Competing needs for capital, regulatory pressures, underinvestment, and tightening operating budgets threaten U.S. healthcare facilities. But an alternative infrastructure funding mechanism does exist – one that can help deliver projects in a timely and financially responsible manner.
Private-Public Partnerships (PPP) are innovative instruments that can mitigate funding challenges resulting from the ongoing transformation of the healthcare industry. Under a PPP agreement, the private sector typically designs, builds, finances, operates and maintains a given infrastructure project in close collaboration with the public sector throughout the project’s entire lifecycle.
PPPs are a great funding alternative – through a PPP, financial and project responsibility are allocated to the party best able to manage them. The effective allocation of responsibility has a direct financial impact on a project, as it will result in lower overall project costs. The method is long familiar in the healthcare industry in Canada and Europe. However, the method is somewhat absent in the United States, despite its many benefits.
While PPPs may not be appropriate in all cases, they can be a powerful tool for improving the quality of care and controlling costs. They generate greater return on investment when compared to traditional delivery methods, place less financial risk on the balance sheet and allow for the redirection of capital to other important areas of need.
PPP arrangements come in many forms, and are adaptable to the individual needs and characteristics of each project and project partners. Crucial to the selection process of a PPP is determining if it will provide additional value beyond traditional procurement methods.
One substantial value-add that PPPs bring is allowing the hospital to keep its focus on delivering care during the construction process, while the private design and construction firm remains focused on what it does best – bringing value, efficiency and engineering techniques via the latest construction methods and expertise.
Take the New Karolinska Solna University Hospital in Sweden, for example. The hospital, which is targeting LEED® Gold certification, currently represents the world’s largest PPP and Sweden’s first PPP building. It will be completed in 2017 and will feature single patient rooms in order to keep a strong emphasis on patient care. The company responsible for constructing New Karolinska Solna is combining its advanced design knowledge, green building expertise, and financial strength to build a state-of-the-art hospital that otherwise may not have come to fruition for years.
Under the PPP method, the construction and design team applies its sophisticated expertise, sustainable thinking, and building knowledge directly to improving design and efficiency. For instance, New Karolinska Solna’s original design featured two entrances and two large reception areas. However, after the PPP design team took control, the project was redesigned to combine the hospital’s reception desk into one main area. As a result of this change, the hospital will benefit from much more efficient management of its employees over the next 30 years, which will reduce operational costs while also increasing staff productivity.
In addition to new hospital construction, PPPs are also effective with smaller projects and medical office buildings. For instance, a municipal general hospital can partner with a construction company to build, manage, and lease back a new parking structure to the facility. Parking fee revenues will cover the monthly lease payments, but since the hospital does not own or maintain the building, there is no impact on its balance sheet. This arrangement means hospital credit capacity can focus on other core elements, such as bed towers and upgraded operating rooms.
The same scenario also applies to new medical office buildings. Once the office is built, the hospital becomes the master lessee and collects rent revenues from the subleasing physicians to cover the monthly rent. There is no impact to the balance sheet because the building is leased. The owner (the construction company) takes care of maintenance upkeep and repairs, leaving the hospital free to focus on the business of healthcare.
Domestically, PPPs are most commonly seen in action on major transportation projects. Peter Raymond, U.S. leader of PwC’s Capital Projects and Infrastructure practice, put it well when he recently characterized the U.S. P3 market as in the “teething” stage.”
Ultimately, PPPs offer a perfect scenario for two industries to merge their individual talents and work in tandem to reach a desired end that benefits each sector, as well as the end user. PPPs are an ideal solution for healthcare providers looking to complete the projects essential for delivering superior care to patients.