantially improves hospital profitability, enabling them to become financially sustainable even without government subsidy, patient volume decreases by 8.4%, with Medicaid patients experiencing the largest decline in care.

It’s possible that some of that care was unnecessary, but the results of the analysis indicate that privatized hospitals find ways to reduce the number of Medicaid patients they admit to minimize their exposure to unprofitable patients. While some patients appear to be absorbed by neighboring hospitals, the number of Medicaid patients being hospitalized declines at the market-level, which Gupta and colleagues interpret as a decline in access to care. As a result, Medicaid patients — now approximately 1 in 4 Americans — are “likely worse off due to privatization due to the disruption in their preferred provider and potentially because they may have to travel further or wait longer for treatment,” Gupta said.

Implications for Health Care Policy

Gupta listed several significant policy implications based on the study:

Local and state governments need to strengthen protections for vulnerable patients when hospitals privatize. Public hospitals that turn private become profitable by increasing average revenue per patient. They do this partly by reducing the number of Medicaid admissions which has implications for access to care.
Markets with lower income and limited competition among hospitals warrant extra scrutiny when policymakers propose privatizing a public hospital. Gupta finds that adverse effects on access to care were larger in these markets. As a result, Gupta said, “in such markets, the bar for expected benefits should be much higher for approving a privatization plan.”
States and the federal government should consider policies that could support local governments in maintaining their public hospitals. State and federal decisions to expand Medicaid have benefited low-income communities, but this study showed privatizations partly offset these expansions.

What the Findings Mean for Medicaid

Whether Medicaid’s generally low payment rates are sufficient to ensure access to care is a growing concern: The study’s findings indicate that hospitals can’t recover their losses on Medicaid patients by overcharging privately insured patients, Gupta acknowledged. Other research has found that increased Medicaid reimbursement results in greater access to primary care. Taken together, these studies suggest that an increase in Medicaid reimbursement rates for hospital care might benefit both patients and health care markets.

Gupta and his colleagues are now focusing on learning more about how hospitals reduce the intake of unprofitable patients. To gain insight, they are studying some states with patient-level data, where a number of hospitals were privatized in a short period of time. They have obtained patient-level data on hospital discharges and plan to use it to explore the basis on which privatized hospitals reduce their intake of specific types of patients and which types of patients are hardest hit, such as patients with certain diseases or needing certain services. In addition, they plan to study whether quality of care changes following private ownership.

The study, “The Impact of Privatization: Evidence from the Hospital Sector,” was published on January 2023 as a Working Paper (No. 30824) by the National Bureau of Economic Research. Authors include Mark Duggan, Atul Gupta, Emilie Jackson, and Zachary S. Templeton.