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