Public–private partnerships for hospitals Martin McKee,a Nigel Edwards,b & Rifat Atun c Abstract While some forms of public–private partnerships are a feature of hospital construction and operation in all countries with mixed economies, there is increasing interest in a model in which a public authority contracts with a private company to design, build and operate an entire hospital. Drawing on the experience of countries such as Australia, Spain, and the United Kingdom, this paper reviews the experience with variants of this model. Although experience is still very limited and rigorous evaluations lacking, four issues have emerged: cost, quality, flexibility and complexity. New facilities have, in general, been more expensive than they would have been if procured using traditional methods. Compared with the traditional system, new facilities are more likely to be built on time and within budget, but this seems often to be at the expense of compromises on quality. The need to minimize the risk to the parties means that it is very difficult to “future-proof” facilities in a rapidly changing world. Finally, such projects are extremely, and in some cases prohibitively, complex. While it is premature to say whether the problems experienced relate to the underlying model or to their implementation, it does seem that a public–private partnership further complicates the already difficult task of building and operating a hospital. Bulletin of the World Health Organization 2006;84:890-896. ميكن اﻻطﻻع عىل امللخص بالعربية يف صفحة Voir page 894 le résumé en français. En la página 895 figura un resumen en español. .895 Background construction of a health facility and the and Ouchi,8 with Preker et al.9 applying ongoing provision of its nonfclinical it to health care. Arguing that the public The delivery of health care in almost (and in some cases clinical) services sector is intrinsically less efficient and fre every country involves some form of within a public system of provision. sponsive than the private sector, Preker et public–private partnership. In countries Private provision of essential public al. propose a matrix with one axis defined where care is delivered mainly through services has a long tradition, especially by the degree of contestability involved the public system, many inputs, such as in major infrastructure projects in the in providing a service (i.e. ease of market pharmaceuticals and support services, transport sector and in the provision entry), while the other is defined by the ease are sourced from the private sector. In of utilities. The private sector played a with which the outcomes of the service can countries with predominantly privately crucial role in developing these services be measured. owned facilities, the state influences in the 19th century but, in the postfwar Where there is low contestability their configuration through regulations period, many were taken into public and problems of measurement then a and financial incentives. In hospitals, the ownership because of market failure.2 service should be provided within a situation is further complicated because Privatization of public services bef managerial hierarchy; conversely where of the many functions provided by such came more widespread in the 1980s with measurement is straightforward and institutions: the training of health proff the emergence of a neoliberal consensus provision is highly contestable it should fessionals and research and development, that sought to reduce the role of the be purchased from the private sector. for example, are activities that are pubf state.3 In the health sector, however, Supporters of this approach have striven 1 licly funded to varying degrees. comprehensive privatization was ref to reduce barriers to market entry and to However, even the concept of a jected because of the existence of market enhance the ability to measure quality. public–private dichotomy is problemf failure.4 Instead, various quasifmarket Yet the basic premise is not borne out atic. States often limit the scope of prif solutions were developed, typically the by the evidence.10 Australian research vate contractors to decide where to place separation of purchasers and providers showed that, after adjusting for case mix, facilities. Furthermore, there is a differf within the public sector.5 The logical public hospitals are more efficient than ence between forfprofit corporations next step was to move the delivery of those that are privately operated,11 posf that operate hospitals as one business health care out of the public sector. This sibly due to the more intensive managef among many and notfforfprofit organif was seen as a means to increase value for ment of patients in private hospitals.12 zations (including religious foundations) money, innovation, and responsiveness A systematic review identified 149 that exist solely to provide health care. to users.6 comparisons of forfprofit and notfforf This paper will examine one particular The conceptual underpinning of this profit health facilities (of various types) type of public–private partnership — the approach was developed by Williamson7 undertaken over the past two decades in a European Observatory on Health Systems and Policies, London School of Hygiene and Tropical Medicine, Keppel Street, London WC1E 7HT, England. Correspondence to this author ([email protected]). b Department of Public Health and Policy, London School of Hygiene and Tropical Medicine, London, England. c Imperial College London, South Kensington Campus, London, England. Ref. No. 06-030015 (Submitted: 3 March 2006 – Final revised version received: 8 June 2006 – Accepted: 5 July 2006) 890 Bulletin of the World Health Organization | November 2006, 84 (11) Special Theme – Contracting and Health Services Martin McKee et al. Privately financed hospitals the USA. Of these studies, 88 concluded Franchising is an alternative model, of high cost legal, financial and other that nonfprofit facilities performed betf where a private company takes over technical advice — the process remains ter with respect to cost, outcomes of management of an existing public daunting for parties on both sides of the care, access and social mission, 43 studies hospital. This approach has been tried transaction. found no difference, and 18 reported in Sweden17 (including the sale of a In theory, the British PFI model forfprofit facilities to be better.13 public hospital to a private company) should contain the cost to the health and in Italy. A unique model has been authority by transferring risk to the Public–private partnerships developed in the Alzira Hospital, in contractors. But in practice, the corf Valencia, Spain, which is managed by a porate bonds used to finance PFI deals to build and run hospitals private consortium that accepts responf are typically awarded BBB+ status by The model in which a public authority sibility for the health care for a defined financial rating agencies, just above contracts with a private company to population in return for an annual per junk bond status, while government build or run a hospital is, inevitably, capita payment. bonds are considered less risky, and for seen mainly in countries with national There is still relatively little expef many European governments attract health services. Various models have rience with these models of hospital AAA ratings.19 The consequence of this been developed (Table 1). Australia has provision, and governments have yet to low rating is that the cost of borrowing the most diverse range of models, with undertake rigorous evaluations. Thus money is higher than it would be for differing versions in several states.14 The the merits of these models compared governments. A particular problem arises Private Finance Initiative (PFI) in the with the traditional model of provision with the way that the risks of construcf United Kingdom is a design, build, remain highly contentious but it is tion are bundled with those associated finance and operate (DBFO) model. It already possible to identify several key with the operation of services. Whereas has been the primary means of financing issues that have emerged. These are cost, construction risks may be high and quite major capital investments in the health, quality, flexibility and complexity. real, the operation of services carries a education and prison sectors during the much lower risk, not least because hosf past two decades. While this arrangef Key issues pitals are financially backed by governf ment provided a source of much needed ment — i.e. the government is a single new finance, a great deal of this funding Cost payer, meaning that income streams to was “offfbalancefsheet” financing and There are significant costs not only for hospitals are less at risk than in markets did not appear in the government books the firms bidding for a public–private with multiple payers. However, some as new borrowing. This arrangement enf partnership, but also for the healthfcare contend that several of the risks factored abled the government to remain within provider. Prospective bidders incur large into PFI business cases are unlikely or targets set for public sector borrowing. costs in developing their tenders, and notional and appear to be an accountf Moves by the British Office for National losing contenders must find a way of ing device designed to favour private Statistics to redefine such expenditure are recouping their expenditure from subf procurement in cost comparisons with likely, at a stroke, to remove one of the sequent contracts. A sequence of losf its public alternative.20 The reason for main reasons justification for pursuing ing bids by a leading British company this may have been a very strong signal the DBFO model.15 involved in PFI deals led to fears of from government that schemes relying In the British model, a company — insolvency.18 Although the PFI prof on public funding rather than PFI were usually in the construction sector — will cess has been simplified by the use of very unlikely to succeed.