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Public-Private Partnerships in Health Care: Risks & Rewards of an Important Emerging Trend Public-Private Partnerships in Health Care: Risks & Rewards of an Important Emerging Trend

Public-Private Partnerships in Health Care: Risks & Rewards of an Important Emerging Trend

Introduction

Public-private partnerships, or “P3s” in common parlance, are relatively new tools for U.S. health care but have been mainstays in the health care ecosystem of several other countries for many years—most notably, our neighbor to the north, Canada, but also in Great Britain, Australia and parts of Africa. In the U.S., increasingly difficult public budget constraints are coupled with growing demand for technology-driven services, framed against a backdrop of growing chronic and complex care needs. Our system is ripe for alternative financing, delivery and management models for health care.

P3s have been used for transportation infrastructure in the U.S. for a number of years and increasingly in other infrastructure sectors. The P3 model also represents possibilities for innovation and assistance for public health care entities, including hospitals, clinics and academic medical centers, and carries with it a unique universe of potential risks and rewards. In addition, we may see P3s utilized to address specific health care challenges, such as the opioid epidemic. While health care P3s have not become common in the U.S. yet, the combination of constrained budgets and growing demand render them ripe to garner interest and market share in the coming years. Health care-focused investment banks and private equity investors, if able to make the financial case, could play a role in helping to bring about more health care P3s in the U.S.

What is a P3?

At its most basic, a P3 is an alternative to traditional public procurement and financing structures comprised of a long-term contract(s) between a public entity and a private partner (which could be a multi-entity conglomerate) in which one or more aspects of design, construction, financing, service delivery and/or management are assume by the private entity within agreed performance indicators. This arrangement transfers both significant portions of risk and responsibility from the public entity to the private entity. A P3 is not a privatization, in which ownership is transferred to the private entity, but rather a “sustained, collaborative arrangement between the parties.”[1] The public entity maintains ownership of the public asset; however, the details of control and risk, as well as conditions for performance-based payment, are highly nuanced and negotiated aspects of the arrangement. A P3 may be large-scale, involving almost all aspects of infrastructure and service delivery, or may be more limited in scope, involving select elements of financing, management or operations. A P3 may be “greenfield” (a new project) or “brownfield (existing facilities) or both.
According to the 2018 UCSF Global Health Group/PwC report, “PPPs in health care: Models, lessons and trends for the future,”[2] governments internationally have explored health care P3s “to achieve one or more of six functions:
 
  • Finance – financing or co-financing of the project
  • Design – design of the project, including design of the infrastructure and care delivery model
  • Build – construction or renovation of facilities included in the project
  • Maintain – maintenance of hard infrastructure (facilities as well as equipment as applicable)
  • Operate – supply of applicable equipment, IT and deliver/management of nonclinical services
  • Deliver – delivery and management of specific clinical and clinical support services.”
What are the Risks & Rewards in the Health Care Context?

We have mentioned several of the major rewards to a P3, which revolve around transfer of risks, such as cost overruns and delayed delivery, and responsibilities, such as daily operations and maintenance, to the party, arguably, best positioned to bear them. Private financing, if structured optimally, can help provide financial stability for public health care institutions charged with providing complex daily services. Privately-driven operation, maintenance and/or services, if conceived correctly, can help public institutions pursue innovative solutions that may otherwise be off-the-table due to procurement or other operational constraints, such as in the areas of IT or actual care delivery. Moreover, when a private entity takes on appropriate responsibilities, the public entity’s bandwidth is freed up to focus on the tasks and deliverables it is best positioned to delivery. As noted by Ashley Swanson, assistant professor of health care management at the Wharton School of Business, “With P3s, there’s an attempt to leverage the comparative advantages of both the private and public sectors.”[3] Examples of efficiency and innovations in health care P3s from other countries, especially in the area of hard infrastructure, include badly-needed facilities being completed early, new facilities designed and built to produce significant energy consumption and cost savings and implementation of cutting-edge health care IT solutions. Innovation in direct care delivery through P3s is more variable highly dependent on the particular care and skills in question, as well as the underlying public system.

P3s may sound too good to be true—certainly, we cannot give short shrift to the risks and complications inherent in this alternative arrangement. Risks include potential conflicts of interest, inadequate stakeholder/public support (especially if not garnered early in the process), inadequate or evolving performance measurements within the contract(s), inconsistent adherence and commitment to the public health entity’s mission and incomplete risk sharing. An overarching risk that must be contemplated at the very front end is the capacity of the public owner to manage the complex contracts inherent in a large-scale P3.

Examples and Considerations

The demand for opioid addiction treatment is an unfortunate, but important reality in the U.S. currently. In response, the National Institutes of Health launched the Helping to End Addiction Long-term (HEAL) Initiative, which may involve P3s with biopharmaceutical companies to find new scientific solutions. More pertinent for health executives and clinic managers, private investors and publicly-traded health chains are investing in and/or operating inpatient detox, rehab and opioid treatment centers across the U.S. Many of these instances represent outright privatization of services and carry with them important issues as to how comprehensive the service offerings at private clinics may be. However, conversations are beginning about P3s that can adhere to state and local treatment mandates as the public sector struggles to meet demand for this deadly and time-sensitive epidemic within constrained budgets.

It is important to acknowledge that a P3 is not always the optimal structure for a project, and its viability truly depends on the needs and goals of the public owner. In Quebec, the analysis for large project structures “mandates an external, independent entity that analyzes and determines the bet procurement model for each major public project.”[4] Currently, few states in the U.S. have offices dedicated to exploring and pursuing P3s for public projects. As more cities and states consider this option and dedicate resources to its implementation, it will be critical to vet P3s, as well as other possible financial and operational arrangements, to determine what will best meet a public health system’s needs.

The suitability of a P3 for a particular project also depends on the nature and goals of the potential private partners in the market at the time. In the U.S., UConn Health conducted a nationwide search in 2018 for a private partner in order to “secure long-term financial stability for the center, address the challenges of a health care landscape marked by hospital consolidations, and generate more money for academics and research.”[5] However, none of the proposals met all of UConn Health’s criteria, and the health system is now “deciding whether to try working with some of the respondents on new proposals.”[6] The example of UConn Health demonstrates that the quality of the partnership is paramount, and even after a suitable partner is found, the structuring of the partnership is critical to the success of the arrangement. Partner selection, as well as proper deal structuring, benefit from the early involvement of experienced advisors to help conduct a thorough “value for money analysis” and an assessment of the state and local legal and policy landscape.

Last year, MetroHealth in Cleveland was considering a P3 for its Central Utility Plant in connection with its $946 million hospital campus transformation plan. This is an example of a P3 that is limited in scope to one aspect of a large health system.

Finally, an interesting consideration for the future is whether an appropriate P3 could help address the challenges of health care access in our rural communities. According to Navigant’s analysis of CMS data on 2,045 rural hospitals, 21% of rural hospitals are at risk of closing.[7] Regional or bundled financing models could merit exploration.

Conclusion

P3s in the U.S. health care space are not yet commonplace, but may be soon. As public hospitals, clinics and academic centers struggle to meet growing and more complex demand for care within public budget constraints, we expect public owners will consider alternative financing and delivery models, including P3s. As noted by Marc Mitchell, Harvard School of Public Health professor, who believes P3s in health care are inevitable, “In today’s world of complexity and rapid pace, it’s almost impossible to do anything alone.”[8]
 
For more information, contact Sujata Barai Chugh at sujata.chugh@icemiller.com or (317) 221-2829.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 
[1] Abuzaineh, N., Brashers, E., Foong, S., Feachem, R., Da Rita, P. (2018). PPPs in healthcare: Models, lessons and trends for the future. Healthcare public-private partnership series, No. 4. San Francisco: The Global Health Group, Institute for Global Health Sciences, University of California, San Francisco and PwC. Produced in the United States of America. First Edition, January 2018.
[2] Ibid.
[3] “How Public-private Partnerships Can Boost Innovation in Health Care.” Knowledge@Wharton, The Wharton School at the University of Pennsylvania, 26 Oct 2017, https://knowledge.wharton.upenn.edu/article/public-private-partnership-enabled-innovation-health-care/.
[4] Ibid.
[5] Lurye, Rebecca. “UConn Health finds no suitable proposals after search for public-private partnerships.’” Hartford Courant, 7 Feb 2019, https://www.courant.com/health/hc-news-uconn-health-partnership-20190207-lwnfayzu7fe7nc2xccmwlgy5ey-story.html.
[6] Ibid.
[7] Kacik, Alex. “Nearly a quarter of rural hospitals are on the brink of closure.” Modern Healthcare, 20 Feb 2019, https://www.modernhealthcare.com/article/20190220/NEWS/190229999/nearly-a-quarter-of-rural-hospitals-are-on-the-brink-of-closure.
[8] “How Public-private Partnerships Can Boost Innovation in Health Care.”
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