Public-­‐Private Partnerships in the healthcare sector : a real options approach to Hospital de Cascais

The purpose of this paper is to analyse the Hospital de Cascais “Dr. José de Almeida”, built under a Public and Private Partnerships’ program, in order to understand if the private partner will be responsible for the hospital’s management until the end of the contract (in 2018) or if it will step out due to financial losses. Such analysis will be done using a Real Options approach, through the use of abandonment options. Two scenarios will be considered: in the first one the operational costs will follow the same evolution as expected in the Base Case (86,7% of the revenues). In the second scenario the operational costs will be assumed to be 95% of the revenues, to better reflect the past performance of the hospital. Moreover, for each of these scenarios two discount rates will be used to compute the Net Present Value: one is the discount rate used by the government to assess the value of the public sector comparator (PSC): 6,08%; the other is the Weighted Average Cost of Capital (WACC), which changes every year to match with the changing debt ratio. The results show that in the first scenario the optimal decision is to continue in the project and not do the step out, since the Real Options analysis shows that the stepping out provides savings smaller than the profit they would obtain from continuing. However, in the second scenario the optimal decision is to abandon the project. It is also concluded that the DCF model underestimates the value of the project by ignoring the flexibility HPP has to step out