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To secure the most advantageous deal for ourselves, building a new hospital, we believe the cost of these advisors will be in the region of £14.000.000 on the £164.000.000 contract. The consultancy cost figures are in the higher percentage range, around 8-9% so that we do not go under budget for this expenditure.
- Based on two future PFI scheme hospitals, they will have a throughput of patients per bed of 88 and 100 per year. We will aim to have a throughput of 90 in line with these future hospitals.
- We feel that we can best achieve our objectives by offering a new hospital with buildings of high quality. With a new hospital there are a minimum of limitations as to what can be done, and this will hopefully appeal to the NHS trust. This is of course the option that would satisfy the shareholders in our member companies as well as it will increase their return.
- Ancillary staff will be contracted to out to work with existing employees. Because we are pushing for a re-development, TUPE rules won’t apply to current staff and all employees can be paid the same and the same conditions can apply to all staff.
- We could introduce charges for parking; this could be an area which could provide our shareholders with a large increase in profits. Clamping could also be considered with the release fee ‘waived’ if we believed it was under exceptional circumstances. Charging for televisions, radio usage and the use of bedside phones should be considered to further increase profits. Vending machines around the hospital could also be used for profit maximisation. We could aim to receive 50% return on the items purchased.
- To change this public opinion/perception, we will implement an advertising campaign identifying the opportunities for the population and the district i.e. job creation and investment. We will also identify and reaffirm that it is the only and best option so that we can obtain public support for the hospital.
Exhibition portfolio
Issue no. 1 – Use of consultants, lawyers and accountants
We will utilise the expertise of the most qualified consultants, lawyers and accountants to secure the contract and provide us with the maximum profit. The cost of advisors in PFI schemes in the past has been between 2.8% and 8.7%. To secure the most advantageous deal for ourselves we estimate that the cost of these advisors will be in the region of £14.000.000 on the £164.000.000 contract.
As a company we believe this expenditure is justified if we secure the contract. The consultancy cost figures are in the higher percentage range, around 8-9% so that we do not go under budget for this expenditure.
As with previous PFI schemes there have been varying public opinions on the financing of their local hospitals under the PFI initiative. We could use these consultants to put to rest the public concerns. This will be discussed later in issue six.
Pro’s and Con’s for developing a new Hospital:
Pro’s
- larger contract = more profits
- employ own staff (ancillary staff) = cheaper wages
Con’s
- Time needed to build and develop = long wait for return on investment
- Greenfield site
- No road or rail links = these would have to be constructed taking up valuable time
Pro’s and Con’s for the Refurbishment of a previous hospital:
Pro’s
Con’s
- Less profit
- Limitations on employing own staff
- Poor transport links
- Poor emergency access as in built up area
Issue no.2 – Number and throughput of beds
The population in the area is expected to significantly increase over the next 15 years. The area of growth that will be the largest will be that of the elderly population. If we were to aim to provide a bed for each elderly member of the public, our profit margins will decrease significantly to satisfy the increased demand.
To accommodate for these future demands, we will aim to improve the throughput of beds as in other PFI financed hospitals, above the NHS average of 56-57 patients per year per bed. With these other PFI schemes, they have experienced a 20-40% bed loss when building a new hospital after the reconfiguration of services, an area in which we could investigate in order to save money and increase our profits.
Based on two future PFI scheme hospitals, they will have a throughput of patients per bed of 88 and 100 per year. We will aim to have a throughput of 90 in line with these future hospitals.
Pro’s and Con’s for reducing the number of beds:
PRO’s
CON’s
- Not able to cope with patients demand
- Could affect success for the contract
Issue no. 3 – Quality of the buildings
Alternatives to be considered
When considering the quality of the buildings, there are several issues that need to be reviewed. First of all, we need to decide between
- rebuilding and refurbishing the City General Infirmary
- building a new hospital
We also need to decide whether the hospital, existing or new, should be of
- poor quality
- average quality
- high quality
Evaluation of strengths and weaknesses
Rebuilding and refurbishing the City General Infirmary:
Strengths
- As the buildings already exist, the costs will be lower compared to building a new hospital.
- With less construction work needed, the chance of overdue work will be smaller resulting in less chance of being penalized.
- The lower costs of construction work means that the 20% profit expected by builders will be a lower amount.
Weaknesses
- The existing buildings may cause limitations as to what can be done and likely problems with issues like size can be impossible to overcome.
Building a new hospital:
Strengths
- There are no limitations as to what can be done in terms of size, technology etc., enabling us to accommodate all the needs the NHS trust may have.
Weaknesses
- A new hospital involves extensive construction work which will affect the cost.
- Because of the amount of work required, the risk of penalties due to overdue completion is high.
- Extensive construction work also means payment to builders will be a large figure.
Poor Quality
Strengths
- The costs will be low.
- Less work needs to be done.
- Less work means that there is a smaller chance of overdue construction work and penalties.
- As the cost for poor quality construction work will be low, so will the profits paid out to the builders.
Weaknesses
- As lease agreements for PFI hospitals have a typical duration of 25 years, maintenance of the hospital will be the consortiums responsibility for a long period of time. Any savings we might make now for not investing in quality might become costly in future as shoddy construction work normally doesn’t have high durability.
- Low quality buildings might put the health and safety of future employees, patients and visitors at risk.
- The chance of winning the contract may be smaller if we only offer a hospital of poor quality.
Conclusion
After evaluating the range of alternatives, we feel that we can best achieve our objectives by offering a new hospital with buildings of high quality. With a new hospital there are a minimum of limitations as to what can be done, and this will hopefully appeal to the NHS trust. This is of course the option that would satisfy the shareholders in our member companies as well as it will increase their return. Although going with a new hospital and the high quality option will be more costly then the other alternatives, we believe it will increase our chances of winning the contract, and future maintenance expenses will be kept to a minimum. Making a high quality hospital can also be good publicity for the consortium.
Issue no. 4 – Ancillary services
The problem has been defined and recognised. This is concerned with the decision on whether to contract out ancillary services or to provide the service within the scheme. These are the two feasible alternatives. To complete the decision making process, the alternatives will be evaluated and the best alternative will be selected.
The consortium has the opportunity to make a maximising choice. This is defined as the decision making the best choice of various alternatives. The decision making condition is that of ‘Uncertainty’. The decision maker is not able to predict the outcome of the decision, a range of possible outcomes may be identified and evaluated but there is in-sufficient information to derive outcome probabilities.
The problem raises some financial issues. Contracting out the ancillary services is the most profitable course of action for the consortium. Using self-provided employees is less profitable because there pay and working conditions are protected by the TUPE (Transfer of Undertakings) rules. If external ancillary staff were employed, they wouldn’t be protected by the TUPE so the consortium could cut costs by paying staff at a lower level. There is also the possibility of a hospital development rather than a refurbishment which would mean that TUPE would not apply to the staff. This would mean that the pay level could be reduced to cut costs and produce a larger level of annual profit.
The financial decision raises some ethical issues also. Previous consortia have encountered problems when ancillary staff have been hired and are working with self-provided employees. The ancillary staff are paid at a lower rate then the self-provided staff because self-provided staff are protected by TUPE rules. There will be two sets of staff performing the same operations within the hospital but being paid at two different rates. This could lead to poor team-work between the two different sets of staff. This could lead to in-efficiency and poor performance of staff. Strikes could be encountered and this has been experienced by previous consortia. A strike could increase the workload of self-provided staff who may not be able to cope. The question has to be asked on whether it is ethically right and fair to set the level of pay to two different levels for the same job.
The two main issues to contend with before a decision is made the financial and ethical factors. The advantages of hiring ancillary staff are that it is more profitable and are not protected by the TUPE rules so the conditions provided don’t have to meet certain standards.
However, the hiring of ancillary staff may disrupt the running of the hospital. Strikes could be encountered and the relationship between the ancillary staff and the self-provided staff would not be ideal leading to poor performance of staff.
There is also the possibility of a development in contrast to a refurbishment which would mean that self-provided staff wouldn’t be protected by TUPE rules.
After evaluation of the possible alternatives, it has been decided that the best course of action is to provide staff ourselves. The hiring of ancillary staff would be too much of a disruption for the running of the hospital. With the possibility of a development, self-provided staff wouldn’t be protected by TUPE rules. This would mean that self-provided staff would be just as profitable as hiring ancillary staff.
Business Decision Analysis model:
An analytical decision model can be used to help evaluate and interpret which decision will provide the best outcome.
As decision makers, we are operating under the conditions of ‘Uncertainty’. The Stochastic model can be used because it incorporates the estimates of probability. A model can be created to help determine which decision will produce the best outcome. The problems encountered with a stochastic model are that it can be difficult to create estimates of the probabilities. The probabilities will be derived using the ‘Subjective’ method. Under this method, the decision maker uses opinion, intuition, judgement and past experience. The probability tree below conveys the estimates associated with the alternatives concerned with the financial possibilities;
ANCILLARY (1High profit)
REFURBISHMENT
CONSORTIUM SELF PROVIDED (2Lower profit)
DEVELOPMENT ANCILLARY (3High profit)
SELF PROVIDED (4High profit)
The decision tree above shows four possible outcomes from the alternatives. The two types of outcome is high and low profit. There is a higher chance of refurbishment rather than development because that is the original proposition. But the development does have its advantages to the government so this should have a reasonable amount of probability associated with it. From these two original options, the consortium can contract out staff or self-provide staff. There is a 50% chance of the consortium choosing each option. These two options will produce a financial outcome. The table above shows these financial outcomes and the probability associated with them.
The table shows that choosing ancillary services provides a 50% of profit. This is a 30% probability from the refurbishment and a 20% probability from the development. The development also provides an extra 20% probability of profit from the development because there is no TUPE protection for self-provided staff. This shows that there is a 70% chance of profit from the alternative of choosing ancillary staff, which is the reason why this alternative has been chosen. However, it has been taken into account that these probabilities are estimates and there is room for marginal error.
Issue no. 5 – Charges for parking and television
There are a number of options that could be considered so as maximise shareholder profits, many already employed in other PFI hospitals.
We could introduce charges for parking; this could be an area which could provide our shareholders with a large increase in profits.
Clamping could also be considered with the release fee ‘waived’ if we believed it was under exceptional circumstances.
Charging for televisions, radio usage and the use of bedside phones should be considered to further increase profits.
Vending machines around the hospital could also be used for profit maximisation. We could aim to receive 50% return on the items purchased.
Issue no. 6 – Opposition to PFI financed hospital
Within the local population, there is an 81% objection rate to a PFI financed hospital. They will however accept this proposal when they realise it is the only real option for development of their health services.
To change this public opinion/perception, we could implement an advertising campaign identifying the opportunities for the population and the district i.e. job creation and investment. We could also identify and reaffirm that it is the only and best option so that we can obtain public support for the hospital.
We could use the services of the consultants/advisors to either carry out this advertising campaign or advise the company how we should do it and get another company in to do it. The second option would cost more money and would reduce our profits.
Refinancing
We intend to refinance the deal as soon as the risky phase of the construction is complete. We are doing so in order to increase the return on profits for our shareholders.
Theoretical decisions
During the decision making process we aimed to use the rational model of decision-making. This process had the potential to be successful because:
- Goals were known – the goal or aim is to win the contract to build and run a new hospital under the PFI Initiative
- Information/resources were available – through the Department of Health website and other available information it was possible to research previous PFI schemes and what they offer
- Prediction is feasible – the outcome of the decision will hopefully mean that we will win the contract and this is a feasible prediction as we have as much chance as any other group to win the contract
The Rational Model:
- Identify and design the problem
- Gather and sort the information
- Generate the broadest possible range of alternatives
- Evaluate the strengths and weaknesses of alternatives
- Select the optimal alternative
- Implement and monitor the effectiveness
The Rational Model applied to our decision-making:
- Create and submit a promising tender for contract to build and run a Hospital under the PFI Scheme by exceeding present expectations of similar schemes in order to win the contract.
- Researched previous PFI schemes in order to improve the performance and meet expectations
- Choose whether the best option would be to build a new hospital or refurbish a previous hospital
- Identify the six issues in terms of which decision to take – pro’s and con’s of each alternative
- To build a new Hospital in order to increase the chances of providing a better service, whilst benefiting the community, the NHS and our needs, in order to win the contract
- Submit the tender for contract and wait to see if the contract has been won by ourselves
The constraints of the decision making process meant that as a group we may have satisficed rather than maximised due to constraints such as limited availability of resources and time limitations (deadline needing to be met). After attempting to take the Rational approach it can be seen that the decision making process ended up being Bounded Rational as we ended up satisficing the end result.
Despite attempting to be rational during the decision making process the actual processes was much more chaotic and Cohen et al’s (1972) Garbage Can Model is more appropriate to the way in which our decisions were made.
The Garbage Can Model:
Cohen et al identify that there are 4 independent processes affecting decision-making. These four processes all coincide with each other randomly until the decision is made. Our decision-making was chaotic but eventually as the 4 processes merged the decision was made.
- Problems – create a proposal that appeals to the local community and the requirements of the NHS to win the contract.
- Solutions – win the contract
- Participants – we are a group of business men and women leading a consortium of companies
- Choice Opportunities – To build a new hospital or refurbish the existing hospital.
Factors affecting the decision-making Process:
Risk and Uncertainty
- Risk – the contract will be won by another group – choices have to be made about the hospital i.e. new or refurbishment in order to attract the interest and win the contract.
- Uncertainty – the results of the decision are uncertain as we do not know what the competitors proposals contain.
Ethics:
When building something as important a hospital the needs of the patients are top priority and the requirements of the staff to provide a safe and workable environment.
Societal ethics, professional ethics and individual ethics are important factors in the decision-making process.
During the decision-making process the group was not affected by Groupthink or risky-shift.
Bibliography
Whittaker. L, BDA Lecture notes.
www.dh.gov.uk
