Centralised procurement for the health care sector -- bang for your pound or siphoning off scarce resources?

The National Health Service (NHS) has been running a centralised model for health care procurement in England for a few years now. The current system resulted from a redesign of the NHS supply chain that has been operational since 2019 [for details, see A Sanchez-Graells, ‘Centralisation of procurement and supply chain management in the English NHS: some governance and compliance challenges’ (2019) 70(1) NILQ 53-75.]

Given that the main driver for the implementation and redesign of the system was to obtain efficiencies (aka savings) through the exercise of the NHS’ buying power, both the UK’s National Audit Office (NAO) and the House of Commons’ Public Accounts Committee (PAC) are scrutinising the operation of the system in its first few years.

The NAO published a scathing report on 12 January 2024. Among many other concerning issues, the report highlighted how, despite the fundamental importance of measuring savings, ‘NHS Supply Chain has used different methods to report savings to different audiences, which could cause confusion.’ This triggered a clear risk of recounting (ie exaggeration) of claims of savings, as detailed below.

In my submission of written evidence to the PAC Inquiry ‘NHS Supply Chain and efficiencies in procurement’, I look in detail at the potential implications of the use of different savings reporting methods for the (mis)management of scarce NHS resources, should the recounting of savings have allowed private subcontractors to also overclaim savings in order to boost the financial return under their contracts. The full text of my submission is reproduced below, in case of interest.

nao’s findings on recounting of savings

There are three crucial findings in the NAO’s report concerning the use of different (and potentially problematic) savings reporting methods. They are as follows:

DHSC [the Department of Health and Social Care] set Supply Chain a cumulative target of making £2.4 billion savings by 2023-24. Supply Chain told us that it had exceeded this target by the end of 2022-23 although we have not validated this saving. The method for calculating this re-counted savings from each year since 2015-16. Supply Chain calculated its reported savings against the £2.4 billion target by using 2015-16 prices as its baseline. Even if prices had not reduced in any year compared with the year before, a saving was reported as long as prices were lower than that of the baseline year. This method then accumulated savings each year, by adding the difference in price as at the baseline year, for each year. This accumulation continued to re-count savings made in earlier years and did not take inflation into account. For example, if a product cost £10 in 2015-16 and reduced to £9 in 2016-17, Supply Chain would report a saving of £1. If it remained at £9 in 2017-18, Supply Chain would report a total saving of £2 (re-counting the £1 saved in 2016-17). If it then reduced to £8 in 2018-19, Supply Chain would report a total saving of £4 (re-counting the £1 saved in each of 2016-17 and 2017-18 and saving a further £2 in 2018-19) […]. DHSC could not provide us with any original sign-off or agreement that this was how Supply Chain should calculate its savings figure (para 2.4, emphasis added).

Supply Chain has used other methods for calculating savings which could cause confusion. It has used different methods for different audiences, for example, to government, trusts and suppliers (see Figure 5). When reporting progress against its £2.4 billion target it used a baseline from 2015-16 and accumulated the amount each year. To help show the savings that trusts have made individually, it also calculates in-year savings each trust has made using prices paid the previous year as the baseline. In this example, if a trust paid £10 for an item in 2015-16, and then procured it for £9 from Supply Chain in 2016-17 and 2017-18, Supply Chain would report a saving of £1 in the first year and no saving in the second year. These different methods have evolved since Supply Chain was established and there is a rationale for each. Having several methods to calculate savings has the potential to cause confusion (para 2.6, emphasis added).

When I read the report, I thought that the difference between the methods was not only problematic in itself, but also showed that the ‘main method’ for NHS Supply Chain and government to claim savings, in allowing recounting of savings, was likely to have allowed for excessive claims. This is not only a technical or political problem, but also a clear risk of siphoning off NHS scarce budgetary resources, for the reasons detailed below.

Submission to the pac inquiry

00. This brief written submission responds to the call for evidence issued by the Public Accounts Committee in relation to its Inquiry “NHS Supply Chain and efficiencies in procurement”. It focuses on the specific point of ‘Progress in delivering savings for the NHS’. This submission provides further details on the structure and functioning of NHS Supply Chain than those included in the National Audit Office’s report “NHS Supply Chain and efficiencies in procurement” (2023-24, HC 390). The purpose of this further detail is to highlight the broader implications that the potential overclaim of savings generated by NHS Supply Chain may have had in relation to payments made to private providers to whom some of the supply chain functions have been outsourced. It raises some questions that the Committee may want to explore in the context of its Inquiry.

1. NHS Supply Chain operating structure

01. The NAO report analyses the functioning and performance of NHS Supply Chain and SCCL in a holistic manner and without considering details of the complex structure of outsourced functions that underpins the model. This can obscure some of the practical impacts of some of NAO’s findings, in particular in relation with the potential overclaim of savings generated by NHS Supply Chain (paras 2.4, 2.6 and Figure 5 in the report). Approaching the analysis at a deeper level of detail on NHS Supply Chain’s operating structure can shed light on problems with the methods for calculating NHS Supply Chain savings other than the confusion caused by the use of multiple methods, and the potential overclaim of savings in relation to the original target set by DHSC.

02. NHS Supply Chain does not operate as a single entity and SCCL is not the only relevant actor in the operating structure.[1] Crucially, the operating model consists of a complex network of outsourcing contracts around what are called ‘category towers’ of products and services. SCCL coordinates a series of ‘Category Tower Service Providers’ (CTSPs), as listed in the graph below. CTSPs have an active role in developing category management strategies (that is, the ‘go to market approach’ at product level) and heavily influence the procurement strategy for the relevant category, subject to SCCL approval.

03. CTSPs are incentivised to reduce total cost in the system, not just reduce unit prices of the goods and services covered by the relevant category. They hold Guaranteed Maximum Price Target Cost (GMPTC) contracts, under which CTSPs will be paid the operational costs incurred in performing the services against an annual target set out in the contract, but will only make a profit when savings are delivered, on a gainshare basis that is capped.

Source: NHS Supply Chain - New operating model (2018).[2]

04. There are very limited public details on how the relevant targets for financial services have been set and managed throughout the operation of the system. However, it is clear that CTSPs have financial incentives tied to the generation of savings for SCCL. Given that SCCL does not carry out procurement activities without CTSP involvement, it seems plausible that SCCL’s own targets and claimed savings would (primarily) have been the result of the simple aggregation of those of CTSPs. If that is correct, the issues identified in the NAO report may have resulted in financial advantages to CTSPs if they have been allowed to overclaim savings generated.

05. NHS Supply Chain has publicly stated that[3]:

• ‘Savings are contractual to the CTSPs. As part of the procurement, bidders were asked to provide contractual savings targets for each year. These were assessed and challenged through the process and are core to the commercial model. CTSPs cannot attain their target margins (i.e. profit) unless they are able to achieve contractual savings.’

• ‘The CTSPs financial reward mechanism [is] based upon a gain share from the delivery of savings. The model includes savings generated across the total system, not just the price of the product. The level of gain share is directly proportional to the level of savings delivered.’

06. In view of this, if CTSPs had been allowed to use a method of savings calculation that re-counted savings in the way NAO details at para 2.4 of its report, it is likely that their financial compensation will have been higher than it should have been under alternative models of savings calculation that did not allow for such re-count. Given the volumes of savings claimed through the period covered by the report, any potential overcompensation could have been significant. As any such overcompensation would have been covered by NHS funding, the Committee may want to include its consideration within its Inquiry and in its evidence-gathering efforts.

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[1] For a detailed account, see A Sanchez-Graells, “Centralisation of procurement and supply chain management in the English NHS: some governance and compliance challenges” (2019) 70(1) Northern Ireland Legal Quarterly 53-75.

[2] Available at https://wwwmedia.supplychain.nhs.uk/media/Customer_FAQ_November_2018.pdf (last accessed 12 January 2024).

[3] Ibid, FAQs 24 and 25.

AG Cruz Villalon opposes Italian minimum #tariffs for #publicprocurement #certification (C-327/12)

In his Opinion of 5 September 2013 in case C-327/12 Soa Nazionale Costruttori (not available in English), AG Cruz Villalon analyses the compatibility with EU free movement (ie freedom of establishment as per art 49 TFEU) and competition rules (arts 101, 102 and 106 TFEU) of the Italian system of tenderers' certification whereby private certification bodies are legally required to charge minimum mandatory tariffs to the companies seeking to obtain certificates of viability in order to participate in public tenders (as foreseen in art 52 dir 2004/18). 

The most controversial aspect of the system is that it includes a tariff calculation formula that automatically multiplies the rate payable for the certification activities according to the number of tenders for public works for which the applicant company seeks verification. This system was challenged under both competition and free movement rules.

Under the competition analysis, AG Cruz Villalon considers that art 106 TFEU is inapplicable, given that the private certification bodies are not entrusted with 'special or exclusive rights', as defined in Ambulanz Glockner (C-475/99). According to the AG, in Italy, private certification bodies

operate in a market strongly limited, in the sense that there is no cross competition with similar services. That is, the certification of public works companies is a service that, as such, does not compete directly or indirectly with any other, since there are no similar services that a company can use in order to compete in a tender for Italian public works. In such a context, that of a market that could be qualified as "captive", the fact that all [private certification bodies] exercise the special powers that the legislature has decided to entrust the private sector with, excludes any risk of competitive advantage over another market operator. There is no sector that is harmed by allotting ex lege to the [private certification bodies] the power to issue certifications as raised here. Thus, it is not possible to conclude that the Italian State has attributed to [private certification bodies] "special or exclusive rights" within the meaning of Article 106 TFEU. This conclusion implies, obviously, that  that provision is inapplicable to the present case (para 35, own translation from Spanish).

In my view, the argument is rather counterintuitive (since, precisely only private certification bodies can carry out these activities and, consequently, the system does have an element of protection granted to a limited? number of companies that can substantially affect the ability of other undertakings to perform the economic activity in question in the same territory in conditions essentially equivalent, as required in Ambulanz Glockner) but it makes sense (only) on the working condition that any undertaking can request and obtain authorisation to act as a private certification body (as is indeed the case, see para 57 of the Opinion). 

In this scenario, it is the absence of a numerus clausus, rather than the inexistence of an impact on potential competition (which can be highly doubted, as the inexistence of substitutive services is a mere artificial result of the reserve of activity to the benefit of the private certification bodies), that would justify the non-existence of an exclusive or special right under Article 106 TFEU. In my view, hence, the analysis carried out by the AG is blurred and should have been limited to the fact that there is no predetermined (limited) number of authorisations to act as a private certification body and, as a consequence, that market can be considered open and (somehow) competitive.

The AG equally dismisses that the setting of minimum tariffs runs contrary to the State action doctrine on the basis of Articles 4(3) TEU and 101, 102 and 106 TFEU (as described in Arduino C-35/99, and Cipolla C-94/04), given that there is no trace of active involvement of the private certification bodies in the setting of those tariffs (which, in my view, tends to perpetuate the lack of teeth of this theory and continues to significantly restrict the ability of the CJEU to set limits on anticompetitive market behaviour imposed by public authorities--such as setting floors to price competition by way of minimum tariffs...).

In any case, the AG moves past the analysis from the competition law perspective and engages in an assessment of the Italian rules on minimum tariffs for public procurement certification purposes under Article 49 TFEU. After dismissing that private certification bodies exercise public powers (or public authority, which would activate the derogation in art 51 TFEU, but is excluded on the basis of the case law in Commission v Portugal C-438/08, and Commission v Germany C-404/05), the AG clearly considers the minimum tariff system as a restriction of the freedom of establishment and assesses its compatibility with the internal market on the basis of its potential justification on grounds of general public interest (which is accepted) and its proportionality. It is interesting to note that the AG takes into consideration the specific circumstances of the market in order to accept the suitability of the tariffs

the adequacy of mandatory minimum rates must be determined, in this case, in the context of a small size market and in which it is necessary to safeguard the [private certification bodies'] decisional autonomy against possible requirements or interests of their clients. Seen this way, the imposition of a binding mandatory minimum tariff regime by the State is a measure consistent with the purpose of ensuring the quality of the service and the independence of the companies responsible for the certification (para 58, own translation from Spanish).

The analysis of necessity and proportionality of the minimum tariffs as measures designed to ensure the quality and independence of the certification service is then carried out in somehow surprising terms. The AG considers (at paras 61 and 62) that the requirement of independence of the private certification bodies is of such a nature that it justifies the coexistence of a very strict oversight and disciplinary regime enforced by the public contracts authority (Autorità per la vigilanza sui contratti pubblici di lavori, servizi e forniture) AND the minimum tariffs--which, in my view, is clearly excessive, because the element of price negotiation should not affect the regulatory controls in any relevant manner. In my view, the considerations of the AG would justify the existence of minimum tariffs in a multiplicity of markets (such as audit services, for instance), and this should not be accepted as a matter of principle.

However, the AG does take issue with the proportionality of the tariffs and, more specifically, with the fact that they are automatically multiplied (i.e. collected) every time the undertaking seeks to participate in a public contract. According to the AG

65. [...] this system raises serious questions concerning the need of the measure, where certification is requested for various public work tenders. As I said, it is justified that bidders pay a minimum fee required at the time of undergoing certification [...] What does not seem to have enough explanation [...] is that [a private certification body] can automatically multiply the amount of its fees simply because a firm aims to participate in different tenders. The structure, activities, staff, physical, and other features of the company are usually the same, and it is normal that a company with sufficient resources is able to perform various public works at a time, either of low or high values.

66. It is true that in the event that a company aims to participate in several public works the [private certification body] should appreciate its individual situation in the light of the several contracts. Logically the workload of the [private certification body] is increased and it is acceptable that in such circumstances the required minimum rate reflects this increased responsibility. However, a system that automatically multiplies the amount of the required minimum rate depending on the number of works for which undertakings are competing does not respond objectively to the greater burden borne by the [private certification bodies]. On the contrary, the [...] system allows for an evaluation of a single company but applying a mandatory minimum rate much higher than required in the event that it had aimed to submit a single bid.

67. Therefore, and in view of the above, a calculation formula as presented, which in the case of an application for certification for various public works automatically multiplies the amount of the fee depending by the number of intended bids, goes beyond what would be necessary to achieve the pursued objectives of quality and independence. Consequently, I understand that in this specific point the mandatory minimum tariff regime applicable to [private certification bodies], and in particular the calculation formula applicable in case of seeking certification for various public work tenders is not justified by overriding reasons of general interest and therefore not compatible with Article 49 TFEU (paras 65 to 67, own translation from Spanish).

In my view, the conclusion that the AG reaches is appropriate. However, I would rather have the CJEU determining that, in the presence of a sound oversight and disciplinary regime, no minimum tariffs are justifiable, regardless of the proportionality or lack thereof in their calculation.