The K-Bro Linen Flap

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.

sarah-hoffman

Sarah Hoffman Health Minister

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.

Really?

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?****

Indeed.

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.

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Drew Barnes WR Shadow Health Minister

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/

**http://www.newswire.ca/news-releases/k-bro-announces-new-alberta-health-services-contract-510188341.html

***http://www.snl.com/IRWebLinkX/file.aspx?IID=4104834&FID=21224162

****Clear Answers by Kevin Taft & Gillian Steward, p 10

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27 Responses to The K-Bro Linen Flap

  1. Thanks Susan for your excellent commentary and research on this. It really bothered me that David Swann especially would advocate against the government taking time to review this and determine what is most cost effective and safe. Here is a comment from a friend who worked as a consultation to help companies decide on outsourcing contracts vs in house.

    “Having worked on many outsourcing engagements, they all seem to follow the same pattern: They get off to a euphoric start until very quickly someone in head office starts wondering how to improve the profit margin on a particular account. Revenue is fixed; ergo we need to cut costs.

    Let’s see- opt for non-unionized labour, skimp on maintenance and materials, increase life expectancy of equipment. lower headcount, make client pay for any minor requests. A number of ways- all of which decrease quality, responsiveness, etc., etc.

    I’m always amazed how people assume that the “private sector” can do things more cost effectively than the “public sector” with no data to back it up.”

    From my point of view as a social worker another cost to consider in outsourcing is that the private sector companies often pay lower wages – this in turn can impact peoples’ ability to find appropriate housing and feed their families. This is at great personal cost as more people are deprived of dignity and then need to turn to social services and not for profits. So are the lower cost contracts really saving any money?

    • Linda, I too was surprised to see David Swann come out in support of the Opposition on this. On the Liberal website David said “Private laundry service is not a threat to public healthcare – it can reduce, through healthy market competition, our overall healthcare costs.”
      I think that misses the mark, firstly, there is no “healthy market competition” if AHS does what the Opposition wants it to do, namely give laundry services for the entire province to one provider without going through a public tender process and secondly, private laundry service, like private anything, can be a threat to public healthcare if delivering services privately costs more than delivering services publicly because this reduces the dollars available to fund public services. And that’s why Hoffman was correct in asking for a business case for ALL options.
      Your point about the impact of privatization on the bigger picture is very well taken. Thank you.

  2. Nancy Smith says:

    Another issue is the importance of laundry (and cleaning) to infection control in health care settings. Cleaners and laundry workers are the rock of infection control. Do we really want to lose public control of this critical though much undervalued service? Sometimes the necessary oversight of a contracted out critical service can cost more than the “savings.”

    • Nancy, you make an excellent point about infection control. K-Bro says the linen is trucked in from the hospitals, sorted on the wash floor depending on type of cloth and soilage, put on conveyors and washed in “tunnel washers”. Wash water is reused. Linen is then conveyed to dryers and from there to the ironing and finishing area. Then it’s counted, put on sanitized carts and goes back into trucks to be returned to the hospitals. The process takes 24 hours.
      This made me wonder about how this process works when a hospital is experiencing an outbreak of an infectious disease. Do they reuse wash water in these circumstances? What happens when the 24 hour turnaround time is too slow to replenish the supply of hospital gowns for staff who need free access to the isolation wards (this situation occurred at a Calgary hospital and it was awful for everyone).
      It bothers me when people downplay the importance of laundering hospital linen. It’s not the same as dropping off a suit at the dry cleaners.

  3. Neil says:

    I think the key is multiple qualified bidders, otherwise you have monopoly pricing and monopoly inefficiencies. My read is that any contract that is AHS-wide is a mistake…in order to maximise the number of qualified bidders, you need to keep the contracts of manageable size. One hospital per contract ideally. People will argue “economies of scale” for making large contracts, but an actual econ professor would point out the pricing difference between a monopoly or duopoly and a truly competitive market.

    I’d be surprised if in-house is truly the most cost-effective option for the government, but contracting with a monopoly provider is almost certainly worse.

    • Morag Mackenzie says:

      Even in a competitive market the cost usually ends up rising to what the market will tolerate and with essential services the government can end up paying more than tax payers can afford.

      • Neil and Morag I would love to see an apples to apples comparison of the in-house versus outsourced options. One thing we do know from K-Bro securities filings is that it needs to generate enough revenue to pay for things like corporate overhead ($7 million in 2015), special remuneration to directors and key management ($4 million in 2015) and to cover fluctuating risks like foreign currency losses. These aren’t costs that AHS would have to cover if it provided laundry services in-house. But like I said until we see an apples to apples comparison we won’t know how in-house and out-house stack up.
        I agree with Neil that contracting with a monopoly provider is nuts. Morag makes a good point re: rising markets.

  4. Peter says:

    Rather than whipping the opposition with a wet towel, I would prefer gagging them with a dirty diaper!

  5. John Clark says:

    Jean will not comment in the print news unless he has a NO Comment agreement with the paper first. He does however feel real comfortable when he manages to coax a single camara man into his lair.
    His agenda is that of a Republican and has been ordained by the LDS church as a Republican representative. They (LDS) support Republican because it means more corporate wealth and more people on the dole; lining up at the LDS Kitchens and welfare outlets.

  6. Julie Ali says:

    The laundry contract should go up for bidding in the private sector. I doubt that laundry services can be done in the public sector as efficiently or as cost effectively as in the private sector. In addition there is the fact that ultimately 50% of the jobs that would be saved by doing this work in the public sector is expected to be lost with automation of this service.

    There are far more important areas to keep in the public sector such as continuing care services which surprisingly is not an area of controversy for anyone in government or with the opposition parties.

    Why is it that a non-essential service like laundry services gets the attention of all when it has very little impact on patient safety since all providers will have to meet the infection control requirement of hospitals as well as standards set by the health authorities? Meanwhile we have privatization of continuing care services in Alberta with P3 arrangements set up with AHS and no one quibbles about the quality of care received by citizens for the costs involved or the public sector jobs lost. Why not ask for a cost benefit analysis for private continuing care provision in Alberta instead of the cost benefit analysis for laundry services? One wonders at the priorities of Alberta Health.

  7. Julie, I agree that the impact of privatization of continuing care services is a critical issue. I think the only reason this issue is on the front page of the Herald is because Postmedia filed a freedom of information request. What I can’t understand is why Postmedia doesn’t expend the same level of energy getting to the bottom of the quality of care (or lack thereof) in continuing care. Recently I heard about a case where a psychiatrist prevented a family from acting in accordance with their parent’s personal care directive and no one at AHS seemed to be able to do anything about it. The family was beside itself trying to resolve the problem with the psychiatrist.

  8. Eleanor says:

    Thank you for your article, interesting and well put. Helps me to understand the issue further.

  9. David Grant says:

    Thanks for this posting. I have received two e-mails from the Liberals and the Alberta Party making the arguments that you have spent time debunking. Frankly, I am surprised that the NDP has been criticized for bring overly ideological when the decisions to privatize public services is the most ideological. Noam Chomsky has stated that when you privatize a public service you aren’t giving it to a nice person but a unaccoutable tyranny. I think that this is something that people should think about when privatizing public services.

    • Carlos Beca says:

      Well Said David and there are other considerations that somehow seem to be unimportant to people that love privatization.
      1) The profit motive moves money from the employee salaries to one pocket in the name of efficiency. Well that money in most cases leaves the province and does not recirculate in our economy.
      2) In order to be more efficient meaning more profit, they either have to decrease the salaries or have less people which in many cases puts people under the livable salary and more stressed
      3) The ideology that only greed motivates people is to me very destructive to society. Extreme competition especially in work environments diminishes cooperation and to me reduces efficiency and the team spirit.
      I understand that to many people what I just said is garbage, but research proves the contrary. The future will prove me right.
      The NDP will be criticized regardless. In the eyes of the current media there is only one way. Unfortunately Jason Kenney came to add his voice to that same pre recorded cassette. These people cannot think because as far as they are concerned it is all inevitable. The neo-liberal thinking is a cult not an ideology.

      • Great points Carlos. Your last sentence is intriguing. You said neo-liberalism is a cult not an ideology. My mind immediately leapt to Donald Trump and his followers who will forgive every stupid thing he says because he’s a rich businessman and will make them all wealthy.

    • David you’ve highlighted the critical distinction between the public and private sector. Sadly many conservatives believe so strongly in the superiority of the free market that they ignore all the examples of the private sector botching the job. I’m visiting family on the West Coast right now. I was told that the infection rates at the Nanaimo General hospital were once among the highest in the province. When the province looked into the cause they discovered that the outsourced cleaning company cut back on the bleach it used in cleaning to the point where it was no longer sanitary. Every private company has to maximize profit or it will fail. Most will cut corners when profits start to fall. It may not be a big deal if the company is selling iPhones but it can kill people when we’re talking about public health.

  10. Brent McFadyen says:

    I always shake my head at the myth that the private sector is more efficient. It is mainly meaner and more cutthroat with minimum staff , lower wages. Once you privatize all your services the contractors now can hold a gun to your head because you lack alternatives.

    • Morag Mackenzie says:

      So true it also allows the government to pick winners and losers by awarding contracts to their friends.

      • Morag Kevin Taft’s book Clear Answers provides many many examples of the PC government doing precisely this. Friends of the PCs did very well under PC rule, others did not. This is one reason why downtown Calgary went into a tailspin when the NDP were elected, they lost their conduits into the premier’s office and all the major government ministries and didn’t know how to cope in “the new world”.

    • Brent I wish everyone who thinks AHS should hand the remaining contracts over to K-Bro should read your comment because you’re absolutely right–if you privatize all your services you’ve let the contractors hold a gun to your head. That’s why we have laws preventing private companies from becoming monopolies–the concentration of market power in the hands of a few invariably leads to higher costs and poorer service.

  11. david says:

    I can’t agree on this one Susan.
    I am open to the evidence that, in relation to laundry, public is better than private; better in the sense that we assess all investment in healthcare: does it improve timely access, quality and cost-effectiveness.
    I don’t know the answer to that but welcome evidence on both sides.
    What I heard the Minister quoted as saying was that public health demands public funding (presumably for all health- related services)
    I don’t believe that. Buildings can be built more economically in some cases by the private sector. I’ve certainly seen some boondoggles by government over the years and not all public systems have the scrutiny and accountability they need.
    I don’t consider myself ideological in the sense that I would like to see the evidence.
    So far I see growing inefficiency of our healthsystem in value for spending. Poor management? Lack of accountability? Many reasons perhaps but I’m willing to consider that non-medical services might be more cost efficient in the private sector where some level of competition exists.

    • Carlos Beca says:

      Ok so I have a question. So this ‘some level of competition’ brings any better services or even cheaper services for us in the long run? Do you have any evidence of this?
      I seriously would like to know because when it comes to public services we always seem to have to present evidence but when it comes to private services it seems that just saying the word ‘competition’ clarifies everything. Are the services actually better and cheaper?
      Thank you

      • Carlos you raise a very good point. So far the only “evidence” I’ve seen in support of the K-Bro privatization idea comes from Colin Craig who works for the Manning Centre. Recently he wrote a glowing article about Saskatchewan entering into an exclusive deal with K-Bro and disparaging the Notley government for not doing the same. Craig says Saskatchewan will save $100 million as a result of privatization and it will be able to put these savings toward more doctors, nurses and equipment. What’s interesting about Craig’s statement is that he doesn’t go into how he came up with this number…what was his cost/benefit analysis, how did he quantify quality control, that kind of thing. Instead of producing forecasts of future savings which may or may not materialize I would like to see Craig and his fellow analysts provide us with empirical evidence based on real-time examples of privatization that are ongoing today. It’s easy to come up with a pie in the sky number to justify a decision but a real-life example would be much more persuasive.

    • David, thank you for your comment. I always enjoy talking to you about these things because I know we’ll have a respectful discussion even if we end up agreeing to disagree. My concern with transferring 100% of Alberta’s laundry services to the private sector is two-fold. First, in all my years in the private sector never once did did the companies I worked for agree to make themselves 100% dependent on one service provider. The risk of being held hostage to unreasonable price increases and poor service was just too great. Second, the private sector business model is very different from the public sector service model. The private sector has tremendous flexibility to respond to market demand, it can divest unprofitable business units, cut product lines, lay off staff and simply close up shop when profits start to fall. The public sector doesn’t have this flexibility. It has to continue providing services even if its revenue stream decreases and the demand for services increases. I don’t know how we can reconcile these fundamental differences, let alone justify funneling tax dollars into executive bonuses, failed take over attempts and taking on unreasonably risky ventures, just to name a few.
      I’m sure you’re right that there is a growing inefficiency in our health system spending, I’d love to delve into some examples to unearth why that is.

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