Looking into the future

When Lord Carter set his £5bn productivity challenge for the NHS, procurement of basic goods, such as stationery and everyday medical consumables and high-cost medical devices, was very much in his sights. He suggested that £700m of the £5bn overall target by 2020/21 could come from better procurement and went further by targeting a reduction of ‘at least 10% in non-pay costs’ by April 2018. 

The Future Operating Model (FOM) is how much of this will be delivered. In essence, it is a re-procurement of the current NHS Supply Chain – although it will also involve significant transformation of the existing model. It is part of a wider Procurement Transformation Programme (PTP), the launch of which predates the publication of the Carter report. However there is clear alignment between the objectives of the PTP and Lord Carter’s challenge.

The variation in prices paid by NHS providers for often basic goods and consumables has been a long-running story. Back in 2011, the National Audit Office estimated £500m a year could be saved if trusts got together to buy consumables in a more collaborative way. It identified an average 10% variation between the highest and lowest prices paid – with much bigger differences for some items. Trusts were also buying too many different types of the same product.

NHS Supply Chain was originally set up in 2006 to provide an outsourced end-to-end supply chain for the NHS. As part of a contract extension, adding two years to the original end date of September 2016, it has been tasked with delivering £300m of cash-releasing savings by September 2018 and, as of September this year, reported that it had already achieved £250m. However, a fundamental problem has been the low proportion of NHS spend that goes through this system.

Of the £5.7bn spent on goods across NHS England, only 40% (£2.2bn) is going through NHS Supply Chain. The rest is being procured by procurement hubs (40%) and some 200-plus trust procurement teams (20%). By taking a fragmented approach to procurement, the NHS as a whole is not believed to be getting the full benefits of its considerable buying power. 

The clearly stated aim of the FOM is to increase the market share going through NHS Supply Chain to 80%, eliminating the significant variation in prices paid by different NHS providers for the same goods and releasing £615m in funds annually from 2021/22.

The new design of the NHS Supply Chain service sees different types of goods divided into 11 category towers, sitting under an NHS-hosted management function known as the Intelligent Client Coordinator. Consolidating more purchasing through NHS Supply Chain will create further efficiencies through the use of a single national logistics provider and consolidated invoicing.

These will be underpinned by a transactional services provider – providing accounts payable/receivable and query management – and an IT service provider to ensure the supporting technology infrastructure is in place.

Within the 11 category towers, there are six medical towers. For example, one covers ward-based consumables, while another covers orthopaedics, trauma and spine, and ophthalmology. The two capital towers cover diagnostic equipment – divided into large and standard equipment. The three non-medical towers cover office solutions, food and hotel services.

The towers, which could be run by public hubs or private companies in deals lasting initially three years, will manage all the goods in their category. There is no competition between towers as they are dealing in different types of goods. The benefits for trusts come from having category tower providers that understand the markets, the demand patterns, and the clinical needs of the NHS. Clinical evaluation will take place on an industrial scale within all product categories.

All these factors contribute to the rationalisation of the NHS product catalogue to better meet the needs of the NHS, says Howard Blackith, PTP programme director at the Department of Health. According to Lord Carter’s productivity report in 2016, a sample of 22 trusts were using 20,000 different product brands and more than 400,000 manufacturer product codes. 

The first tower covering office solutions was awarded to Crown Commercial Service and began operating in October.

‘Other suppliers should not be able to beat FOM prices on a sustainable basis,’ says Mr Blackith. ‘This is due to the new category tower providers performing world-class category management and taking advantage of national scale. The FOM will continuously be reviewing prices and benchmarking to identify its position in the market and we would expect our NHS partners to challenge us to be the market leader in terms of price and quality of service.’

Trusts have been encouraged to merge their buying clout before, through hubs or buying off pre-arranged framework contracts. But many trusts have continued to do their own thing, convinced they are getting a better deal on their own. So what is different this time around?

Currently the operating costs of NHS Supply Chain are financed by the addition of a margin on top of the product cost. In effect, an element of the funds that flow into tariff funding (and other funding arrangements) is there to cover this overhead margin.

Top-sliced funds 

But under the new system, the operating costs of the FOM will be top-sliced prior to flowing into tariff and other funding routes, and then allocated directly to the FOM. This will mean an extra adjustment in tariff prices for the year starting April 2019, when the top-slice model takes effect. Until then the existing level of margin will continue to be applied. The Department of Health is currently working with NHS England and NHS Improvement on how the top slicing will be applied.

Having covered the operating costs via the top-slice, the buy price – the price paid by NHS Supply Chain – will be equal to the sell price (the price paid by trusts). 

This achieves two things; – increased transparency in pricing and central funding that allows NHS Supply Chain to develop and support the infrastructure required to maximise the buying power of the NHS. 

With the top-slice operational, the Department believes the value delivered through the FOM will be completely clear. But it says that even in the run-up to April 2019, the NHS Supply Chain model is beginning to move in the direction of the FOM. 

‘For example, the current model is partnering with NHS Improvement to determine national strategies on certain product ranges that fall within the Nationally Contracted Products (NCP) programme and is beginning to deliver good value to the NHS,’ says Mr Blackith.

The category tower service providers (CTSPs) will be paid using a two-part mechanism. They will be paid operational costs, with an annual target in the contract. A gain share mechanism will also operate with CTSPs only making a profit when savings are delivered. The more savings, the more profit. The contract includes a minimum level of savings and incentives to encourage CTSPs to overachieve on their savings targets.

This will not be an overnight change and trusts will instead see changes over time – apart from the switch over to the top-slice model. 

‘New category strategies will be developed and framework contracts replaced over time when there are opportunities such as current frameworks expiring or new mini competitions being run,’ says Mr Blackith. 

‘Our aim is not a “big bang” change in the way we interact with our NHS partners. We expect there to be a transition into an improved approach to account management, core services and ultimately price. We will make changes in a way that doesn’t risk continuity of supply, is in line with NHS expectations and moves the NHS procurement landscape to a more efficient one.’