The Doctor Is In

An alternative to health care cost catastrophes

In 1995, Los Angeles County faced one of the most serious fiscal crises of any county in the United States. The culprit: ballooning costs from a government-run health care apparatus that included six hospitals and 39 health centers and clinics. New York City- -which owns a dozen hospitals and employs more health care workers than the total number of city employees in Boston, Cleveland, San Diego, and Seattle combined–is also experiencing major problems with its health care system.

Maricopa County, Arizona, supervisors think they have a cure: getting county government out of the health care delivery business. In what could become a model for other troubled city and county health care systems, Maricopa County–which includes Phoenix–privatized its entire $620 million-a-year health care system in late March. The county hospital and a dozen clinics were turned over to S.K. Ching and Associates, a private firm based in Los Angeles.

Maricopa County had spent about $46 million a year on direct health care costs and millions more on indirect costs, but generated only $26 million in revenue. Under the terms of the contract, Ching will pay $12.5 million a year in rent for the Maricopa Hospital and the clinics and will receive a fee of $33 million a year to provide care for the uninsured poor. The contract also allows the county to share in any year-end profits.

Tom Rawles, the county supervisor who spearheaded the privatization efforts, estimates the county could save between $80 million and $100 million over the life of the lease without lowering service quality. The savings would come from reducing the county's indirect costs and from the profit-sharing arrangement. "The same people will go to the same facilities and will be treated by the same doctors," says Rawles. "The only thing different is that we have found a new, a better, more efficient way to deliver services."

The county also expects the contract to lead to substantial physical improvements to the health care facilities. Ching has to make $25 million in capital improvements over a five-year period. The firm will have total control over the county's health operations, enabling the company to set fees, close programs, and negotiate purchases free from a host of cumbersome public-sector bureaucratic and legal restrictions.

"It took us six weeks and six signatures just to hire a nurse," says Rawles. "Government can't move fast enough to be in the health care business."