A Profit a Day Keeps Insolvency Away

It took a dose of the private sector to revive an ailing government hospital in Canada.


Hawkesbury, Ontario, is a town of some 10,000 people located between Ottawa and Montreal. The local hospital is a pair of three-story brick buildings. About two years ago, an experiment was launched in those buildings that holds out the hope of radical improvement to many hospitals in the Canadian hospital system and elsewhere.

The experiment did not carry the drama of a new advance in surgical technique. There were no transplant headlines, no trumpeting of new coronary-bypass operations. Rather, the experiment was economic, not medical. Yet it may prove to be more beneficial for patients generally than some of the very high-cost, high-prestige projects that abound in the medical arena.

The story starts a few years ago. Hawkesbury General Hospital was the result of the amalgamation of two old hospitals—both badly in need of modernization—that jointly were supposed to provide medical care to a total community of 35,000 people. Hawkesbury operates within the Canadian health system, which provides "free" medical care to the public.

This joint operation had been running at a half-million-dollar annual deficit for many years. The hospital was not accredited (that is, it had not passed certain specified inspections by the national Ministry of Health). The hospital board of governors was not able to get the hospital management to adopt quality-assurance programs. To cap it all off, the hospital was plagued by major problems with morale and labor-relations.

For several years, the hospital board had struggled with these problems, but it was effectively barred from achieving any improvements because of inadequate information and inefficient administration. The final straw came when it found it could not raise from local resources the necessary one-third share of the costs to construct a new building. Faced with the prospect of having to make do with its antiquated facilities, and with the possibility of half-million-dollar annual losses in perpetuity, the hospital board turned to the Ministry of Health for assistance.

The ministry suggested that the board consider employing a private hospital-management company to help it cure its financial woes and put the hospital back on the rails. The board was far from overjoyed at the prospect of handing over the management of the hospital to a private concern, but, nevertheless, it invited tenders from 11 companies and received bids from three, including one from a major Ottawa public hospital. It selected one—American Medical International (AMI), the third-biggest of the American hospital/health-care companies, based in Beverly Hills, California—and signed a 12-year management contract, which took effect January 1, 1983. Hawkesbury thus became the first privately run hospital within Canada's public health system.

The results were dramatic. In its first year managing Hawkesbury, AMI transformed the $500,000 annual deficit into a surplus of $369,000. Staff morale has improved. A senior inspection team from the Ministry of Health found "improved methods and services in the past year with a positive influence on the quality of patient care." The chief of the medical staff at the hospital commented, "Patient care has improved 200 percent."

In more-specific terms, the hospital has doubled the size of its physiotherapy department and has added dietary counseling and an ultrasound department to its services. Extra nursing staff in the emergency department ensures that patients may now be seen within the hour, rather than the previous wait of up to four hours. Staff-training expenditure has been increased from virtually nothing to $15,000 within the first year. The hospital library, which was previously described by the chairman of the board of governors as "virtually useless," is being updated over a three-year period. Good purchasing management made possible the acquisition of an electronic patient-monitoring system at a discount of 15 percent.

There were no miracles at Hawkesbury—nobody walked on water. The sharp improvement in efficiency and major upgrading of quality of service were both achieved by common sense, good management, and a combination of medical, technical, and managerial expertise. Proper financial-control systems were installed; first-class specialist advice in a variety of technical areas was made available; and most important of all, department heads were given responsibility and were required to exercise it. In the words of Rhonda Schaffer, the hospital's chief dietician, "We were given control and responsibility of our departments, and the resources to run them professionally."

American Medical International seems to have exercised subtlety and discretion in handling these matters. Above all, it employed a highly competent Canadian as hospital administrator and gave him plenty of support, rather than bringing in lots of American outsiders.

The improvements were also achieved without laying off any full-time workers. There were cuts in overtime and in part-time staff, and a number of petty abuses of hospital resources (such as telephones) were eliminated. But the staff and their branch unions seem very happy with the change. The president of the laboratory technicians' local put this succinctly: "Employees feel a new direction. We all have the same goal. We're trying to better see what's going on in each department."

On a national level, the unions have been silent—and of course the Ontario leadership of the New Democratic Party, Canada's socialist party, has described the private management of public hospitals as a threat to the state-run healthcare system. Beyond that, however, there has been a remarkable absence of criticism.

Most notable has been the conversion of the hospital's board. Many governors were concerned about placing the care of their patients in the hands of people whose objective is to make a profit. Not unreasonably, they were concerned that the company would be tempted to cut costs at the expense of the quality of care—at the expense of the patients. In fact, the reverse has happened: higher quality and lower costs were achieved simultaneously and by the same actions. This is a lesson that Japanese industry has been teaching the West for twenty years: intelligent pursuit of higher quality can very rapidly lead to lower costs. It does not matter whether we are considering cars, cameras, calculators, or care of the sick—the same principle applies. For example, preventive medicine is highly cost effective and simultaneously provides the best possible quality of health care: less sickness.

A slightly more arcane example demonstrates how human ingenuity can help both the cost and the quality of care. A number of hospitals under the management of AMI needed a computer-assisted topographical (CAT) scanner, an expensive and sophisticated diagnostic tool. None had sufficient resources to buy one, and indeed none could utilize one to its full capacity.

The management firm responded by packaging the delicate electronic machine so that it could be transported by road between hospitals. Thus, high-quality health care was brought down to a practicable cost. By contrast, under a government-run system it is perfectly possible for three hospitals in a single city each to have its own, underutilized, machine.

Moreover, with AMI'S track record, a bank was willing to loan the money needed for the construction of a new facility, and the hospital moved in this year. As a result of this and other achievements, interest in the private contract-management approach is spreading rapidly among hospital boards throughout Ontario.

Hawkesbury, it's worth noting, is not an isolated example. In the United States, a number of public-sector hospitals have been rescued from the final stages of decline by private hospital companies. As at Hawkesbury, costs were cut at these institutions while quality of care was improved. The Hawkesbury experiment is not just remarkable—it is repeatable.

Canada, like other countries, has difficulties funding its health-care system. The costs of running Canadian healthcare institutions doubled in the six years to 1982. Furthermore, the quality is not uniformly good. Some 54 percent of Canadian hospitals are not accredited. Although a lack of accreditation does not automatically imply either inefficiency or poor quality, the size of the number does indicate that there is scope for many more Hawkesburys.

The experiment at Hawkesbury demonstrates that it is possible, within a nominally free public health-care system, to "privatize" the provision of hospital services. More important, such privatization shows that making profits and caring for patients are not conflicting goals: running a hospital on a sound business basis in fact makes it possible to have both lower costs and better care, an achievement that eludes governments.

Naturally, extreme care would have to be exercised in deciding how the contracts and remuneration procedures of a privatization scheme would work. There are many pitfalls that could induce either poor care or unnecessary increases in the cost of the hospitals. But there are many examples of both successful and unsuccessful contractual arrangements within the American health-care system. A relatively small amount of investigation would produce robust guidelines as to how privatization ought to be achieved.

In my native Britain, privatization would be especially beneficial. Demographic changes are going to cause the cost of the National Health Service (NHS) to climb by more than one percent a year above inflation; technological costs may increase this further. If Britons are to maintain current levels of health care—and improve those levels without taxing the economy to the breaking point—they must find ways of reducing health-care costs. It is time that Britain undertook its own Hawkesbury experiment.

Private contract management of a National Health Service hospital would not, of course, give Britons any extra freedom of choice. Neither would it tell us if our hospitals are operating at their optimal size; nor would it, per se, break the monopoly of the NHS unions. It would simply give the taxpayer better value for the money; and the sick, better care.

Britain has plenty of run-down hospitals. And there is no shortage of candidate companies able to attempt the task of revitalizing these institutions. At worst, it would be a low-cost/no-cost experiment. We—the people who both pay for and use the National Health Service—would have nothing to lose and much to gain. The same could probably be said for government health systems everywhere.

David Davis is a senior executive with Tate & Lyle, the British-based international sugar manufacturer and refiner. He recently returned to the United Kingdom after spending two years in Ontario, Canada.