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Of incontinence pads and private equity

Recent revelations on the privatised health and elderly care sectors in Sweden make for an excellent example of the worst excesses that the profit-motive can lead to in formerly state-run sectors.
Gerhard Schnyder
16 February 2012

To outsiders, Sweden is known as a model economy; home to successful export-orientated companies and haven of social peace and justice. Yet, recent revelations around grievances in the privatised health and elderly care sectors make of Sweden mainly an excellent example of the worst excesses that the profit-motive can lead to in formerly state-run sectors.

Over the past two or three decades Sweden has indeed had the doubtful privilege of being quoted by the ultra-conservative US Heritage Foundation as an example for pension reform and the country has privatised large parts of the social services sector including primary education. Certainly one of the most extreme examples of market-optimism and anti-statism comes from the Stockholm County Council. Between 1998 and 2002, when a centre-right alliance controlled the county, public property for SEK 30bn has been sold off in the region of Stockholm and 25% of the social services have been outsourced to private providers. Deregulation and privatisation have particularly touched the health system including care for the elderly. By 2008 all of Stockholm’s major hospitals had become public limited companies (plc) and 100% of Stockholm county’s wards were in private hands. The outcome of this situation provides an impressive and depressing summary of everything that critics of neoliberalism think is wrong with private provision of public services.

Shortly after the first wards in Stockholm were sold to private providers it became clear that the privatisation did not have the promised effect of bringing the costs for the county council down. Rather than decreasing, the costs of health services rose by as much as 12% in one year, leaving the council with a deficit of SEK 2.4bn by 2004, while the now private wards made handsome profits. Even more disturbingly: the shareholders of the now incorporated wards – in many cases the formerly council-employed GPs – paid themselves dividends amounting to as much as a million SEK per year (Dagens Nyheter March 3, 2007). The source of these profits in the health service sector were tax payers’ money because the County Council continues to pay the health bills of its citizens. Former county council employees thereby became entrepreneurs and tax-made millionaires within a couple of years after privatisation.

Soon, critical voices started to make themselves heard. The Council was accused of selling off the wards basically at the inventory price – not including any goodwill as would be the case in a takeover of one business by another. The Council justified this sellout of state property as a subsidy to start-up companies, which was what the new private wards were considered to be.

Yet, by 2007, the Stockholm County Council saw a need for action in face of increasing costs. The problem was quickly diagnosed, a solution found and the stage set for the second act of this Nordic drama: the rising costs were explained not by the increasing profits that went into private pockets, but by a lack of competition. There were simply not enough private providers on the ‘market’ and competition was not fierce enough. Stockholm County Council next elaborated  a new programme called “Ward Choice Stockholm” in an effort to bring down costs. Ward Choice Stockholm – which entered into force on January 1, 2008 – aimed at stimulating competition between health care providers, by cutting subsidies and making payment of services dependent on some simple metrics. The new metric that would determine how much the Council paid health care providers was the number of patients that they treated in a given period of time. Higher payments for socio-economic underprivileged areas – where language problems and other problems related to poverty make treatments more difficult and hence time consuming – were scrapped. This put pressure on health care providers to lower costs as best they could. Among the measures used by the private providers to attract new ‘customers’ were longer opening hours (evening opening), a free health check-up on registration (worth SEK 200) and freebees for new ‘clients’.

As so often, free competition between private providers did not lead to innovative solutions – other than freebees on registration – but greatly favoured the economically and politically powerful over other market participants.

Thus, in an open letter published in the Dagens Nyheter (DN) – close to the liberal Folkpartiet – five GPs accused Filippa Reinfeldt – then Stockholm’s conservative County Commissioner of Health Services and wife of Sweden’s PM, Fredrik Reinfeldt – of favouring major players in the industry by attending their opening ceremony of a new ward (DN 21 October 2008). The health care provider in question was Carema Care one of the four largest – and stock market listed – health care providers in Sweden.

Yet, from the Council’s perspective the increased competition soon started to bear fruit: in 2008 a private drug abuse clinic – Maria Beroendecentrum – lost a bid for renewal of its contract with Stockholm’s County Council to Carema Care. During Maria Beroendecentrum’s appeal over the regional parliament’s decision to favour Carema’s bid, Folkparti county counsellor Birgitta Rydberg explained that the council was actually happy with how Maria Beroendecentrum had run the facility, but that Carema Care had promised to run the same facility for SEK 35m less (DN November 8, 2011). This is a striking example that competitive markets often do not create a level playing field for perfect competition among equal participants, but that political influence or economic power (size) help a lot in ensuring that one has an even leveller playing field for oneself.

To be sure one could argue that Carema Care, as a very large provider of health care services, simply was able to run said ward more efficiently due to economies of scale. A powerful argument indeed. Yet, over the past months it has become increasingly apparent that the reason for Carema Care’s competitive pricing may derive not from economies of scale but from a wholly different source. Since early October 2011, Dagens Nyheter has run a series of articles about alleged shortcomings in the caring standards at two of Carema Care’s nursing homes in Stockholm. DN had been granted access to reports from nurses in different elderly care homes run by Carema Care, complaining about working conditions and the standard of the facilities. The complaints concerned mainly cost cutting in terms of not replacing staff, cutting the budget to buy such basic necessities as toilet paper, soap and incontinence pads. The company had also ‘made redundant’ cleaning staff at one home, asking caring staff to do the cleaning themselves - with the only exception being the day before announced inspections when a professional cleaning service provider would be brought in.

The reports on caring standards at Carema Care have grown worse by the day ever since: from rather harmless cost-saving schemes such as the introduction of a sensor in patient’s incontinence pads that allowed it to reduce the number of incontinence pads used by measuring the degree of dampness of the diaper [sic!], to cases where a patient had to sleep on the floor for several weeks because her bed was broken and could not be replaced, to truly horrific cases where the ward personelle was aware of continuous sexual assaults on one elderly patient by another patient, but did nothing to prevent these assaults over a number of months!

Carema cannot fundamentally reject most of these claims. In a first reaction to the story about an elderly women sleeping on the floor, Kerstin Stålskog the company’s responsible for elderly care – in a statement full of (unintended) irony – declared that there was no lack of beds in the concerned home, but that the ‘customer’ [sic!] had chosen to sleep on the floor (DN November 3, 2011). (It remains an open question whether that is the sort of choice that free-marketers had in mind when they introduced ‘Ward Choice Stockholm’.)

Carema Care has since created a weblog in order to address the numerous criticisms raised against it. The company now denies that a patient had to sleep on the floor and points out that the company had known about many of the grievances revealed by DN and it had started to take measures to improve the situation. Yet, a documentary on a public TV channel about the company further added to the list of grievances. It revealed that a secret bonus programme was in place, which incentivised the managers of Carema’s homes to compete with other divisions in bringing down costs. (Carema has since announced that the bonus programme in its ‘elderly care’ division would be put on hold and a new system will be adopted based on quality indicators rather than costs).

The reason why these grievances went unnoticed for so long, has to do for one with the fact that Carema Care had a reputation among its employees of doing anything necessary to keep staff in line. In at least two cases, it sued former employees for breaching professional secrecy. Moreover, the public authorities contributed their bit to hushing up any complaints from Carema’s employees or nursing inspectors in the event that they dared to pipe up. Dagens Nyheter reported that at least in one case a report by an inspector was altered in order to embellish the situation described. Entire paragraphs had been cancelled and others had been rewritten.

Why should the British public care about this tale from the North? Beyond, the obvious lessons to be drawn from the Swedish horror stories in the context of the current debates about the Health and Social Care Bill, the UK played a direct role in the changes in Swedish welfare services. Indeed, Ambea – the holding company that owns Carema Care – was owned between 2005 and 2010 by the London-based private equity and venture capital fund 3i. The fund bought the holding in 2005 for SEK 1.85bn and resold it in 2010 for approximately SEK 8bn to Triton – an investment fund owned by several Swedish citizens – and KKR – the famous US private equity firm.  When the company was taken over, KKR and Triton also extended large loans to the company and loaded it with external debt. Overall, Carema Care has debt to service amounting to SEK 8bn, approximately half of which stems from the two private equity firms that own Ambea. What is more, the loans from KKR and Triton were made at an interest rate of 12% - well above the current market rates for such a loan. This device allowed the owners to create artificial tax deduction, because any profits Carema Care would make were wiped out by interest payments. This allowed the owners to channel Carema Care’s profits around the Swedish tax authorities, because the interest payments were booked as ‘capital income’ in an off-shore tax haven rather than declared as taxable profits from a productive activity. After it has become clear over the last weeks that most major private health care providers pay literally no income tax in Sweden, the centre-right government has promised a tax reform for 2013, making this sort of internal loan at above-market rates illegal.

The Carema Care scandal illustrates in impressive fashion the discrepancy between what market-believers promise when they initiate privatisations and deregulation policies and what the actual reality of competition is. To be sure, for 3i’s, Triton’s and KKR’s investors the deal was by extremely rewarding…but the belief in efficient markets and that individual actors’ selfish and profit-seeking behaviour in a market place will ultimately lead to optimal outcomes for societies as a whole seem laughable at best and dangerously cynical at worst in face of the transformation of healthcare in Sweden. The Carema case – which also touches on other major healthcare providers such as Attendo – shows once again that privatisations are mainly about transferring public money to private individuals.

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