This was a note I prepared for myself
International experience provides very little guidance to the problem of designing an effective health system; there is little structural convergence between the health systems of affluent countries on the supply-side.
One almost universal exception to this pessimistic conclusion is that the funding of a health system needs to be primarily unified and the role of private payments limited. This was a conclusion of proponents of Obamacare. But entrenched interests left the US with its fragmented healthcare funding which is generally thought to be one of the reasons that the US has exceptionally poor health outcomes despite spending more per capita than any other country and having some of the most advanced medical centres in the world.
It is on the supply-side of health delivery that there is so little agreement or convergence. The divergences partly reflect differing sizes of nations and their constitutional and fiscal arrangements. But there are also considerable differences in the balance between public and private delivery of healthcare. In the case of a unified funding system this amounts to some outsourcing, in which the central agency funds the treatment which is provided by an agency which is not in the public sector. (It may be for profit, not for profit, or charitable.)
There are various forms of outsourcing. To make this paper tractable, it focuses only on secondary care. Public-private partnerships are discussed in an appendix, which concludes that it seems unlikely that PPPs, rigorously defined, have a significant role in New Zealand’s public health system. The focus here is on the public sector contracting out treatment to agencies outside the public hospital system.
This paper is presented with large population centres using multiple possible private suppliers. Some centres may not have that option. Centres in which there is only a single feasible private supplier of a service raise the complication of bilateral monopolies, which weakens the ability of the public hospital to get a good deal.
Contracting Out
Contracting out is where the public health system purchases (i.e. fully funds) a healthcare service which is provided by a private agency. The possible services and reasons for the transaction are numerous.
Contracting out non-medical services, such as for cleaning and food services, is common. What seems to be happening is that the medical management is contracting out a non-medical part of the service to an agency with more expertise in the management of that activity. The principle does not seem controversial although there may be controversy about the particular quality of a contracted service.
Here are some examples of medical contracting out which illustrate the variety and the broad reasons for doing so.
– in about 1990, the (Labour) Government gave the Tauranga Hospital a grant to reduce its surgical waiting-list backlog. The hospital commissioned private providers to carry out the surgery, presumably because the public hospital was already working at full capacity. (This was a poster case for the supporters of the health redisorganisation of the time and brought CEO Lester Levy to public prominence – not his fault. It actually supported the dissenters. There were no efficiency gains, just extra funding.)
– about twenty years ago, a Wellington oncologist was hired by Waikato Hospital to assess women with potential breast cancer who would then be sent by the hospital to Sydney for treatment. Both the hiring of the oncologist (he would have been on contract rather than salary) and the Sydney treatment were contracting out caused by a shortage of local capacity.
– an Auckland dermatologist told me that the public hospital did not have a particular piece of equipment but when it was needed (for birthmarks, as I recall) they contracted out to a private provider who had the equipment. There was not enough demand within the public service to fully utilise the equipment, but the external provider was already using theirs to meet private cosmetic demands.
– one Monday my public hospital doctors got my biopsy and decided I needed a full-body CAT scan for the consultation on Wednesday. I got the scan on the Tuesday from a private provider. I assume the public hospital CATs were fully booked and that rather than bump someone else, my case was outsourced. The backup MRI a few days later was booked and done in the public hospital. (There was no evidence of metastatic cancer.)
The above examples appear primarily as a consequence of full utilisation of capacity in the public sector. Here are some examples which might be more problematic.
– ACC tends to use the private sector, presumably to skip public sector waiting lists. (This illustrates the dangers of multiple funders, since accident victims need not be a higher medical priority than non-accident patients.)
– Off-campus laboratory services are outsourced to a (monopoly) private sector provider. I assume this is because the hospital system does not want to run the myriad off-campus sites which are convenient for those who need to be tested. Presumably the processes involved are sufficiently routine not to require the tight-quality supervision that the public hospital provides. (It has internal laboratory services for those in treatment.)
– Ambulances are another example of specialist outsourcing.
– I am told that the Wellington Hospital has insufficient MRI scanners which means that some patients are referred to a private sector provider. It could be argued that this example belongs to the earlier ones of outsourcing because of lack of capacity but as usually explained, it seems that the hospital has made a deliberate decision not to acquire another scanner. The example needs to be teased out.
I am guessing that outsourcing MRI investigations saves the hospital the capital outlay of installing another scanner. There are parallels here with the public-private-partnership approach set out in the appendix because it involves the private sector installing the capital (e.g. equipment and accommodation). However it involves permanent private ownership (typically, PPPs eventually revert to public ownership) and there is no contractual obligation for the public hospital to use the private scanner nor has the scanner an exclusive monopoly (another business could set up in competition and the public hospital switch its custom or install its own capacity). Thus it is not a PPP in terms of the NZ government accounting conventions (neither is the outsourcing of cleaning or food services). Even so, one is left a little uneasy if the reason for the outsourcing is to avoid public sector capital investment. But that is also true for some of the earliest group of outsourcing examples.
Evaluating
Outsourcing
There is such a variety of ways of outsourcing it is difficult to evaluate them generally. Here follow some pointers.
Does outsourcing reduce costs?
For a variety of reasons it may increase them. Capital costs are higher and it
is generally thought that salaries – at least of senior medical professionals –
are higher in the private sector than the public sector.
In one way, private provision is likely to appear more expensive. A fully utilised service (as public healthcare tends to be) has no downtime; the private healthcare service covering it when the public supply is constrained must have periods in which its equipment, and possibly labour, is not fully utilised. Thus the cost of outsourcing is likely to be higher than internal provision except, of course, the costs of providing above the public sector constraint will be higher than average costs of its provision too.
There is a trope that the public sector – in this context, the public delivery of healthcare – is always inefficient. That can be true. There is (and should be) a constant effort to reduce such inefficiencies as there are. But the issue here is whether the private sector is any more efficient. We do not know but it is not obvious in healthcare why it should be – ideology aside – when we do an exact case match. It is an empirical question, which needs to be evaluated by case studies. There are few such studies. (The only one I know of — from the early 1980s, found the costs of public and private cataract surgery were within a $1 of each other. The remunerations to the private surgeons was higher, but it was offset by the private treatment discharging the patient after one overnight stay, but the public treatment keeping them for three nights. Nowadays it is day surgery.)
The point about the previous paragraph is to be cautious about the claim that outsourcing to the private sector reduces costs. That is an unproven hypothesis, not a fact.
(It should be acknowledged that private provision may innovate new or more effective treatments – as will the public sector. There is a general economic consensus that multiple independent agencies tend to generate greater innovation.)
One issue which I have wondered about is quality control. It seems to me that it is likely that public provision has more checks and balances – in a large hospital anyway. When I have discussed this with (even public sector) doctors they have discounted the issue. I suspect that may be because the outsourced services are relatively simple and quality control straight forward. (I have never heard of routine multi-disciplinary meetings in the private sector.) Perhaps all that is needed is that when outsourcing, a public hospital should require in the contract quality standards similar to what it expects internally – and that their expectations be enforced.
One concern is that outsourcing may shift medical personnel from the public sector to the private sector, both raising costs of provision and making equitable provision more difficult because private treatment prioritises by ability to pay rather than medical need. (The mechanism is that the public sector outsourcing provides a base which enables the private practice.) Essentially, private payments (including medical insurance) weaken unified funding.
A further issue is whether practising in the private sector undermines commitments to the public sector. It is sadly true that some doctors present themselves as if their chief loyalty is to their remuneration – they may still be very good doctors. Generally though, I’d have said that most doctors’ loyalty is to their profession. How much equity of treatment (base on medical need) and hence the importance of public provision may vary from doctor to doctor.
Conclusion
Disappointingly, this review does not produce strong conclusions. The weak one is that outsourcing has a role in public healthcare provision but it has to be carefully managed and not used too extensively. The biggest danger identified here is that the public hospital limits its capacity because of inadequate provision of capital, in which case the outsourcing is nothing to do with healthcare but because the government, in effect, borrows for the heathcare system without putting it on the public balance sheet.
It looks like that in our large centres, at least, are going to have an ecology of different suppliers including private suppliers providing publicly funded services. What is critical is that outsourcing does not undermine the commitment to a dominant unified funder – the danger is that private insurance may reduce public pressure to ensure there is adequate funding. Even more critical is the principle that access to treatment be based on need rather than ability to pay.
Appendix: Public Private Partnerships
Public private partnerships (PPP) is a term which is used very loosely in the public discussion. It is a form of outsourcing. Inconveniently the Government’s most recent policy statement New Zealand PPP Framework: A Blueprint for Future Transactions (to which the Labour Opposition signed up) does not offer a definition.
An associated media release describes how a PPP works as follows:
Normally, a government agency would contract designers and architects to plan an infrastructure project, builders and engineers to create the asset, and then one or more contractors to maintain it for the rest of its life. The government would take out a loan to pay for the build, and then pay this loan back over time. It would be responsible for maintaining the asset as well.
With a PPP, the government agency works out what it would cost them to build the asset and maintain it for 25 years to a certain standard under the traditional approach. Private sector bidders then work out how they can deliver these bundled services to a better outcome for this same price. A PPP will only be pursued and accepted if it delivers demonstrably better value than the agency would have got by doing the job itself.
With the bid accepted, the private sector partner then builds the asset and maintains it for the next 25 years – billing the government quarterly (including the repayment of debt incurred by the partner) from the time it’s built until the 25 years is up. If the asset doesn’t meet the agreed performance standards, the partner is paid less.
After this, the debt has been repaid and the asset will have been maintained to a pre-agreed condition. The government maintains ownership of the asset throughout the 25-year period and beyond, taking responsibility for asset management at the end of the PPP.
Thus a PPP is about the financing and operation of a physical asset. It could apply to a hospital building although there is no hint in the documents that this is a New Zealand interest.
PPPs have been used in Britain to develop hospitals. Generally the outcome has been very expensive. There are particularities in Britain which made PPPs attractive (assuming they are cost effective – they were not). The effect of British public accounting conventions was that the PPPs were off-balance-sheet borrowings which allowed the British government to claim to be below a set public borrowing limit while actually exceeding it. New Zealand public accounting conventions are more rigorous so this cannot happen here. For example, the liability to the government incurred by the Transmission Gully motorway is explicitly reported in the public accounts. One expert summarised the New Zealand convention that it includes ‘hire-purchase as a debt’.
The recent government release on PPPs states
PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs). (p.7)
It goes on:
One of the features that has distinguished the New Zealand PPP approach from other jurisdictions is the focus on greater outcomes rather than lower cost.
It is not obvious how a PPP could generate ‘greater outcomes’ in the health sector which is dominated by skilled professionals rather than capital. Hence, it seems is unlikely that PPPs, rigorously defined, have a significant role in New Zealand’s public health system. As discussed in the main text, the focus will be on contracting out.