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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

barrie.dowdeswell@echaa.eu

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Aims of this session – the capital investment related problems of the credit crisisand - 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?

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

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Spending is unlikely to get back to former levels any time soon

Med

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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

Portugal

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The impact of an ageing population – a critical EU problem areaWe should have started planning a decade ago, it was all totally predictable

2010 - 10 to 1

2030 - 4 to 1

Ratio of working population toelderly retired

* Europe 2020

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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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 investmentWhat are we trying to achieve?

We routinely make capital investment decisions about new hospitals worth

hundreds of € millions

Are we sure we understand and identify measurable benefit

Clinical outcomes

Contribution to improvement in population health

Reducing health inequalities

Do we place a measurable value on the investment

Do we understand the risks we are taking

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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 35-70% 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

6&

94% = 10.6% cut in revenue cost

6% cost of capital

10% cost saving

83%% = 12% cut in revenue cost

17% cost of capital

10% cost savingSurveys showlittle awarenessof the impact of increases incapital costs and lifecycle factors

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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

Functional efficiency gap on commissioning

Functional Decay

Adaptability costs

Lifecycle capacity

Adaptability value

Planning and development input

Needs assessment•Inequalities•Acute care•Outcomes•Medical educationEconomic sustainabilityPolitical agendas

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Consider:•Cost of action•Intervals of action•Real rate of return•Lifetime of building

Valueing lifecycle cost

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Capital; diversity of funding / procurement models

State / Regional allocation – gives maximum political, policy and tactical control

Three principal options:

Free (grant)

Capital charging

Repayment

Public Private ‘Partnerships’ – usually (project) focused on healthcare delivery, may have some additional societal / economic benefit and / or commercial enabling dimension

Commercial funding (including EIB) - a commercial, risk assessed, loan transaction – income collateral

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’

World Bank – usually tied to targeted structural change

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Public Private Partnership models

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Principal PPP models

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

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An EU (wide) policy approach

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

Investment in infrastructure is an important means to maintain economic activity

during a crisis

“The Private Sector can provide an effective way of doing this”

“Better value for money from infrastructure by exploiting the efficiency and innovative

potential of a competitive private sector”

Spread the cost of financing the infrastructure over the lifetime of the asset –

reducing immediate pressure on public sector budgets

Give the private sector a role in developing and implementing long-term strategies

for major infrastructure programmes

Grow EU competitiveness in this field

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Capital - the trend towards (PPP) market modelswill almost certainly accelerate

Performance Tariff Internal ‘Open’ marketsmanagement models markets

Privatisation trajectory

Polit

ical ri

sk

Low

High

Nor

Fin

FR

UK

GDR,RK

GDR

Hun

HolSwe

Tendency toPrivate FinanceInitiative

Tendency tofull servicePPP

FinFR Spn

Sw,Kar

UK

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Capital is a key factor

Productivity growth, Output per hour,

1954=100, US

Source: Boston Consulting Group, The Economist, A special Report on Innovation, October 13th 2007, pg 4.

Capital contribution

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PPP growthin Europe

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There are problems with PPPs

Infrastructure only PPP

Low cost but inflexible with long-term ‘lock-in’ problems – risk is often

‘one sided’

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

Returns are excessive and the benefits of risk transfer limited – 15% ‘return’

and over is ‘unacceptable’ – 10% is ‘reasonable’

Will the hospital and ‘lender/operator’ work closely together to equitably

share costs and benefits – not a safe assumption

There is a need to consider economic regulation of PPPs

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PPP and the credit crisisThere 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 Stronger (lower risk) business models are emerging – and the sub-continent is taking

an interest

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Raising capital loansWhat 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 factorsShould 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.

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.

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Lisbon Strategy evaluation document

Earmarking of Structural Funds has helped mobilise considerable investments for growth and jobs although there is further to go:

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

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“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.”

www.ec.europa.eu/growthandjobs/pdf/complet_en.pdf

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Structural Fund investment, evolving priorities,

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

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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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Health in the EU Economy of 2020Healthcare 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 proveunsustainable. The current crisis will create the climate andopportunity for change

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

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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.

* Issues of subsidiarity

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SF Direct Health SectorSignificant variations in levels of State support

• 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.

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Changing the focus (within country) of SF masterplanningSome Euregio III observations

Uncoordinated and often opportunistic project funding Ageing and hospital investment Hospital and eHealth Acute care and public health

Absence of reliable and robust measurable benefit Weak evaluation processes On cost on time delivery of budget plans and buildings

Replacement and recombination investment

Integrated cross-sectoral masterplanning Integrated spending plans From replacement / recombination to transformational change “It’s the economy stupid”

Often lacking coordination

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Lack of cohesion can create serious problems

10,000

2,000

Patientnumbers

2007 2010

The daily numbers of elderly “blocking’ bedsin English NHS Hospitals 2007 /10

? The impact of uncoordinated policy shifts and ‘cuts’ – in primary and social care

?

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and - wasteful use of resources across the EUExample - the utilisation efficiency of scanners

9 months One week 4 months

Waiting times

Scanner range 1 to 30 per million populationEuropean recommendation 10 to 12 per million

1

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And soon – theemergence of the low costScanner, IndiaChina and soonthe EU

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Silos frustrate opportunity cost assessment and encourage monocultures Example: Cardiovascular disease

Underlying factors

Immediate factors

Disease

Treatment

Outcome

Poverty Housing

Diet Smoking

Cardiovascular disease

Treatment

Death

Tra

nsl

ati

onal

str

ate

gie

s

needed

The application of most SFinvestment

IntersectoralSF need

Netherlands - 46% avoidable deaths - reactive clinical intervention - 44% avoidable deaths - prevention (and rising)

“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.”

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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

provider-centred

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

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

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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

SF as a facilitating fund for transformational change – but be clear about defining transformational change – and time scale – and total (sustainable) cost and benefit

All roads lead to the economic agenda

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An accelerating and increasingly complex trajectory of change in healthcare in the EU

Cumulative growth

ModernisationQuality improvement

Technology diffusion

Transformational change

Intersectoral investment

Public Private Partnerships

The patient as co-producer of care

Complexity& risk

Low

High

2000/6 2007/13Creditcrisis

Healthtransitions 20/20

Deficitreduction

All happening within the current SF cycle

Incremental change

Age Gapcrisis

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Thank you for your attention