Posted by http://www.thestar.ca/thestar/back_issues/ED20000319/news/20000319NEW01c_NA-OZ.html on March 25, 2000 at 19:08:36:
FIXING HEALTH CARE
Hard lessons Down Under
A very public failure of a private
hospital
By Thomas Walkom
Toronto Star National Affairs Writer
TRARALGON, Australia - There is a buzz in the
auditorium of Latrobe Regional Hospital as the doctors
gather. Stuart Rowley, executive director of the privately
owned institution, has grave news.
The hospital, he tells the doctors grimly, is losing money,
$2 million in the past six months alone. As a result, it has
decided to launch a $10 million lawsuit against the state
of Victoria - for whom Latrobe's owner, Australian
Hospital Care, operates the institution.
The state government simply has not been giving as
much money as Australian Hospital Care thinks it is
owed.
One doctor, thoughtfully munching a sandwich,
interrupts to ask the central question: If you don't win
the lawsuit, will the company walk away from the
privatization contract?
``We can't,'' answers Rowley grimly.
Any Canadian provincial government - indeed, any
private health company - that thinks privatization is the
answer to Canada's medicare woes should look closely
at the Australian experience.
For Australia has tried that path. When Alberta Premier
Ralph Klein talks about letting private ``facilities'' bid to
provide public hospital services, he is aping schemes
attempted by New South Wales and Victoria.
`The efficiencies are always illusory.
Governments think they will save
money. But the private operators
always bid low - then they threaten to
go into bankruptcy and the contracts
have to be restructured. Privatizing
the operation of public hospitals is a
bizarre experiment which I think will
be proven to be a disaster'
- Dick Scotton
Original designer of Australia's medicare system
Not one of these Australian experiments has worked
out.
Australia's over-all health system is much like Canada's.
There is publicly-funded medicare available to all. Public
hospitals provide free services to all.
What's different here is that Australia has a parallel
private health system operating alongside medicare.
Unlike Canada, Australia permits private hospitals.
Patients willing to pay hefty extra fees to these hospitals
and to Australia's well-heeled specialists can jump the
queue.
But in the past decade, the Australians have tried a new
wrinkle. In an attempt to take advantage of what they
believed to be efficient private sector practices, state
governments began to let profit-making health-care
companies bid to take over their public hospitals.
The companies jumped at the chance. Faced with
declining profits, private health-care firms were anxious
to piggyback onto the much bigger and potentially more
lucrative public system.
Like Klein's proposal, the idea was to have the
newly-privatized hospitals offer a range of surgical
services. Patients would not be charged extra fees as
they are in Australian private hospitals.
The only difference was to be that the privatized public
hospitals would operate more efficiently.
Just how this was to happen was never made clear. Nor
- given that governments and business simply assumed
private enterprise to be more cost-effective in all fields
of endeavour - did it need to be.
The belief was that privatized hospitals would provide
more bang for the medicare buck. Period.
That was the theory. The practice has been something
else.
In 1992, at a small town named Port Macquarie that's
situated near the Queensland border, the government of
New South Wales ushered in what it hoped would be a
new era in hospital care.
Health-care costs were rising but the government was
strapped for cash. Port Macquarie's hospital, which
served a large region in the north of the state, needed to
be rebuilt and refurbished. To do so would cost the
government $50 million.
Then someone had a brilliant idea. Why not let the
private sector build, operate and own a new hospital?
The government could then enter into a contract with the
private company to have it provide public health care.
The government would save money. The private
operator would make money. The patients would be
served. Everyone would be happy.
So the government went ahead, signing a binding
contract with the giant firm Health Care of Australia.
HCOA would build and operate the new Port
Macquarie Base Hospital and the government would
fund it annually over a 20-year period to deliver public
hospital services. At the end of 20 years, the hospital
would belong to HCOA which then could, if it wished,
enter into another contract with the state.
Local residents bitterly opposed the deal. They argued
that, at the end of 20 years, the private health firm might
decide not to renew its contract and the region would be
without a public hospital.
But the most telling criticism came in 1995, a year after
the new institution opened. And it came from the New
South Wales state auditor. The auditor did not dwell on
the philosophy of privatization. But he did point out that
the government had signed a bum deal. Over the
20-year period, he said, the government would
reimburse the operator $143 million for construction of
the hospital - almost three times what it would have paid
had it built it itself.
And this was on top of the annual payments the
government paid HCOA just to run the institution.
After 20 years, the auditor said, the government would
have paid for Port Macquarie Hospital more than twice
over - yet wouldn't even own it.
Port Macquarie has become a byword in Australia for
how not to privatize health care. Even other private
hospital operators snicker when the name is brought up.
But, while Port Macquarie provides an example of how
a government can get hosed, privatization deals signed
since then in South Australia, Western Australia and
Victoria have demonstrated the opposite.
In Victoria, for example, the state government began an
ambitious program of hospital privatization in the
mid-'90s. Contracts were signed with private companies
to build, own and operate three major hospitals.
Like Port Macquarie, these institutions were to operate
as full public hospitals - that is, they would accept
medicare patients without extra-billing them.
`There were tomatoes thrown at us.
People received death threats. One
doctor we had hired interstate was
told what would happen to him if he
came . . . He didn't come'
- Stuart Rowley
Executive director Latrobe Regional Hospital
The savings to the state were to come from the use of
efficient private sector techniques.
Latrobe, completed in 1998, is the first of the three to
become operational. It is a spanking-new, state-of-the
art institution which, even critics of privatization agree,
does a fine job treating patients.
But it was the economics that made Latrobe attractive
to government. Its owner, Hospital Care of Australia,
agreed to provide services at 96 per cent of what it
would cost the state for an equivalent publicly-owned
institution.
Latrobe head Stuart Rowley says the health care firm
was sure it could trim sufficient waste to meet this target.
As it turned out, privatization was not that easy. First,
the privatized hospital had to deal with the opposition of
local residents. The La Trobe Valley, southeast of
Melbourne, is a region in flux. Hundreds of workers had
already been laid off by the state's decision to privatize
the valley's main industry, electrical power generation.
When Victoria's conservative Liberal-National
government announced it was going to follow this by
privatizing the local hospital, residents were outraged.
Officials of Latrobe Hospital (name is spelled differently
from the valley) were booed when they held public
meetings to explain the new system. ``There were
tomatoes thrown at us,'' recalls Rowley.
``People received death threats. One doctor we had
hired interstate (from another part of the country) was
told what would happen to him if he came . . . He didn't
come.''
``I had my power cut off,'' adds nursing director Marilyn
Sneddon.
While the new owners were able to eliminate 257 jobs
by amalgamating three older hospitals into Latrobe, they
were not able to force wage rates down.
Rowley and Sneddon say they were able to institute
more flexible work practices to increase efficiency. But
public hospitals were becoming more efficient, too.
The better public hospitals became, the more the
government ratcheted down their grants. Every time
public hospital grants went down, Latrobe - which had
promised to do the same job for 4 per cent less - got
squeezed even more.
Meanwhile, in Victoria's political arena, privatization
was not serving the governing Liberal-National coalition
well. Victorians were becoming alarmed by the sell-off.
The government's decision to privatize a major
Melbourne teaching hospital was the last straw.
In a fall campaign dominated by the hospital privatization
issue, the opposition state Labour Party decisively
defeated the coalition.
Then, last month, came Health Care of Australia's
announcement. After enduring heavy losses at Latrobe,
the company was suing the state government for $10
million, arguing its contract was not being interpreted
generously enough.
Both politically and financially, Victoria's privatization
attempt had been a stunning disaster.
The fundamental problem, says Monash University
health economist Dick Scotton, is that privately-owned
hospitals aren't really any better than their public
counterparts.
``The efficiencies are always illusory,'' he says.
``Governments think they will save money. But the
private operators always bid low - then they threaten to
go into bankruptcy and the contracts have to be
restructured.''
His arguments are borne out by studies from both the
United States and Britain. Even a review of the literature
by Canada's right-wing Fraser Institute concludes that
there is no discernable difference in efficiency between
for-profit and not-for-profit hospitals.
Scotton, one of the original architects of Australian
medicare, says that as an economist he's not necessarily
opposed to a two-tier system. If that's what voters
want, he says, then so be it. He's even written,
suggesting ways Australia can better meld its private and
public health schemes to make them more efficient.
But privatizing public hospitals à la Alberta's Ralph Klein
is to him simply the wrong way to go.
``Privatizing the operation of public hospitals is a bizarre
experiment, which I think will be proven to be a
disaster.''
Yet governments remain drawn to the idea. What
attracts them, the Australian experience demonstrates,
are the peculiarities of public accounting and the politics
of perception.
If a government pays $50 million to build a hospital, the
cost appears as a one-time item in the government's
books. This, in turn, leaves it vulnerable to charges of
wasting money.
If it borrows that $50 million, the politics are even
worse. It is accused then of incurring a debt on the
backs of generations yet unborn.
But if a private firm borrows $60 million to build the
same hospital on behalf of government, these objections
mysteriously disappear.
And even if the government, over 15 or 20 years, ends
up paying the private firm double that amount in annual
operating grants, the political perception is better. For in
this case, the government pays just a few million dollars
a year over a long period, rather than a big chunk of
money all at once.
According to Tass Mousaferiadis, a health official in the
Victorian state government now working as an adviser
to Labour's Human Service Minister John Thwaites, that
is exactly what happened with the state's hospital
privatization schemes.
``The capital cost doesn't show on your (government's)
bottom line,`` says Mousaferiadis who, as a bureaucrat
under the previous government, helped to handle the
Latrobe privatization file.
``Instead you have just a recurring annual cost.
``In the end, it costs more. It has to. It costs more for
private firms to borrow money.''
That's why, he says, Health Care of Australia cannot
make a profit operating Latrobe at the current 4 per
cent discount.
So why did Victoria's government opt for the private
sector solution?
``Good question,'' says Mousaferiadis, shrugging. ``The
care isn't any better; the policy guidelines are the same
(as in a public hospital). It ultimately costs more.
``I'm absolutely convinced it was ideology. There is no
other reason.''
Tomorrow: How the Australian taxpayer supports
private medicine - and why.