How Public-private Partnerships Can Boost Innovation in Health Care

CHUM

Public-private partnerships (P3) are one of the most promising models for financing successful health care innovations, note many observers. By combining public interest with private-sector research and development, P3s have injected new life into stalled projects and delivered innovative solutions to numerous industries — especially medicine.

P3s have been most successful in Canada, where they work well with the country’s single-payer health system. In the U.S., the P3 market is still in its early stages, but it shows promise. That promise is reflected in Canada with a history of success built on the P3, and one recent standout in Montréal.

Success in Canada

According to the Canadian Council for Public and Private Partnerships (CCPPP), P3s offer a number of advantages over traditional financing arrangements, including the following:

  • a single contract, with the scope resolved at the outset;
  • confidence on budget, schedule and size of the project;
  • an annual service payment based on performance, with the managing company not compensated until the project is delivered as contracted.

Commenting on the P3-supporting Royal Ottawa Hospital, for example, CCPPP sees P3s working so efficiently in British Columbia that some have been finishing hospitals early — before the allocation of operating funds. “The P3 model was able to deliver a much-needed new facility to the community on time, within budget and more efficiently and effectively than the traditional procurement approach,” it concluded. “The P3 model represents a viable option for other health care infrastructure in the face of limited government and philanthropic funds.”

In the U.S., initial P3 successes have been related to major infrastructure projects. A Harvard Kennedy School Review report counts 48 major P3 infrastructure transactions in the U.S. between 2005 and 2014 with a worth of $61 billion. Of these, 40 closed — that is more than 80% of the total, with a value of $39 billion. And with only a handful of states with offices dedicated to examining these deals, there’s still plenty of room to grow. In 2016, the U.K.’s National Audit Office reported a 15-year average of $5.8 billion annually in P3 capital investment. Its economy is about one-sixth the size of the one in the U.S.

“In these projects, the government teams up with the private sector, with the latter typically responsible for design, construction, financing, maintenance and, in certain instances, operations.”

One promising target for future P3s in the U.S.: health care. Since 2012, spending on health care in the U.S. has risen to more than 17% of GDP, and it is expected to rise to about 20% by 2020 — reflecting an older population and an increase in requests for treatment, a rise in chronic conditions and expensive tests inspired by certain advances in technology.

CHUM: A P3 Success Story

The new $2 billion Centre Hospitalier de l’Université de Montréal (CHUM), which completed its first construction phase in 2017, merges three older hospitals (Saint-Luc, l’Hotel-Dieu and Notre-Dame) in the heart of Montréal. CHUM has emerged as the largest health care project in North America, as well as the largest health care project in Canadian history.

According to Martin Viau, representing the provincial agency overseeing CHUM, the three hospitals “had to rethink their facilities to globally deliver care or research in over 30 specialties, mostly in the quaternary and tertiary level of care.”

Canada has an strong record in P3s, especially in health care. Between 2003 and 2011, more than 50 public-private hospital projects alone, valued at more than 18 billion Canadian dollars ($12.3 billion), took place in Quebec, Ontario, British Columbia and New Brunswick. These partnerships enable a community to combine the resources and medical expertise of the public sector with the operational and environmental specialties of the private sector. Together, they can create sustainable infrastructure — introducing current customers to more efficient services that also help to future-proof Canada for the health care challenges it will face as its cities add population and natural disasters become more common.

In these projects, the government teams up with the private sector, with the latter typically responsible for design, construction, financing, maintenance and, in certain instances, operations. The managing company takes a long-term interest — 25 to 30 years — with pre-set conditions and a performance-based contract. It also takes on partners to build and operate the facility, including construction companies, architects, property managers and providers of food, janitorial services and similar essentials. Together, they bid for the contract.

To tie the hospital and its energy provider together, Veolia, a private company, became a 20% partner in CHUM’s development. In that way, the hospital would not just share financial risk — its energy assets would enter into a continuous collaboration. The arrangement provides benefits to the health care community that become increasingly important as the campus sees more people, patients and, most likely, extreme weather.

Viau said the P3 process presents some built-in advantages, one of them being that the private partner and the public partner are in a unique position, through a series of design workshops, to work together to get to the best understanding possible of the needs of the medical, teaching and research communities. “P3 isn’t the only way to manage a hospital project,” he admits. “There’s no magic recipe, and CHUM would have been built without it. But this approach definitely offers better security to the public partner because of the risks that are transferred to the private sector.”

Indeed, P3s aren’t applicable in all situations. Quebec’s formula for large projects mandates an external, independent entity that analyzes and determines the best procurement mode for each major public project. That process definitely supported a P3 for CHUM. For the next 30 years, CHUM’s maintenance levels and lifecycle expenses are fixed — a major advantage to government planners. And the private partners are responsible for the maintenance and utility lifecycle operations formerly handled by the hospitals and their technical teams.

Designed for the Environment

The 22-story, 3-million-square-foot CHUM, which will be fully completed in 2021, encompasses two city blocks in the new Quartier de la Sante health care district. It has 772 patient beds, 39 operating theaters, multiple labs, 400 clinics and examination rooms, as well as ambulatory, intensive and diagnostic care. The complex is built to serve 345,000 ambulatory patients, 22,000 in-patients and 65,000 emergency-room visitors annually.

“With P3s, there’s an attempt to leverage the comparative advantages of both the private and public sectors….” Ashley Swanson

Some 180 architects based around the world worked on the design, which preserves the historic St. Sauveur steeple and other architectural details from the site’s earlier structure. The facility’s three interconnected towers provide a showcase for large works of art and an entry garden, while rooftop gardens overlooking the city offer patients a place to relax and breathe in the healthy scent of medicinal herbs.

In its efforts to provide sustainable infrastructure, CHUM is also setting an example for environmental responsibility. The project’s request for proposal (RFP) included a mandate that it use at least 40% less energy than a baseline design. The target represents a more than 40,000-ton annual reduction in greenhouse emissions from that baseline.

These environmental principles guided the plans from their inception. CHUM’s power plant, provided by Sofame Technologies, is the largest among Montréal hospitals and will have best-in-class heating efficiency. Even the elevators and escalators, from supplier KONE, were chosen for their energy efficiency.

In addition, 15-foot-diameter honeycomb-design “heat wheels” capture warmth and humidity from air leaving the building and transfer it back into the fresh air entering it. The 47 SEMCO wheels in operation will be able to supply 2.8 million cubic feet of conditioned outside air per minute. According to Bruce Becker, a Connecticut-based architect who specializes in green buildings, “Energy-recovery heat wheels are one of the most effective ways to reduce energy consumption, and CHUM has broken new ground in using this technology in a high-tech, controlled hospital environment.”

Under a 34-year agreement, Veolia is providing critical lifecycle and energy performance maintenance for the entire facility.

P3s U.S. Health Care

Canada carries a level of public involvement that has served them well in the development of privately financed medical projects. “In the U.S., we have a different flavor, with both government and private hospitals can be either for-profit or non-profit,” according to Ashley Swanson, assistant professor of health care management at Wharton.

“Private hospitals are certainly not a failed model,” she clarifies. “With P3s, there’s an attempt to leverage the comparative advantages of both the private and public sectors. There’s precedent for that — the vast majority of large organizations outsource some services. The University of Pennsylvania, for instance, might outsource food and maintenance services. In Canadian P3s, the government outsources management and operation of non-clinical operations to the private sector, and in some cases clinical services, too. How well that works will vary — the devil is in the details.”

“In today’s world of complexity and rapid pace, it’s almost impossible to do anything alone. This is especially true in health care.”— Mark Mitchell

Nonetheless, Marc Mitchell, a professor at the Harvard School of Public Health, says public-private partnerships in health care are inevitable. “In today’s world of complexity and rapid pace, it’s almost impossible to do anything alone,” he said. “This is especially true in health care, because constantly rising prices, changing disease patterns and increasing use of sophisticated technology for diagnosis and treatment have made it virtually impossible to imagine any single organization providing services without some type of institutional partnership.”

The P3 model allows health care officials to share the risk of building new facilities with the private sector. “Under a P3 model, risks such as cost overruns and late delivery are transferred to the private sector, which is better able to mitigate and manage them,” Bert Clark, president and CEO of Infrastructure Ontario, told Mediaplanet’s Industry and Business.

Current U.S. concerns about government spending and health care costs also make the time ripe for P3s. “With federal budgets under increased pressure, the question of what the government can do to curb the pace of its health care spending looms large,” Cognosante executive Simona Lovin wrote on LinkedIn. “Health care federal agencies have searched for creative ways to engage with the private sector outside the confines of traditional outsourcing contracts. … In doing so, these agencies have wielded a variety of market-making tools, including the creation of several P3s.”

With this in mind, Moody’s Investors Service said in 2014 that the future of U.S. P3s depends on political cycles (particularly gubernatorial elections); the ability of the federal government to make loans and offer other financial assistance in P3 transactions; and the rate at which other funding sources — such as gas or carbon taxes — increase available revenue. But ultimately, according to the firm, the U.S. “has the potential to become the largest P3 market in the world.”

The viability of P3s in financing Canadian health care expansion has been demonstrated with the Montréal’s CHUM and, to many observers, appears likely to spread in the U.S. in coming years.

This article is part of a special report on public private partnerships: Partners in Resilience: Constructing the Future of Sustainable Infrastructure.

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