Austerity, innovation & reform: European perspectives on capital asset strategy in times of economic uncertainty
Steve Wright
HaCIRIC International Conference 2012 Transforming Healthcare Infrastructure & Services in
an Age of Austerity Cardiff, 19th-21st September 2012
PowerPoint: can you be inoculated against death by sound-bite?…
…but I’ll use PPT anyway
Signposts
Economic crisis - where did that suddenly come from?
Persuading somebody to give you investment money
What to build when you’ve got their money
What role for the private sector?
Source: IMF World Economic Outlook, September 2011
In rescuing the economy, state debt has risen, in the West, to the highest ever levels for peacetime
Not a “normal” post-war recession – at least 5-10 years of consistent fiscal surplus to work this off
Sadly, high state debt itself reduces growth: Advanced economies, 1946-2009
When state debt
>90% - then
slower growth
This analysis is
controversial –
but at best,
growth will be
slow until public
sector debt
“deleveraging” is
over
Average state debt/GDP level >90% in 2009 – so we can
expect growth in coming years to be slower than normal
Source: Reinhart & Rogoff, December 2009
But there are potentially bigger problems:
private debt
Changes in the stock of debt can contribute to flows of GDP
Economic boom saw rising private sector debt going into
consumption
The size of the crash in 2009-? resulted from the reversal of this
flow of private debt (a so-called “Minsky moment”)
The public sector compensated by raising its debt to support
demand
However, we don’t know: When the private sector will stop deleveraging – again, probably
ten years from now
If the public sector can continue to increase its debt
Growth & debt - this time for total debt
Again, above a certain level of private sector debt, economic growth is damaged
Alphabet soup
A typical post-WW2 recession was “V”-shaped: out
as rapidly as going in
Often, recessions resulting from financial busts have
been “U”-shaped: clearing up the broken china
took time
Then there were the cases where recovery set in but
faltered for a while, “W”-shaped: double-dip
However, this one isn’t giving us a good time, “L”-
shaped: not clear when it’s going to stop
Then, “entitlements”: scenarios for diversion of GDP
to pensions, health & long-term care, 2000-2050
Source: Own calculations, from IMF World Economic Outlook 2010
2010 was when the baby-boomers started to retire, & spending entitlements rise
0
2
4
6
8
10
12
14
16
18
Australia Canada France Germany Italy Japan Korea Spain UK USA
%
G
D
P
Cost pressure
Base case
Summary on the economic crisis
Public sector debt has ballooned; this will need to be
reversed then paid down (more deflation)
Private sector debt is, maybe, a bigger problem - &
we don’t know how to cut it while simultaneously
controlling public sector debt
The ageing wolf is definitely at the West’s door!
There will be low Western economic growth for the foreseeable future The state will not be able to fund, including new infrastructure, in the way it has in recent decades
Signposts
Economic crisis - where did that suddenly come from?
Persuading somebody to give you investment money
What to build when you’ve got their money
What role for the private sector?
Capital providers: if not Treasury, then from where? 1. EU Cohesion Policy/Structural Funds
A pooled & shared resource (€336 billion 2014-2020):
European Regional Development Funds (ERDF), strengthening
economic, social & territorial cohesion between regions
The European Social Funds (ESF), EU’s main financial instrument for
investing in people
In future: strengthened conditionalities – improving performance
requirements & impact evaluation
The ‘political’ climate has shifted to requiring an explicit
contribution to growth, fiscal sustainability & results
The health sector is not a stated priority (will get c. €6 bn.?
over the 2014-2020 period)
Not too available in the UK; used in PT, HU, SK…
Another capital finance option: 2. PPP - some alternative models in Europe
1. “Public-Public Partnership” (Spain)
2. Accommodation PPP (e.g. UK’s PFI, & E, F, I…)
3. Hospital infrastructure-clinical Joint Ventures (PT)
4. Licensed hospital privatisation (D, FI…)
5. Population primary/hospital full-service PPP (E)
This list is in ascending order of private-sector involvement & bundling – the “envelope” around the project company becomes wider (e.g. not just construction & FM, but also medical services)
They are not just theoretical examples
PFI is not the only game in a town near you
Another capital finance option: 3. European Investment Bank
The EIB is the “house bank of the European Union”
Strategic priorities are SMEs, cohesion, climate change,
environment, energy supplies, TENs & knowledge
economy (health is not a stated priority…)
EIB turnover ~€68 billion p.a., will rise in next few years
Of turnover, <5% is health sector: will amount still to
c.€20 bn over 2014-2020
EIB requires financial, economic, social & economic
viability in financed projects
Now, “EU Project Bonds” – to help finance PPPs
Available in UK (historically funded many hospital
PFIs & LIFT), & all EU countries, & beyond
The route to direct money for capital investment
Either a separate budget for capital: 1. Non-specific grant payment to hospital (“Model 1”)
2. Payments specific to intended use (Model 2)
Or a single activity budget (e.g. DRG), for both capital & recurrent costs:
3. Capital payment included as fixed proportion of all case types (Model 3)
4. Estimated capital cost for each case type in a previous period, actual average (Model 4)
5. Estimated capital cost for each case type if good/best care methods used, “standard” cost (Model 5)
Or a free market (n.b. all the above are “administered prices”), as in US &… possibly NL
Model 1 - Separate capital budget: global, non-specific grants (many states)
Capital Fund Recurrent Expenditure Payment
(could be DRG)
#1 #2 #3 #4 #5 #6 #7 #…
Amounts based on bed numbers,
total patients, hospital type, etc Payment by volume and case type
Advantages: Simple to operate
Care providers have opportunity to innovate
Disadvantages: No direct central control
Model 2 - Separate capital budget: payment for specific investments (many states)
Capital Fund Recurrent Expenditure Payment
(could be DRG)
#1 #2 #3 #4 #5 #6 #7 #…
Approved bids for buildings, etc Payment by volume and case type
Advantages National (system) policies can be applied
Risk of idiosyncratic decisions is reduced
Disadvantages Difficult to operate (time-consuming)
Accountability taken away from care providers?
Model 3 - Single hospital budget: fixed proportion of capital costs (Estonia)
Single Fund
#1 #2 #3 #4 #5 #6 #7 #…
Capital component is X% of total amount, all DRG types
Advantages Simple to operate (like global grants)
Care providers have opportunity to innovate
Disadvantages No central control
Imprecise messages about real or desired cost
Likely mismatch of hospital capital resources to future needs
Model 4 - Single hospital budget: different capital payments for each DRG, based on actual average cost (UK)
Single Fund
#1 #2 #3 #4 #5 #6 #7 #…
Payment based on estimated actual cost in previous period
Advantages Fairer allocation of payments among care providers Gives messages about actual, albeit past, costs, therefore encourages
attention to efficiency
Disadvantages Difficult to operate (time-consuming, data needs) Discourages innovation (based on previous care practices) Likely mismatch of hospital capital resources to future needs
Single Fund
#1 #2 #3 #4 #5 #6 #7 #…
Model 5 - Single hospital budget: different capital payments for each DRG type, based on “standard” cost (?)
Payment based on estimated cost of best clinical practice
Advantages Fairer allocation of payments among care providers
Gives messages about appropriate costs & good clinical practice
Disadvantages Difficult to operate (time-consuming) – in practice, only top-ups tried
Still potential mismatch of hospital capital resources to future needs if “standard cost” not well-computed over the long term
Inclusion of capital, European DRGs: only sometimes
Included Source: HOPE, 2006
DRGs – a complicated family tree (Anna Karenina?)
Aide mémoire: Born in the USA, originally conceived to allow control but avoid “socialistic” global budget of hospitals DRGs (HRGs) are not good descriptions of either products or process technologies!
Source: EuroDRG project
The right answer for payment systems?
Simple capital grants (Models 1 & 2) do not link capital assets well to services (it’s a free gift!), & inflexible
Model 5 (different “standard costs” payments for each service/DRG) signals best & is flexible for new care models, theoretically, but hard work to set up systems
It does become easier to use over time because best-practice information becomes more widely available
In the real world, it might make sense to use:
Model 5 for a few high-volume case types with evident room for improvement
A simpler approach (Model 4) for other case types
(Model 3 – same capital share in all DRGs – isn’t much used)
Summary on raising capital
Apart from ministry of finance, capital resources can
be provided by other actors:
EU Structural Funds grants
PPP debt (not just PFI)
EIB debt (=> also PPP including “Project Bonds”)
Commercial debt
Capital can be paid for in the form of:
Treasury grants (but decreasingly available)
Allocations within activity payments (such as DRG)
PPP, despite the travails of PFI, looks like a way to go The more market-based the health system, the more that DRG-inclusive capital payments will be appropriate
Signposts
Economic crisis - where did that suddenly come from?
Persuading somebody to give you investment money
What to build when you’ve got their money
What role for the private sector?
Will the hospital just… disappear?
Surgery => free-standing surgical centres
Outpatient medicine => polyclinics
Rehabilitation => intermediate care facilities
Telemedicine => chronic care at home
Obstetrics => free-standing, midwife-led birthing centres
“Third Age” => nursing & residential homes
Imaging => CT scanners in trailers & ultrasound in offices
Laboratories => desktop kits
What’s left? Certainly a greater integration between the hospital as the main capital plant & other care locations
Beds?…
Hospital capacity is a mix of medical & diagnostic equipment, operating theatres, wards, waiting areas…
In practice, it is almost universal to summarise & denominate it in terms of certified or manned beds, forecast using:
Bed numbers = Population * Hospital admissions frequency * ALoS
Occupancy rate * 365
This “Hill-Burton” (US: 1946 law) formula substantially drives the capital planning process for hospitals in most national healthcare jurisdictions
Other hospital functions are not well integrated in this approach, nor evolving operational constraints identified
The “bed” as a function is mostly storage – warehousing of patients while the institution works out what to do with them; it is not a long-term operation constraint
Life-cycle analysis – linking processes to capacity
Costs of capital are: Small (relative to Net Present Value of lifetime
maintenance) Tiny (relative to NPV of lifetime medical spending) But the capital stock determines in part these larger flows
Acceptable functional life is far less than technical life for most elements of health buildings
Design adaptability depends on: Foundations, roofs & main technical systems having
maximum technical lifetimes Inner parts (ceilings, partitions…) being alterable
The “Layers” model indicates for hot floor, office, hotel & factory functions of a hospital, that there are different: Costs/m2 to build Functional lives
HOTEL nursing
HOT FLOOR
intensive, neonate & coronary care
imaging
operating theatres
emergency
OFFICE
outpatients’ clinic
offices
UTILITIES
laboratories pharmacy kitchen food preparation
The “Layers” approach to hospital conceptualisation
HVAC
consulting rooms
Only one bit is actually medicalised – the rest is support
Hot floor (clinical, imaging)
Hotel (wards)
Offices
Building durability, years
high
low
Probability of change
10 30
Characterisation of “Layers” components
Capital, technology intensity
high
low
Utilities
A traditional hospital or a technical hospital?
% space Hotel Hot floor Offices Utilities
“Traditional” 36 24 27 13
“Technical” 21 42 27 10
With ageing societies, more prone to chronic illness: Need to cascade care out of the hospital into the community The “hot floor” is the same M2 for either typology – just a
greater share of the total area for a “technical” hospital
Signposts
Economic crisis - where did that suddenly come from?
Persuading somebody to give you investment money
What to build when you’ve got their money
What role for the private sector?
What is competition in healthcare?
Patient choice, say in elective care, is unambiguously well served by 1. Hospital (& GP?) efficiency is arguably better too in the presence of some within-market competition (Propper)
Two concepts of healthcare competition: 1. Competition within a market
Individual bits of the care process, or single institutions, are open to competitive forces (often on price as well as quality)
2. Competition for a market The whole of a pathway, or of care for a disease process, or across settings of care, is tendered for competitive provision (usually benchmarked, often in a geographical area)
Competition can work (a UK analysis)
Source OHE, Competition in the NHS, January 2012
The more green cells & fewer red, the more likely that competition will work well in the area:
Competition & the private sector
If there is competition & prices are variable, quality can suffer since it is usually less observable
If prices are fixed, at above marginal cost, providers will tend to compete on quality. The evidence (Busse) for German private-for-profit hospital groups relative to state hospitals is: Efficiency is lower (costs higher) for a given output;
but Quality performance (risk-adjusted mortality) is
better At the same time, financial performance is better!
What will Hinchinbrooke do, in its context?
What is integration in healthcare?
There are many relevant concepts of integration (that is, coordinated health service delivery): 1. Primary/community + secondary/hospital care 2. Commissioning + provision 3. Clinical models of care + financial/business models 4. Clinical services + support services (=franchise) 5. Asset provision + support services (=PFI) 6. Healthcare + social care 7. ...
All of these could be seen as valuable, in their own right Let’s focus on 1.
“Integration of care” is good for you – right?
Care integration is usually thought of as synonymous with patient-centred care, & therefore desirable
Integration will become more desirable still as the balance shifts further towards chronic disease
The (monopoly, public) NHS hasn’t achieved it, via exhortation, in 60 years – but might market mechanisms?
Experiments with integration
Perhaps competition for a market makes it inherently more easy to achieve integration of care than competition within a market
Maybe then a good idea to have currencies/ prices/ tariffs for packages of competitively-tendered care, e.g.:
Capitation, beyond primary care (Alzira, E) Chronic Disease Management with incentives (D) Chains of Care contracts (S) “Year-of-Care tariffs” (for individual long term conditions,
potentially UK) Or foster corporate contracted forms such as “Accountable
Care Organisations”, in contestable markets (US)
It’s not sure any of these will cut costs – but they might meanwhile make patients better
“Osama Bin Laden is either alive and well, or alive and not too well, or not alive”
“Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know”
Well, we know about some of that, but there are still lots of uncertainties
In conclusion…
The economic crisis won’t go away. Investment
capital will be in short supply
Despite the economic issues, private (debt-
financed) capital will be important
Healthcare activity payments should include a
capital component, preferably prospective, which
will help in introducing innovation
In hospital planning, bed numbers just don’t
matter. The hot-floor is key to a modern,
networked hospital
Aim for competition mainly when it’s consistent
with integrated care