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March 20, 2018

The Future Operating Model for NHS Procurement – A Change for Good?

Following the submission of the Carter report, on the 5th of February 2016, it should be no surprise to see changes being made to the structure of procurement within the NHS, especially given that a key recommendation was to improve procurement management in order to deliver cost savings!! However, what are those changes, are they necessary, and how could they impact suppliers?

It’s fair to say that the current model of procurement within the NHS has not been working as effectively as it could with a lack of transparency in pricing, and no guarantee of business for suppliers. Indeed, for products supplied via NHS Supply Chain (NHS SC) this is clearly evident. For every different framework that is open for tender there are multiple suppliers listed, often with multiple products, and yet there is no guarantee of any business! In fact, any supplier with a CE mark is generally accepted onto any one framework, irrespective of the clinical evidence and cost! Furthermore, there are numerous different rebate agreements, or regional pricing agreements, in place for difference hospital groups which makes it difficult to establish the true costs being paid. How can anyone truly benefit from such a structure? Suppliers are expected to submit their best pricing, without any commitment from the NHS to purchase their products, whilst the NHS itself is not getting the best pricing up front!! This current structure has resulted in the needless variation of products and prices which is considered unsustainable. As a result, it would seem logical that the structure of procurement is updated and improved.

Whilst the above is true, currently only 40% of the NHS’s £5.7 billion spend in everyday hospital consumables, common goods, high value healthcare consumables and capital equipment goes through NHS SC. The changing structure is expected to result in double the volume of product going via NHS SC, with NHS SC itself changing. NHS SC is presently managed by DHL in a contract that was signed in 2006 and involved combining the NHS logistics authority and parts of the NHS purchasing and supply agency. This contract has been extended until October 2018 whilst the new changes take effect, changes which are expected to result in the standardisation and aggregation of products. There are currently reported to be over 330,000 products listed on the NHS SC catalogue, whilst an average hospital trust only uses around 9,000 products, so we can expect to see a significant reduction in the total number of products being sold into the NHS.

The future operating model will disaggregate the current NHS SC service and has re-procured 14 separate contracts to a number of organisations who will manage the service over the next 3 years. The 14 contracts will cover 11 ‘category towers’; logistics; transactional services and supporting technologies. The category towers represent the different categories of products that are currently used across the NHS with any one organisation only having the opportunity to manage up to 3 different towers. The category specialists will undertake the clinical evaluation of products and run procurement processes on behalf of the NHS. They will be incentivised to reduce the total cost in the system and not just reduce the unit price of products, which has been a clear approach in the recent past. The oversight and operational management of the new contracts and services will be overseen by a new organisation known as the intelligent client coordinator (ICC). The ICC will operate as a private company which will be solely owned by the secretary of state.

 

The concern amongst suppliers is that the new structure, with its move towards standardisation and aggregation of products, will ultimately drive suppliers out of the market. Whilst the DoH suggests that this is not their intention, it is difficult to see how there will be a rationalisation of products without a resultant rationalisation of suppliers!! Ultimately the outcome seems obvious and that is, whether it’s an intention or not, we are likely to see a reduction in the number of suppliers that are selling in to the NHS over the next few years.

Whilst a reduction in suppliers seems an obvious outcome, there will certainly be benefits for those that remain. For example, the aggregation of demand could result in larger volume opportunities for suppliers but with better sales commitment than the current structure provides. This in turn should ensure that those suppliers see a reduction in the costs of sales, and marketing, activities as well as improved forecasting and production planning which has previously been more challenging when products are ‘listed’ but no confirmed commitment is ever made.

As a result, the conclusion for suppliers is that the potential opportunities of the changing landscape could be significant, and achieving greater commitment, with increased volumes, is certainly attractive. However, suppliers have to ensure that they have products available that are worthy of inclusion when the changes occur! These products must meet clinical requirements, but more importantly, must reduce the ‘total cost’ in the system, not just be the cheapest product available. Significant efforts must therefore be made to ensure that the evidence is available to support the implementation of your products at the earliest opportunity, and it would be wise to share this information with key clinical, and procurement, stakeholders at the earliest opportunity!

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