PPP Problems & Pitfalls: How to Avoid Them

1. PPP Problems & Pitfalls: How to Avoid Them April Harding MazowieckeVoivodeship January 28 2010

2. Key points PPP design to suit goals PPP design to fit context You will get things wrong (managing implementation is critical) The “partnership” is critical

3. Outline UK Case and Lessons Spain Case and Lessons Conclusions

4. UK starting point 1992: directly administered hospitals UK national government directly administers hospitals National Health Service (NHS) owns the hospitals, and funds their operation Rigid public services rules undermines effective, responsive operation. Low spending, run-down facilities

5. PPP infrastructure model gets adapted for hospitals In infrastructure sectors (power, transport, water, rail) • tendered for finance, facility & services • large amounts of capital upfront; risks are big, but there are many payers • efficiency gains captured in full range of activities (facility design and operation) When applied in health, one big change: services omitted. In health: another key difference, only one payer, the NHS….more risk, higher cost

6. Omitting services, limits efficiency gains Average % of hospital operating budget by cost category 54% Clinical Care Delivery Building Design & Constr. Support Services Diag & Lab Pharm-acy Facility Mgt, Maint Dietary IT Medical Tech

7. Limited efficiency gains What the private sector does.... PRIVATELY-FINANCED ‘DESIGN, BUILD, FINANCE AND OPERATE’ PUBLICLY-FINANCED ‘DESIGN & BUILD’ Designs Builds Non-clinical services Designs Builds Finances Non-clinical services, for 25-30 years

8. PFI benefits 90% of all PFI projects delivered on-time Within budget projects Better maintenance

9. PFI costs Transactions costs are higher for PFI than traditional procurement: • external advisers for all parties • longer duration of tendering and contract negotiation

10. Higher Cost of Capital PUBLIC FINANCE • Government borrows • Government’s cost of capital paid • (Future taxpayers bear risks) PRIVATE FINANCE • Borrow from banks, bond and equity markets • Higher cost of capital

11. Privately Financed versus Well-Managed Publicly Financed PFI offers: • Slightly lower construction costs • Fewer construction time overruns • Little difference in support services • Better maintained hospitals • Higher transactions costs • Higher costs of borrowing

12. Result: in most cases, not value for money PFI model used less often after budget reform compelling the costs to be properly accounted for (e.g. on capital account) Main driver may have been getting around budget constraints on capital investment Insight: PPP model didn’t fit the objectives of cost savings, and services improvement Insight: Poor accounting misrepresented “value for money”

13. Valencia government applies a comprehensive PPP model

14. Valencia starting point State (sub-national govt) directly administers services Universal coverage; tax finance Lacking facilities Rigid public services rules undermines effective, responsive operation.

15. Alzira community needed a hospital Alzira community – 230,000 people Nearest hospital: Valencia, > 30 miles Political promise to build a new hospital

16. PPP for finance, facility & services PUBLIC FINANCING Builds new premises Employ medical staff Management “know how” Free & public healthcare services CAPITATION PAYMENT PERIOD: 10/15 years ALZIRA MODEL PUBLIC CONTROL PRIVATE PROVIDER Local Government Inspector Control Inspection Returns to the Local Government after 10 years PUBLIC PROPERTY

17. Innovativeservicespurchasing: “moneyfollowsthepatient” Yearlycapitation paymentforeachperson Hospital is paid an 80% of the cost of treating patients from other area Hospital pays 100% of the cost of patientswhogo elsewhere CAPITATION PAYMENT Annual review: CPI or % healthbudget

18. Alzira: phase 1 Alzira Model I (Hospital Care): 1999/2003 • Contract #1: lease of facility/ land • Contract #2: concession for 10 years, extendable to 15 for the operation of hospital services for people in catchment area • Capitation fee: $300 + CPI (1999) • Investment commitment ($95M) - build new hospital

19. 2002: Alziramodel clearly not working Consortium can’t cover costs Can’t constrain costs because PHC referrals are high, and they can’t influence them Can’t deliver investment, and new facility Renegotiation - PARTNERS

20. Alzira II: integrated with PHC to enable cost control Alzira Model II (Integrated Care): 2003/2018 • Contract #1: lease of facility/ land • Contract #2: concession for 15 years, extendable to 20 • Covers management of primary and hospital care in catchment area • Capitation fee: $570 + % yearly increase in the health budget • Investment: $115 M during the 15-year period

21. Redesigned model achieves good results Increasing activity, services availability Substantial increase in patient satisfaction New facility offers sizable upgrade in capacity and quality Ranked most years in top 20 general hospitals in Spain

22. More and more services and facilities provided with this PPP model Valencia Community: 25% of thepopulation • Alzira (1999) • Torrevieja (2006) • Denia (2008) • Manises (2008) • Crevillente (2009) Madrid Community • Valdemoro (2008) • Portugal: • Braga ( 2006)

23. Insights: the services are critical Private sector (flexible) management and staffing enables: • Incentivizing performance of staff • incentivizing team work and coordination • Incentivizing uptake of use of new organizational models and technology supports • widespread use of chronic disease management systems

24. Insight: monitoring and dealing with problems as partners is critical Extensive collaboration and cooperation was required to bring about the successful redesign

25. PPPs work when model fits goals and context Services taken over by private operator – allowed efficiency and quality gains PHC added to enable cost containment Capitation (money follows patients) worked within the Spanish health finance context to incentivize performance

26. PPPs can be fixed Even with lots of effort… • Everyone gets things wrong • The “partnership” is critical