Spanish competition watchdog CNMC issues report on health care outsourcing procurement

The Spanish Competition Authority has recently published a report on the application of its Guide on Public Procurement and Competition to public health care provision-related procurement in Spain (only available in Spanish: Aplicación de la Guía de Contratación y Competencia a los procesos de licitación para la provisión de la sanidad pública en España). 

The report is interesting to read and it identifies some common trends in competition-reductive procurement practices (if not fully suppressive of meaningful competition) and areas for massive improvement in Spanish health care-related procurement. 

Some of them may offer valuable insights for other countries that also organise their health care provision around a national health system. These are some of the aspects of the report that I find more interesting:

1. The report is mainly concerned with outsourcing processes, whereby the competent (regional) public authorities tender contracts for the construction and management, or only the management, of health care facilities (mainly hospitals). This is an area that will remain lightly regulated in the future EU Directive on concessions (Art 17) and in the new version of the Directive on public sector procurement (Arts 74 to 76a). Consequently, the recommendations and best practices identified in the CNMC report may help in the construction of a fuller set of (binding and non-binding) guidelines for health care management outsourcing.

2. The report offers a radiography of the hospital sector in Spain, which shows that it is rather large and that there is a very relevant presence of private investment in the sector. Overall, there are 789 hospitals in Spain (162,070 beds), which means that each hospital serves an average of roughly 59,300 inhabitants (290 inh/bed). 

However, there are significant regional differences in availability of total hospital services, ranging from Andalusia at 378 inh/bed to Catalonia at 218 inh/bed. Furthermore, it is also interesting that only 325 of the 789 hospitals are public (41%), but they accumulate almost 67% of available beds--which means that the availability of public hospital services actually ranges between Catalonia at 523 inh/bed and Aragon at 308 inh/bed. All regions have schemes of arrangement with private hospitals, so that they extend 'public' coverage through private hospitals (49% of private hospitals are included in such schemes, again with large variations ranging from 100% of private hospitals being included in the 'extended public network' in La Rioja to only 22% of private hospitals in Catalonia). 

The big discrepancies between the availability of total and public hospital services shows large regional differences in private investment and alternative (ie non-public) health care management strategies. This also seems to show that private hospitals tend to be smaller than public hospitals (116 v 334 beds on average)--and, probably, easier (but more expensive) to manage, at least in terms of general costs if economies of scale are properly exploited in the public system (a big if, I think, although the report offers no data to test this). It may also be worth stressing that 21% of private hospital capacity (by number of beds) is controlled and run by the Catholic church and religious organisations. The next larger private (or non-public) player only reaches 4%.

The distribution by areas of activity is also relevant, and it is worth noting that generalist, geriatric and psichiatric hospitals accumulate almost 90% of the available beds--which seems to indicate that there is room for further specialisation in the sector.

The report also offers more detailed analysis of the regions where there has already been some outsourcing of public health care management: Catalonia, Madrid, Valencia, La Rioja and Navarra.

3. The main body of the report focusses on the 5 aspects of health care management outsourcing that are more susceptible to create distortions of competition: (i) the design of the tender procedure and the setting up of the technical specifications, (ii) the setting up of selection criteria, (iii) the choice and weighting of award criteria, particularly those related to (non-measurable) qualitative elements, and (iv) issues related to contract modification.

It is remarkable that, in all of these areas, the CNMC has identified specific examples of very clear distortions of competition. It is worth noting, for instance, that:

a) There has been an excessive degree of bundling of specialist and general services in hospital outsourcing (sometimes forcing the hospital concessionaire to enter into existing public services contracts with third party providers of specialist services, such as image diagnostics or laboratory analysis).

b) Regional authorities have not availed themselves of proper strategic division of tenders into lots and the dominant strategy (one lot, one hospital) may have facilitated collusion.

c) Initial contract duration may have been excessive, with a median of 30+ years for works concessions (building + managing hospitals) and 10 years for service concessions/public service contracts (management only of an existing hospital). Some of them also include relatively generous extension/renewal provisions.

d) Of the 19 contracts that included health management (others were limited to the management of the premises, but included no sanitary provision), 15 were awarded to the only tenderer submitting an offer. In the other 4 instances, only 2 offers were received. This seems to indicate that participation requirements were exceedingly restrictive (or, in an alternative and very personal view, that there was no expectation of effective competition, either due to the existence of a market sharing agreement or widespread corruption, particularly in the case of Valencia and Madrid, where criminal investigations are underway).

e) The setting of very demanding selection criteria (particularly in terms of financial standing and previous experience) have limited dramatically the number of potential offerors and been particularly alienating for temporary unions of undertakings, as a relevant part of the tender documents required that each of the undertakings individually considered met all of the requirements. This is a stark breach of procurement law and, as such, should have been the object of legal challenges.

f) There was an insufficient publicity and advertisement of the tendering for public service concessions worth Eur 4,000 mn in the Madrid region (advertised only in the region itself). This indicates that, in reality, there may be some need for the extension of publicity requirements to concession contracts as the future Directive aims to do. However, this may also have been a breach of EU law requirements, given that the contracts seem to have (at least potential) cross border interest.

g) There was an insufficient disclosure of information with relevant financial implications, such as the personnel costs to be assumed by concessionaires of existing hospitals, or the system of mutual invoicing between public hospitals (which made it difficult to calculate the cost and revenue structure of the concession, particularly for relatively unexperienced tenderers). The information asymmetries were even higher when it came to disclosure of health planning and other requirements.

h) There was widespread misuse of the price criterion as one of the key elements to award the contract. Price assessment formulae based on average prices, or that gave a very low weight to prices (of 30% in construction concessions), or that included irrelevant criteria (such as giving 30% of weight to the establishment of a stock-option scheme by the concessionaire) might have limited the ability of regional authorities to obtain value for money in the outsourcing of hospital management.

i) There were several instances of double-count of elements as both selection and award criteria, particularly as previous experience is concerned. This is another blatant breach of procurement law and, as such, should have been the object of legal challenges.

j) Insufficient or too basic quality control mechanisms and penalties for breaches thereof were included in a significant number of concession schemes. Also, remuneration was always calculated on a per capita basis, so that concessionaires and public service providers would always be remunerated almost regardless of the level of quality or actual provision of services (80% of the per capita support working as a common floor or minimum remuneration).

k) Most tender documentation either imposed or facilitated subcontracting of up to 50-60% of the contract and no proper oversight mechanisms were in place, so that concessionaires were basically free to subcontract very significant parts of their contracts as they saw fit.

l) Excessive resort to contractual modifications: "Of the 38 contracts for which information is available, there have been changes in 24 of them (64%). In 7 of the 24 contracts modified there have been two changes to the contract."

4. In its conclusions (a bit too mild in my opinion, particularly in view of the major irregularities documented in the report), the CNMC recommends, among others, the following measures (see press release in English):

  • When designing tender processes, the open procedure must be used whenever possible, as that procedure is the most conducive to competition and precludes contracts that cannot be justified on account of the pay-back times for investments.
  • As regards access to tenders for participants, publication should be more widespread in order to open up access to the highest number of potential bidders possible.
  • With respect to the weighting of criteria and the procedure for the award of contracts, a suitable weighting should be attached to the variables to avoid leaving excessive discretion to the award body. In the case of healthcare services, the overarching goal is to ensure quality in the provision of services to patients, so that a balance must be struck between competition in the price variable and the quality of the service.
  • Lastly, as regards the implementation of contracts, it is proposed, among other recommendations, that the specifications should describe the elements that define the quality of contract performance and should contain credible and robust mechanisms for monitoring and penalising failures to meet the requirements of those elements. The specifications should also lay down remuneration and transparency mechanisms that encourage the awardee to provide high quality services (emphasis added).
In my view, this Report brings to light a very serious problem and a massive challenge in the modernisation and reform of health care management in Spain. I started wondering if a sectoral regulator would not be necessary, as the ones existing in England (Monitor) or The Netherlands (NZa), as this sector seems to really be crying for some close scrutiny...