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Health Service Procurement Is a Mess - the Military Has Answers

11/05/2015 10:46 BST | Updated 11/05/2016 10:59 BST

Despite reform, the NHS' procurement process still delivers poor value for money, stifles medical innovation and prevents new entrants to the market. It's time to look to the military for solutions.

In 2002, the then Labour Health Secretary, Alan Milburn, announced plans for the establishment of Foundation Trusts. Seen as a radical shake up of the health service, by granting increased autonomy to local Trusts, Foundation status was seen as a mechanism to introduce much needed competition between hospitals. In turn, it was determined this competition would drive up clinical standards and curb wasteful spending, while also improving the managerial oversight of the health service as a whole. This internal 'synthetic' market was designed to incorporate the strengths of private healthcare provision, while retaining state control.

The initial proposals were ultimately a stepping stone to increased levels of autonomy, including responsibility for financial management. By giving local Trusts responsibility over spending and treatment decisions, it was felt they would be better placed to tailor treatment services to local requirements, thus improving clinical outcomes.

While Foundation Trusts have undoubtedly been successful in improving patient care and curbing wasteful spending in some areas, the system has also brought with it inherent disadvantages. One example of this is the procurement of high value medical equipment.

In 2007 the Department of Health delegated responsibility for the procurement of high value capital equipment, such as Magnetic Resonance Imaging (MRI) and Computed Tomography (CT) scanners, to individual Trusts. Each Trust was given responsibility for making its own assessment of patient demand, and purchasing specific pieces of kit through the route of its choosing and operating that equipment as it saw fit.

It was felt the Foundation arrangement would provide Trusts with sufficient incentive to coordinate spending decisions and reduce costs.

Trusts were given access to three principle routes for the procurement of high value equipment: by dealing directly with suppliers; through framework agreements - managed by a central coordinating body, NHS Supply Chain; or by joining up with other Trusts in collaborative purchasing agreements.

In the three year period following the introduction of the 2007 procurement changes, NHS Trusts in England spent around £50 million annually on buying three specific types of high value equipment -MRI and CT scanners and Linear Accelerator (Linac) machines for radiotherapy treatment. A 2011 review estimated the existing value of these three types of machines to the NHS to be in the region of £1 billion.

Despite framework agreements being regarded as the most efficient mechanism to purchase one-off equipment, a 2011 investigation by the Public Accounts Committee found that as many as one in five equipment purchases were made outside framework agreements.

Even within the framework agreements, it found there was much greater scope to save money by grouping orders across Trusts. Despite accounting for 80 per cent of machine purchases, the NHS Supply Chain had failed to place a single bulk order.

Instead, the review determined decentralisation had led to high value equipment procurement becoming fragmented and uncoordinated, leading to wasted resources and variable standards of service.

By centrally coordinating procurement processes, the health service should be better placed to take advantage of its collaborative buying power and economies of scale. It should also more easily facilitate the pooling of requisite technical skills and expertise to serve as an 'intelligent customer', ensuring the taxpayer receives value for money in procurement decisions.

In response to criticism from the Public Accounts Committee and the National Audit Office, in March 2012 the Department sought to enhance centralised procurement. It established the "Capital Equipment Fund"; a £300m fund set aside for the NHS to allow them to buy capital equipment in bulk and make the best possible use of Health Service's buying power.

The fund was set the target of delivering £7m of savings in the first year of operations, by achieving discounts on the previous purchase price. The fund was also set a minimum aggregate discount target of five per cent.

While the fund has had some success in creating savings for the relevant Trusts, more can be done. In the health service, like the military, delivery of high value equipment is dominated by a limited number of equipment providers. The volatile, unpredictable, and closed nature of equipment demand makes it harder for SMEs to plan ahead, innovate, and break into the market.

Increasing budgetary constraints imposed on the Defence Department as a result of the financial crisis called for increased savings while at the same time retaining the country's defence capability. One area identified for cost savings was defence procurement. In its 2012 White Paper, the Government set out a radical new vision for military procurement. At the heart of this new approach was the principle of 'Open Procurement'.

Recognising that open competition is often the most effective way of obtaining the best products and services at the lowest possible cost to the taxpayer, the review set forth the principle that wherever possible it should seek to fulfil the UK's defence requirements through open competition in the domestic and global market.

Where appropriate, the military would buy 'off-the-shelf'. Similarly, it would adopt a common set of open principles, rules and standards to ensure the flexibility and agility to upgrade capability incrementally and to ensure broad compatibility. To stimulate innovation and competition, it would make procurement as open as possible to SMEs. Finally, it would ensure that support services provided by industry are increasingly integrated with other defence agencies to provide assured availability during operations.

A crucial objective of this new approach was to end the effective oligopoly held by a few large defence contractors. By reducing barriers to entry and setting out clear standards and transparent forecasts for future requirements, SMEs have been afforded the stability and security they needed in order to plan ahead, innovate and break into the market, thus enhancing competition.

The similarity between defence and health procurement are striking. If the Department of Health is serious in its commitment to drive up patient standards while delivering best value for the taxpayer, it must learn from these reforms.

The establishment of the Capital Equipment Fund to enhance the use of the health services collaborative buying power has done some good, but the reforms must go further.

By setting an arbitrary minimum aggregate discount target of five per cent, the administrators of the fund are offered no real incentive to negotiate savings beyond this point. Instead, the health service should subcontract the administration of the fund to a private sector procurement agent, whose commission is based on a percentage of the discount to list price achieved for any given purchase. The fund will also be responsible for improving coordination between Trusts and publishing clear standards, technical specifications and up to date projections for capital equipment requirements to improve new entrants to the market.

Similarly, the Health Department's ongoing procurement of two new proton beam therapy machines has highlighted an additional opportunity for improving the procurement process.

Proton beam therapy is an advanced form of radiotherapy that targets tumours with greater precision than other radiotherapy based treatments.

In 2010, the Coalition Government announced its intention to build two new proton therapy centres in the UK.

In August 2013, it confirmed that £250 million would be made available to build two UK proton therapy centres - one at the Christie Hospital in Manchester and the other at UCL Hospital in London. Both are set to open before the end of 2018.

However, given the nature of proton beam therapy - a cutting-edge, high cost, capital intensive form of cancer treatment - the technology is developing quickly and costs are falling.

The news of the Health Department's investment has already been superseded by developments in the private sector. In January it was announced that a pioneering private sector deal would see the delivery of a technically superior, more compact and lower cost proton therapy facility in the heart of London's Harley Street. The next generation facility is set to come on stream a full year earlier than either of the two NHS centres.

Then, earlier this month, in a separate private sector deal, it was revealed the UK will see the opening of three first-generation proton therapy centres by 2017 with the first due be in operation in Cardiff next year.

As a result of the Health Department's ailing and overly bureaucratic procurement setup, it has found itself facing the prospect of a £250 million bill for two out-dated, over-sized, inferior proton therapy centres, which one cancer expert has described as 'concrete mausoleums'.

The cumbersome nature of the Health Department's procurement process, particularly for one-off, high cost pieces of capital equipment, such as proton therapy, mean it is unlikely to ever meaningfully compete with the private sector's ability to provide such treatments efficiently and cost effectively. Instead, particularly for this type of scenario, the Department should look to embrace the private sector's agility.

For treatments such as proton therapy, rather than procuring the treatment technology for use 'in house' and taking responsibility for the ongoing maintenance and service costs, the Health Department should make greater use of sub-contracting arrangements with the private sector, whereby external providers are responsible for establishing, operating and maintaining clinical centres in return for a guaranteed income per patient treated from the health service.

Health service procurement has improved, but there's still a long way to go.

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