Anti-competitive, excessively broad, long-term service contracts as a substitute for legislated reform of the NHS in England? -- re manchester out of hospital care tender

In my previous post, I had tried to scope the potential impact of Brexit for NHS procurement in England. There, I stressed the peculiarities derived from the traditional purchaser-provider split that has characterised the activities of the English NHS since the 1990s. That split has evolved beyond a pure "public management" tool and, over the past 25 years or so, resulted in the emergence of mixed markets where public and private undertakings compete for the provision of certain services that are procured or commissioned by a different (buying) branch of the NHS. Those markets are controlled by competition and public procurement rules, which are in part of EU origin, and in part purely domestic instruments -- such as the Health and Social Care Act 2012 and the NHS (Procurement, Patient Choice & Competition) No 2 Regulations 2013.

I also stressed that this domestic policy aimed at creating an "NHS internal market" with clear elements of a mixed economy was (and is) not mandated by EU law. In my view, there is nothing in EU law that obliges member states to open up public healthcare services to competition (see Art 14 and Protocol (No 26) TFEU). EU law simply sets specific rules and constraints applicable to situations where member states independently decide to open up those markets to competition. My arguments for this are largely along the same lines of those maintained by Hervey & McHale (2015, see ch 9).

Therefore, if policy-makers identified the NHS purchaser-provider split as a problem for the introduction of reforms in the way NHS England operates, with or without Brexit, it would be possible to move back to a fully integrated public healthcare system without infringing EU law. Or, in other words, there is no reason why policy reform aimed at undoing the purchaser-provider split in the English NHS could not fit within the blueprint of EU law. 

However, the way in which such change of model can be legally delivered is not without constraints, both under UK and EU law. In my opinion, it is not possible for policy-makers to move away from the current "NHS internal market" without changing its basic regulatory framework (ie without legal reform), and decisions aimed at bringing the existing mixed markets under public control under an appearance of compliance with public procurement and competition law are highly problematic. An on-going project to alter the market for the provision of out of hospital care services in Manchester offers a clear example of this. Given that Manchester's is the first in a series of parallel on-going projects, this can well serve as a cautionary tale.

As part of the implementation of a sustainability and transformation plan (STP), Manchester authorities responsible for health and social care (including three Clinical Commissioning Groups, CCGs, and the Manchester City Council) tendered a contract for the creation of a ‘Local Care Organisation’ (LCO) for a range of out of hospital health and care services for Manchester. The LCO would aim to "deliver sustainable, high quality, safe and affordable prevention, primary, community, secondary health and social care services, through a blend of direct and sub-contracted provision." Furthermore, the contract notice also indicated that "Over time, some services currently provided in the acute sector may be transferred to the LCO; commissioning intentions may result in the transfer of some low acuity, non-surgical (or non-complex surgical) services, into the LCO from year 3 (2020/21) at the earliest, and possibly thereafter over the contract term." In short, this was a contract for the provision of virtually all health and social care services with the exception of in-hospital services. The tendered contract was for a duration of 10 years and an estimated value of £5.9 billion, and was designed as a single block, thus excluding the possibility of awarding it by lots. This was the biggest ever NHS tender at the time of being launched, but other similar contracts are already being sought by local NHS commissioners (see here).

It is worth stressing that the contract was advertised on 14 March 2017 and expressions of interest had to be submitted by 28 April 2017, which does not seem like a particularly long time frame, given the complexity and duration of the contract. The tender notice also explicitly indicated that "The contract will be awarded without further advertisement of this opportunity and there will be no further opportunity to express interest", which clearly created time pressure and possibly discouraged potentially interested tenderers that did not consider it possible to submit a competitive (or even a complete) qualification questionnaire within 6 weeks.

Unsurprisingly, it has now emerged that only one offer has been received fro this contract, and that this offer has been submitted by "the Manchester Provider Board, which is a consortium made up of Manchester City Council, local GP federations, the city's three acute trusts [ie hospitals], community service providers and the Greater Manchester Mental Health Trust". In my view, there are two plausible reasons for this less than competitive outcome: first, that the tendered contract exceeds the delivery capabilities of any given organisation (as demonstrated by the fact that the only offer comes from a collaborative effort that aggregates virtually the entirety of the public providers -- which probably also count on continued reliance on private providers); and, second, that the entities participating in the design of the Manchester STP had, at least, a clear time advantage to prepare their tender (if not also information not available to other potentially interested tenderers). On the whole, it seems that the advertising of the contract was never intended to create real competition, and is simply a formal step aimed at creating an appearance of legality of this strategy aimed at side-stepping the (NHS) market.

I am concerned about at least three dimensions or implications of the strategy followed in the (partial) delivery of the Manchester STP through the tendering of such excessively broad, long-term services contract in less than competitive conditions.

First, at the immediate level of the tender, I am concerned that its design is anti-competitive and potentially breaches the requirements of the principle of competition established in reg. 18(2) and (3) of the Public Contracts Regulations 2015 (in transposition of Art 18(1) Dir 2014/24, on which see here), which requires contracting entities not to artificially narrow competition, in particular by favouring or disadvantaging certain economic operators. Similar issues of interpretation of the requirement of effective competition in the tendering of procurement contracts in the health sector has arisen in other jurisdictions and, in the specific case of Finland, there is an important precedent against the creation of exceedingly large contracts leading to a single potential supplier (for discussion, see here). If I am right and there is a breach of this principle, the whole procurement process should be quashed (although it also seems clear that litigation is unlikely at this stage).

Second, and at a more general level, I think that the effort behind the STP is not merely aimed at streamlining the functioning of the existing NHS market for the provision of out of hospital health and social care services, but rather at setting aside that market altogether. Rather than simply searching for better service delivery through aggregation in the patients' interest (within the limits of the NHS (Procurement, Patient Choice & Competition) No 2 Regulations 2013 -- for discussion, see here), this aims to deliver a change of model for the management of the NHS (and ancillary social services) and clearly exceeds the policy-making space of the procurement regime. If this is the case, I do not think that this can be done through the procurement of a massive umbrella contract capable of eating up the NHS market (while also indicating that there is space for subcontracting and for the future placement of additional services under that umbrella). Legal reform is necessary, in particular to ensure full debate in Parliament of the move away from the purchaser-provider split, as well as the broader implications of the (apparent) project of de-marketisation of the NHS. This is necessary because a change of model is not without consequences, in particular if (foreign) investors in private health care providers raised claims against the UK Government for what could amount to an expropriation in terms of international investment law, as well as a potentially disproportionate (ex post) restriction of EU fundamental freedoms of establishment and movement.

Third, and looking at the future, I am concerned that the delivery of this macro umbrella contract will be highly challenging and difficult to achieve within the terms of the original contract (although I have not seen them). It seems clear that such a long-term and broad contractual object will require permanent adjustments and modifications, which may trigger litigation down the line. The fact that a single contract has such a large scope creates legal risks of its own, in particular if it was to be set aside or terminated in the future. I am sure that there will be contractual provisions aiming to minimise disruption in the provision of such crucial health and social care services should contract execution run into serious difficulties, but it is hard to see that all contingencies can be covered.

Overall, I do not think that EU law (or domestic law) opposes or prevents the end result that the Manchester (and other) STPs aims to achieve. However, they do oppose and raise significant issues in the way that this very fundamental change (ie reversion) of the NHS internal market model is being delivered. Before the Manchester strategy is rolled over or mimicked in other areas, I would suggest that a deeper rethinking and a commensurate reform of the applicable legal framework is necessary. It is clear that the Government is not in the best position to undertake such a large scale project in the context of the Brexit negotiations and the aftermath of the June General Election, but allowing for such reform to be carried out under the radar of Parliamentary scrutiny seems to me both politically wrong and legally risky.

 

Scoping the impact of Brexit for NHS procurement

NHS England spends over £20 billion every year on goods and services, which typically accounts for around 30% of the operating costs of each hospital. A significant part of the remainder of NHS non-salary budget involves the commissioning of health care services. This expenditure and commissioning is controlled by NHS procurement rules, which in part derive from EU law. Different procurement rules apply in different countries within the UK, and both Scotland and Northern Ireland both have separate regulatory schemes. Even though this post only focuses on the situation in England, some issues reflect broader concerns in the UK context. Generally, NHS procurement rules are regularly criticised for imposing excessive red tape and compliance costs on the NHS, and calls for NHS procurement reform to free it from such strictures are common.

In this context, Brexit could be seen as an opportunity to overhaul NHS procurement and to move away from the perceived excesses of EU law (see eg Cram: 2016). However, I think that it is far from clear that such reform could not fit within the blueprint of EU law, and that most of the constraints on NHS procurement rather derive from independent decisions adopted by the UK over the last 25 years. Moreover, from an economic perspective, Brexit will probably hurt the functioning of the NHS (including its procurement), with or without significant regulatory reforms.

This post is based on my presentation at the event Brexit, Regulation and Society, held by ManReg: The Manchester Centre for Regulation, Governance and Public Law (slides at the bottom of this post), and concentrates on two issues. First, does EU law prevent significant reforms of NHS procurement and, if so, can Brexit suppress such constraints? Second, is the way the Brexit process is unfolding conducive to an improvement of NHS procurement, both from an economic and a regulatory perspective?

Starting point, where were we before Brexit?

Since the 1990s, in England, the activities of the NHS have been characterised by a peculiar purchaser-provider split. Some branches of the NHS act as purchasers or commissioners of health care services (currently, clinical commissioning groups, or CCGs), while other branches of the NHS (trusts and foundation trusts) act as providers of health care services and compete with private providers in some markets. The activities of these entities are overseen by NHS Improvement as sector regulator.

The purchaser-provider split policy was introduced with the aim of creating an “NHS internal market” to generate competition-based incentives for the improvement of service delivery and cost management. However, the system has been permanently evolving (a ‘continuous revolution’, Maynard:2016), and this has both created increased scope for public-private competition (Odudu: 2012; Hunter: 2016), and notable difficulties in keeping pace with the successive waves of NHS procurement re-regulation.

Currently, NHS procurement is primarily covered by two sets of domestic rules (as well as a large volume of soft law). The core bodies of rules applicable to NHS procurement are:

Additionally, given the organisation of the system as a mixed market with public and private suppliers in different forms of competition for different services, NHS procurement is also subject to a host of EU and UK competition rules, such as:

  • The Competition Act 1998 and the Enterprise Act 2002 (as domestic statutes that replicate, to a large extent, substantive EU law prohibitions); and the
  • Treaty on the Functioning of the EU, including State aid rules – and in particular those for the financial support to the provision of Services of General Economic Interest.

On the whole, this results in a rather complex regulatory setting that is commonly criticised as imposing significant constraints on the way NHS procurement is carried out. However, it is important to stress that these constraints ultimately depend on the existence of the purchaser-provider split and the establishment of a mixed market for health care services—which are decisions independently made by successive UK governments rather than an EU imposition. There is nothing in EU law that obliges member states to open up public services to competition, and the UK could move back to a fully integrated public system without infringing EU law. In other words, EU law is not the cause of any shortcomings identified in the existing regulation of NHS procurement of health care services.

Could Brexit alter the situation?

Given the above, in regulatory terms, the short answer is that Brexit should mostly not have any meaningful effect on the regulation of NHS procurement. Significant reforms are possible under current EU law. They would however require political drive and changes in funding schemes. Indeed, already before the referendum, it was clearly stressed that “leaving the EU is an irrelevance when it comes to what many regard as the creeping marketisation of the NHS” (Hunter: 2016; and in similar terms, later reiterated by McKenna: 2016; Taylor: 2016).

Leaving the single market would not lift constraints on the reform of NHS procurement, or NHS governance more generally, but it could affect it in practical terms. Indeed, it was clear that Brexit could have negative operational impacts for NHS procurement. This would be the case both if: (1) the “NHS internal market” was kept, because exiting the EU’s single market could have negative impacts on private competition in health care provision, including in the market for health care insurance in the UK; or (2) if the “NHS internal market” was to be dismantled, since the acquisition of equipment and supplies from outside the UK would face barriers and additional costs (Hall: 2017), which can only be exacerbated by the negative impact of Brexit on the economy, both in terms of economic slowdown and inflation (which are now materialising; ONS: 2017).

NHS (procurement) in the Brexit and general election campaigns

NHS funding featured prominently in the political campaign leading to the Brexit vote. Most discussion concentrated on the level of funding for a cash-strapped NHS. However, the deeper impacts of Brexit on the NHS – in particular those of a hard Brexit that implied the UK’s exit from the EU’s single market and customs union – received much less attention (not least because leaving the single market was back then explicitly rejected as an option for the future).

Nonetheless, it was clear that any impact of Brexit on NHS procurement was compounded by the uncertainty surrounding the framework for UK-EU trade post-Brexit. This was not clarified during the Brexit campaign, and the following plans unveiled by the UK Government failed to provide any further specifics. Neither the Brexit White Paper nor the Great Repeal White Paper reduced such uncertainty. The Brexit White Paper simply stated that the Government’s intention is to “not be seeking membership of the Single Market, but … pursue instead a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement and a new customs agreement.” The Great Repeal White Paper only included one mention of procurement as an example of a ‘negative procedure’ for the adjustment of EU-derived law post-Brexit.

This situation continued during the recent electoral campaign, where issues around NHS funding were more prominent than issues surrounding reform of the NHS system, including NHS procurement. However, there seemed to be some commonality to the long-term strategic goals of both main political parties around a correction (to different degrees) of the current market-based purchaser-provider split system. Both the Conservative and the Labour manifestos pledged more funding for the NHS. Both alluded to a change of system.

Labour promised to “reverse privatisation of our NHS and return our health service into expert public control [including the] repeal [of] the Health and Social Care Act  … and [making] the NHS the preferred provider”. The contours of this proposal are rather vague. However, in terms of NHS regulation, this would seem to suppress public-private competition for the provision of health services (possibly excluding the application of competition law) and the NHS procurement regime, by mandating provision of services by the NHS (at least as preferred provider).

The Tories indicated that they would “consult and make the necessary legislative changes. This includes the NHS’s own internal market, which can fail to act in the interests of patients and creates costly bureaucracy. So we will review [its] operation … and, in time for … the 2018 financial year, we will make non-legislative changes to remove barriers to the integration of care”. This seems even less clear, but could imply a simple reform of NHS procurement policy with the aim of maximising the effectiveness of the concept of ‘patient interest’ under the NHS Regulations (No 2) 2013.

Interestingly, both changes to the purchaser-provider split seem possible within the constraints of the existing EU regulatory framework, and they seem to require political choices unaffected by Brexit – with the obvious exception of funding, which is directly (and negatively) affected.

Brexit … one year on – What now?

Almost a year after the UK’s vote to leave the EU, and after the surprising result of the General Election, the only thing that can be said with a minimum of confidence about the impact of Brexit on NHS procurement is that uncertainty prevails (similarly, Simpkin & Mossialos: 2017), and the economic impacts are probably going to be both negative and severe. This seems to run in the opposite direction of the aims (and promises) of those supporting Brexit.

The situation may have been worsened as a result of the General Election, as the Tory government is seeking to reach an agreement with the DUP for support of a minority Conservative government. Either way, this seems likely to require concessions in terms of funding for public services in Northern Ireland, which could impact plans to boost investment in the NHS in England. However, there is no clear indication that other reforms of NHS procurement should necessarily be altered. The question thus remains: Will NHS procurement be reformed along the lines of the Conservative manifesto and, if so, what will that entail?

On-going reforms and uncertainties

Assuming continuity of recent policy developments, it is worth stressing that, since the adoption of the Five Years Forward View for the NHS in England in 2014, the system has been progressively reoriented. Current reforms are geared towards experimentation with the so-called sustainability and transformation plans (STPs), which aim to suppress the purchaser-provider split, including through the creation of accountable care organisations (ACOs). Recently, Stevens (CEO NHS England) clearly indicated this goal by stressing that STPs “will for the first time since 1990 effectively end the purchaser-provider split, bringing about integrated funding and delivery for a given geographical population”. The strategy is still not clearly spelled out and there are open questions concerning its feasibility and/or desirability (Hare:2017).

However, even if this strategy was completely carried out, it seems unlikely that the NHS would not have to comply with procurement rules at all. While a suppression of the purchaser-provider split would potentially allow for a derogation from the NHS Regulations (No 2) 2013, the NHS would still need to buy a number of goods and services from the market. Thus, the reforms to NHS procurement refer to the suppression of a layer of complication and constraints in NHS governance (that derived from the purchaser-provider split), but not a complete shielding of the NHS from procurement and competition rules.

These would remain particularly relevant in terms of new investments in physical and IT architecture for the NHS, which have been pledged by the Conservatives (and by Labour). Expenditure of NHS funds would remain subject to the strictures of the Public Contracts Regulations 2015, which could only be reformed or derogated post-Brexit in the absence of a UK-EU free trade agreement covering procurement.

Overall assessment

In view of all this, I would reach two conclusions. First, that the discussion surrounding the regulation of NHS procurement needs to concentrate on the fundamentals of the potential alternative models: ie a system of integrated NHS governance subject only to public law checks and balances, vs a mixed market system for the provision of health care services for the purposes of the NHS (including some form of purchaser-provider split) subject (also) to market regulation. Most of the pre-Brexit and current discussion conflates elements of both models without acknowledging that both fit within the EU regulatory framework and, consequently, decisions on the model that should be adopted (and the regulatory implications that follow) exclusively depend on UK political decisions.

Second, that the broader economic context in which NHS procurement takes place has a deep influence on the ability of the NHS procurement function to support the provision of high quality health care services. From that perspective, the deterioration of the economic climate created by Brexit and the uncertainty surrounding the future UK-EU trading framework are damaging NHS procurement as much as they are damaging the UK’s economy and public sector more generally. In this context, whichever reforms of the NHS model that may follow from the above will be negatively affected by Brexit. In these circumstances, I find limited space for hope for an improvement in the functioning of the NHS, including its procurement function, at least in the medium term.

"Monitor and the Competition and Markets Authority": My new paper on health care, procurement and competition in the UK

I have just uploaded my new piece "Monitor and the Competition and Markets Authority" as the University of Leicester School of Law Research Paper No. 14-32. The paper looks at the institutional design for the enforcement of competition and public procurement rules in the health care sector in the UK and criticises the concurrency regime developed in 2013. It is linked to my previous paper on the substantive aspects of the NHS Competition, Choice and Procurement Regulations 2013 (about to be published in the Public Procurement Law Review and available here).

I will be presenting this new paper at the EUI (Florence), at a workshop on Antitrust Law in Healthcare organised by Prof Giorgio Monti. Comments welcome!
Abstract 
As part of its enforcement duties under the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013, and in exercise of the powers assigned to it by the Health and Social Care Act 2012, the health care sector regulator for England (Monitor) is co-competent with the competition watchdog (Competition and Markets Authority) to enforce competition law in health care markets. Oddly, though, unlike other sector regulators, Monitor does not have a duty to promote competition but ‘simply’ to prevent anti-competitive behaviour. Monitor is also competent to carry out reviews and to decide bid disputes concerning procurement carried out by health care bodies, provided there is no formal challenge under the Public Contracts Regulations 2006.
This paper contends that such a concentration of regulatory, competition enforcement and procurement review powers puts Monitor in a unique situation of (potential) structural conflict of interest that can diminish significantly its ability to act as an effective (co-competent) competition authority. This paper focusses on this difficult structure for the enforcement of competition law in the health care sector in England, in particular due to the asymmetrical, sui generis concurrency regime created by the Enterprise and Regulatory Reform Act 2013 and the Concurrency Regulations 2014. As examples of such conflict of interest and its implications, the paper assesses Monitor’s incentives to bend the interpretation of both art.101(3) TFEU and the new special regime on procurement of social services (arts.72-77 dir 2014/24). The paper concludes that this situation requires regulatory reform to devolve powers to the Competition and Markets Authority.
A Sánchez Graells, 'Monitor and the Competition and Markets Authority' (November 20, 2014). University of Leicester School of Law Research Paper No. 14-32. Available at SSRN: http://ssrn.com/abstract=2528569.

New Paper: A critical assessment of the new health care procurement rules in the UK

The recently adopted UK National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 include an interesting (and somehow unsettling) provision authorising anti-competitive behaviour in the commissioning of health care services by the National Health Service (NHS), if that is in the (best) interest of health care users.
As briefly discussed here, generally, it seems that under the new public procurement and competition rules applicable to the NHS, whatever is considered in the “interest of patients” could trump pro-competitive requirements and allow the commissioning entity to engage in distortions of competition (either directly, or by facilitating anti-competitive behaviour by tenderers and service providers)—as long as a sort of qualitative cost-benefit analysis shows that net advantages derived from the anti-competitive procurement activity. The apparent oddity of such general “authorisation” for public buyers to engage in anti-competitive procurement of health care services deserves some careful analysis, which this new paper carries out.

The
paper assesses Regulation 10 of the NHS Procurement, Patient Choice and Competition Regulations 2013 and the substantive guidance published by the UK's health care sector regulator (Monitor) from the perspective of EU economic law (and, more specifically, in connection to public procurement and competition rules). The paper claims that there is a prima facie potential incompatibility between Regulation 10 of the 2013 NHS Procurement, Patient Choice and Competition Regulations and both EU competition law and public procurement law—which are, in principle, opposed to any anti-competitive or competition restrictive behaviour in the conduct of public procurement activities. Consequently, there is a need for an EU law compliant, restrictive interpretation and enforcement of the provision—at least where there is a cross border effect on competition and/or a cross border interest in tendering for the health care contracts, which triggers the application of both EU competition law and public procurement law.
 
Sánchez Graells, Albert, New Rules For Health Care Procurement in the UK. A Critical Assessment from the Perspective of EU Economic Law (February 2, 2014). University of Leicester School of Law Research Paper No. 14-03. Available at SSRN: http://ssrn.com/abstract=2389719.

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...

Planning for US DOD pharmaceutical benefits procurement: A need to think outside the box and a lesson for the EU

The US Department of Defense (DOD) offers health care coverage through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. Its current contract for the management of pharmaceutical benefits expires in the fall of 2014 and DOD has already started planning the next stage of procurement.
 
According to the US Government Accountability Office (GAO) report of 30 September 2013,
During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told [GAO] that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract.
At first sight, this looks like a proper exercise of procurement planning and one that is specifically concerned with promoting effective competition in the next stage of pharmaceutical benefits management procurement. However, GAO has very high standards and considers that the exercise carried out by DOD is insufficient and that the Department needs to think outside of the box (of the current structure of benefit management contracts) to see if an even better scenario is achievable. In that regard, GAO considers that
DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts—a carve-in structure—or a structure that incorporates certain components of DOD’s pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD’s current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries.
DOD is now required to conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. GAO will report again once this additional exercise is completed.
 
In my view, this case shows how important it is to develop effective and demanding standards of market investigation and procurement planning in order for contracting authorities to reap all the benefits of effective market competition. It may well be that the result of the enquiry shows that current structures are the most efficient. But, even in that case, the additional market research would not have been an sterile exercise. By avoiding path dependency and seeking for alternative modes of provision (ie by actually knowing the markets where they contract from), contracting authorities can obtain true value for money.
 
Hence, this type of mandatory market intelligence should be seen as best practice and, in my opinion, imported into the procurement systems of many European countries (and, definitely, Spain). Only in that way will public procurement really contribute to smart growth and be truly aligned with the Europe 2020 strategy. Hopefully the revision of the domestic procurement systems as a part of the process for the transposition of the soon to be adopted new EU rules on procurement will offer Member States an opportunity to also reflect on these issues and to strengthen their market intelligence requirements and infrastructures.

Risk of 'sweet deals' for public sector #mutuals under the new #EU #publicprocurement rules leading to #monopolisation of social services

Article 76a of the final compromise text for a new Directive on public procurement creates a significant risk of abuse in the award of contracts for social services that may be of particular concern when read side by side with the UK Government's public sector mutualisation strategy.

Article 76a allows contracting authorities to reserve for the participation of given types of organisations (such as ‘public sector mutuals’, for instance) the award of contracts for certain services included in specific categories of the Common Procurement Vocabulary[1] in the areas of health, social and cultural services[2]—which basically comprise all or the most relevant medical services, personal services, educational and training services (including eLearning), sports and cultural services. 

In such cases, the contracting authority will need to make sure that the (type of) organisation chosen to be awarded the contract meets the following requirements: (a) its objective is the pursuit of a public service mission linked to the delivery of the services to be contracted; (b) its profits are reinvested with a view to achieving the organisation’s objective (and where profits are distributed or redistributed, this should be based on participatory considerations); (c) the structures of management or ownership of the organisation performing the contract shall be based on employee ownership or participatory principles, or shall require the active participation of employees, users or stakeholders; and (d) the organisation shall not have been awarded a contract for the services concerned by the contracting authority concerned pursuant to this Article within the past three years. Moreover, the maximum duration of the contract shall not be longer than three years and the call for competition shall make reference to this Article. There is no (maximum) value threshold for this exclusion to be effective.

Given that the Mutuals Taskforce has clearly recommended that the UK Government use the (direct) award of contracts as a tool to support, foster and consolidate the creation of public sector mutuals (Recomm 9), there is a risk that the carve-out (negotiated?) in the new EU public procurement rules leaves the award of such 'start-up contracts' fundamentally unchecked, since there will basically be no EU rules applicable in this case, regardless of the value of the contracts [which is also valid in relation to the EU rules on the control of State aid, which exclude health care and other social services from their scope of application; see art 2 of Decision 2012/21/EU].

Therefore, there is a clear risk that the public sector reform strategy ends up creating (3-year long, local) monopolies for the provision of those services in the hands of the newly spun-off public sector mutuals, which may extend their dominance beyond that point in time as incumbency advantages pile up. That would result in distortions of competition similar to those just identified by the Competition Commission in the market enquiry on private health care services and, in my view, is an undesirable prospect. 

In that regard, then, the OFT (and, soon enough, the CMA) seems to have a mounting amount of pressure to uphold its commitment in the 2013-14 Annual Plan to "focus on IT and local government issues in particular and work with government partners on a range of issues relating to the public sector reform agenda to ensure that government interventions maintain competitive markets. In addition to advocacy and influencing, [the OFT] will consider using the full range of tools at our disposal to tackle any breaches of competition law identified in public service markets" (emphasis added).

Otherwise, the structural changes that non-competitive mutualisation under the umbrella of Article 76a of the new EU public procurement rules can create may be difficult (if not impossible) to revert in the future. At any rate, however, the difficulty derived from the blurred application of competition rules in the health care sector after the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 were approved may require some creative enforcement efforts on the part of the OFT (and the European Commission).



[1] See the consolidated version available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2002R2195:20090807:EN:PDF, last accessed 2 September 2013.
[2] The specific references are 75121000-0 (Administrative educational services), 75122000-7 (Administrative healthcare services), 75123000-4 (Administrative housing services), 79622000-0 (Supply services of domestic help personnel), 79624000-4 (Supply services of nursing personnel), 79625000-1 (Supply services of medical personnel), 80110000-8 (Pre-school education services), 80300000-7 (Higher education services), 80420000-4 (E-learning services), 80430000-7 (Adult-education services at university level), 80511000-9 (Staff training services), 80520000-5 (Training facilities), 80590000-6 (Tutorial services), from 85000000-9 to 85323000-9 (fundamentally, all types of medical services), 92500000-6 (Library, archives, museums and other cultural services), 92600000-7 (Sporting services), 98133000-4 (Services furnished by social membership organisations), and 98133110-8 (Services provided by youth associations).