Financing patient-centred health care homes through value capture

An innovative approach to funding primary health care involving collaboration between different levels of government and other stakeholders

The Commonwealth Government initiative to establish patient-centred health care homes (PCHCHs), announced in late 2015 following the recommendations of the Primary Health Care Advisory Group,1 represents an ambitious reform to better deliver and coordinate primary care to individuals with chronic conditions.2 PCHCHs, developed originally in the United States,3 involve patients voluntarily enrolling with a primary care provider (a home base such as a general practice or Aboriginal medical service) to receive tailored treatment based on individualised chronic disease management plans. Providers are remunerated through a bundled quarterly payment for each patient enrolled — the aim being to eliminate the fragmented care and duplication that is often associated with the current fee-for-service system.4

At present, $21 million has been set aside over 3 years to fund the first phase of this scheme. Phase one is expected to enrol 200 medical practices and 65 000 patients,2 which works out to be around $100 per annum per patient. Although this sum seems modest, given that about half of all Australians have a chronic disease and that one in five have multiple chronic conditions,5 the investment required for the subsequent rollout of PCHCHs is likely to be substantial. With a limited appetite among the public and governments to tap into existing sources of revenue to meet our ever-growing funding needs, it remains to be seen where this money will come from.

One option that has previously been applied to the funding of public investment in infrastructure projects is that of value capture. In this article, we explore the potential for the use of this framework in funding PCHCHs, and how this principle might be applied more broadly to facilitate the funding of new health care programs.

Value capture is a form of public financing that involves redistributing to government some of the windfall gains that private property owners receive as a result of government investment in infrastructure projects. As an example, it has been proposed as a means of funding the building of railway lines in Sydney and capitalising on the increase in the value of adjacent land this generates. Like many cities, Sydney faces major funding challenges in the coming years to meet the infrastructure needs of a rapidly growing population. In this case, value capture involves the New South Wales government imposing a levy on private developers via a land tax to claw back some of the private value created.6,7 Such innovative contracting arrangements and financial instruments, by adjusting the share of costs and benefits between different stakeholders, can turn conventional investment proposals into win–win scenarios. Applied more broadly, it potentially addresses areas of underinvestment by enabling governments to find additional funds from non-government sources.

Another form of value capture currently underway is the social impact bond (SIB; also known as social benefit bond) program being rolled out across a number of states and territories in Australia. SIBs are a method of financing health and social programs that are delivered by non-government organisations but expected to achieve cost savings to government through improved health and social outcomes and ultimately reduced service use (eg, hospitalisations). The bonds that finance these programs are purchased by private investors and the returns paid by government are subject to the program achieving future cost savings, as determined by a third party evaluation. In principle, SIBs enable governments to access private capital and offset the risk associated with public investment.

The NSW government, the earliest adopter of SIBs in Australia,8 recently completed a pilot of Newpin — a parenting program delivered by UnitingCare to support families to avoid children being put into out-of-home care. In successfully restoring 130 children to their families and preventing another 47 children from entering out-of-home care (restoration rate of 61% over 3 years versus a baseline of 21%), Newpin achieved a return of 12.2%, paid by NSW Treasury to bondholders.9 In 2016, the NSW SIB program was extended to health with the announcement of two new bonds: Managing mental health hospitalisations (Richmond PRA and Social Ventures Australia) and Managing chronic health conditions (Silver Chain Group). The expectation is that these programs will deliver cost savings through reduced hospitalisations, although specific details are not yet available.10

Through this lens, PCHCHs can be seen as another value capture opportunity in the health sector, albeit on a much larger scale involving a potential arrangement between Commonwealth and state and territory governments. The opportunity arises because the upfront funding for PCHCHs will occur through the Commonwealth Government via Medicare, while much of the potential value will be generated in terms of reduced hospitalisations that benefit state and territory governments. As indicated in the media release accompanying the PCHCH announcement: “Investing in prevention and management of chronic disease keeps people healthier and out of hospital, easing the strain on the hospital system, and increasing efficiency across the wider health system.”2

Underlying the value capture proposal set out here is the critical role of primary health care in disease prevention, and explicit recognition that Medicare expenditure is to a large extent investment in such prevention. The substantial value capture envelope that is ready to be realised is reflected in the over 600 000 hospitalisations per year that would be preventable through effective or timely provision of primary care in Australia.11

There are two general options for how a value capture arrangement could be developed for PCHCHs. The first could be an arrangement in which states and territories would contribute toward the costs of implementing the program; akin to the conventional value capture model in which property developers are charged a fixed levy. The second option, more like the SIB model, would entail gain sharing, where investment in PCHCHs is packaged as a bond underwritten by state and territory governments and held by the Commonwealth, with returns payable based on demonstrable reductions in preventable hospitalisations. This approach would involve:

• State and territory governments underwriting bonds in which they pay a dividend contingent on financial savings from reduced hospitalisations after, say, 3 years. As with SIBs, the share of savings retained by states and territories compared with that which is factored into the dividend would be based on a predetermined scale linking performance levels with rates of return. See, for example, the arrangement involving the Benevolent Society.12

• Funding for PCHCHs coming from the Commonwealth acting as a bondholder, although the option exists to part or fully fund the program through the sale of bonds to private investors.

• PCHCHs being delivered by the Commonwealth — as currently envisaged — alongside an evaluation conducted by a third party to assess whether the PCHCHs achieve their expected cost savings.

• State and territory governments paying out a dividend to the Commonwealth as bondholders, pending achievement of performance targets.

There are a number of clear advantages with this gain-sharing approach:

• It requires no financial burden on state and territory governments until cost savings are realised.

• It strengthens the Commonwealth case for investing in the rollout of PCHCHs. Existing arrangements will require costs to be borne by the Commonwealth (via Medicare); the proposed approach provides the Commonwealth with an offsetting stake in the expected savings in hospitalisation costs.

• It makes explicit the stake that state and territory governments have in the success of PCHCHs. Despite being major stakeholders, at present there do not appear to be clear plans for how they will be engaged in this initiative. By aligning interests so that savings realised in terms of reduced hospitalisations are shared between levels of government, value capture arrangements reduce incentives to cost shift and may be a catalyst for the intergovernmental collaboration needed to ensure the success of PCHCHs. Therefore, while cost-saving programs in health tend to be rare and the recent experiences with coordinated care programs have generally been disappointing,13-15 a unique feature of this proposal is the alignment of the financial incentives of key players toward a common goal.

Within this value capture arrangement, evaluation is no longer an optional extra. It is reliant on the collection of data, ongoing evaluation and the use of data in determining the returns achieved by such programs. While decisions to invest in health programs are often predicated on claims regarding future cost savings and outcomes, there is nothing in the current system that compels such claims to be subsequently tested. Value capture creates feedback loops and institutionalises evidence-based investment decision making. It therefore vests in health service funders a strong interest to use evidence effectively and, ultimately, to become better at picking winners.

The template for this value capture arrangement has already been established through the SIB programs being implemented across Australia. These are based on gain-sharing deals contingent on savings in future health care costs. As such, the arrangement proposed here involves no additional cost or risk to the states and territories over the status quo, as any payout by an individual state or territory to bondholders would only be apportioned from the money that it has already saved.

The fiscal pressures caused by chronic illness, an ageing population, technological innovation and consumer expectations have created an urgent need to find new ways of encouraging investment in the health sector. By realising the potential for investment in primary health care to prevent future health care costs, value capture represents an innovative means by which different levels of government and other stakeholders can work together to address health sector funding needs.