Governments at all levels are placing greater emphasis on fiscal accountability in the MUSH (Municipalities, Universities, Schools and Hospitals) sector. This increased attention has led to a specific focus on keeping health care costs low. Such a focus is not surprising, given that health care sector costs in Ontario, for example, account for almost half of the provincial budget.
Indeed, 46 cents of every program dollar in the 2008 Ontario budget is being spent on health. Proposed expenditures in the health sector for 2008-2009 would total $40.4 billion, rising to $44.7 billion in 2010-2011. In Alberta, spending on health care is projected to be $13.2 billion in 2008-2009, rising to $14.3 billion in 2010-2011. In Québec, budget estimates for 2007-2008 allocated $23.8 billion to health and social services. The 2008-2009 budget projects $56.9 billion in spending on health and education for that fiscal year. The recent report of the Québec task force chaired by former Québec Health Minister, Claude Castonguay, observed that the growth in health care expenditures in that province exceeds the anticipated growth in the economy, thereby rendering government revenues insufficient.
In light of mounting fiscal pressures, new accountability mechanisms in the health care sector require hospitals to achieve and maintain a balanced budget. As a result, hospitals are increasingly outsourcing functions outside of their core health care expertise. In fact, many aspects of our health care system are already being provided by the private sector. A 2006 report of the Canadian Institute for Health Information (CIHI) indicated that private sector spending represented nearly 30% of health expenditures in Canada. Private sector expenditure was expected to reach $47.1 billion in 2007, according to CIHI’s report, National Health Expenditure Trends.
In Ontario, we have seen such outsourcing occur in four key areas.
Health care outsourcing has become increasingly important for capital projects. Infrastructure Ontario has identified a five-year $5 billion investment plan to renew and build new hospital facilities with private expertise and financing. National and international consortiums have been established to respond to this unprecedented reinvestment in Ontario’s public capital infrastructure. In 2007, Québec announced infrastructure spending of $30 billion over five years, while in Alberta, a 20-year strategic capital plan earmarking $120 billion to improve infrastructure, including hospitals, was announced earlier this year. In British Columbia, $5.8 billion was budgeted for infrastructure spending in 2008-2009, with similar spending anticipated for the 2009-2010 and 2010-2011 fiscal years.
Back office functions
Many hospitals are outsourcing “back office” functions, including their purchasing, warehousing, human resources and finance departments. In our experience, hospitals are most frequently looking to shared services corporations to take on these functions. Such corporations are formed expressly for this purpose and develop specialized expertise, for example, in strategic sourcing.
Shared service providers generally offer their services to multiple health care institutions and therefore are able to offer purchasing and volume discounts. These arrangements result in significant savings that can be applied to a hospital’s core patient care function, or for financing new equipment such as sophisticated information technology systems that are being developed by the private sector.
While these arrangements have resulted in a reduction in inventory costs and spoilage, human resources savings have not yet been realized due to the reluctance of various levels of government to outsource unionized jobs. Additionally, the creation of shared services arrangements has resulted in potential conflicts at the board level. Shared service corporation boards are comprised of representation from member institutions. This means that board members represent both the interests of the shared service corporation as well as the interests of member institutions. These member institutions, who are the boards’ customers, may be called upon to provide supplemental funding to the shared service corporation in the event of a shortfall.
The Ontario Ministry of Health and Long-Term Care has identified a province-wide e-health strategy as one of its priorities. The use of electronic health records and repositories may dramatically change the way that Ontario provides health care, enabling more timely, complete and accurate information exchanges between health service providers.
The 2008 Ontario Budget pegged investment in electronic health records at $47 million for this year and climbing to $239 million in 2010-2011. We are working with hospitals to build and maintain shared network and storage solutions for electronic diagnostic imaging records and are relying on private sector entities to provide the requisite technology and expertise. British Columbia allocated $30 million over five years to this initiative, beginning in 2005. The province expects an additional $120 million from Canada Health Infoway over the same five-year period.
Finally, patient care itself is increasingly being outsourced to the private sector. Lab work and diagnostic imaging work are both increasingly being outsourced to companies that provide such services. In Canada, provincial health insurance plans cover only those health care services that are determined to be “medically necessary.” Since there is no universal definition of “medically necessary” applicable across all provinces, each province has the discretion to determine which services will be considered “medically necessary” and hence be insured. This discretion has resulted in the scope of publicly insured services differing from province to province which, in turn, has resulted in the scope of privately provided services varying from province to province.
Moreover, the difference between what governments say they will fund and what the public demands as the best health care is becoming more and more remarkable. The basket of health care goods that provincial governments are providing has remained modest and stagnant for several decades due to crippling cost pressures, despite the evolution of clinical science in terms of technology, procedures, drugs, pharmacology and devices.
Furthermore, there is no federal or provincial legislation which prohibits insured persons from directly or indirectly paying for uninsured hospital or physician services which are clinically “medically necessary.” Indeed, the Supreme Court of Canada’s decision in Chaoulli v. Québec supports the private provision of services which are not available through provincial health insurance plans.
Private sector opportunities ahead
Given the shift in demographics towards a growing elderly population – it is estimated that the number of seniors in Ontario will double in 15 years – coupled with increasing sustainability pressures, we expect to see significant growth in the private sector provision of both publicly- and privately-funded health care.
In addition, we anticipate significant fundamental structural changes in the Canadian health care system. The platform for the delivery of health care services is broadening to include the provision of home-based health care services in addition to the strictly institutionalized provision of such services, and the technological advances that support the evolution of medical science continue to expand. These changes will present unique opportunities for the private sector to fill the breach between health care services that are considered “medically necessary” and are therefore publicly funded, and those services that are not publicly funded but may be made available privately.
Canada is open for business for the private sector to narrow (if not fill) the gap between what governments can offer and what the public demands. Private health care providers have been expressing a great deal of interest in Canada recently. For instance, private long-term health care providers are looking to get into private home health care in Canada. Likewise, major drug distributors are looking to ramp up their Canadian acquisitions.
Private providers looking to expand their interests in the Canadian market need to bear in mind that the health industry is highly regulated in Canada. Compliance with such a steep regulatory burden requires sophisticated legal counsel who are familiar with the applicable law and policy, and who can assist organizations in identifying and exploiting potential entrepreneurial opportunities.