Buying bulk to boost NHS funding? Some legal and governance challenges

Albert Sanchez-Graells

The UK government has been trying to leverage its buying power in an attempt to release additional funding for frontline NHS services and for the implementation of newly devised sustainability and transformation plans (STPs), but without significantly increasing the total funding of the NHS. The NHS spends nearly £6 billion a year on goods – such as everyday hospital consumables, high-cost devices, capital equipment and common goods. Given such a large volume of expenditure, there are high hopes for the generation of savings through centralised and more strategic deployment of such purchasing power.

Indeed, the recently published NHS Long Term Plan of February 2019 foresees the centralisation of 80 per cent of NHS procurement expenditure by 2022 through the so-called New Operating Model (NOM), which would double current levels of centralised procurement (roughly at 40 per cent). The Department of Health and Social Care hopes that the NOM will generate annual savings of £615 million in real terms from 2022/23 onwards. A strategic approach to centralised NHS procurement thus seems to hold significant promise to contribute to alleviating the financial situation of a cash-strapped NHS.

However, the viability of a full implementation of the NOM and the ensuing expected savings should be taken with a pinch of salt. First, because the unrealised potential for significant savings in NHS procurement expenditure has been rather high on the policy agenda since at least a 2010 NAO report, but the reform of NHS procurement practice has been much slower than expected despite political commitment and pressure. Second, because the enormous economic interests at stake constantly threaten the roll-out of the NOM, which has already given rise to litigation and delayed its implementation by more than six months beyond its initial operating date of October 2018. Significantly changing the model of NHS procurement is no minor project.

As a baseline, it is worth bearing in mind that the NHS acquires medical equipment and consumables in a very complicated way. NHS trusts in need of specific equipment or supplies have three options: they can procure them directly from private providers; they can collaborate with other trusts to procure them together; or they can buy them from a centralised entity running the NHS Supply Chain (NHS SC). NHS SC belongs to the NHS Business Services Authority (NHSBSA), which is a special health authority and an arm’s-length body of the Department of Health and Social Care. Prior to the NOM, NHS SC has been run through an outsourcing contract with DHL Supply Chain.

NHS SC offers centralised procurement services to the English NHS, in an attempt to streamline procurement procedures and to achieve economies of scale by accumulating the NHS’s buying power in a single entity. The NOM essentially aims to change the modes of operation of NHS SC and to increase its role by roughly doubling the volume of expenditure channelled through its centralised activities. It does so by establishing new ‘category towers’ of NHS goods and appointing ‘category tower service providers’ (CTSPs) entrusted with establishing and implementing procurement strategies for the entire NHS (see graph for details). Given the significance that the adoption of the NOM can have on NHS procurement, as well as its potential knock-on effect on frontline services, this strategy merits close scrutiny.

In my recent article in the Northern Ireland Legal Quarterly, I explore the legal and business structure of the NOM and assess the strategic, governance and legal compliance challenges it presents. This leads me to stress that the NOM rests on a complex network of contracts resulting in a layer of contractualised governance that obscures its architecture and decision-making processes. The article maps the changes that the NOM introduces in the operation and governance of the NHS supply chain and identifies key challenges in ensuring that the NOM is subjected to adequate oversight and accountability mechanisms, in particular from the perspective of public procurement and competition law.

Regardless of the complex contractual structures and the functional delegation of roles along the NHS supply chain, I advocate for the location of all NOM relationships in the NHSBSA, especially to facilitate judicial review. I also raise some concerns regarding the concentration of NOM contracts on ‘strategic suppliers’, which increases the potential risk of failed delivery as recently shown by the too painful examples of Carillion, Capita, Southern Cross or G4S. The concentration of contracts on entities within the ‘NHS family’ that already centralise procurement supplies is also problematic, as this can severely limit the scope for actual economic efficiencies derived from a NOM that could simply imply a relocation of existing efforts for NHS collaborative procurement. Further, I identify the need for explicit guidance on the management of conflicts of interest within the NOM and for independent oversight by the Competition and Markets Authority of the potential anticompetitive effects of the exercise of buying power on which the NOM rests, as well as of the potentially excessive exchange of commercially sensitive information.

In my view, only if these checks and balances are made effective will the operation of the NOM be subjected to effective oversight, and only then will whichever savings it can generate not be at the expense of robust procedures, and the required accountability in the management of public funds.