Would someone snap a wet towel at the Opposition please?
The Opposition is upset because Sarah Hoffman, the Health Minister, wants to see a business case on alternatives before she agrees to outsource the province’s healthcare laundry services to K-Bro Linen Inc.
K-Bro started as an Edmonton-based diaper laundry service in the 1950s. It moved into healthcare and hospitality laundry services in the 1980s and now it’s the largest owner and operator of laundry services in the country.
Edmonton and Calgary outsourced hospital laundry services to K-Bro in the 1990s. The Opposition says Hoffman is balking at giving K-Bro the rest of the province because of “ideology”. They say she’s going to waste $54 to $200 million replacing inadequate AHS laundry facilities in order to save a paltry 130 to 140 jobs.
As they say in the media, let’s “unpack” the Opposition’s arguments.
“Everyone is doing it!”
The Opposition says other provinces have outsourced laundry services and we should too.
Leaving aside the fact that “everyone is doing it” is a childish argument, this is a broad overstatement.
The only province to completely outsource healthcare laundry services is Saskatchewan which signed a contract with K-Bro last year (more on this below).
Some provinces toyed with outsourcing but the number of hospitals involved is not high. Only 40 out of 226 hospitals in BC and only 3 out of 473 hospitals in Ontario (down from a high of 16 in 2006) have privatized laundry services.*
K-Bro recognizes that its dependence on the public sector is a significant business risk because “many large Canadian cities currently process all or a portion of their linens through public sector central laundries or on-premise laundries located within public sector facilities”.
K-Bro is optimistic that the trend to outsourcing will continue, but acknowledges that hospitals and health authorities “continually assess and review their outsourcing strategy”…which is exactly what Hoffman is doing notwithstanding the objections raised by the Opposition.
“We’ll save money!”
The Opposition argues it costs millions to do laundry in-house and this money would be better spent on patient care, salaries and critical infrastructure.
Fair point. But the Opposition is ignoring the fact it also costs millions to do laundry out-house.
K-Bro’s 2015 consolidated financial statements identify Edmonton, Calgary and Vancouver as its biggest customers. Last year these three cities produced $62 million in revenue. K-Bro doesn’t break this down per customer but if we assume that all three customers spent the same amount on laundry services Edmonton and Calgary would have generated $40 million in revenue for K-Bros. Multiply that by 10 and the ballpark cost to taxpayers to outsource laundry services under the existing 10 year contracts is roughly $400 million…and that’s before we add in associated costs which are not K-Bro’s responsibility.
For example, K-Bro’s contract to provide laundry services for hospitals in Edmonton and Calgary required it to move its facilities to newly upgraded leasehold space.
The move to leased facilities was such a coup that when K-Bro announced the Edmonton contract it told its shareholders any concessions K-Bro had made on price and the additional carrying costs for associated debt would be directly offset by the efficiencies it would reap from moving into the upgraded leased buildings. Presumably the cost of maintaining these facilities is borne by AHS as owner, not K-Bro as lessee.**
Compare this to the 10 year province-wide contract Saskatchewan signed with K-Bro.
The Saskatchewan contract didn’t allow K-Bro to lease space. Instead K-Bro was required to build a state of the art facility in Regina and two distribution centres in Saskatoon and Prince Alberta (valued at $22 million) so the costs of maintaining the facility falls on K-Bro not the Saskatchewan government.***
Bottom line: a good chunk of the cost savings Alberta should have received from outsourcing laundry services to K-Bro appear to be flowing to K-Bro and its shareholders, not AHS and Alberta’s taxpayers and Hoffman is wise not to press ahead with outsourcing without asking for a business case on all the options available.
“For-profits are more efficient and cost effective”
Former Liberal MLA Kevin Taft is a strong supporter of publicly funded and publicly delivered healthcare, but even he concedes that contracting out non-clinical functions such as laundry services isn’t a bad idea if there are several qualified bidders in competition for a contract. Why shouldn’t a hospital benefit from market forces he asks?****
Sadly the Opposition isn’t trying to engage market forces by putting laundry services out to public tender. It’s demanding Sarah Hoffman stop fussing and give it all to K-Bro on a silver platter.
Nothing would please K-Bro more than the government making it the only game in town—this furthers its growth strategy by expanding existing markets. It also puts AHS behind the 8-ball when the Calgary and Edmonton contracts end in 2018 and 2023, because AHS would not have a credible alternative service provider (itself) ready to take over if K-Bro is unreasonable.
Excuse me, your ideology is slipping
Hoffman blames the shabby state of AHS laundry facilities on the previous PC government who forced AHS to privatize linen services by starving it of capital. She’s prepared to support linen services but wants to assess how such projects stack up against competing demands for other healthcare infrastructure.
And that’s why she’s asked AHS to provide a business case supporting a number of options.
The Opposition says Hoffman is being “ideological”, but K-Bro would say she’s using good business sense.
*K-Bro SEDAR filings, 2014 statistics from Statista http://www.statista.com/statistics/440923/total-number-of-hospital-establishments-in-canada-by-province/
****Clear Answers by Kevin Taft & Gillian Steward, p 10