Public/Private Partnerships: Learning from the Model and Implications for Nonprofit Healthcare

As a result of a confluence of complex laws, an aging and chronically ill population, new operating models and a variety of other factors, the healthcare sector is experiencing unprecedented levels of change. It’s an exciting time for the sector, and we’re seeing incredible transformation across the continuum of care. However, for some organizations, these changes are leading to financial strain.

According to the American Hospital Association’s 2013 Hospital Statistics, there are about 5,724 hospitals in the U.S., 2,903 of which are nonprofit. While healthcare is far more than hospitals alone, these institutions are a major component of both the care continuum and total national healthcare spend. In 2011, approximately 31.5 percent of healthcare spending, or about $850.5 billion, was attributed to hospitals; in 2012, this spending increased to $882.3 billion, or $8,915 per person.

This kind of spending is placing tremendous pressure on hospitals to make changes to their operating models to bring down the cost of delivering care. However, such initiatives demand capital, which is in short supply: Standard & Poor’s recently shifted its outlook on nonprofit healthcare to negative, expressing concern that revenue pressures will prevent hospitals from achieving much-needed cost reductions.

So what is a nonprofit hospital to do? For many organizations, a merger may serve as a promising avenue for securing the capital required to make necessary operational changes. However, this is not their only option. These organizations may instead want to consider pursuing a Public/Private Partnership arrangement.

Such agreements typically exist between governmental entities and non-governmental entities, and occasionally, for-profit companies. Under these types of agreements, government entities engage private organizations to carry out essential public services. Arrangements are typically structured around financial and operational activity, with specific governance procedures implemented to preserve the initiative’s public mission. In the case of a nonprofit hospital, this arrangement takes the form of a private company entering into partnership with the hospital to provide the funds necessary to implement cost-reduction and care-improvement programs.

Partnerships can occur at all levels within a nonprofit hospital. Partnerships can provide a means for organizations’ to more effectively fund the provision of care and improve the health of the community being served through innovative programs. Partnerships can also provide an opportunity to share managerial talent and allow hospital staff to share resources, lower costs and improve the standard of care.

Below are some considerations for nonprofit hospitals thinking about pursuing a Public/Private Partnership:
  • Infrastructure assets are to be used, but not necessarily owned. When structured correctly, this agreement allows technology and maintenance risks to be shifted to financial or strategic investors. However, understanding how this new source of capital aligns with the organization’s clinical model is essential.
  • Governance is critical. Any “for-profit” activity, or even perception of such activity, must be clearly delineated and outlined so that the organization can maintain its nonprofit status. This is often a “brave new world” for management, and a cogent, sustainable strategy must be clearly defined and implemented. Board education will be key for maintaining appropriate governance procedures.
  • Transitioning from an operating model to an asset-focused model can be risky. Keep in mind that the traditional hospital-centric model for the majority of nonprofit hospitals will be disintermediated by new care models, such as accountable care organizations and bundled payment models.
  • Transparency and direction from the Board and senior leadership is necessary. Organizations must engage a strong communications office to clearly and frequently communicate with both internal and external constituencies to create a shared vision for the organization’s future.
  • Boards and senior management should learn best practices. Organizations can learn quite a bit about finding the right structure and operating model for them based on the experiences of other entities that have engaged in Public/Private Partnerships.
  • Do you think Public/Private Partnerships are a viable option for the nonprofit health sector? Tell us more in the comments below.