Public-private hospital partnerships are risky business

Public-private partnerships mean government s don’t have to pay the full capital costs of hospitals up front but they’re far from risk-free. Image from shutterstock.com

Public-private partnerships for new hospital developments are again in vogue in Australia, with recent announcements that Sydney’s new northern beaches hospital and the new Sunshine Coast University Hospital will be developed under those arrangements.

Such partnerships can have a variety of forms. One model is for a private company to take responsibility for both building a new hospital and providing the maintenance on the building for a 20- or 50-year period. The costs of the building and the maintenance are paid through regular facility payments over the life of the building. This means that the state government doesn’t have to pay the full capital costs up front and it reduces the immediate debt burden on the state’s balance sheet.

The proposed Sunshine Coast University Hospital goes further, with private-sector management to take responsibility for all aspects of service provision in the hospital, including clinical care.

Ostensibly, private management will drive efficiency more rigorously than public management because of the desire to generate profits, potentially leading to cost savings to the state government. This “transfers the risk” of aspects of system performance, including failure of management to achieve efficiency targets, from the public sector to private sector managers.

In announcing the complete outsourcing of services at the Sunshine Coast University Hospital, Health Minister Springborg also released an assessment by consulting firm KPMG of the various outsourcing options. KPMG gave the “full outsourcing” model five out of five for the ability to transfer risk, noting that:

Significant transferred risks include operating cost risk, performance risk, industrial relations risk, and compliance with laws and standards. In addition, (the government) should be able to transfer a degree of demand risk through annual purchasing agreements …

But public-private partnerships are far from risk-free for governments.

Chequered past

Public-private partnerships or private contracting in Australia have a chequered history and many such arrangements have collapsed. The Queensland government’s announcement that it would outsource the Sunshine Coast University Hospital, for instance, was made in the same week that the Victorian government decided to buy back the buildings of the privatised Mildura Hospital to facilitate a much-needed expansion.

Public-private partnerships for private hospitals are typically long term. This carries democratic risks, as the South Australian Auditor General pointed out, because the contracts “can extend for periods in excess of the life of a particular Parliament and, on the basis of historical experience, the Government of the day”.

A former Commonwealth Auditor General, Pat Barrett, has also raised the issue of accountability in public-private partnerships, suggesting that,

Commercialisation and privatisation can strain the thread of accountability between executive government and the elected representatives of the people in parliament.

Public-private partnerships mean state governments don’t have to pay the full capital costs up front. Image from shutterstock.com

These democratic risks are not mentioned in the KPMG appraisal, and apart from noting their materiality, nor are the potential future costs to a government that may wish to renegotiate a contract to take account of changing demographic, disease or clinical practice patterns.

Obviously a government’s ability to accrue risk-transfer benefits crucially depends on the nature of the contract between government and the private sector “partner”. Such contracts are difficult to write, and many public-private partnerships are “asymmetrical” in the sense that risks are not evenly shared or appropriately transferred with the private partner gaining more than the public funder.

Contracts for hospital services face added complications. A contract for services can only be written if the services can be well specified. Unfortunately, development of robust measures for many aspects of hospital care – such as teaching, training and research, mental health care – is still a work in progress. Without adequate service descriptors, operators have the opportunity (and incentive) to underperform and game the contract.

The risks of contract failure

Assuming a robust contract can be developed, public-private partnerships for hospitals have a very high failure rate (probably in excess of 50%), which needs to be factored into any assumption of successful risk transfer.

State Auditors General have been scathing (in the polite and euphemistic way that they normally write) about some of the previous contracts. The Victorian Auditor General, for example, concluded that the privatisation tender process for Victoria’s La Trobe Regional Hospital “allowed an unsustainable bid price to succeed” and the hospital eventually was returned to government ownership and operation.

A similar fate occurred with Modbury Hospital in South Australia, despite contract revisions to relieve the proprietor of some of its obligations.

Public-private partnerships for hospitals have a very high failure rate. Image from shutterstock.com

New South Wales’ Port Macquarie Hospital also bounced back to public sector management. Importantly, the New South Wales Auditor General suggested in this instance that the original contract did not effectively transfer key risks.

Queensland’s first public-private partnership hospital, Robina Hospital, also returned to public sector management.

Western Australia’s Joondalup experience may provide the sole ray of sunshine in terms of successful contracting, with a recent report from the Western Australian Auditor General noting only minor problems with the contract (the potential to reduce the price for emergency department services).

Despite Joondalup, this litany of failure across a number of states should give cause for some scepticism about the potential to transfer risks successfully to private operators. The hospitals covered by public-private partnerships provide essential public services and governments must assume responsibility for service provision in the event of contract failure so patients can continue to access public hospital care. This means government always holds a residual risk.

Proceed with caution

Despite the naive and optimistic views expressed in the enthusiastic initial public announcements of public-private partnerships, they are not magic puddings. It is not clear that private-sector management necessarily leads to greater efficiency in hospital delivery, with a Productivity Commission report concluding that:

After controlling for differences in services provided and types of patients treated, the efficiency of public and private hospitals is, on average, similar.

Governments must be extremely careful about how they negotiate public-private partnerships and cannot assume the contracts they negotiate will be free from the problems seen in past contracts.

Given that risks are never fully transferred to the private sector in these partnership arrangements, governments need to be very clear about what benefits accrue to offset the costs of the arrangements. Private-sector providers should be expected to demonstrate very clear benefits in terms of innovation, costs and quality, and be held to account for these claims, before new partnerships are developed.

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