The Role of the Private Sector in Health Service Delivery

• Is Private Health Care a Declining Market?
• Trends in Patient Volumes
• Facility Developments
• Private Hospital Ownership
• Range of Services
• Admission Process
• Financial Return
• Role of Health Insurance Companies
• Reasons for Growth in the Private Sector
• Transfer of Patients with Complications
• Can Crown Health Enterprises Attract Private Patients?
• Patient Selection
• Cream-Skimming
• Risk Aversion
• Future Role of the Private Sector

Is Private Health Care a Declining Market?

The media portray the image that New Zealand’s health services are provided by public providers at the expense of the Crown. This is not an accurate picture of health service delivery.

When focussing on Hospital-based services, tertiary care is predominantly a public provider responsibility. There is currently no private radiotherapy service or trauma service and very limited private neurosurgery. The private sector operates at least three private cardiac surgical units and, for many years, the only MRI scanner in Auckland was in the private sector. Very few acute medical services are privately provided and there is only one private psychiatric unit.

However, once one moves outside the secondary/tertiary care spectrum, there is a considerable increase in private involvement in health care delivery.

There has been a significant withdrawal by the public sector from the provision of continuing care. It is understood that there are only three or four Crown Health Enterprises (CHEs) left in this market. The majority of the assessment and rehabilitation units remain in CHE facilities. Rest homes are almost exclusively provided by private sector operators.

Primary care is predominantly private with general practitioners (GPs) accepting various subsidies from the Crown. These range from the recent Coalition initiatives increasing the subsidies for children under six years, to immunisation, GMS, practice nurse and rural assistance payments.

With the advent of independent midwives, professional maternity services are now predominantly provided in the private sector, although private facility contracts are limited to a few providers.

District nursing and home health care are divided between public and private providers, although the majority of funding comes from the public purse. Hospice services are predominantly private facilities, though they again receive significant public funding.

In discussing the role of the private sector in health care, this paper focuses on secondary care and explores the private sector role in the provision of surgical services.

Trends in Patient Volumes

In 1993 (the last year for which statistics are available) 31% of all surgical operations in New Zealand were performed in private sector facilities. This includes some 38% of Ear, Nose and Throat (ENT), 27% of gynaecological and 43% of ophthalmological procedures. The Accident Rehabilitation and Compensation Insurance Corporation (ACC) purchased 26,000 elective surgical procedures in 1996 of which 23,000 were purchased from the private sector. There are between 10,000 and 15,000 patients currently on the public hospital waiting lists for ACC-funded operations.

The New Zealand Hospitals’ Association has 24 private surgical hospitals as members. The majority of these hospitals have significant numbers of in-patient beds. Southern Cross, with 13 facilities, has chosen not to be a member of the Association.

In mid-1996, the Hospitals’ Association surveyed its surgical members to determine the effect of the health reforms on business. The results were based on the 16 responses received. From 1992 to 1995, average bed occupancy fell from 34% to 30.7% while bed numbers increased by 13%. The average length of stay for surgical patients fell from 3.23 to 2.64 days. In-patient numbers increased by 28%, day-patient numbers increased by 89% and out-patient procedures increased by 64%. By 1995 in-patients accounted for only 40.5% of patients treated in these hospitals (49% in 1992). Twenty three percent of patients were funded by ACC.

Medical admissions accounted for 5.5% of all admissions and 32% of bed days. Medical patients stayed an average of 8.51 days.

The major growth area in private hospitals is in day-stay and out-patient surgery. Part of this growth has been in endoscopy services, however there has been significant growth in orthopaedics, ophthalmology and gynaecology. Changes in surgical technique, anaesthetic drugs and patient expectations have resulted in procedures previously managed as in-patient cases being conducted appropriately as out-patient cases.

The private sector has been disappointed with the direct outcome of the health reforms implemented over four years ago. A level playing field has not been created. It has taken longer than anticipated for public providers to identify their core competencies and subsequently those services that are better bought than provided. By restricting their purchasing forays with the private sector to tenders for limited volume contracts, the Health Funding Agencies have not allowed innovation in private provider contracting.

Facility Developments

The growth in day surgery has prompted a number of private providers to re-model existing facilities or develop new facilities to cater for this market.

The barriers to entry into the day-stay market have fallen significantly allowing surgeons to fund the development of stand-alone units. Five day-stay surgical units have opened in Auckland over the past six years. These units are primarily surgeon-owned and operated, with minimal infrastructure and a focussed spectrum of surgical care. They include two ophthalmology clinics, an endoscopy unit and two surgical centres. Some question whether the true cost of capital is being recovered in the majority of stand-alone surgical centres. Opening a unit calls for initial seeding capital that can be borrowed, however continued operation of the unit requires equipment replacement and upgrades which cannot always be foreseen because technology changes rapidly.

The development of the $47 million Ascot Clinic in Ellerslie, Auckland, will be the first new non-Southern Cross Hospital to be constructed for some years. It will also be unique in that it is to be funded by investor capital rather than charitable donations. There are many in the health sector who do not believe the current return on investment is sufficient to service debt repayment on a totally new in-patient facility.

Private Hospital Ownership

Of the 24 private surgical hospitals belonging to the New Zealand Hospitals’ Association, 19 are owned by religious organisations or charitable trusts. These facilities are therefore owned by public entities, although not funded by the Crown. This group of facilities ranges from Mercy Auckland, the largest private hospital in the country, to Churchill Trust which operates under a wet lease from the public hospital in Blenheim. Many of the community operated charitable trusts were formed as religious organisations ceased to provide private hospital care.

The remaining members are owned by shareholders who expect payment of a dividend from operations. It is understood that no member hospital returned a dividend to shareholders in 1996. These shareholders are predominantly surgical staff who practise in the hospitals. An example of such a facility is Royston Hospital in Hawke’s Bay which was owned by a charitable trust until 1993 when a group of local surgeons bought a majority shareholding in the facility. The new shareholders have injected significant capital, enabling the hospital to be redesigned, expanded and modernised.

Range of Services

Private surgical hospitals offer a narrow range of procedures. The Auckland Adventist Hospital (the Adventist) specialises in orthopaedics, general surgery, ENT, gynaecology and plastic surgery. The 8,000 patients who attend the hospital each year undergo 1 of around 275 procedures. A limited number of procedures in ophthalmology, urology, neurosurgery and vascular surgery are conducted, however specialists in these categories are not actively recruited. There is a separate endoscopy unit and the hospital has recently added a minor procedure room as the sixth operating room to cater for skin lesion and regional anaesthetic work. The Board of Management has specifically chosen not to enter the area of cardiac surgery as this would require dedicated theatre space and there would be a substantial establishment cost. At the time that a proposal was considered, the Board was uncomfortable about the long-term prospects for surgical intervention in cardiac disease.

Although the Adventist is able and willing to perform acute surgery, barriers to the use of this service are very high. Four years ago the hospital identified a demand for acute care of fractured hips. At the time, the radiology provider was purchasing an image intensifier and so the hospital purchased a leg extension for one of the operating tables. The fracture table has yet to be used. Funding is the most significant barrier as ACC requires prior approval, which may take up to three weeks to be approved, and no insurance company is willing to fund an accident case until a decision has been made by ACC. For some six months in 1994 the Adventist provided an acute roster for general surgery. This roster was faxed to all the Accident and Medical clinics in the city and was updated regularly. Only two to three cases per week resulted which proved insufficient for the surgeons to be willing to maintain the roster and so it was abandoned. Difficulties arose in identifying those patients who held current insurance and in arranging for the surgeon to assess the patient prior to admission.

Very limited medical care is offered in the private sector. Less than 6% of admissions to private secondary care facilities are medical admissions. This arises in part through lack of available physicians in the private sector and in part as a result of limited insurance cover for medical admissions. In the public sector, physicians are predominantly salaried employees. They rely heavily on house staff to assist with routine investigations and to monitor changes in conditions. During the care of a medical patient a significant amount of time is spent waiting for the treatment to take effect or the results of an investigation to come from the laboratory. Medical admissions often arrive at unsociable hours and require assessment on admission. Very few private hospitals employ house staff. Surgical admissions are the responsibility of the operating surgeon and there is considerable resistance from private surgeons to allowing other medical staff to assist in the treatment and care of their patients. Physicians in public employ are usually expected to attend their public patients on a daily basis and are therefore not available to be called on to investigate the change in condition of a patient in a private hospital unless it is immediately adjacent to the public facility. This observation does not extend to procedural specialists in areas such as cardiology or endoscopy where there is a significant involvement in private delivery. However, even these specialists admit few patients to private hospitals for medical care.

Admission Process

Patients are brought to private hospitals by the admitting specialists. The hospitals themselves have very limited ability to directly attract patients. When a patient has a complaint, they consult their GP. The GP then makes a provisional diagnosis and refers the patient to the specialist of the GP’s choice. The patient is usually unable to influence the referral as they seldom have independent knowledge of the skills or interests of a specialist. The specialist exercises their discretion in choosing which hospital the patient should be admitted to. It is at this point that a knowledgeable patient may express a preference. However, the choice of hospital may still be restricted; most surgeons in Auckland, for example, operate at only one or two of the six major private hospitals in the region.

A major focus in the private hospitals’ drive to increase business has been to improve surgeon satisfaction with the facility. This is achieved by increasing the surgeon’s productivity or by purchasing technology which assists the surgeon to shorten recovery time, reduce length of stay or simplify the performance of complex surgery . Hospitals endeavour to provide consistency in personnel, well-trained theatre staff, well-maintained equipment, the flexibility to allow acute additions to theatre lists and to accommodate cases that run over, and pricing that is attractive.

Financial Return

Although the performance of surgical procedures contributes a significant return to the business operation of a hospital, the enormous swings in bed occupancy make the provision of accommodation services very costly. With an average length of stay of just 2.4 days and occupancy around 31%, there is no money to be made in the operation of private surgical hospitals with in-patient beds. Day-surgery facilities, however, are proving financially rewarding under present conditions.

Private surgical fees are based on the Southern Cross fee schedule. The fees charged by surgeons and anaesthetists are not influenced by the hospitals. A patient will receive separate accounts from their surgeon, anaesthetist, hospital, radiology provider and physiotherapist. As hospitals are dependent on the surgeons for business, there is little incentive for hospitals to influence surgeons’ fees. This, however, has significantly changed with the development of fixed-price contracts between providers and ACC. Aetna has indicated its intent to put surgical work out to tender in 1998.

Currently, high relative reimbursement for surgeons by insurance companies compromises private hospitals’ ability to competitively tender against public providers for publicly funded surgery. In 1996, the Adventist won a tender for 200 cataract procedures - DRG039. (Diagnostic Related Groups are the international definitions used to define bundles of care, and determine comparative prices. For DRG039, North Health published a price of $1,840 with $2,137 being the national benchmark). Although the price was slightly lower than North Health’s price, payments to the surgeon and anaesthetist (including the cost of the prostheses) comprised over 75% of our figure. This procedure lasts less than 30 minutes. Based on an annual salary of $130,000, the professional component for this procedure (including prostheses) in a public hospital would be less than $200 – a cost advantage of over $1,250.

Role of Health Insurance Companies

The final component in surgical hospital care is the insurance companies. Eighty two percent of patients attending the Adventist last year were covered by private health insurance. Twenty seven percent were partly funded by ACC. The 18% who had no private insurance were either covered by ACC or chose to ‘self-fund’. The rate of self-funding for major surgery is extremely low. Around 60% of patients are covered by Southern Cross insurance, although this number has been steadily declining over the past four years. A further 10% are funded by Aetna and this number has grown significantly over the past three years. National Mutual, National Insurance, the Police Health Fund and other smaller players make up the difference. There has been a significant increase in the range of policies offered to New Zealanders over the past five to six years. It is perceived that this has lead to more confusion than clarity among customers. As Southern Cross is both the dominant health insurance provider and also operates a chain of 13 hospitals, members are given the strong impression that they should attend a Southern Cross hospital for surgical care.

Reasons for Growth in the Private Sector

Why has the private surgical industry seen growth of 42% over the past four years? A positioning study commissioned by the Adventist asked people in the Auckland area who hold private health insurance which hospital they would prefer to enter if they had to have surgery next week. The margin of error for the study was plus or minus 3% for any single statistic. It was found that less than 7% of people surveyed would choose a public hospital if they needed surgery tomorrow. The remainder was spread amongst the six private hospitals in the region. Public hospitals were acknowledged as having technical expertise but scored very low in aspects of caring, customer focus and facility standards.

Private hospitals are dependent on surgeons and GPs to maintain their customer base. Public hospitals are not required to present themselves in a competitive light in order to attract patients. When the Southern Regional Health Authority approved a contract for St George’s Hospital (a private surgical hospital) to provide maternity services, women in Christchurch had a choice of maternity facility providers. This has led to some 30% of the population now choosing to avail themselves of some aspect of private maternity care despite St George’s being unable to offer an epidural service. Christchurch Women’s Hospital has begun to seriously review its practices and offer significant enhancements to its service.

All private hospitals are acutely aware that patients have a choice. Several hospitals have gained liquor licenses over the past two years in order to offer wine with meals. Hospitality packs, reading material, television programmes, refrigerators, carpet, air-conditioning and nurse phone-up calls are all part of the process of adding perceived value to the delivery of surgical services.

The increased competition among surgical providers and the consequent increase in the facility standards has also resulted in an increase in quality awareness. Eleven of the twenty-four member hospitals are now accredited by the New Zealand Council on Healthcare Standards (NZCHS).

An advantage that private surgical hospitals do have is their size. In the Hospitals’ Association survey referred to above, the respondents’ average bed numbers were 43. In a facility of this size it is possible to implement significant cultural change in a relatively short time. The administrative team can be aware of all staff in the facility and can monitor staff attitude and presentation on a continuous basis. As an illustration, at the Adventist there are two staff in the admitting office and three staff in patient accounts. These staff members have key roles in patient engagement and separation and are aware of the customer relations standards that the facility aims to maintain.

This trend in improved service provision has been accompanied by a decline in public confidence in the provision of care by public hospitals. As the acute work load on CHEs has increased, the public has been made increasingly aware of the state of the waiting lists. This appears to have encouraged people with private insurance not to consider surgery in public hospitals as an option.

Transfer of Patients with Complications

One of the allegations that has often been heard about private hospitals is that they transfer all their difficult cases to the public sector. In 1995, less than 0.15% of major cases were transferred to a public hospital.

Can Crown Health Enterprises Attract Private Patients?

As mentioned earlier, 6% of Aucklanders with private health insurance would choose to go to Auckland Public (Greenlane 6%, Middlemore 6.5%) if they needed surgery tomorrow. This compares with Adventist at 13% and Mercy at 13.5%. Conversely 15% of Aucklanders would not go to Auckland Public (9% Greenlane, 34% Middlemore) while only 5% would not choose Adventist and 2.5% Mercy.

As a generalisation, patients do not have the ability to evaluate the quality of the surgical care that is delivered. As long as the surgeon is pleasant and spends time explaining why a procedure went wrong, the patient seldom has the data to challenge the interpretation given. After all, the patient made a choice to entrust their life to the surgeon and being critical requires an admission that they made a bad choice. Patients therefore judge the quality of care provided on the basis of accommodation standards and nursing staff attitude.

With chronic under-funding of public facilities, the standard of accommodation offered in most New Zealand public hospitals does not meet patient expectations. Over 65% of patients admitted to the Adventist ask to be in a single room. It is expected that a telephone will be available beside the bed and that a television will be provided. Although more patients prefer the daily newspaper the Herald to Sky TV, the number of patients who expect Sky TV to be available is increasing.

The cost of altering an existing multi-storey hospital to provide single rooms with en suite bathrooms and Sky TV is prohibitive, and will preclude most public hospitals from competing for private patients undergoing secondary surgical care.

When a facility is dependent on patient satisfaction for continued financial viability, a number of checks are put in place. Patient satisfaction is eagerly sought at the Adventist and all responses are analysed monthly by department directors.

Focus groups are established to address any persistent or serious deficits. The patient/staff interaction is monitored and any concern is brought to the attention of staff by an administrator. In 1996, the hospital ran a compulsory in-service education programme on Customer Satisfaction. This programme focussed on body language, handling difficult customers and producing the WOW factor.

This contrasts markedly with the public hospitals. "I recently attended a meeting at an out-patient clinic at a major teaching hospital. I arrived five minutes early and walked up to the patient reception area. It was a full twelve minutes before any of the staff made eye contact and a further four minutes before anyone asked what I was there for. In total, I waited 46 minutes before being shown into the office of the person I came to see. It appeared to be a busy clinic, however I was the only one waiting at the counter and there were four staff at various work desks in the reception area. If I had been paying for the service, I would have complained and been happy to tell all my friends about how the service did not meet my expectations. . . . "I do not believe that privately insured patients will tolerate such care when they have a choice of providers."

Patient Selection

Patient selection is a specific issue often raised when private hospitals are being criticised.

An accusation made against private hospitals is that they select their patients. I know of no private hospital that has a policy of not admitting a certain type of patient when it is capable of delivering the necessary surgery. It may be assumed that self-selection occurs in that only those who can afford it have private insurance. However, over 45% of the population has some form of private insurance cover. Another indicator that private hospitals are willing to operate on all patients is the number of ACC patients treated in the private sector. Earlier it was noted that of the 26,000 elective surgical procedures purchased by ACC in 1996, 23,000 were performed in the private sector. This was despite ACC only funding 53% of the cost of surgery, creating a significant co-payment. Since mid 1997, all Association member hospitals have entered into elective purchasing contracts, which preclude co-payments and require the hospitals to submit a package price for surgery, including the cost of the surgeon, anaesthetist, physiotherapy and follow-up care.

Surgeons take responsibility for the ongoing care of patients in private hospitals. This may bias surgeons in favour of admitting sicker patients to the public hospitals. There is considerable resistance on the part of privately insured patients to attending public hospitals, and this may mitigate against surgeons being able to selectively admit only the "easy" patients to private care.

Private hospitals do select the type of surgery performed. The Adventist has chosen not to offer cardiac surgery. It also discourages minor surgery in major operating theatres. Each private facility develops competency in certain clusters of procedures and surgeons demonstrate preferences for a facility that specialises in that cluster of procedures. One hospital may acquire a reputation for excellence in urology, while another is recognised for arthroscopies. As the volume of procedures performed grows, the facility is encouraged to invest more in the technology to support its area of expertise, thus enhancing its skills further. Being relatively small, the economies of scale encourage private hospitals to select certain services in which to specialise. Because no private facility is required to provide a comprehensive range of services, specialisation makes good sense.

This specialisation is not necessarily different to what a public hospital is expected to do. For example, it is inappropriate to expect Dargaville Hospital to perform total hip joint replacements. "I find it astonishing that Auckland Public Hospital is expected to specialise in both tertiary and secondary care. If a hospital undertakes to perform cardiac surgery, it cannot efficiently use the same resources to perform cataract extractions."

As private hospitals in New Zealand do not employ medical practitioners, they are dependent on significant volumes of surgery being available to justify investment in technology. To provide a comprehensive trauma service requires investment in facilities, standby staff, and theatres that are consistently available for urgent surgical procedures. These services are expensive to provide and the volume of surgery required in New Zealand would not justify more than one such unit in most urban areas. Few private specialists would be prepared to put their own time at risk waiting for the occasional patient to present, even if the reimbursement were satisfactory.

Cream-Skimming

A second accusation made against private hospitals is that they are involved in cream-skimming, but this is hard to sustain. Any business-aware organisation matches its capabilities to the goods it produces. If a facility is tailor-made to perform minor surgery, it makes no sense for it to endeavour to perform major operations. Again, there are significant economies of scale to be observed in health care delivery. A facility that specialises in grommet insertion, maximises its productivity when it concentrates on inserting grommets. Staff skills are honed, turn-around time is minimised, equipment utilisation is maximised and patient expectations can be clearly anticipated. One of the most inefficient ways to utilise surgical facilities is to mix surgical procedure types and staffing. The private sector has developed the process of matching resources to production. This does not seem to have occurred to any extent in the public sector. Private hospitals would be delighted to work with any public provider who admits it is not customised to perform minor procedures efficiently and asks for assistance or offers to purchase time in the private facility.

Risk Aversion

The third accusation against private facilities is that they are risk averse. Private hospital margins are very tight. Charitable trusts do not have significant resources an size=3d so are unable to underwrite a hospital’s losses for any extended period. Most private hospitals do not have the reserves to enable them to take risks. This has lead to a hesitancy in the industry to offer quotes for surgery or to price for an unknown mix of procedures. This in turn has lead to considerable frustration on the part of purchasers as they wish to purchase on the basis of DRGs. DRGs are to a large extent an amorphous collection of procedures. "Surgery to the Knee" can range from a simple arthroscopy to an anterior cruciate ligament repair. Having one or the other as the primary procedure can move the average hospital price between $800 and $2,700. As mentioned, the scale of operation of private hospitals does not allow those facilities to assume significant risk.

Future Role of the Private Sector

Private hospitals are efficient providers of minor surgical services. They specialise in a relatively narrow range of procedures and deliver these services with a focus on patient satisfaction and quality outcomes.

The private sector has developed a competitive advantage in facility presentation, accommodation standards and patient focus. It has invested heavily in equipment which attracts surgeons to the facility and in nursing skills to enhance surgeon productivity. This advantage can be made available to the public sector through strategic alliances. As the business orientation of CHEs matures, it is hoped that they will explore opportunities to purchase services from private providers rather than build their own facilities in a market that may already have excess capacity. There would need to be considerable discussion to determine whether such an alliance would be on the basis of a wet lease or the purchase of a complete service.

Insurance companies in New Zealand have recently been faced with a significant increase in demand. This has lead several companies to explore closer relationships with providers. Facilities that have achieved independent quality certification such as NZCHS accreditation are at an advantage in this process. As preferred provider agreements are consolidated, those providers who are selected will be able to take advantage of economies of scale and reduce the price for services. This will place significant pressure on surgeons and non-selected providers to reduce prices or lose business.

Perhaps the greatest opportunity for private providers is the development of managed care in New Zealand. As private surgical hospitals do not have acute surgical loads, they are able to negotiate with GP fund holders to perform surgery within contracted time frames. If GPs were given responsibility for budget-holding for minor procedures such as skin surgery, endoscopy, ophthalmology, minor ENT and minor gynaecological procedures, it is expected that many GP groups would be interested in owning and managing their own facilities. Joint ventures would be more likely to be favoured with private providers who were seen to be competent financial managers than with public providers who were creating much of the demand for budget-holding.

Alterations in the purchasing mechanisms of insurance companies and ACC will see a significant shift in the demand for and delivery of private care. With a strategic lead in the standard of accommodation and customer satisfaction, the private sector looks towards an increasing role in the delivery of health care to New Zealanders.