False alarm obscures hospital privatization savings

A false alarm should not detract from the fact that, to this point, privatization efforts of Louisiana’s charity hospital system are pulling in more revenue than predicted, although vigilance will be required to ensure the realized savings do not get overcommitted and prematurely in years to come.

Some unnecessary anxiety came from one media source when it breathlessly reported from an item in an in-house publication put out quarterly by the Legislative Fiscal Office, which is attached to the Legislature to analyze the fiscal impact of legislation. The LFO claimed that existing cooperative endeavor agreements signed with the operators of state hospitals were supposed to generate over $140 million for the state, but predicted only $101 million or so would materialized, leaving the actual intake $38.75 million short. This money was assigned to pay for several budgetary items out of a pool where 70 percent would go to higher education.

But the LFO report was dated and not privy to inside information, leaving an erroneous impression. First, it was not even sure about its figures because it printed that one CEA remained unresolved, that for Huey P. Long Medical Center in Pineville. But last week those details, apparently overlooked by LFO staff or happened too late to include in the online PDF version, were finalized, in that the takeover there would not occur until the beginning of FY 2015. Thus, the LFO printed estimated figure was “final.”

Except that it also was inaccurate. Commissioner of Administration Kristy Nichols pointed out two errors that, in defense of it, the LFO could not have known unless it had specifically solicited Nichols’ information for this, which it must not have. But the Associated Press did, whereupon Nichols revealed that the operator of the two northern Louisiana facilities, the holding corporation of the Biomedical Research Foundation of Northwest Louisiana, made a bonus quarterly payment to pay for an entire fiscal year even though it would only operate the hospitals starting Oct. 1 (nice of it given that it vacuums a tax-based subsidy from Caddo Parish property owners annually), and that the holding corporation for Children’s Hospital in New Orleans was making a whole year’s early lease payment for operation of the Interim LSU Public Hospital in New Orleans; in other words, paying now for two years.

Of course, one can’t expect these bonuses every year. The BRF has a 10-year lease and the advance payment by Children’s is completely voluntary and lasts only through 2017 or when it ceases operation of the interim facility and moves to the new Big Charity. And regardless whether Nichols at some point after the beginning of the fiscal year realized that on paper the state wouldn’t make it and asked if the BRF and Children’s might help out, the fact is with an extra $11 million thus coming from the former and $44 million from the latter, for this year the state actually will have an extra $6 million more than anticipated. And that figure could increase for this and later years by other provisions for “advance” and “additional” rent as defined in the Master Hospital Lease.

Understand that this means for next year there’s no BRF bonus and Children’s does not have to pay $44 million, plus; there’s an inflation factor that could bump up next year’s lease payment by a million bucks or so, meaning that many fewer dollars would be available for funding other things. But there will be additional revenues from the HPL privatization, probably at least $10 million, and the inflation factor will add a couple of million more. So it’s not inconceivable that the leases will pull in $75 million next year, and then perhaps $125 million. By the next fiscal year, with the new Big Charity in place, the agreement guarantees at least a $35 million bump up from the previous level.

For now, that means that even if subtracting out the BRF bonus and Children’s prepayment, the state will save $86 million over continuing the public system run directly by the state, and will go tens of millions higher when the new Big Charity rate kicks in and because privatized operation will hold down increases as compared to public operation. Further, extant literature indicates the quality of care is better in for-profit and not-for-profit hospitals than government hospitals, so not only will taxpayers be better off, but also clients. Privatization remains the right move in that sense, but the Gov. Bobby Jindal Administration must be careful not to overpromise the benefits of it relative to the rest of the budget by making sound policy choices in forecasting lease revenues and in their uses.