Barrie Dowdeswell

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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
1
                        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

2
              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

3
    The global credit and economic crisis




4
                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
5
    Spending is unlikely to get back to former
    levels any time soon




                                                 Med




6
Portugal

           Three immediate and ongoing
           impact factors for healthcare

           •Ability to borrow and service debt
           •Cost of borrowing
           •Sustainability of funding for service cost




7
                      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

8
                                                                      * Europe 2020
    The EU - an ageing society




9
     Ratio of spending on health




10
     Overall ranking of EU Health systems




11
     Capital models and impact of the crisis




12
                    The value of capital investment
                    What 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




13
                    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
14
                     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


              10% cost saving                     10% cost saving
                                                                            Surveys show
                                                 83%% = 12% cut             little awareness
             94% = 10.6% cut                     in revenue cost            of the impact of
             in revenue cost                                                increases in
         6&                                      17% cost of
                                                                            capital costs and
             6% cost of capital                                             lifecycle factors
                                                   capital
15
               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

16
                    Lifecycle economy - a framework for analysis


                                                        Lifecycle capacity

                                                  Adaptability value

Functional efficiency gap on commissioning

 Needs assessment                                       Functional
 •Inequalities                                          Decay
 •Acute care
 •Outcomes
 •Medical education
 Economic sustainability
 Political agendas



                            Planning and
                            development input       Adaptability costs
17
     Valueing lifecycle cost




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


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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’
19        § World Bank – usually tied to targeted structural change
     Public Private Partnership models




20
                    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
21
                       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
22
                           Capital - the trend towards (PPP) market models
                           will almost certainly accelerate


                                                                     Sw,Kar
                         Tendency to
 High
                         Private Finance                    UK
                         Initiative


                                                                      FR
      Political risk




                                                            Hun
                                                                                     GDR,RK
                                                    Swe
                                                                           FR    Fin Spn Hol
                                            Fin
                                                    GDR
                                     Nor
                                                                                Tendency to
                                                                                full service
                          UK                                                    PPP
     Low
                       Performance         Tariff         Internal          ‘Open’ markets
                       management          models         markets
23
                                       Privatisation trajectory
                                             Capital is a key factor
                                      Productivity growth, Output per hour,
                                                  1954=100, US




                                                                                                           Capital
                                                                                                           contribution




 24
Source: Boston Consulting Group, The Economist, A special Report on Innovation, October 13th 2007, pg 4.
     PPP growth
     in Europe




25
                     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
26
               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
27
                  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
28         -continent 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

29
     The role and importance of EU Structural
     Funds




30
                 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
31
               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.
32
                     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


33
              “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.”


34   www.ec.europa.eu/growthandjobs/pdf/complet_en.pdf
                 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
35      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.

36
     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.

37
                   Some difficult choices for States in the current economic
                   climate


     §   Rationing services and cutting health care spending – will make the
         position worse
     §   Raising additional revenue – does not look possible
     §   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

     §   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
38
                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.


39
     * Issues of subsidiarity
                    SF Direct Health Sector
                    Significant 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,
40     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               Often lacking coordination
        § 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
41
     § “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                                  2010

42
                    and - wasteful use of resources across the EU
                    Example - the utilisation efficiency of scanners

                          Waiting times



                                                          30




                                                               And soon – the
 1                                                             emergence of
                                                               the low cost
                                                               Scanner, India
      9 months             One week            4 months
                                                               China and soon
      Scanner range 1 to 30 per million population             the EU
     European recommendation 10 to 12 per million
43
                    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
     Immediate factors                                      Diet        Smoking
                                  Translational
                                   strategies
                                    needed
          Disease                                          Cardiovascular disease


         Treatment                                                 Treatment
                              The application of most SF
                              investment

         Outcome                                                     Death

      “Individuals heavily influence their mortality rates and the quality of their health, subject to,
44
      genetic make-ups, developments in the medical field, epidemics, luck, and other considera
     Conclusions




45
                  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


46
                   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


47
                     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
48
                 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

                                    Health      Credit             Deficit     Age Gap
               2000/6   2007/13     transitions crisis 20/20       reduction   crisis
49
                                  All happening within the current SF cycle
     Thank you for your attention




50

				
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