24 March 2016

Introduction of Extraterritorial Practices of Medical Institution PPPs

In recent years, the Chinese government has been dedicated to the reform of state-owned hospitals and has issued a series of policy papers in this field, including Opinions of the State Council on Deepening Medicine and Health System Reform issued by the State Council in 2009, Opinions of the National Development and Reform Commission, the Ministry of Health and Other Departments on Further Encouraging and Guiding Social Capital to Establish Medical Institutions promulgated in 2010, and Circular of the General Office of the State Council on Progressing the Guiding Opinions of the Ministry of Finance, the National Development and Reform Commission and the People's Bank of China on Promoting the Public-Private-Partnership (PPP) Mechanism in Public Services (“the Guiding Opinions”) published in 2015. Particularly in the Guiding Opinions, the government promotes the development of non-public medical institutions, and specifically encourages social capital participation through the public-private-partnership (PPP) mechanism for public services including medical treatment, and healthcare This makes a big contribution to the prospects of system innovation in the healthcare sector.

In this context, it is essential to broaden the international perspective, and to seek valuable experience and innovative ideas from health sector developments in other countries. 

Infrastructural PPPs

The key feature of this model is that the services provided by social capital do not include core clinical services, but mainly focus on the construction of hospital infrastructure, as well as various non-clinical services, such as catering, cleaning, security, parking, and so on. This model has been widely adopted in the UK, Australia, Italy and Canada. These operational models are mostly Design-Build-Finance-Maintain (DBFM) or Design-Build-Finance-Maintain (DBFM) schemes. The private partners undertake the obligations of design, construction, financing of fixed assets, and operation (or maintenance) as required by the public sector. 

1. UNITED KINGDOM

As initiator of the Private Financing Initiative (PFI), the UK has built a great number of new hospital buildings since 1997. These new hospital projects usually involve private partners in the design, construction and operation of hospital buildings, as well as the supply of non-clinical services, such as cleaning and catering. Whereas the core clinical services, such as the clinical, medical and nursing services of doctors and nurses are still the responsibility of the National Health Service (NHS). 

During the performance of PFI contracts, charges are paid by the Trust (the government sector) whether periodically or lump sum. Payments may be either for the construction and management of the buildings and equipment, or payments for facilities management and non-clinical services.

Case study: University College London Hospital (UCLH)

The UCLH National Health Service (NHS) Trust is one of largest providers of healthcare services, medical research and training in the UK. It comprised 8 rundown and cramped hospitals in different districts of central London. The reconstruction of these hospitals adopted a DBFO (design, build, finance and operate) scheme and Health Management (UCLH) Plc. was selected as the private sector partner to build new hospitals and replace old buildings while providing services for facilities that were still running. The duration of the agreement was 40 years and the hospital was leased back to the NHS Trust for £32m annually. In addition, Health Management (UCLH) Plc. provides non-clinical support including supplies, waste management, security, car parking, laundry and linen, estate management and building services.

After construction, services that were provided by 3 hospitals can now be undertaken by 1 new hospital with capacity for 669 beds and 54,000 patients in central London. This is 10% more than before. The cost of this project is subsidized by the government and the medical services are free for patients. During the 40 year term, it is forecast that this PPP project will save more than £30m, about 6.7% of total costs, compared with traditional procured hospital construction and operation of hospitals. At the time, UCLH was the largest hospital reconstruction project using the PFI model, the success of which has now spurred more than 100 new hospital PPP projects. The London project has been described as “the bravest and best decision ever made by NHS”.

The PPP Framework:

Intro of Foreign Practices of Medical Institution PPPs

Brief summary:

  • Payment Mechanism: Government Payment. 
  • Duration of the agreement: 40 years. 
  • The private partner is responsible for:  non-clinical support services (e.g. supplies, waste management, security, car parking, laundry,estate management and building services).

2. AUSTRALIA

Case study: Royal North Shore Hospital (RNSH) and Community Health Facility, Australia

The Royal North Shore Hospital (RNSH) began as a cottage hospital in 1885, and now serves as the main public teaching hospital in Sydney, Australia, providing general medical services. Its main area accomodates 5.7% of the population of Australia. In 2008, it entered into a $950-million PPP contract with InfraShore Consortium. The contract covered financing, design, construction, operation (excluding clinical services) and 28-years facilities maintenance. InfraShore Consortium rebuilt 53 buildings, and designed them so as to provide for facilities that are patient-centered, and facilities for management and non-clinical support services, such as cleaning, security, and waste management. In 2012 the hospital started operating at full capacity. The rebuilding of RNSH has increased the number of beds by 20%. Chemotherapy and renal dialysis chairs have been added; clinical services have been enhanced; and 29 operating rooms are available. This project also involved a new clinical services building completed in 2014, with a new burns unit and mental health units. 

Utilizing the value for money (VFM) method of valuation, it is predicted that this RNSH PPP will save $13.4 million. And this project has been completed under budget.

The PPP Framework:

Intro of Foreign Practices of Medical Institution PPPs

Brief Summary:

  • Payment Mechanism: Government Payment. 
  • Duration of the agreement: 28 years. 
  • The private partner is responsible for: reconstruction of buildings, maintenance and management of the facilities, and non-clinical support services (e.g. cleaning, security, waste management, etc.).

Integrated PPP

This PPP model integrates all hospital services in a PPP contract, which includes both clinical services and non-clinical services.

1. SPAIN

In 1999, Spain developed the Alzira PPP Model, the main features of which are management of both clinical and non-clinical services by the private partner, and if the PPP contract is not renewed after 10 years then the local government may take over the ownership of the hospital. 

Case study: The Alzira Model, Hospital De La Ribera, Valencia

Hospital de la Ribera is a pioneer of the use of PPPs in Spanish hospitals. In 1997, Union Temporal de Empresas-Ribera (UTE-Ribera) contracted with Valencian government for a 10-year partnership (extendable to 15 years) to build a public hospital and to manage its clinical and non-clinical services. However, the price for the project did not cover the cost. Therefore UTE-Ribera refinanced in 2003 and entered into a second PPP agreement for 15 years (renewable to 20 years in total). The private partner is not paid according to the number of patients, but based on the quality of the services. 

During the concession, UTE-Ribera was to spend at least €68 million on the operating costs of the clinical services. The government would retain ownership of the hospital during the partnership.

After entering into the PPP contract, UTE-Ribera has greatly enhanced the quality of medical services, for example by building a new Hemodialysis Unit, an Interventional Radiology Unit and a Medical Physics Gamma Camera. Also UTE-Ribera has invested in additional diagnostic facilities and radio-therapy, endoscopy testing, and pathological testing. The services at the new hospital are provided for free. Under the contract the private partner was allowed to retain up to 7.5% of the profit with any amount above this is returned to the local government. The private partner will be forfeited a certain amount of money upon failing to retain a patient turnover rate lower than 20 percent. If local patients refuse to be treated in Hospital De La Ribera, the Hospital is obliged to cover all expenses of the patients’ medical treatment in another district.

This project has benefited both the hospital and local community in terms of coverage of local high quality medical service, hospital management efficiency, staff incentive system, and healthy competition within the industry.

The PPP Framework: 

Intro of Foreign Practices of Medical Institution PPPs

Brief Summary:

  • Payment Mechanism: Government Payment.
  • Duration of the agreement: The initial contract was for 10 years (extendable to 15 years), and the second contract was granted for 15 years (extendable to 20 years). 
  • The private partner is responsible for: clinical support services, as well as clinical services.

2. LESOTHO

The Lesotho PPP structure is a good example for reconstruction of a hospital in developing countries.

Case study: The Queen Elizabeth II Hospital, Maseru

For the purpose of replacing the shabby Queen Elizabeth II Hospital, the Government of Lesotho entered into a PPP contract with Tsepong,(Netcare) a private partner, in 2008. Under the contract, Tsepong is responsible for, (i) constructing a new Queen Mamohato Memorial Hospital which can hold 425 beds ( 390 public beds and 35 private beds); (ii) renovating the 3 strategic primary health care clinics in the greater Maseru area; (iii) managing clinical facilities; and(iv) providing 18 years’ (including 3-year construction period) all clinical services. The operating cost price payable by the Lesotho government was $32.6 million each year, adjusted for inflation annually. Tsepong could profit from the 35 private beds. This construction project was for a fixed price of $120 million (85% debt + 15% equity). The hospital was completed in  2011. 

According to the government, the previous rate of hospitalization was 3.2% of the population of the country, i.e. about 64,000 patients. The new hospital was expected to accommodate as many as 20,000 inpatients and 31,000 outpatients. Netcare also invested in a Women and Rape Crisis Management center to coordinate with the government with a focus on women as the targeted beneficiary group. Because Netcare was the sole beneficiary of all profits of the independent operation of the deluxe 35-bed private patient unit, dissenting opinions were raised. Global Health Check also pointed out that the $32.6 million annual payment to Netcare was a 100 percent increase to the 2007/2008 budget, which was US$17 million. 

An IFC report stated that the Lesotho hospital project fell within the affordability of the government. The facilities, clinical services, and medical care have been largely improved, and the government is not paying more than before. This arrangement transferred risk to the private partner and reduced government financial, operational, and legal risks. 

The PPP Framework: 

Intro of Foreign Practices of Medical Institution PPPs

Brief summary:

  • Payment of charges: the Lesotho government agreed to pay Tsepong an annual fixed service payment (USD 32.6 million) for delivery of all services,  increased only by inflation annually. In addition the private sector is authorized to profit from running a deluxe 35-bed private patient unit within the hospital.
  • Payment Mechanism: Government Payment, and User Charge.
  • Duration of the agreement: 18 years. 
  • The private partner is responsible for: construction, operation, financing, clinical support services, as well as clinical services.

Facility-Based PPPs

This model focuses on expensive and high-tech medical facilities to cope with the capital shortage for new medical facilities. Under the “Build-Operate-Transfer” (BOT) model, the private partner is authorized to purchase and take profit from medical facilities, and finally hand them over to the government. 

Case study: B. Braun Dialysis Centers, Andhra Pradesh, India

Under the Arogyasri health insurance scheme, the Government of Andhra Pradesh provides basic medical treatment to patients living below the poverty line (BPL). However, many public hospitals are not capable of providing dialysis services. Therefore, the government awarded a 7-year BOT agreement with B. Braun Medical (India) Pvt. Ltd., a subsidiary of one of the world's leading healthcare suppliers. B. Braun was authorized to build and maintain 11 dialysis centers in public hospitals in Andhra Pradesh. The project was initiated in 2010, and was paid for by the government. B. Braun owns 111 hemodialysis machines and invested a total of Rs.45 million. For each hemodialysis, the government pays B. Braun Rs.1200 which pays the hospital/medical colleges Rs.120. The quality of medical services is guaranteed because 90% of the staff are experts who are also employees in public hospitals. The public hospitals supply power and water. This project is considered cost-saving.

The PPP Framework:

Intro of Foreign Practices of Medical Institution PPPs

Brief Summary:

  • Payment of charges: The Government of Andhra Pradesh pays the private operator Rs1200 for each dialysis performed, out of which Rs.1080 (about USD 23) is paid to B. Braun and Rs.120 is paid to the respective hospital/medical college.
  • Payment Mechanism: Government Payment (to patients living below poverty line, BPL)
  • Duration of the agreement: 7 years.
  • The private partner is responsible for: establishing and operating dialysis centers, and providing dialysis services.

Editor’s note: This article was simultaneously published on Chinalawinsight.com

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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