The Impact of Privatization on Efficiency and Productivity: The Case of American Public Hospitals

Abstract

Public hospitals typically operate in more challenging environments than private hospitals. Research suggests that privatization is one of the strategies that struggling public hospitals adopt to stay competitive. The purpose of this study was to examine whether privatization of public hospitals enhances efficiency and productivity. We used a national sample of non-federal acute care public hospitals in 1997 that was tracked through 2013, resulting in a cohort of 436 hospitals (7,386 hospital-year observations). Privatization was defined as conversion from public to either private not-for-profit or private for-profit status. Efficiency was measured by current assets turnover (CATO), fixed assets turnover (FATO), occupancy rate, full-time equivalent (FTE) employees per occupied bed, and work hours per adjusted patient day. Productivity was measured by case mix adjusted admissions per FTE. We controlled for organizational and market factors. Linear regressions with hospital and year fixed-effects models were used to test the hypotheses. Privatization from public to private status was associated with increased efficiency in terms of its positive associations with CATO (β =0.63) and FATO (β =0.23) and its negative association with FTE employees per occupied bed (β =-0.93) all at (p ≤ 0.001). Privatization was associated with increased productivity (β= 0.83; p ≤ 0.001).