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P3 for Canadian Hospitals – private buildings, public care

by Michael Wilson

Few issues are currently publicly debated with the same vigour as the allegations of a pending “privatization” of the Medicare system, or the introduction of “two-tier health care” or “for-profit health care.” Such emotive phrases tend to obscure a reasoned and necessary debate as to appropriate boundaries for public and private roles in improving and enhancing the core aspects of the Canadian health care system.

The health care system in its current form is arguably economically unsustainable. Annual operating costs for health care are in many cases approaching 50 percent of the provincial budget, and if not controlled, could soon consume it entirely. And yet, there is a critical need to make capital investments to improve the stock of infrastructure, IT and medical equipment.

The January 2002 Alberta report “A Framework for Reform” (a.k.a. the Mazankowski report) usefully distinguishes options for potential public and private roles in funding, clinical care delivery, and delivery and operation of medical buildings and equipment. This article addresses only the latter potential private role.

Often raised as an intractable obstacle to any private role in our health care system, the Canada Health Act, in fact, is a federal funding scheme. The Act sets out five guiding principles of universality, comprehensiveness, accessibility, portability and public administration. A province that does not follow the principles (i.e., by tolerating private funding for insured services) risks the loss of certain federal transfer payments. These principles apply to provincially insured clinical care delivered in hospitals and doctor’s offices. That’s all. Private participation in other aspects of our broader health care system is commonly estimated at 30 percent, or about double that of the “two-tier” health care system in the United Kingdom.

Two pilot public-private partnership (P3) hospital infrastructure projects were recently announced in Canada, at the William Osler Health Centre in Brampton, and at the Royal Ottawa Hospital in Ottawa. These P3 proposals target the infrastructure deficit within the hospital system, and have little or nothing to do with the private funding or private provision of clinical care.

The P3 model contemplated for the pilot Ontario hospital facilities is a variation of the design-build-finance-operate (DBFO) model, under which a private partner designs, builds and finances a new hospital capital facility, and operates selected non-clinical services within the facility for a relatively long term (25 to 40 years). Under the private finance initiative (PFI) program in the UK, 85 percent of major National Health Service projects since 1987 have been implemented using such a DBFO approach, with 38 projects worth £6.8 billion now underway or completed. Plans for UK infrastructure renewal include construction of 100 new hospitals by 2010, well in excess of the predicted pace of infrastructure renewal within Canada.

Under the PFI model, the hospital pays for the use of the capital asset by way of a unitary charge, similar to a lease payment, and a performance charge, similar to a fee for a management contract. Each charge can be reduced or waived if the private partner does not meet performance standards. Significantly, no charge at all is payable by the hospital until the facility is completed, commissioned and operational.

To be feasible, a P3 option must demonstrate risk transfer to a private partner and greater value for money (VFM) than the value available under the public procurement scheme.

The P3 model allows for a significant rethinking of the best way to allocate scarce public resources to the important public service of clinical care within hospitals, while allowing a separate private partner’s role in providing the infrastructure necessary to deliver that clinical care as well as provide sector expertise in operating the facility. In particular, a properly structured P3 arrangement:

  • allows a private partner to assume various risks which it can manage better than a hospital;
  • may allow capital funding of a hospital project to flow over a period of years, rather than up-front;
  • achieves value-for-money, for example, in the UK, 17 percent average benefits were experienced across a range of industries, with a VFM range of 4 to 14 percent in hospitals;
  • allows hospitals to focus on their core mandate of clinical care; and
  • creates a more robust model for whole-life-cycle costing of capital assets.

A well-structured P3 arrangement will not impinge on a province’s responsibility and authority to set priorities between hospital capital projects and to regulate hospital operations.

It is worth noting that the UK program, initiated by a Conservative government, was endorsed and expanded by a subsequent Labour government, demonstrating that support of the P3 concept has been pragmatic, not ideological.

Applying the P3 concept to the delivery and operation of private health care infrastructure should be seen as an important positive development that supports, rather than threatens, the principles of the Canada Health Act and the important public role in the regulation funding and delivery of clinical care.

Michael Wilson is the Chair of The Canadian Council for Public-Private Partnerships. This article has been developed in cooperation with Mark Bain, Partner, Bennett Jones LLP (Toronto).




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