z0 wqupornt co Public Hospitals Rolor and Options for Reform through Public-Private Partnerships Simion Blair As governments struggle with rising health care costs, public-private Ro6 7aylor is a pvrincipal prnrhp nadpbi a investmentofficerin partnerships in constructing and managing public hospitals can Private Sector Advisory provide innovative ways. to control costs and improve service. Services at the World Bak Gerie {ItalWorld Experience shows that such partnerships offer significant benefits as 3- Bank Group (rlylor@ ifc.org). Simon Blair is long as policymakers structure the transactions carefully and create lead health specialist in sound regulatory arrangements to ensure universal access, quality the Europe and Central AsiaRegion ofthenWorld care, and improvements in efficiency. Banlk. Before joining the Bank. Before joining the Globally, health expenditures rose from an aver- ing firom general tax revenue to payroll-financed Bank, he was chief executive officer of age of 3 percent of GDP in 1950 to 8 percent national health insurance, narrowing the basic (US$3 trillion) in 1999 (WHO 2000). The package of services available to all citizens, link- Australia's largest p)ublic z l/eatla )rgvder andincrease in spending has been driven by rising ing hospital ftinding to outputs and efficiency, o-X healactively involved in income, changing demographic and epidemio- amalgamating hospitals into networks, increas- Australia's ho.spital logical trends, and costly new pharmaceuticals ing autonomy and incentives for management, privatizatiou initiative and technology. Although technology is allowving and reducing the number of hospital beds. Some (sblair@worldbank.org). a shift to outpatient care, hospitals still account governments have also turned to public-private for 30-50 percent of health expenditures. partnerships to bring private sector efficiency Public funding has not kept pace with the into public hospitals. A. growth in spending. Much of the increase has O been financed from private soul-ces (out-of- Partnering with the private sector cc pocket payments and private insurance), while In Australia federal and state governments have the share funded publicly (by tax revenue and introduced private participation in more than z national insurance) declined by 6 percent 50 public hospitals through several different between 1977 and 1997. Constraints on public mechanisms. They have completed 15 BOO funding, combined with rising costs, have forced transactions (in which a private firm builds, public hospitals to cut costs wherever possible owns, and operates a public hospital), 4 con- O while still endeavoring to guarantee universal versions (in which a hospital is sold to a private (and often free) access to public patients. operator as a going concern), 4 transactions rU 1Governments have used different strategies to involving private management of a public hos- address these problems, such as shifting financ- pital that the government continues to own, 3 PUBLIC HOSPITALS OPTIONS fOR REFORM THROUGH PUBLIC-PRIVATE PARTNERSHIPS build-own-leaseback arrangements (in which a all public patients who come to the hospitals. private firm constructs a new public hospital, The government pays for the medical services then leases it back to the government), and 30 based on a target volume of patients. The oper- colocations (in which a private wing is located ators must achieve 80 percent of the target to within or beside a public hospital). These initia- receive payment but are not reimbursed for vol- tives were driven by a need for new capital, a per- umes above the target. Nevertheless, they have ceived need to transfer operational risk, and a routinely exceeded the target by 30 percent. desire to increase efficiency. In Sweden the muLnicipality of Stockholm 2 One example from Australia is the Mildura leased a 240-bed public hospital, St. Goran's, to a hospital contract, awarded in 1999. The govern- private provider in 1999 following a series of ment selected a private operator to design, reforms aimed at introducing competition, build, own, and operate a new, 153-bed hospital improving quality, and loweringcosts. The munic- under a 15-year contract. The existing public ipality transferred cost risk to the private provider hospital was closed, and its employees trans- through ftinding contracts specifying the prices ferred to the new hospital. The operator must and volumes of services. And it looked to the pri- provide appropriate clinical services to all vatized hospital for performance benchmarks to patients who come to the hospital without exert competitive presstire on other public hospi- charging them. The provider receives from the tals. Since the reforms were launched in 1994, St. government annual payments based on the fore- Goran's has cut unit costs by 30 percent and is now cast mix of clinical patients (with funding able to treat 100,000 more patients annually with capped at a specified number of patients) plus the same resources (Hjertqvist 2000). a small block grant to cover such costs as teach- The U.K. government has used public-private ing. For quality control purposes, the provider partnerships in financing, construction, and is required to maintain the hospital's accredita- facility management for many public hospitals tion (by an independent agency), provide over the past decade. Under its program a monthly reports on clinical indicators, and have regional health district tenders for a private firm high-volume treatments reviewed by external to finance and construct a new hospital, main- peers. The contract includes penalties for non- tain the facility, and provide nonclinical services compliance (including the ultimate sanction, stIch as laundry, security, parking, and catering. "step-in rights" for the government). And it The operator receives annual payments for requires the operator to provide a performance 15-25 years as reimbul-sement for its capital bond of about 5 percent of its annual revenues. costs and its recurrent costs for maintenance Mildura's results have been impressive. Capital and services. In this model of public-private costs for the new hospital came in 20 percent partnership, unlike those adopted in ALIstralia, below those for public sector comparators, and Brazil, and Sweden, the public sector remains the hospital provides clinical services at lower cost responsible for all medical services. than government-operated hospitals. Moreover, all performance targets have been met, patient Which option to choose? volumes increased by 30 percent in the first year, Public-private partnerships can take many forms, and the operator made a profit. each with a different degree of private sector In northeast Brazil the Bahia state govern- responsibility and risk (table 1). These are dif- ment entered into contracts with private firms ferentiated most critically by whether the private for the management of 12 new public hospitals, firm manages medical services, owns or leases constructed and financed by the government. the facility, employs the staff, and finances and The government's aim is to increase efficiency, manages capital investments. A government's improve quality, and transfer operational risk. decision on the most appropriate option will The private operators recruit the staff and man- depend on the hospital's needs and circum- age the facilities (including all medical services) stances, the government's capacity to regulate tinder annual funding contracts that can be and effectively control the quality of care, and extended for five years. The operators must treat the public consensus on the need for reform. Option Private sector responsibility Public sector responsibility l olocation of private wing within Operates private wing (for private Manages public hospital for public patients and or beside public hospital patients). May provide only contracts with private wing for sharing joint accommodation services or clinical costs, staff, and equipment. services as well. Outsourcing nonclinical Provides nonclinical services (cleaning, Provides all clinical services (and staf9 and support services catering, laundry, security, building hospital management. maintenance) and employs staff for 3 these services. Outsourcing clinical Provides clinical support services such Manages hospital and provides clinical services. support services as radiology and laboratory services. Outsourcing specialized Provides specialized clinical services Manages hospital and provides most clinical clinical services (such as lithotripsy) or routine services. procedures (cataract removal). Private management Manages public hospital under contract Contracts with private firm for provision of of public hospital with government or public insurance public hospital services, pays private operator fund and provides clinical and nonclinical for services provided, and monitors and services. May employ all staff. May also regulates services and contract compliance. be responsible for new capital investment, depending on terms of contract. Private financing, construction, Finances, constructs, and owns new Manages hospital and makes phased lease and leaseback of new public hospital and leases it back payments to private developer. public hospital to government. Private financing, construction, Finances, constructs, and operates new Reimburses operator annually for capital costs and operation of new public hospital and provides nonclinical and recurrent costs for services provided. public hospital or clinical services, or both. Sale of public hospital as Purchases facility and continues to operate Pays operator for clinical services and monitors going concern it as public hospital under contract. and regulates services and contract compliance. Sale of public hospital Purchases facility and converts it for Monitors conversion to ensure adherence to for alternative use alternative use, depending on sales agreement. contractual obligations. While many of the options are well established how costs, staff, and equipment are shared. in infrastructure, hospital services have unique The contract can create an integrated characteristics that allow policymakers a broader public-private hospital that provides choice menu of options for private participation: to patients and improved financial viability * Governments can pilot private participation while also ensuring universal access and in a few small hospitals without having to qutality care for all patients, public or tackle the entire network. private. * Hospitals provide diverse clinical services * Hospital operators include for-profit and that can be unbundled for private provision. not-for-profit firms. Many not-for-profit oper- Governments can outsotirce sophisticated ators were founded with a charitable mission (and expensive) clinical services while leav- but are run on commercial principles. ing hospital management and standard clin- Governments often opt to contract with not- ical services tinder the public sector. for-profit operators because they are more * Hospitals can provide services to both pub- acceptable to the local commutnity. lic and private patients. This opens up new possibilities for private participation, such The critical policy issues as colocation of a private wing within a ptub- While public-private partnerships can be a pow- lic hospital tinder a contract that governs erftul tool for improving the quality of care and PUBLIC HOSPITALS OPTIONS FOR REFORM THROUGH PUBLIC-PRIVATE PARTNERSHIPS controlling costs, governments must pay careful tation agency that reviews and certifies their attention to key policy issues: clinical procedures. But public-private part- * Universal access. To ensure that all public nerships may impose additional public pol- patients, particularly the poor and uninstired, icy obligations that require monitoring, have access to adequate hospital care, most sanctions for noncompliance, and disptite contracts for private management of public resolution procedures. "Step-in rights" for vie 17' hospitals require the provider to continue the government will probably be necessary service to all public patients. In some cases the in the event of significant financial or qual- is an open forum to provider is fully compensated by the govern- ity failure. Governments will also need to ment. In other cases the provider may not be, address the extent to which they will rely on encourage dissemination of but accepts this financial risk on the assump- regulation, legislation, self-regulation, exter- private sector-led and tion that it will be able to introduce cross- nal certificationi, or contractual arrange- market-based solutions for subsidies between patients and funding ments in their interaction with private development. The views sources. providers. The experience with infrastruc- published are those of the * Funding. Governments generally fund public ture privatization suggests that an inde- authors and should not be hospitals through budgetary payments or pendent regulator may be needed to attributed to the World public health insurance programs. In recent monitor and enforce public-private partner- Bank or any other affiliated years governments have shifted the basis for ship contracts for hospitals. organizations. Nor do any of payments from historical or input costs to the the conclusions represent clinical mix of patients to be treated. With Conclusion official policy of the World the transition to private management, Public hospitals worldwide are facing a financial Bank or of its Executive greater attention must be paid to linking the crisis, squeezed by rising costs and public budget Directors or the countries public funding (whether from the budget or constraints. Public-private partnerships can be a they represent. from public insurance) to performance while powerful policy tool for improving the viability also rewarding quality care and patient of public hospitals and the quality of their ser- To order additional copies satisfaction. vices. But they are often controversial, and get- contact Suzanne Smith, * Consolidation. Many countries, particularly in ting them right requires careful attention to the managing editor, Eastern Europe, have too many public hospi- critical policy issues. Room 19-017, tals and will need to downsize, consolidate, The World Bank, and close some facilities. Public-private part- 1818 H Street, NW, nerships can spur consolidation of services. Washington, DC 20433. Governlments can tender a group of facilities, Note Telephone: allowing the private operator to consolidate 1. Public hospitals, whether- publicly or privately 001 202 458 7281 them (including closing some) while still owvned anid maniaged, are those that provide access to all being obligated to provide a specified level of and arc fuLnded fiom puIblic SOuIrCCS. Public paticnts are 001 202 522 3l8l clinical services. those whose care is publicly funided, fiom tax revenue or Email: Comp5elition. Competition between hospitals nationial insuranice. Private hospitals inclide for-profit and ssmith7@worldbank.org stimulates improvements in the quality and not-for-profit entities. efficiency of service. Governments should resist granting privately managed public hos- References Printed on recycled paper pitals exclusivity privileges or othenvise pro- Hjertqvist,johan. 2000. "Swedish Health-Care Reform: tecting them from market forces. At the same From Ptublic Moniopolies to Market Services." Paper pre- time, where a government continues to own sented at conferenice on the FuLttlle of Health Care in other public hospitals and also purchases care, Quebec, Montreal Econiomiiic InstituLte, Monitreal, Canada, contracts should include nondiscrimination 18 October. clauses to prevent the government from pro- WHO (World Health Organizationi). 2000. World viding preferential ftnding or other unfair Health Report 2000. Geneva. advantages to publicly managed hospitals. a Regulation. In many countries the regulatory system for hospitals is limited to an accredi- This Note is available online: www.worldbank.orglhtml/fpd/notes/