Feature / Gaining Purchase

WITH THE ENGLISH HEALTH service spending more than £17bn on goods and services each year it is not surprising that it has been targeted by the efficiency-conscious Treasury. In response to 2004’s Gershon efficiency review, the Department of Health pledged to save £6.5bn by March 2008, much of which will come from more efficient procurement and realising the service’s buying power.

Organisations such as NHS Purchasing and Supplies Agency (PASA) and the outsourced NHS Supply Chain are attempting to give the health service greater clout at a national level – negotiating framework agreements for utilities or children’s vaccinations, for example.

PASA, which was set up in 2000, says it has saved the health service more than £1bn since its inception. ‘This is money that can, potentially, be used for direct patient care,’ a spokesperson says. ‘Although savings are important, it is important to stress that the agency’s work seeks to ensure that the quality of goods and services procured for the NHS meets all the high standards required. Quality and choice must not be sacrificed to price.’

PASA is also responsible for the development of collaborative procurement hubs (CPHs). These regionally based procurement organisations are part of the Department’s Supply Chain Excellence Programme, which aims to achieve savings of £500m a year by the end of the current financial year. The hubs are owned by their member organisations and work with PASA and the Office of Government Commerce to get better value for the money that local trusts spend on procurement.

PASA says the introduction of the hubs has extended the opportunities for all NHS organisations, including primary care trusts, to reap the benefits of collaborative procurement.

Hubs were given the official seal of approval last year when Sir Ian Carruthers, then acting NHS chief executive, wrote to SHAs to explain that the Department wanted one hub per SHA by the end of 2007/08. While stopping short of making hub membership mandatory, the message was clear – hubs were the only game in town. Sir Ian asked all SHA chief executives to ensure all organisations in their area were committed to their local hub. He added that organisations acting alone to try to secure savings were being counterproductive and hampering the service’s attempts to leverage its buying power.

As yet, the wish for one hub per SHA has not been realised. PASA lists 22 collaboratives on its website, though this number will fall with eight of the 10 regions due to have their own operational hub this year. And SHA-wide hubs are being developed in the two remaining areas – London and South West.

While there has been support for hubs following Sir Ian’s letter, PASA admits that not all trusts have joined the hubs. However, it adds that most trusts have signed up, even though membership is not mandatory.

It is not clear how much hubs have saved – though the Greater Manchester Collaborative Procurement Hub (now merged into the North West CPH) achieved savings equivalent to £16.8m a year in 2006. There are other examples of procurement hub successes. This year East of England CPH managed to reduce its members’ mobile phone bills for voice calls from £1.4m a year to £730,000. Some 11,500 staff across 40 trusts are currently migrating to T-Mobile under the deal.

East of England CPH assistant director of procurement Glen Gooch says consolidation of mobile use is all about getting more buying power. ‘We have a bigger stick. Before, we couldn't necessarily get the best deal. We are a more important customer now.’

While PASA is upbeat, well-placed sources say hubs exist in a difficult environment, with some questioning whether they can survive beyond the short term. There is some resistance from trusts, which believe they can get a better deal on their own. The dissenters are often the biggest trusts in the area with the most developed procurement functions: having built up their procurement expertise, they are reluctant to hand over control of their procurement to a hub. But without the biggest trusts the hubs have less buying power and, consequently, they save less.

Also, choice will be reduced as a natural consequence of the deals struck by hubs, PASA and Supply Chain. To get the best deal, a hub might agree a contract for rubber gloves with a single supplier, where previously there might have been many suppliers. This may not meet the approval of clinicians.

‘The idea of buying in bulk and everyone using the same supplies is anathema to the NHS,’ says one procurement manager. ‘The other problem is that trusts expect hubs to deliver “straight out of the box” with little resources.’

John Wilkinson, director-general of the suppliers’ organisation the Association of British Healthcare Industries, says there must be a balance between national and regional purchasing to ensure the NHS makes the most of its buying power but also meets local needs.

‘Our belief is that hubs are probably a good idea, but it is unclear how they are going to evolve and what the right size for them is,’ he says. ‘London is probably too big for just one hub, for example. I don’t know if hubs will survive, but I wouldn’t be confident that Supply Chain can achieve its objectives because of the policy environment. We are devolving power to the SHAs and individual foundation trusts. It’s not clear to me how a central monolith fits into that policy landscape of devolution and encouraging competition.’

Mr Wilkinson is hoping for a period of stability following an unsettling period for suppliers that has seen the implementation of the Supply Chain Excellence Programme, the outsourcing of NHS Logistics and uncertainty over the role of PASA.

‘We have gone through a period of dramatic change, but there is lack of clarity on what the policy objectives are,’ he says. ‘A number of financial targets have been bandied about, but they are of questionable usefulness in terms of understanding the objectives. Buying cheap isn’t necessarily the solution to all the health service’s problems.’

The industry is waiting to see what the installation of a new commercial director-general at the Department, Chan Wheeler, will mean. But further upheaval could result from the Department’s current review of procurement in the NHS.

‘There has been a period of confusion over what constitutes good value and what needs to be done to hit short-term targets,’ says Mr Wilkinson. ‘With the NHS getting back into balance, hopefully there will be a more rational landscape. Procurement needs to be subordinate to the operational goals of the organisation rather than what it has been – the deliverer of short-term cost savings.’

Breath of fresh air?

Oxygen Finance is hoping a simple idea will help it break into the NHS procurement market. Steve Graham, director of public sector business at Oxygen Finance, says its system acts a bit like a credit card. The trust negotiates rebates on its purchases directly with its suppliers and buys from them directly. Suppliers send their invoices to Oxygen, which collates them and sends a statement to the trust at the end of the month. It then takes the amount owed from the trust’s bank account by direct debit early in the new month. Oxygen deducts the rebate (which it refers to as a transaction fee) when it pays suppliers.

‘Typically, procurement people in the NHS will get the lowest price but this is saying to them, “If you give suppliers a bit more benefit, they can give you a bit more discount.” We are taking costs out of the system for everybody’s benefit.’

Mr Graham says the number of suppliers will fall as the trust negotiates better deals. ‘A typical hospital will have around 2,000 suppliers, but something like 90% of its supplies expenditure will be with less than 500. There is quite a cost attached to doing business with that number of suppliers.’

The rebate is different from getting a direct reduction in the cost of supplies because it generates an income stream for the trust, he says. Finance directors might decide to give budget-holders an incentive to buy with suppliers that are part of the Oxygen system – perhaps by passing all or part of the rebate back to their budgets. Not only will the trust have the income stream but it should also gain greater control over its supplies spending.

Mr Graham believes Oxygen can work with hubs or individual trusts. Indeed, he says, rebates could be used to fund each hub’s operational costs. If each trust’s share of the hub’s costs was £200,000 a year, for example, the first £200,000 of every trust’s rebate could be diverted into the hub’s accounts.

In return for its service, Oxygen takes a fixed percentage of the invoice value, which is deducted from the monthly rebate to the trust. The fee is set by a framework agreement the company has with the NHS and is on a sliding scale. If the volume of supplies billed through Oxygen increases, its percentage fee falls. Though it currently has no NHS clients, it is in dialogue with PASA, all the hubs and a number of trusts.

‘Assuming a 2.7% transaction fee, a trust will always get at least 1% of the invoice value and that will increase as our costs fall,’ says Mr Graham. ‘If a trust spends £100m a year on supplies, it will get £1m back through the Oxygen programme.’