Understanding the Hospital's Role in the Community

I n most communities, not-for profit or public hospitals are governed by a community-
based hospital board. Our case studies and conversion experiences elsewhere show clearly the prospective loss of traditional community control is of great concern for such boards and their communities. Fundamental to such control is the autonomy of such governing boards to make decisions regarding the provision of community benefits based on perceived local needs.

This section discusses the importance of understanding the hospital's mission and role of the hospital as a provider of health care and community benefits. This understanding has critical implications for which conversion options make sense to consider.

WHAT IS THE HOSPITAL'S MISSION?
In many conversion situations, hospital governing boards may consider lucrative bids appearing to meet the hospital's immediate and future needs. Before reaching this stage, the governing board would benefit from reviewing the hospital's mission and role in providing health services and community benefits. In their conversion process, some hospitals have actively sought the input of the public through hearings and community forums (Section II). However accomplished, these essential steps in strategic planning provide decisionmakers with important insights needed to understand the pros and cons of alternative conversion bids, ensuring the health and other interests of the community are protected.

Central Questions to Consider
There are three key questions governing boards might consider prior to conversion:

Who are we as an organization—what are our core beliefs, mission and vision?

Why do we need a partner to live out our values and vision in the future? What problems, deficiencies or barriers to our desired future would be attained through a partnership?

What advantages and synergies do we hope to gain from a partnership and in return, what are we prepared to give up in the way of autonomy and control?

A hospital governing board that knows the answers to these questions is in a far better position to make a decision that is a win-win situation for both the hospital and community.

Hospital's Role in the Community
The following are illustrative questions that may help clarify the hospital's mission and role in the local community, region and state:

Does the hospital have a specific mission dictated by a corporate charter or historical precedent (e.g., providing indigent care)?

Does religious affiliation influence the services that can or will be offered?

Does the hospital have a history of serving a particular geographic area?

Does the hospital have commitments beyond the immediate community (e.g., medical education or research)?

Are there community health needs currently not being addressed by the hospital that could or should be?

What alternatives would citizens have if the hospital were not providing specified services and what would the consequences be (in terms of travel times, risk to health) if patients had to seek care elsewhere?

Once the core elements are defined, the community may assess the importance of each by posing the question: would conversion be acceptable to our community if these things were changed? If certain priorities appear central to the operation of the hospital, the community must further assess its willingness to change by asking: would conversion be acceptable if it were the only way to meet our community's priorities?

* Narrowing conversion options to reflect priorities occurred in the Wake Medical Center case. The county wanted indigent care to continue, but believed this mission might not be carried out adequately by a for-profit owner. The county commissioners therefore chose to convey hospital assets to a not-for-profit board despite strong interest and attractive offers made by for-profit bidders.

WHAT ARE COMMUNITY BENEFITS?
Not-for-profit hospitals historically have received tax exemptions and related subsidies based on the assumption that they provide unique benefits to the communities they serve. Similarly, county facilities often offer needed services at a financial loss, relying on tax subsidies to fill the gap. For these reasons, the wave of consolidation in hospital markets and the increase in for-profit hospital numbers has caused a great deal of concern regarding the impact these changes will have upon the provision of these services.

It is a common perception that once a not-for-profit hospital enters the for-profit sector, the number and type of community benefit services it provides will be dropped in favor of those that are more profitable. However, supporters of for-profit hospitals assert that generating a healthy profit entails keeping the public satisfied with the availability and quality of hospital care – an approval that might be jeopardized by the reduced provision of community benefits.

The following section describes some of the community benefits provided by hospitals and summarizes the evidence on whether conversion to a different ownership type jeopardizes their continued provision. Generally, there is far more evidence about general differences in hospital performance by ownership type than about the effects of conversion. But this is true for other industries as well, as there has been relatively little research on conversions in any industry.

Those making the conversion decision must determine their hospitals' areas of commitment among these benefits, analyze the evidence and determine which areas are the most important and feasible to pursue in their conversion agreement.

Community Control
Some emphatically oppose the conversion of a local hospital to ownership by either a for-profit firm or out-of-area interest (even a not-for-profit owner) as locally owned hospitals are presumed to be more receptive to local needs.1 These opponents assume that, the profit motive or lack of understanding/receptivity to local needs, the new owner may reduce or eliminate community benefits earlier provided by the hospital. While the merger, sale or other conversion of a hospital does unavoidably alter the balance of control, a growing body of evidence suggests for-profit and not-for-profit hospitals are more similar than different in terms of overall community benefits. Moreover, conversion agreements may be structured to include continued community input in key hospital decisions and mechanisms to enforce agreements to retain community benefits.

* A 1995 Kaiser Family Foundation poll found that while feelings are mixed about the relative merits of for-profit versus not-for-profit hospitals, fully 70 percent of Americans prefer local control to a national chain (regardless of ownership type).

Hospital Survival
A hospital cannot provide any of the following community benefits without continuing to survive. Therefore, a central question is whether conversions improve the odds of survival. One important element of survivability is profitability.

* An early study of Florida conversions from 1979-82 showed that profit margins of converting facilities grew 8 times faster than those of nonconverting hospitals, A more recent study of all not-for-profit to for-profit conversions from 1988-1995 found that profitability improved substantially in converting hospitals.11 In both studies, profitability increased much more rapidly in converting hospitals relative to those that did not convert. Even though profitability improved, absolute levels of profitability following conversion still fell below that of facilities that did not convert. Both studies also found that profitability grew more rapidly in for-profit to not-for-profit conversions than in not-for-profit to for-profit conversions. However, this appears to result from the fact that for-profit firms tend to acquire hospitals that have higher pre-conversion levels of profitability than other hospitals that convert.8 * Among the 10 Project Hope case studies, all hospitals (4) that had been losing money and 3 others that had not clearly improved their financial performance following conversion.

These analyses and case studies imply that conversion improves the chances of survival, which generally is supported by the handful of studies on this question.

* A recent study of all U.S. not-for-profit to for-profit conversions from 1989-92 found that by 1995, 7.2% had closed (compared to a 5% failure rate among all community hospitals during that period). An earlier study of rural hospitals showed system affiliation with a not-for-profit chain did not affect the chance of survival, while affiliation with a for-profit chain significantly reduced survival odds.

* In 6 of our 10 cases, conversion was judged by those we interviewed to have had a beneficial effect in averting an eventual closure.

IV. Conversion Options

A Guide to Communities Considering Hospital Conversion
Durham, NC: Duke University, Center for Health Policy, Law and Management, May 1998.