Sunday, December 15, 2013

One of the things to consider about private equity ownership of a hospital system--given the inevitable desire of the investment firm to flip the system--is what it is has done to the cababilities of the organization during the holding period.

For example, one such firm has a policy of outsourcing as many of the hospital functions as possible.  It removes staff from the payroll and shifts their functions to a third party.  Examples are campus security, food service, mechanical engineering (the people who maintain medical equipment), and laundry.

What does this do? Well, if the goal is to attract as a potential buyer of the system a for-profit hospital chain that has a central services organization, that buyer would not need to worry about taking on as many of the staff of the hospital system it is purchasing.  It would avoid the discomfort of layoffs and also obligations like unemployment tax, accumulated pensions, and the like.  It could also provide these services with little incremental cost from its own central services department--simply cancelling or not renewing the local third-party contracts that have been in place.

In summary, outsourcing avoids costs and obligations and therefore enhances the likely purchase price in the flip.

But what if the original private equity owner had made promises of enhancing the capabilities and professional advancement opportunities of the local workforce? Well, that's a commitment that goes by the board.


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