Transcript After the economic crisis!

After the economic crisis! The future economic outlook for capital
investment in the health sector
Barrie Dowdeswell
Director of Research at the European Centre for Health Assets and Architecture
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European Centre for Health Assets and
Architecture (ECHAA)
A consortium of European research and
academic centres (NfpT)

A Europe-wide organisation

First point of reference for evidence-based knowledge relevant to capital asset
strategy for healthcare in Europe.

focal point for academic and research organisations, NGOs and other
associated groups with an interest in, or working in the field of health
infrastructure.

Collaborative opportunities for new knowledge generation and funded
research projects.

A bridge between the public and private sectors relating to all dimensions of
capital assets.

Strategic advisory and peer review services, as a new resource for the
European healthcare sector.

Training and skills and competency development, principally in the form of
masterclasses, workshops, seminars and policy briefings.
www.echaa.eu
[email protected]
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Aims of this session – the capital
investment related problems of the credit
crisis
and - rethinking SF policy and strategy
 Understanding the nature of the credit crisis and ongoing
economic fragility
 Capital models and the impact of the crisis
 Structural funds – and their role and importance in the new
economic era
 Transformational change in healthcare delivery
 Opportunities, and
 Threats
 Capital diversity
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The global credit and economic crisis
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What caused the global credit crisis?
Will it end soon?
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Fiscal inbalance between the East and West
 East; dominant export position – saving the net gain in balance of
payments
 West; dominant import and spending position – increasingly
afforded by debt creation
 Reluctance by the West to live within its ‘export’ means, false sense
of security generated by (financial) service industries
Debt financed growth – personal and public
 Sub-prime mortgages
 Easy credit
 Public service expenditure financed out of high levels of debt
(justified by GDP growth) – revenue and capital
Reduction in public spending – stabilises the problem, but
Economic regeneration is needed to reduce debt levels
We then face the age gap pensions crisis
These factors have triggered a policy shift by Gov’s and the EU
Spending is unlikely to get back to
former levels any time soon
Med
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Portugal
Three immediate and ongoing
impact factors for healthcare
1.Ability to borrow and service debt
2.Cost of borrowing
3.Sustainability of funding for service cost
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The impact of an ageing population – a critical
EU problem area
We should have started planning a decade ago,
it was all totally predictable
2010 - 10 to 1
Ratio of working
population to
elderly retired
2030 - 4 to 1
Each year that passes sees a greater pressure being placed on the
working population to fund the current healthcare needs of the
elderly. Increased unemployment, as a result of the financial crisis, is
making the problem worse
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* Europe 2020
The EU - an ageing society
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Ratio of spending on health
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Overall ranking of EU Health systems
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Capital models and impact of the crisis
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The value of capital investment
What are we trying to achieve?
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We routinely make capital investment decisions about new hospitals worth
hundreds of € millions
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Are we sure we understand and identify measurable benefit
 Clinical outcomes
 Contribution to improvement in population health
 Reducing health inequalities
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Do we place a measurable value on the investment
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Do we understand the risks we are taking
Capital investment is critical to change
– but:
Current levels of (hospital) revenue and capital debt are unsustainable
 Simply cutting expenditure will damage services
 Ways need to be found to:
 Reduce debt
 Ensure hospitals live within their means
At the same time a need to invest in new (capital) initiatives to tackle:
 Health inequalities
 The impact of an ageing population
 The rising cost burden of chronic illness
 Public expectation
 Modernisation of facilities
Transformational change is needed – for example:
 Greater productivity from capital investment (and the workforce)
 A policy of disinvestment to reinvest – in new service models
 Major Hospital reconfiguration and pushing investment upstream
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Cost implications of capital
 In the WHO European region, the hospital sector absorbs between 3570% of total national expenditure on health care
 40 year consolidation of a hospital centric model of care - with high
opportunity costs
 Annualised cost of capital absorbs between 3% & 20% of total income
 Some forms of new capital investment are expensive:
 Norfolk and Norwich UK PFI – before the PFI scheme 6%
 1st year of the PFI model 22% - subsequent ‘stabilised’ cost 17% - for 40 years
10% cost saving
94% = 10.6% cut
in revenue cost
6&
6% cost of capital
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10% cost saving
83%% = 12% cut
in revenue cost
17% cost of
capital
Surveys show
little awareness
of the impact of
increases in
capital costs and
lifecycle factors
Four critical issues for capital
investment planning
 Cost of capital will have a direct impact on revenue flexibility –
a critical need to understand impact
 A key planning and investment decision:
 High initial capital cost - to include provision for lifecycle
adaptability
 Low initial ‘affordable’ cost - and consequent higher
lifecycle capital injections over time
 Different capital models offer different investment profiles and
degrees of flexibility
 Capital spending strategy has a dominant impact on economic
sustainability – it can sediment growth and change
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Lifecycle economy - a framework for analysis
Lifecycle capacity
Adaptability value
Functional efficiency gap on commissioning
Needs assessment
•Inequalities
•Acute care
•Outcomes
•Medical education
Economic sustainability
Political agendas
Functional
Decay
Planning and
development input
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Adaptability costs
Annuity
Cost
Life Time Cost
Valueing lifecycle cost
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Discount to net present value
Functional Lifetime
•Investment (capital) cost
•Annual MOM costs
•Replacement and periodic
maintenance costs
Consider:
•Cost of action
•Intervals of action
•Real rate of return
•Lifetime of building
Capital; diversity of funding / procurement
models
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State / Regional allocation – gives maximum political, policy and tactical
control
 Three principal options:
 Free (grant)
 Capital charging
 Repayment
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Public Private ‘Partnerships’ – usually (project) focused on healthcare
delivery, may have some additional societal / economic benefit and / or
commercial enabling dimension
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Commercial funding (including EIB) - a commercial, risk assessed, loan
transaction – income collateral
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Development grants – usually business case driven within economic or
explicit healthcare frameworks e.g.
 EU Structural aid – highly focussed, possible match funding,
sometimes with EIB involvement within the ‘12’
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 World Bank – usually tied to targeted structural change
Public Private Partnership models
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Principal PPP models
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The Private Finance Initiative
 Used to finance and procure new hospital infrastructure, may include
some non-clinical services
 Mainly centred on the UK
 Applied mainly by State Hospitals
 Payment for use of buildings (a form of lease)
Full service public Private Partnerships
 Mainly used for acute hospital services
 Provision of buildings, technology and all operational and clinical
services
 Most common form of PPP in Europe
 Funded through (DRG) patient treatment payments
Extended forms of PPP
 Full provision of hospital buildings and services
 Includes primary care (may include some community services)
 Funded by annual capitation payment per head of population
An EU (wide) policy approach
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The EU and member states are implementing an ambitious recovery
plan
 Stabilise the financial sector
 Limit the impact of the ‘recession’ on citizens and the economy
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Investment in infrastructure is an important means to maintain
economic activity during a crisis
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“The Private Sector can provide an effective way of doing this”
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“Better value for money from infrastructure by exploiting the efficiency
and innovative potential of a competitive private sector”
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Spread the cost of financing the infrastructure over the lifetime of the
asset – reducing immediate pressure on public sector budgets
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Give the private sector a role in developing and implementing longterm strategies for major infrastructure programmes
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Grow EU competitiveness in this field
Capital - the trend towards (PPP) market models
will almost certainly accelerate
Sw,Kar
Tendency to
Private Finance
Initiative
Political risk
High
UK
Hun
Swe
Fin
FR
GDR,RK
FR
GDR
Fin Spn Hol
Nor
Tendency to
full service
PPP
UK
Low
Performance
management
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Tariff
models
Internal
markets
Privatisation trajectory
‘Open’ markets
Capital is a key factor
Productivity growth, Output per hour,
1954=100, US
Capital
contribution
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Source: Boston Consulting Group, The Economist, A special Report on Innovation, October 13th 2007, pg 4.
PPP growth
in Europe
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There are problems with PPPs
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Infrastructure only PPP
 Low cost but inflexible with long-term ‘lock-in’ problems – risk is
often ‘one sided’
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PPPs – the term “Partnership” is a misnomer
 They are defined by adversarial relations and supplier
opportunism
 There is a secondary market in PPP contracts and debt – not
unlike sub-prime mortgages
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Returns are excessive and the benefits of risk transfer limited – 15%
‘return’ and over is ‘unacceptable’ – 10% is ‘reasonable’
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Will the hospital and ‘lender/operator’ work closely together to
equitably share costs and benefits – not a safe assumption
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There is a need to consider economic regulation of PPPs
PPP and the credit crisis
There are further problems
 The collapse of inter-bank lending (and the collapse of
some of the insurers) has drastically reduced liquidity
 Bank stress tests have resulted in banks increasing their
‘risk security’ and further reducing liquidity
 Some banks have withdrawn from the PPP market –
others have withdrawn to their domestic market resulting
in “relationship banking”
 There is an increasingly high degree of selectivity on the
part of banks – sovereign debt guarantees are distrusted
 No viable market has yet emerged to replace the
‘wrapped’ bond market
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What ‘public’ responses are available to
bridge the capital gap?
 State (public authorities) level
 Expand already existing forms of support: grants, or multilateral
lending
 Offer State guarantees for project debt or project bonds (Portugal /
France) but ------?
 Co-lending by the State – the new Infrastructure Unit, UK
Treasury, but so far limited experience
 ‘Hospital (procurer) level
 Existing procurement models have not yet been adapted – the
buyers market attitude
 Competitive financing at a later stage in the project
 Better risk assessment and management strategies
 Sharing re-financing risk
 Shorter debt maturity (lending) terms
 New entrants to the market
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 Stronger (lower risk) business models are emerging – and the subcontinent is taking an interest
Raising capital loans
What the banks should know and ask for
Should Know
 Macro government health priorities and policy
 Social Fund purchasing strategies and competencies
 Healthcare and economic risk factors
Should ask for
 Long-range business plan (at least) extending for the lifetime of the
loan
 Service demand model
 Lifecycle investment model
 Risk assessment model, including
 Quality and safety – clinical governance
 Reputational risk impact
 Income schedule – also as collateral for loans
 Evidence of workforce competency – business and professional
 General governance (probity) arrangements
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The role and importance of EU
Structural Funds
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Lisbon Strategy evaluation document
Main Findings
 The Lisbon Strategy has helped build broad consensus on the
reforms that the EU needs
 it has delivered concrete benefits for EU citizens and businesses
 but increased employment has not always succeeded in lifting
people out of poverty
 Structural reforms have made the EU economy more resilient and
helped us weather the storm – cohesion policy worked
 However, the Lisbon Strategy was not sufficiently equipped to
address some of the causes of the crisis from the outset
 Whilst much has been achieved, the overall pace of implementing
reforms was both slow and uneven
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Why innovation and diversity is
important, Deficit recovery – the EU
Lisbon ‘reflection process’
 “The crisis has wiped out recent progress”
 The steady gains in economic growth and job creation
witnessed over the last decade have been wiped out
 GDP fell by 4% in 2009, our industrial production dropped back to
the levels of the 1990s and 23 million people - or 10% of our
active population - are now unemployed.
 Public finances have been severely affected, with deficits at 7% of
GDP on average and debt levels at over 80% of GDP – two years
of crisis erasing twenty years of fiscal consolidation.
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Growth potential has been halved during the crisis. Many
investment plans, talents and ideas risk going to waste because of
uncertainties, sluggish demand and lack of funding.
Lisbon Strategy evaluation document
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Earmarking of Structural Funds has helped mobilise considerable
investments for growth and jobs although there is further to go:
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Need to enhance policy effectiveness
Difficulties with the process
Weak capacity
Lack of strategic approach
Poor integration of process
Weak outcome assessment
Need to strengthen leverage – “through financial engineering”
Health remains a high value investment
The findings are consistent with the Euregio case study review
“Europe 2020”
Shaping future EU (SF) policy
 SMART, SUSTAINABLE AND INCLUSIVE GROWTH
Where do we want Europe to be in 2020?
 “Three priorities should be the heart of Europe 2020:
 Smart growth – developing an economy based on
knowledge and innovation.
 Sustainable growth – promoting a more resource efficient,
greener and more competitive economy.
 Inclusive growth – fostering a high-employment economy
delivering economic, social and territorial cohesion.”
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www.ec.europa.eu/growthandjobs/pdf/complet_en.pdf
Structural Fund investment, evolving
priorities,
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Major policy focus – Economic Regeneration and Growth,
plus for health:
 Targets EU top health priorities e.g.
 Health inequalities
 Healthy ageing - a DG Sanco priority
 Should Demonstrate
 Innovation
 Contribution to growth and economic regeneration and
sustainability – but this is a difficult agenda
 Should deliver
 Improvements in population health status
 Affordable investment
 Progressive modernisation of health facilities
Simply making capital investment available is unlikely in itself to be
enough to stimulate transformational change – no more bail out
Issues of governance and economics
 Stronger economic governance will be required to deliver results.
 Europe 2020 will rely on two pillars:
 The thematic approach - the flagships - combining priorities
and headline targets; and
 Country reporting, helping Member States to develop their
strategies to return to sustainable growth and improved
public finances.
 Integrated guidelines will be adopted at EU level to cover
the scope of EU priorities and targets.
 Country-specific recommendations will be addressed to
Member States.
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Failure in the governance of health and care could
lead to levels of expenditure close to that of the US
where healthcare now accounts for 17% of GDP
Health in the EU Economy of 2020
Healthcare accounts for 8.5 % of EU GDP, and about 10% of
employment
When other aspects of social care, and the "secondary market" for
healthcare related products and services are considered the total impact
on our economy may be twice this level – about 20%
Moreover the economic impact of health is increasing rapidly: as our
populations age, as technology improves our capability to tackle diseases
and as people demand higher standards of health care.
The economic downturn adds to these challenges - the highest burden of
disease in the EU arises from mental illness - which increases with
unemployment and is going largely unnoticed in many health systems.
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Some difficult choices for States in the current
economic climate
1. Rationing services and cutting health care spending – will make the
position worse
2. Raising additional revenue – does not look possible
3. Implementing structural reforms that improve the health sector’s
productivity and responsiveness and economic sustainability
1 & 2 have been tried within the 15 and 12 and usually fail or prove
unsustainable. The current crisis will create the climate and
opportunity for change
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The EU wide trend is now in the direction of (3) – structural reform, but
It will require significant capital investment
PPPs may offer a way forward as an alternative – in part, but --SF investment may assume more critical importance
Members of the Commission’s
Directorate for Health and national
Ministries of Health need to:
 Ensure specific strategic and operational programmes* for
health within the funds.
 Determine priorities with a balance of (integrated) objectives
between ‘public health’ and healthcare.
 Agree health priorities within other sector policies and
investments.
 Determine health investments which take into account public
health trends, and national and regional contexts and plans.
 Increase administrative capacity and expertise.
 Develop impact measures and demonstrate that programmes
are following the proposed paths and will deliver operational
targets.
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* Issues of subsidiarity
SF Direct Health Sector
Significant variations in levels of State
support
•
•
•
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Funds available from MoF
National sectors (Health) between DG
Regio and national MoF
• Health €5 billion
• IT (all purposes) €5 billion
• Ageing €1billion
Proportions of national funds
allocated – wide variations are
evident
Programmes often use administrative rather than health priorities because
ministries of finance are risk averse: they want no flaws in the process,
yet also full and legitimate use of the funds. The on cost on time’ issue.
Changing the focus (within country) of
SF masterplanning
Some Euregio III observations
 Uncoordinated and often opportunistic project funding
 Ageing and hospital investment
 Hospital and eHealth
 Acute care and public health
Often lacking coordination
 Absence of reliable and robust measurable benefit
 Weak evaluation processes
 On cost on time delivery of budget plans and buildings
 Replacement and recombination investment
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 Integrated cross-sectoral masterplanning
 Integrated spending plans
 From replacement / recombination to transformational
change
 “It’s the economy stupid”
Lack of cohesion can create serious
problems
The daily numbers of elderly “blocking’ beds
in English NHS Hospitals 2007 /10
?
10,000
Patient
numbers
? The impact of
uncoordinated policy
shifts and ‘cuts’ – in
primary and social care
2,000
2007
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2010
and - wasteful use of resources across the
EU
Example - the utilisation efficiency of
scanners
Waiting times
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1
9 months
One week
4 months
Scanner range 1 to 30 per million population
European recommendation 10 to 12 per million
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And soon – the
emergence of
the low cost
Scanner, India
China and soon
the EU
Silos frustrate opportunity cost assessment and
encourage monocultures
Example: Cardiovascular disease
Netherlands - 46% avoidable deaths - reactive clinical intervention
- 44% avoidable deaths - prevention (and rising)
Underlying factors
Poverty
Housing
Intersectoral
SF need
Disease
Treatment
Outcome
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Diet
Translational
strategies
needed
Immediate factors
Smoking
Cardiovascular disease
Treatment
The application of most SF
investment
Death
“Individuals heavily influence their mortality rates and the quality of their health, subject to,
genetic make-ups, developments in the medical field, epidemics, luck, and other considerations.”
Conclusions
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Underlying structural change themes
across Europe
 Diversifying financing and moving to economically more
sustainable models
 Facilitating innovation and applying new technology as a driver
of change
 Making health systems more patient-focused and less providercentred
 Strengthening primary care and reducing the burden (of the
elderly and chronic ill) on the hospital sector
 Introducing competition between service providers to drive up
standards and promote cost competitiveness
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Practical steps to rethink capital value
 Reassess capital capacity
 Revisit operational and strategic plans
 The ‘right’ level of investment
 Regional economies of scale and scope
 The medical and nursing dimension
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Use ‘real estate’ to create ‘capacity’
Consider divesting non-core assets
Evaluate merger or partnership options
Consider acquiring good-fit services
Consider risk
Reassess convergence with the core business
The credit crisis as an opportunity
 Public expectation of ‘difficult’ decisions
 End of ‘free’ capital – including SF
 But also difficulties in cross match funding SF / Gov or PPP
 True cost of capital factored into all policy and planning
decisions
 PPP as an emerging policy shift across Europe but make
sure it’s the right model
 SF part of a multiple funding model of the future
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 SF as a facilitating fund for transformational change – but
be clear about defining transformational change – and
time scale – and total (sustainable) cost and benefit
An accelerating and increasingly complex trajectory of
change in healthcare in the EU
The patient as co-producer of care
Intersectoral investment
High
Public Private Partnerships
Transformational change
Complexity
& risk
Technology diffusion
Modernisation
Quality improvement
Incremental change
Low
Cumulative growth
2000/6
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2007/13
Health
transitions
Credit
crisis 20/20
Deficit
reduction
All happening within the current SF cycle
Age Gap
crisis
Thank you for your attention
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