Public-Private Partnerships and Collaboration in the Health Sector

An Overview with Case Studies from Recent European

Experience

Irina A. Nikolic and Harald Maikisch

October 2006

INTRODUCTION

Discussion of Public-Private Partnerships and Collaboration (PPPs and PPC) in the Health Sector is important and timely in light of the challenges the public sector is facing in healthcare finance, management, and provision. Many governments are confronted by fiscal constraints that force them to carefully prioritize and restrict public expenditures. Moreover, many public health systems are already indebted and face further fiscal pressures, such as the need to provide care to increasingly aging populations, improve quality, or invest in often expensive medical treatment and technology advances. For those governments that wish to explore this approach, turning to the private sector can, when appropriately structured and executed, help address specific cost and investment challenges, deliver improvements in efficiency (e.g. improved service provision and management at reduced costs), and enhance service quality (e.g. increased expertise, more rapid and substantial investments in infrastructure and new medical technologies, a potential to attract and retain better performing staff). However, leveraging partnerships and collaboration with the private sector to address the challenges governments face in healthcare today may not be easy. PPPs and PPC may take a long time to establish and bring to fruition, and in many cases may not be the most effective or efficient option available. Careful evaluation of the conditions for success and sustainability is required on a case-by-case basis so as to assess the costs and benefits and the likelihood of success of such an approach.

DEFINITION AND KEY TYPES

PPPs and PPC in the health sector can take a variety of forms with differing degrees of public and private sector responsibility and risk. They are characterized by the sharing of common objectives, as well as risks and rewards, as might be defined in a contract or manifested through a different arrangement, so as to effectively deliver a service or facility to the public. The private sector partner may be responsible for all or some project operations, and financing can come from either the public or private sector partner or both.

In practice, several key types of PPPs and PPC are frequently encountered in the health sector as discussed in what follows.

Contracting-out involves publicly-financed investments aiming to improve efficiency and/or quality by awarding a service contract, a management contract, a construction, maintenance, and equipment contract, or various hybrid contracts to serve a specific need or situation, or a lease to a private partner or partners.

Service contracts are entered into by public and private partners for provision of a defined service (e.g. laboratory services, catering) aiming to leverage comparative advantages of a private partner, such as experience or advanced technology, to improve efficiency and/or the quality of the service.

Management contracts involve transfer of authority from a public partner to a private partner to manage a public facility and provide services, including full responsibility and authority to manage all necessary functions and staff (e.g. employ and manage staff, procure medicines and equipment), with the objective of enabling more efficient management.

Construction, maintenance, and equipment contracts are typically entered into for development, refurbishment, or maintenance of a healthcare facility.

Hybrid contracts may involve a variety of elements of the contracts mentioned above to serve a specific need or a situation, such as an IT contract providing for both the building and operating of the infrastructure, or a health facility management contract requiring the private operator to also refurbish or upgrade the facility. Leases involve a private partner paying a fee to the public partner to manage and operate a public facility in exchange for revenues from the facilitys operation, typically with the objective of improving the facilitys financial situation by introducing more efficient management. Under a lease contract, the government typically remains responsible for major new investments in the facility.

Concessions are arrangements with the private sector in which, for existing facilities, asset ownership remains in public hands but where the private partner is responsible for new investments, as well as operating and maintaining the existing assets. Concessions can also be used for new facilities, with the private sector partner responsible for design, construction and operation. Different contract types, such as performance-based management contracts, leases, build-operate-transfers or even divestitures under license, can be used and have various degrees of underlying risk allocated to the public and private parties. A typical example of a concession would involve the private partner financing construction of a facility and being repaid over time through a service charge to the public partner, revenues from the facility, or a combination of the two. Concessions typically shift much of the investment risk to the private sector, although the government often provides an explicit or implicit guarantee to protect the private partner against the risk of lower than expected revenues or other risks.

Divestiture/privatization involves a sale of a public facility and transfer of ownership to the private partner, including transfer of all commercial risk. Free entry allows for private partner participation in a project without contract with the public sector or the government (e.g. franchising). In these cases, operational and investment risks typically rest with the private partner. While the government does not usually provide any guarantees, it may provide support by adjusting the regulatory framework or offering financial incentives (e.g. tax breaks) to influence the private partners behaviour.

The specific format of PPPs and PPC in any given situation will depend on the regulatory framework, which often needs to be adjusted to accommodate new types of partnerships and collaboration. Beyond enabling PPPs and PPC, the regulatory framework plays a critical role in assuring and promoting the quality of healthcare services resulting directly or indirectly from any such arrangements. That may include establishing or revisiting quality assurance policies and indicators, monitoring and enforcement mechanisms, accreditation and licensing systems, a patient rights framework, as well as other related regulations (e.g. effective oversight structures, labour regulations to help facilitate performance-based staff management).

POTENTIAL BENEFITS AND RISKS TO MANAGE

Partnering with the private sector carries the potential for meaningful benefits to be gained for the public partner and the health sector. Potential benefits can include reduced government spending (e.g. eliminating large up-front investments of scarce public funds), greater efficiency (e.g. due to private partners operational efficiency), or better healthcare management (e.g. of hospital services and infrastructure). In the health sector, partnering can also be particularly valuable as a method of leveraging technical or management expertise (e.g. performance-based monitoring and incentives), and spurring technology transfer, all of which can lead to quality improvements.

Partnering can also reduce or better allocate risks (e.g. the private partner may be better able to manage cost and schedule overruns). Appropriate convergence of interests and expertise in a PPP or PPC in practice may also lead to a better managed project execution. Finally, in a PPP or PPC, the public partner can take steps to ensure that the above-mentioned benefits are obtained, the risk is minimized, and that public funds are used in accordance with the partnerships stated objectives through introduction of payment and reward mechanisms that set incentives for better performance and improved outputs.

There are also important risks to manage, and planning an effective PPP or PPC involves careful review of the allocation of financial risks and rewards, decision-making mechanisms and responsibilities, and the applicable regulatory and contractual framework. Accordingly, an accurate up-front evaluation of the likely trade-offs and benefits are key to appropriately designing and pro-actively managing a PPP or PPC. Such evaluation can uncover risks stemming from an inadequate regulatory framework or low institutional capacity, which may need to be addressed either through special provisions built into the contract or through separate reforms undertaken by the government (e.g. enhancing accreditation systems, updating patient rights policies, enabling transparency in health providers performance).

Other situation-specific risks may also need to be addressed, such as the frequently encountered risk of creating excess capacity or new capacity in the wrong place in the health system. Such risks can be mitigated through an effective planning and licensing system that allows for a needs-based distribution of services. In many situations, an adequate licensing system should not only selectively issue licenses to operate health facilities based on a set of pre-defined criteria, but might also include the option of a special regulation of high-risk interventions, such as, for example, through a so-called certificate of need procedure.

A diligent up-front evaluation is also critical for ensuring financial responsibility and managing fiscal risks for the public partner. Analysis of unsuccessful projects often reveals a hastily or inappropriately designed arrangement that might in effect shift spending off-budget, defer sizeable fiscal costs, obscure higher private financing costs, or excessively shift costs to the public sector. Appropriate fiscal risk mitigation requires that the fiscal costs and risks of the contractual obligations in a partnership or collaboration be identified and quantified upfront. Furthermore, while PPPs and PPC are not a new approach, some governments have yet to develop sufficiently sophisticated legal and institutional frameworks for their management, including effective methods for evaluating and accounting for fiscal risks, as well as the institutional capacity and expertise required to capture benefits while mitigating the associated risks.

Contracting risks can be best managed through clear and well-considered division of roles and responsibilities. To ensure that efficiency gains made by the PPP are shared between the public and private partners, contracts may need to include variable payment levels that allow appropriate benefits to be captured by the public sector. Transparency in the bidding and contracting process, as well as the contract arrangements themselves, should help eliminate incentives for any potential asset-stripping and rent-seeking behaviours by the private partner. At the same time, the sharing of risks and rewards is a key driver for a quality private partner to enter into a collaboration/partnership, and the public partner should ensure that contracts are based on realistic evaluations of the situation and do not transfer unmanageable risks to the private partner or excessively curtail performance incentives.

The choice of private partner should be guided by well thought-through criteria in accordance with the specific need or situation (e.g. financial stability and a proven track record of experience and expertise in the field), and international best practices should be leveraged in the process of soliciting bids and awarding contracts. In addition, while taking existing best practices into account, contract provisions should be carefully tailored to the situation at hand. Thus, for example, if a PPP is intended to reduce waiting time on the waiting lists, then the contract should address not only the aspects mentioned above, but also specifically reference the objectives and set forth transparent waiting list management procedures and criteria.

Appropriate monitoring and managing of quality and performance are particularly important in healthcare PPPs and PPC. Monitoring and evaluation mechanisms, performance indicators, targets and outputs, as well as any performance bonuses should be discussed upfront, built into contracts, and refined at the pilot stage if possible. It is critical that the public partner has sufficient capacity for oversight and for making timely adjustments as needed. External oversight methods can also be utilized (e.g. licenses to practice or to operate a facility or a specific health technology, and accreditation according to agreed quality standards). In ensuring continuity in the monitoring and managing of quality and performance, it is helpful that a single task force, advisory board, and/or project management office is established for the duration of the project.

CONCLUSION — HELPING ENSURE SUCCESS

PPPs and PPC can be beneficial for the health sector when they are well justified, prepared, implemented, and monitored, including being adjusted in an appropriate and timely manner.

PPPs or PPC should include well-defined objectives, clear division of roles and responsibilities, risk allocation, and other transaction elements (e.g. which asset changes hands under what provisions), to be agreed upon between the partners in advance. In that regard, the quality of contracts between the public and private partners and, in some cases, between partners and third parties (e.g. what are the roles and responsibilities of the partners, what are the arrangements for provision of services in question in short- and long- term) is critical to the success of a PPP or PPC.

Most importantly, all parties to a PPP or PPC should bring adequate expertise and experience to the contracting process. Contracts and all other arrangements should be based on fair and transparent discussions, cover all the aspects and stages of the project, fully assess costs and benefits, including the appropriateness of the use of PPP or PPC, allocate risks and rewards, and allow for on-going monitoring of quality and performance, as well as the flexibility for on-going adjustments as appropriate.

PPPs and PPCs for private participation in hospitals take many different forms depending on the identified needs and objectives, the governments health sector policy priorities and capacity to control the access and quality of care, the availability of and the need for funding or other resources, as well as other key elements in the public domain (e.g. regulation, public consensus). Once the appropriateness of private participation has been determined in a fact-based manner, the public partner can select the best way to proceed from a broad set of approaches (e.g. pilot vs. broader program, profit vs. non-profit, specific service vs. bundled services, mix of patients vs. only private or only public patients). Once determined, these selections should be built into what is typically a complex and challenging contract agreement that needs to be able to account for a set of probable and desired outcomes and build in the appropriate incentives to achieve them.

QUESTIONS

Question 1 (25 Marks)

Discuss the main bases of collaborative advantage. Categorize the main bases for the public-private partnership and collaboration in the health sector and identify whether collaborative advantage was always the outcome of such collaboration.

Question 2 (25 Marks)

Define and discuss the role of the focal actor. Identify from the case, who the focal actor is, the role the focal actor plays and the strategies set by the focal actor. Refer and distinguish between network level and firm level goals. Discuss the importance of the focal actor for this kind of partnerships.

Question 3 (25 Marks)

Identify the six dimensions of collaboration and discuss the aim ownership from internal and external ownership perspectives. Identify and discuss what the main collaboration aims and organization aims are and what kind of external ownership is most valid for this partnership. Define the routes of achievement and provide evidence from the case on how this specific collaboration has worked things through.

Question 4 (25 Marks)

Define and discuss the three perspectives of power. Explain the types of power the private sector has in this partnership compared to the public sector.

GENERAL INSTRUCTIONS FOR STUDENTS

Cut-off date: Week of November 20, 2014

TMA weight: 20% of total course grade.

Course material:

- Chapter 2: Goal setting: a five-step approach to behaviour change; from Organizational Collaboration Book; and

- Chapter 1: Collaborative advantage: What? Why? How? And Why Not?; from Managing to Collaborate Book.

- Chapter 5: The role of goals in the management of supply chain networks; from Organizational Collaboration Book.

- Chapter 6: Managing Aims; from Managing to Collaborate Book.

- Chapter 10: Using Power; from Managing to Collaborate Book

Format: The answer to each question should be shown clearly with the question number next to it. Failure to do so may result in deduction in presentation points of up to 4 marks. In addition, you are expected to write your answers in an essay format. However, you may use bulleted paragraphs, diagrams, tables, or any graphs to support your arguments. Failing to do so could result in the deduction of up to 4 marks from presentation marks.

Plagiarism: Its imperative that you write your answers using your own words. Plagiarism will be penalized depending on its severity and according to AOU plagiarism policy.

Word count: your answers are expected to be within the specified word count. A 10% deviation from word count limit is acceptable. Not adhering to specified word count could result in the deduction of up to 4 marks of your word count marks.

Referencing: You are expected to use the Harvard referencing style for in-text referencing and list of reference at the end. Failing to do so could result in the deduction of up to 5 marks of referencing marks. In addition, although text books assigned in the course may be used freely as references, you are required to use a minimum of 2 external sources. It is recommended that you use scholarly articles found in the E-library link at LMS. Failing to do so could result in the deduction of up to 4 marks of your referencing marks.