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On January 1, 2017, the KHI News Service became part of KCUR public radio’s new initiative, the Kansas News Service. The Kansas News Service will continue to cover health policy news and broaden its scope to include education and politics. All stories produced by the former KHI News Service are archived here. Stories and photos may be republished at no cost with proper attribution and a link back to KHI.org.

Challenges ahead on path to privatize Osawatomie State Hospital

By Meg Wingerter | November 21, 2016

Challenges ahead on path to privatize Osawatomie State Hospital
Photo by KHI News Service File Last week, state officials posted a request for proposals to operate Osawatomie State Hospital. Kansas’ request for proposals stipulated that the state would reduce its hospital funding and the contractor would need to find other revenue sources.

Kansas officials have taken the first step toward privatizing Osawatomie State Hospital, but drumming up interest from potential bidders, finding a workable financial model and convincing the Legislature all are hurdles.

Last week, state officials posted a request for proposals to operate Osawatomie State Hospital, one of two state-run psychiatric facilities for people deemed a danger to themselves or others. Federal officials halted Medicare payments to the hospital in December 2015 after finding dangerous conditions for patients and staff, costing the state about $1 million per month.

Since then, the hospital has hired additional staff, completed renovations and worked with a consultant to improve its care. It isn’t clear when inspectors will come to perform the two inspections the hospital must pass to begin receiving Medicare payments again.

Tim Keck, secretary of the Kansas Department for Aging and Disability Services, said at the end of the legislative session that the department would focus on getting Osawatomie State Hospital recertified before pursuing privatization.

But he said during a legislative hearing last week that the process has taken longer than expected.

“We’ve done that at this point mostly because we haven’t been recertified yet,” he said. “I believe we need to look at what other models might be to operate the state hospital.”

Photo by Andy Marso/KHI News Service Tim Keck, interim secretary of the Kansas Department for Aging and Disability Services, told legislators at a meeting of the KanCare oversight committee on Friday that the department wasn’t wedded to privatization of Osawatomie State Hospital but would consider the merits of any proposals it receives before bringing them to the Statehouse.

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KDADS isn’t looking to privatize the other state hospital in Larned because it has newer facilities and wasn’t decertified, Keck said.

He told legislators at a meeting of the KanCare oversight committee on Friday that the department wasn’t wedded to privatization of Osawatomie State Hospital but would consider the merits of any proposals it receives before bringing them to the Statehouse.

Financial aspects

Any contractor will face hurdles to profitability. Many Osawatomie State Hospital patients don’t have private insurance and Medicaid currently doesn’t pay for stays in large mental health facilities if they last longer than 15 days. Medicare could reimburse the hospital for caring for older patients, but Osawatomie State Hospital would have to complete recertification first.

One of the main advantages of privatizing is that the contractors usually can offer higher salaries and more benefits to attract employees, said Brian Hepburn, executive director of the National Association of State Mental Health Program Directors. States don’t usually save money on the cost of operating a psychiatric hospital when they privatize, he said, but in some cases they do see savings if contractors build new facilities that cost less to maintain than older state hospital buildings.

Kansas’ request for proposals stipulated that the state would reduce its hospital funding and the contractor would need to find other revenue sources. That might work, because insurers tend to be more willing to pay for treatment at a private facility than at a state hospital, Hepburn said. A contractor also could get around federal limits on Medicaid payments to psychiatric hospitals by opening multiple smaller facilities, he said.

Potential bidders have until Dec. 29 to submit their proposals for Osawatomie State Hospital. Some other state proposals to privatize have stalled at that point due to lack of interest from the private sector, Hepburn said.

In other states, at least one bidder has come forward, but state officials haven’t found the proposal to their liking. Texas rejected bids to privatize two of its state hospitals: one over concerns about staff cuts, according to the Texas Observer, and the other after the state auditor found problems with how officials tentatively awarded the contract, according to the Texas Tribune

Other state models

States moving forward with privatization have taken several tactics, Hepburn said. In Maryland, for example, the state has agreed to pay private hospitals to treat voluntary patients while patients committed by a court continued to go to a state facility, he said.

“They’ve privatized, not in terms of whole hospitals, but in terms of populations,” he said.

That model appears unlikely in Kansas because the request for proposals mentions both voluntary patients and those committed by the court. Osawatomie State Hospital has treated only involuntary patients for more than a year, and private hospital psychiatric units have little capacity to treat more people.

Fewer contractors tend to be interested in taking over an entire state hospital, particularly if it involves using older facilities, Hepburn said. The Kansas request for proposals doesn’t specify that a contractor must use the existing facilities, but it does require the bidder to keep at least 94 of the 206 beds in Osawatomie.

“That might be more problematic,” Hepburn said.

Even if KDADS receives a bidder who meets all of its conditions, however, the plan still must pass the Legislature. A bill signed by Gov. Sam Brownback earlier this year requires legislative approval before either state hospital could be privatized, though it doesn’t spell out the process for seeking that approval.

Rep. Jim Ward, a Wichita Democrat, told Keck on Friday that privatization has fallen short of its goals for the Kansas Medicaid program known as KanCare and the foster care system in Kansas.

“I don’t see how anyone … could think privatization is a good idea,” he said.

Rep. Will Carpenter, an El Dorado Republican, argued the Legislature should at least look into any proposal, however.

“I commend the secretary for taking a look,” Carpenter said. “What do we have to fear, to look at it?”