ppp problems & pitfalls: how to avoid them

PPP Problems & Pitfalls: How to

Avoid ThemApril Harding

Mazowiecke VoivodeshipJanuary 28 2010

Key points

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PPP design to suit goals

PPP design to fit context

You will get things wrong (managing implementation is critical)

The “partnership” is critical

Outline

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UK Case and Lessons

Spain Case and Lessons

Conclusions

UK starting point 1992: directly administered hospitals

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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

PPP infrastructure model gets adapted for hospitals

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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

Omitting services, limits efficiency gains

4%

2%

4%3%3%

5%

10%

15%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Average % of hospital operating budget by cost category

Dietary ITPharm-

acyFacilityMgt,Maint

Support

Services

MedicalTech

Diag&Lab

ClinicalCareDeliver

y

54%

Building Design & Constr.

Limited efficiency gains

DesignsBuilds

Non-clinical services

DesignsBuildsFinances

Non-clinical services, for 25-30 years

PUBLICLY-FINANCED ‘DESIGN & BUILD’

PRIVATELY-FINANCED ‘DESIGN, BUILD, FINANCE AND OPERATE’

What the private sector does....

PFI benefits

90% of all PFI projects delivered on-time

Within budget projects

Better maintenance

PFI costs

Transactions costs are higher for PFI than traditional procurement:

external advisers for all parties

longer duration of tendering and contract negotiation

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

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

Privately Financed versus Well-Managed Publicly Financed

Result: in most cases, not value for money

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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”

Valencia government applies a comprehensive PPP model

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Valencia starting point

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State (sub-national govt) directly administers services

Universal coverage; tax finance

Lacking facilities

Rigid public services rules undermines effective, responsive operation.

Alzira community needed a hospital

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Alzira community – 230,000 people

Nearest hospital: Valencia, > 30 miles

Political promise to build a new hospital

PPP for finance, facility & services

PUBLIC FINANCING

ALZIRAMODEL

PUBLICCONTROL PRIVATE

PROVIDER

PUBLICPROPERTY

CAPITATION PAYMENTPERIOD: 10/15 years

• Local Government Inspector

• Control• Inspection

• Builds new premises• Employ medical staff• Management “know how”• Free & public healthcare

services

Returns to the Local Government after 10 years

Innovative services purchasing: “money follows the patient”

CAPITATION PAYMENT

Yearly capitationpayment for each person

Annual review:• CPI or • % health budget

Hospital pays 100% of the cost of patients who go elsewhere

Hospital is paid an 80% of the cost of treatingpatients from other area

Alzira: phase 1

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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

2002: Alzira model clearly not working

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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

Alzira II: integrated with PHC to enable cost control

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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

Redesigned model achieves good results

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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

More and more services and facilities provided with this PPP model

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Valencia Community: 25% of the population• Alzira (1999)• Torrevieja (2006)• Denia (2008)• Manises (2008)• Crevillente (2009)

Madrid Community• Valdemoro (2008)

• Portugal:• Braga ( 2006)

Insights: the services are critical

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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

Insight: monitoring and dealing with problems as partners is critical

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Extensive collaboration and cooperation was required to bring about the successful redesign

PPPs work when model fits goals and context

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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

PPPs can be fixed

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Even with lots of effort…

• Everyone gets things wrong

• The “partnership” is critical