Procurement: modernising move

For years, the NHS has talked about leveraging its buying power when it comes to goods and services. And with an estimated £9bn annual spend on goods and services – £6.5bn on clinical and general items – it would appear the potential for savings is significant.

Lord Carter thought so in his 2016 review of acute trust productivity and efficiency – he believed savings of at least £700m a year on clinical items and general supplies could be realised. And now a national bulk buying scheme seeks to address his recommendations.

Though many of the elements of the new strategy were established last year, Supply Chain Co-ordination Limited (SCCL) was only formally launched in April. It replaces the contract operated by logistics firm DHL, which delivered about £300m in savings since 2015.

SCCL is the management function of NHS Supply Chain and aims to lower prices and drive efficiencies through product rationalisation and economies of scale. It has divided goods into 11 procurement towers and three enabling services (logistics, IT and transactional services), each operated by companies such as DHL and Unipart, as well as some public sector bodies.

The procurement tower operators are incentivised to deliver lower prices but SCCL is funded through an adjustment to the national tariff (see box), prompting complaints from some trusts.

The adjustment of the national tariff is one obvious difference from previous attempts to get national purchasing off the ground, but there are others.

SCCL has a single shareholder – the health secretary – and its board draws representatives from the Department of Health and Social Care and NHS Improvement, together with four non-executive directors. This makes it more accountable than previous attempts to save on procurement spending, according to Alan Wain, SCCL’s chief operating officer.

NHS Supply Chain has been moving to the new system for the last year, gradually transferring in-house a £3bn business from DHL. Back-office functions were the final activities to move over before the programme launched in full on 1 April.

The new organisation’s work has also included letting contracts to new partners that provide logistics and IT and establishing the 11 category towers and their providers.

‘All trusts have contributed in some way to the cost of our operation,’ Mr Wain says. ‘As a result, we have removed the margin from the price paid for products. Under the old operating model, DHL funded its operation using the margin – a bit like a retail model – but in this model there are variables in the margins and it is not transparent. That transparency is there now because the price we buy at equals the sale price.’

Early successes

Mr Wain says SCCL has achieved some early successes. The business case setting out the rationale behind the new operating model was that there would be a £68m annual saving. But in the last financial year, savings of £286m were achieved by elements of the new model that were up and running, such as the category towers, plus the old DHL model.

‘Our target is to deliver cumulative savings of £2.4bn by 2022/23. Currently, our cumulative savings are standing at £800m – a third of the way to the target and way above our trajectory.’

He says the NCP (nationally contracted products) procurement initiative – an NHS Supply Chain and NHS Improvement pilot project that sought to aggregate demand at national level – offered proof of concept for the new operating model. ‘We did some rationalisation and at the same time drove down the prices – on average we achieved around 22% savings. We have embedded the NCP principles in all of our category towers,’ Mr Wain says.

‘We are also looking at deals of more than one year. Typically, the NHS operates on a one-year cycle, but we are moving to three-year deals to get better value for money.’

He believes the new model is a step forward compared with previous attempts to save money on NHS procurement. The procurement towers mean buying teams are focused on particular types of related products – under the old model, expertise was spread across all categories of products.

Previously, central procurement competed with the regional NHS procurement hubs. Many are now part of the new system, with four of the old hubs coming together as CPP, which manages three clinical category towers.

Mr Wain explains that clinical and product assurance is one of SCCL’s driving forces. ‘One of the ways we are driving value for the NHS is by regular rationalisation of products. But to be able to rationalise, you must be sure those that are remaining are clinically sound, fit for purpose, high quality and fit for the NHS.’

SCCL uses its clinical and product assurance (CAPA) process to follow the Carter principles of reducing variation. ‘It’s good to assure ourselves in the NHS that these are the right products. The CAPA team sits within SCCL and sets the framework for how we expect the tower service providers to work.’

SCCL is also working closely with other national programmes, such as Getting it right first time (GIRFT), as well as the national wound care and excellence in continence care strategies. The intention is to ensure best value and to check that towers focus on the products identified as best for patients.

Anecdotally, Healthcare Finance has heard that some trusts have complained about the new arrangements. For one trust, question marks over switching to SCCL are primarily over the accuracy and timeliness of the receipt of goods.

‘At a hospital level, our first priority is product availability. Long delivery lead times and variable fill rate performance remain a barrier to giving growth to the new model,’ says one procurement lead.

Others say they can find supplies offered through the new tower system at lower prices, even when the suppliers’ margin is factored in.

Mr Wain accepts that some trusts have taken this position on prices, but he also points out that DHL had about 38% of the market share, while SCCL has 53%. This shows that trusts are moving their purchasing to SCCL, he insists, though switching could be delayed where trusts still have a contract with other suppliers.

‘They might be complaining about specific items, but they are moving their activity to us more generally,’ he says. ‘Last year’s savings were three times the business case target, which is higher than in any year with DHL. In our first quarter, we are already two-thirds of the way towards our target this year.’

Mr Wain adds that SCCL’s customer satisfaction index is high – in one month since April the index hit 8.5 out of 10, matching the previous high under the old system.

He believes some trusts are being offered lower prices for a number of reasons. Suppliers that have not won contracts under the new system – or do not want to contract with SCCL – may be offering attractive deals to offload excess stock, he says. ‘I would anticipate that when we are doing national level procurement, there will be opportunities for trusts to get better deals. But I have a message for finance directors: they must take a system-wide view.

‘If you take these spot deals, it may work for your trust, but it is undermining the whole system at national level. If we commit to a volume of goods at national level and we can’t deliver it because trusts are taking spot deals, maybe next time we won’t be able to commit to the same volume.’

Lower amounts of goods equals lower savings, he says.

Are some types of trust, such as major teaching hospitals, more likely to take local deals than that offered by SCCL? Mr Wain says teaching hospitals will be able to leverage the volumes of supplies they use, although these volumes are not as big as national levels, and some suppliers will sell at lower prices to have their name associated with a particular trust.

However, a supplier could also offer a district general a good deal for the volumes they use – it could happen at all levels, he argues.

‘We have got to get all trusts behind the principle at national level so we can get better deals for the whole system.’

Looking ahead two or three years, Mr Wain says value-based procurement will be important to the NHS, increasing value and quality. ‘We are looking at whether we can contract for outcomes – this could mean fewer days before discharge, for example. This is important to us because if you keep driving prices down, you come to a point where a supplier can’t do any more.’ At this point, value can be driven by increasing productivity.

Supply Chain is also looking at asset utilisation. ‘For an asset such as an MRI scanner you will pay £600,000 to £1m, so we want to get better information to the NHS on how they can utilise assets to get more out of them and get better throughput,’ says Mr Wain.

Asset use evaluations are being carried out at trust level, though increasingly system-level use across integrated care systems will be more important. ‘It could be about sharing assets and reconfiguring the system to utilise the assets better. It could mean replacing an asset less frequently or not having to replace them at all.’

Five finance messages

As well as insisting trusts do not undermine national savings efforts by taking spot deals, Mr Wain has a further five messages for finance teams. The first is not to miss out on easy savings. At the beginning of the year trusts were provided with a list of margin-free prices on all products and were asked to indicate which products from NHS Supply Chain they would like to switch to. This was called demand capture. Mr Wain says that with the variable margin model in the old model, and margins as high as 25%, savings opportunities were expected in all trusts. But only 60% of trusts filled out demand capture forms to the value of around £100m.

This indicates that either the other 40% had no savings opportunities from margin removal or had not looked closely enough at the pricing information and are leaving savings on the table, he adds.

By July, almost half of the £100m of demand capture had been moved to NHS Supply Chain, but that means 50% of the savings available through demand capture have not been taken, Mr Wain says. Further savings may have been available if all trusts had filled in their demand capture forms.

‘I know there are legitimate reasons why some trusts can’t move across, such as commitments in contracts, but the overriding message to finance directors is that they must check with their procurement staff that they have cross-checked with Supply Chain to ensure they are getting the best deal.’

Mr Wain’s second message is to raise awareness of the potential for value-based contracting with suppliers, which would include an element for patient outcomes. ‘This is something for finance directors to think about – how will we do this? How do we realise that value?

‘If it comes down to reductions in beds or fewer interventions, it may be challenging but how does that affect a department’s budget?’

His third point is for finance directors to be aware new medical device regulations come into force at the end of May 2020. These place greater emphasis on traceability through a unique device identification system and new standards for clinical evidence. If products are non-compliant, the Medicines and Healthcare products Regulatory Agency can prevent them being used, potentially leading to longer waiting times and loss of income.

The opportunity to redeploy procurement staff to value-generating work is Mr Wain’s fourth message to finance directors. ‘It makes no sense to duplicate services you’ve already paid for through the tariff. They could look at other procurement areas where resources have not been there to focus on them in the past. “Evergreen” contracts have always been there. Or you could redeploy staff into the management of service contracts.’

Finally, he adds that Supply Chain will be investing in upgrading its IT to ensure all processes are carried out online.

SCCL is bullish about its prospects, buoyed by its early savings successes. Its overriding message to trusts is that national procurement releases savings, but the NHS must think collaboratively to get even better value from purchases and existing assets.

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