After the economic crisis! The future economic outlook for capital

1. 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

2. 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

3. 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

4. The global credit and economic crisis

5. 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

6. Spending is unlikely to get back to former levels any time soon Med

7. Portugal Three immediate and ongoing impact factors for healthcare Ability to borrow and service debt Cost of borrowing Sustainability of funding for service cost

8. 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 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 * Europe 2020

9. The EU - anageing society

10. Ratio of spending on health

11. Overall ranking of EU Health systems

12. Capital models and impact of the crisis

13. 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

14. 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

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

16. 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

17. Lifecycle economy - a framework for analysis Lifecycle capacity Adaptability value Functional efficiency gap on commissioning • Needs assessment • Inequalities • Acute care • Outcomes • Medical education Economic sustainability Political agendas Functional Decay Planning and development input Adaptability costs

18. Valueing lifecycle cost • Consider: • Cost of action • Intervals of action • Real rate of return • Lifetime of building

19. 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

20. Public Private Partnership models

21. 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

22. 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

23. Capital - the trend towards (PPP) market modelswill almost certainly accelerate Sw,Kar Tendency to Private Finance Initiative High UK FR Hun GDR,RK Political risk Swe FR Fin Hol Spn Fin GDR Nor Tendency to full service PPP UK Low Performance Tariff Internal ‘Open’ markets management models markets Privatisation trajectory

24. Capital is a key factor Productivity growth, Output per hour, 1954=100, US Capital contribution Source: Boston Consulting Group, The Economist, A special Report on Innovation, October 13th 2007, pg 4.

25. PPP growthin Europe

26. 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

27. 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

28. 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

29. 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 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

30. The role and importance of EU Structural Funds

31. 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

32. 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.

33. 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

34. “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 ahigh-employment economy delivering economic, social and territorial cohesion.” www.ec.europa.eu/growthandjobs/pdf/complet_en.pdf

35. 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

36. 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.

37. Failure in the governance of health and care could lead to levels of expenditure close to that of the US where healthcare now accounts for 17% of GDP 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.

38. 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

39. 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

40. 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.

41. Changing the focus (within country) of SF masterplanningSome Euregio III observations Often lacking coordination • 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”

42. 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

43. and - wasteful use of resources across the EUExample - the utilisation efficiency of scanners Waiting times 30 And soon – the emergence of the low cost Scanner, India China and soon the EU 1 9 months One week 4 months Scanner range 1 to 30 per million population European recommendation 10 to 12 per million

44. Netherlands - 46% avoidable deaths - reactive clinical intervention - 44% avoidable deaths - prevention (and rising) Silos frustrate opportunity cost assessment and encourage monocultures Example: Cardiovascular disease Underlying factors Poverty Housing Diet Smoking Cardiovascular disease Treatment Death Intersectoral SF need Immediate factors Disease Treatment Outcome Translational strategies needed The application of most SF investment “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.”

45. Conclusions

46. 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

47. 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

48. 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

49. 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 transitions Credit crisis Deficit reduction Age Gap crisis 2000/6 2007/13 20/20 All happening within the current SF cycle

50. Thank you for your attention