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.


UK's Competition Commission issues provisional findings on private healthcare markets

The UK's Competition Commission (CC) has published today its provisional findings and remedies to improve competition in private healthcare markets. All relevant documents can be accessed here.

The CC's provisional findings show a situation where hospitals hold a significant degree of market power derived from a lack of local competition (particularly in the case of companies that own clusters of hospitals in a given region), which is not compensated by the countervailing power of (even the largest) private medical insurance companies. The CC is consequently envisaging to recommend some structural remedies that may include the divestiture of up to 20 hospitals in different areas of the UK.

In my view, the analysis of this sector is difficult to understand because it is conducted in isolation. My impression is that public and private healthcare markets should be analysed together--or that, at least, their connections should receive more attention--since public healthcare seems an obvious constraint on the offer and demand of private healthcare. If that was correct, then, the proposed structural changes in this sector should take into consideration the significant reform of the National Health System (NHS) that is taking place and the effects that the recently adopted National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 may generate in the provision of (public) healthcare in the UK in the near future.

In any case, it seems clear that the competitive landscape of the healthcare sector in the UK is about to suffer a significant change (in both its public and private dimensions) and that this is an area that deserves some careful policy-making for its immediate impact on the welfare of citizens and the costs (for private and public entities) of continuing to offer them satisfactory standards of healthcare. In that regard, it will be interesting to see what are the final remedies and recommendations due to be adopted by the CC in April 2014.

US DoD to consolidate contracting for healthcare professionals in view of GAO recommendation

The US Government Accountability Office (GAO) has released a Report on Defense Health Care (GAO-13-322), where it concludes that the Department of Defense (DoD) needs a strategic approach to contracting for health care professionals. According to GAO, 
DoD does not have a consolidated agency-wide acquisition strategy for medical services. In the absence of such a strategy, contracting for health care professionals is largely fragmented. For example, the military departments had not consolidated their staffing requirements by developing joint contracts beyond a limited number of instances amounting to about 8 percent of the fiscal year 2011 spending on health care professionals. The departments have made efforts to use multiple-award contracts to consolidate intraservice staffing requirements, but GAO identified several instances where multiple task orders were placed for the same type of provider in the same area or facility. A more consolidated strategic sourcing strategy could allow DOD to acquire medical services in a more cost-effective way.
Therefore, GAO is recommending that the Secretary of Defense develops a DoD-wide strategic approach to contracting for health care professionals, with which DoD concurs. This means that there are winds of consolidation in US DoD healthcare procurement. Hopefully it will take into consideration previous GAO recommendations concerned with consolidation and centralisation, as discussed here in relation to inter-agency agreements.

How forcefully can the @OFTgov reign in #NHS anti-competitive procurement?

In his speech about Competition in Public Services, the Chief Executive of the Office of Fair Trading (OFT) has expressly mentioned the need to address market design issues in the current reform of the provision of public services and, more specifically, healthcare services. It is worth noting that the OFT considers that:
Market design needs to flow from the public policy objectives intended from opening up a market.
For example, in health it has been considered necessary to fix price tariffs and allow competition to focus on quality to avoid competition focusing on price at the expense of quality. In this context, quality is partly about clinical outcomes, partly about other things like access and service.
But articulating clear objectives can be difficult when the purpose of introducing choice and competition itself varies: sometimes to address concerns about quality, choice or innovation; in others to reduce costs. Weighing up these points is an important first step in market design (emphasis added),
As should be expected, it looks like the OFT's approach to the reform of healthcare provision is based on the premise that competition is still the best mechanism to achieve the desirable levels of quality. And this seems difficult to reconcile with the provisions of the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013, which (as briefly discussed here) precisely allow NHS commissioners to engage in anti-competitive behaviour (ie in distortions or restrictions of competition) in order to achieve desired quality improvements.

With this in mind, it looks difficult to reconcile the substantive guidance given by the sectoral regulator Monitor--which has advanced that qualitative assessment is not a mathematical exercise and that quality improvements can justify reductions in competition (although some marginal competition is expected to be protected)--with the warning issued by the OFT, which Chief Executive has stressed that it will seek direct enforcement of the competition provisions in the healthcare sector where appropriate, as its recent enforcement track record shows, since:
For example, last summer we secured voluntary assurances from eight NHS Hospital Trusts that they will no longer exchange commercially sensitive information about their Private Patient Unit (PPU) prices, to ensure they comply with competition law. We have urged all Trusts to take steps to ensure compliance with competition law when engaging in commercial activity.
One can wonder whether this type of enforcement activities will still be possible when NHS commissioners argue that their anti-competitive behaviour is justified on the basis of Regulation 10(1) of the 2013 Procurement, Patient Choice and Competition (No. 2) Regulations, since it was carried out in the patients' interest, measured in qualitative terms.

Enforcement of competition law in this area is growing more and more complicated precisely at a moment where the reform of the provision of public services may have a significant impact on market structure and competitive dynamics. Therefore, it is to be welcome that the OFT has prioritised this area in its strategic plan for 2013-14 and that this focus is likely to gain equally important strategic relevance for the future Competition and Markets Authority

However, closer coordination with the sectoral regulator Monitor may be necessary at this point in order to prevent sending mixed messages to the actors in the field and, more importantly, to prevent situations where an excessively broad interpretation of regulatory exclusions of competition could take place. The market structure resulting from the current wave of public sector reform is likely to influence market dynamics for a relatively long time in the future and, consequently, getting the process right is of utmost importance.

#publicprocurement in price regulated markets: you cannot have your cake and eat it too, Mme. Spanish Minister of Health

The Spanish press has just reported that the Ministry of Health, Social Services and Equality has mandated some pharmaceutical companies to lower the prices of certain common use drugs. This would not be in the news but for the important detail that the Ministry has adopted this decision in retaliation for the low bids submitted by those pharmaceutical companies in a centralized procurement process run by the Andalusian Health Department in 2012 (which re-run is currently taking place). 

The Spanish Health Minister was upset to see that, as a result of the centralized purchase of drugs, the Andalusian regional authorities were receiving better offers than the Ministry and other (regional) Health Authorities had managed to secure from the same pharmaceutical companies. Moreover, the prices offered in the Andalusian tender were significantly lower than those charged in the 'private' market to users whose medication is not covered by Social Security.

Instead of learning the proper lessons and exploring the potential benefits of more efficient procurement techniques (which remain to be seen in the long run, particularly in terms of sustainability of low prices, rate of innovation, protection of effective competition, etc--of which I am personally highly skeptical), the Ministry adopted a rather childish and short-sighted strategy whereby it has sought to punish the drug manufacturers by damaging their revenue stream.

In today's reported decision, the Ministry is forcing the unruly pharma companies to lower their prices for the affected drugs to levels even lower than those offered in Andalusia.  The Ministry can impose such a price reduction as part of its general regulatory powers. In my opinion, this is an enormous mistake. The use of price regulation powers as a poison pill against pharma companies that bid aggressively in public tenders is simply nonsensical.

The only message that pharma companies should take home is the following: never, ever again, compete on prices. Surely, in the immediate future, the safest position for pharmaceutical companies will be to always bid the maximum authorized price, in order to avoid a downward revision every time they offer a discount in a public procurement procedure. And, in order to protect their revenue stream, to then lobby the Ministry to protect (or raise) the level of authorized prices. 

Could one think of a worse outcome in terms of effective market competition and efficiency of public procurement? I can't. But I am sure that the Spanish Ministry of Health may surprise me in the future...