Developing and implementing a public-private partnership (PPP) project requires the preparation of a business plan. This entails the following:
1. Data gathering
1.1 Catchment area characteristics
a. Bed-to-population ratio (relative to government target of 1:500)
b. Relative income profile
c. Health conditions (how do health indicators compare with targets, such as Millennium Development Goals)
d. Utilization rates of hospitals that cater to the catchment
e. Disease profile (e.g., of hospitals in representative markets)
f. Unmet needs of the catchment area
1.2 Case rates (published by the country's social health insurance provider)
1.3 Project cost1
a. Building construction (requires a decision on capacity based on the gap between current and projected bed-to-population ratio)
b. Land development costs
c. Building services and equipment
d. Medical equipment (requires a decision on service level of the hospital based on disease profile and other unmet needs that the hospital intends to address)
e. Capital costs2
1.4 Project funding
a. Own funds
b. Grants available from national government (subject to negotiations between the local government and national government agencies such as the department of health)
c. Loans
d. Other sources
2. Development of assumptions about the future performance of the hospital under a likely scenario (i.e., base case)
2.1 Income statement assumptions
a. Bed occupancy rate (BOR), disease profile, and average length of stay (ALOS) (developed from catchment area data analysis)
b. Inpatient volume = (number of beds x 365 x BOR/ALOS)
c. Outpatient volume = (inpatient volume x outpatient)/inpatient ratio3
d. Revenue per inpatient (derived by applying case rates and historical payments of PhilHealth [Philippine Health Insurance Corporation] to the disease profile, weighted by the disease distribution)
e. Revenue per outpatient (derived by assuming a percentage of inpatient revenue)4
f. Personnel costs and other operating costs5
g. Depreciation6
h. Management fees (to be paid to PPP partner)7
i. Taxes (30% statutory income tax rate)
2.2 Balance sheet assumptions
a. Cash8
b. Accounts receivable9
c. Inventory, other assets, and accounts payable10
3. Preparation of the base case forecasted income statements, balance sheets, and cash flow statements based on the assumptions developed above
4. Calculation of the project's internal rate of return (using the year-to-year changes in net equity)11
5. Comparison of the IRR with the minimum return (or cost of equity) required by private investors12 (to determine if PPP options, other than management contracts, can be considered)
6. Sensitivity analysis to determine how the project performs under less or more favorable scenarios than envisioned in the base case
7. Calculation of expected project IRR (by judgmentally applying probabilities to each scenario)
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1 Estimates on costs of construction, land development, building equipment, and services can be based on country estimates (e.g., data from the health department). For these assumptions, data came from Budgetary Requirements for Construction of Hospitals and Other Health Facilities, as of June 2010, National Center for Health Facility Development.
2 A local government may use 20% of total personnel costs and other operating costs (based on Costing Study for Selected Hospitals in the Philippines, which analyzed the operating performance of selected Level 3 public hospitals). This may be subjectively adjusted downward for sub-Level 3 hospitals.
3 The local government may use 3.2, the average outpatient/inpatient ratio of Batangas Regional Hospital, Gov. Roque Ablan Sr. Memorial Hospital, Mariano Marcos Memorial Hospital and Medical Center, Oriental Mindoro Provincial Hospital, Ifugao General Hospital, and Veterans Regional Hospital (all from the Philippines).
4 Local government may use approximately P2,000.00/outpatient as a subjective estimate (based on Philippine currency and market conditions).
5 Local government may access Department of Health (DOH) estimates (e.g., FOURmula One for Health Operations Manual for Convergence Provinces provides DOH estimates of these costs).
6 An examination of selected private hospital companies indicates these to range from 10 years (for equipment) to 30 years (for buildings).
7 A reasonable estimate to use is 5%.
8 An acceptable convention is 2%-5% of total revenues.
9 This can be based on a weighted average of the collection periods assumed for private-and public-paying patients. Local government may use cash or 30 days for private-pay patients, and 90 days for public-pay patients (the latter being subject to the length of the reimbursement period of say, PhilHealth).
10 Based on financial statements analyzed by the technical assistance team, private hospitals maintain inventories, other assets, and accounts payable equivalent to about 5%, 1%, and 16% of revenues, respectively.
11 This method assumes that the project is 100% funded by equity.
12 Anecdotally observed by the technical assistance team to be 15%-25%, based on comments from private companies in roundtable discussions and other meetings. The capital asset pricing model provides an alternative for estimating the cost of equity; for example, using a risk-free rate of 4.86% (the yield on the benchmark 10-year Philippine peso bond on 17 August 2012), a conventional market risk premium of 6%, and an observed beta of 0.60 for Asian companies engaged in hospital operations yields a cost of equity of 8.5%.