Improving Purchasing of Clinical Services* 21 st October 2005 *connectedthinking 

Why the need for change Procurement Trends & Best Practice Purchasing considerations Impact & constraints Options Summary Questions Contents

Our analysis has shown that the current model does not function effectively for a range of reasons: Relative strength of providers compared with PCTs Variable purchasing skills in PCTs, often because this function is not given high enough priority and, as a result, is not always adequately funded. Lack of consistent and reliable data and knowledge of how to use it Duplication of effort because each PCT negotiates its own contracts Complex model with many PCT’s competing for attention Why is there a need for a new purchasing model?

Current & Future State of Existing Model PCT Provider 300 PCTs each contracting with a few providers PCT Provider Approx.125 PCTs each contracting with many providers Volume of purchasing will increase over the next few years as planned reforms such as PbR, choice, and greater plurality of provision are implemented. The number of providers that PCTs would have to contract with would increase significantly.

From research evidence we have determined that best practice for purchasing is likely to achieve these benefits through : A co-ordinated approach for all purchasing decisions Positioning purchasing as as a strategic function Aggregated purchasing activity Being driven by business cultural and organisational needs Being viewed as a key business advisor on industry and provider market trends Aligning with authority levels across organisations Contracting activity being separated from strategic sourcing and performance monitoring activity, but linked through effective systems and processes. Acting as a source of intelligence Purchasing best practice

Organisation Structure There is an increasing trend toward hybrid (central / decentral) purchasing organisations; an 18% increase from previous studies Companies under $500M have more centralization 33% Vs those more than $10B - 18% Service companies tend toward more centralization 32% Trends in Purchasing Organisational Models Co-ordination of purchasing activity typically takes place where: Services are common to a range of organisations to which leveraged purchasing can be applied; There are limited skilled resources capable of undertaking the activity; Centralised purchasing is typically applied where: Specialised services which require specific knowledge & skills: Small number of highly specialised suppliers

Purchasing considerations & principles Role of purchasing Purchasing needs to act as the link between the strategic business requirements of the PCTs, the needs of the patient and to ensure these requirements are aligned in the contracts placed with suppliers Purchasing needs to understand the dynamics of the market place, and incorporate the impact that Patient Choice will have on provider behaviours Provide strategic business advice on the implications of commercial changes to the contractual relationship with Providers Provide purchasing & contractual frameworks under which “Area Purchasing” operates Purchasing Organisational Model Options: Outsource purchasing activity to an external third party Create lead purchasing hubs within a number of “competent” PCTs who act on behalf of all Set up separate regional purchasing hubs to undertake purchasing activity Contracting Framework & Structure Implementation of contracts that incentivise providers to deliver quality outcomes Vs payment on activity levels Drive performance of providers through market dynamics and system of patient choice Commonality of service levels across all providers to ensure consistency of service Use of credit regimes to drive delivery of agreed service levels rather than “cash returns”

Purchasing considerations & principles Contract & Supplier Management Provide distinction between the role of “contract management” (delivering what is contained in the contract and “Supplier Management” (working with supplier to improve & enhance services) – the feel good factor Create governance regime to allow balance of power to fall appropriately between DoH, PCT, procurement, Patient & Provider Undertake regular review of contract performance to ensure objectives are continually being met and delivering desired objectives Performance Management Creation of supplier enabled performance measurement systems to focus on both delivery of service levels and key performance indicators Performance measurement needs to be driven through feedback at all levels starting with patients

The problem is size; contracting and purchasing is either done at a level that is too large, or too small Local National Responsive to patient’s needs Flexibility according to local context Ability to influence clinical practice Ownership by stakeholders Critical mass to allow for variations in numbers Concentration of expertise Reductions in transaction costs Proximity to national targets …purchasing needs to strike the balance between commercial control of national activity and the local needs of patients. It also needs to ensure clarity of financial responsibility

The available evidence needs to be set against existing policy drivers. These include: Extending patient choice Commissioning a Patient-led NHS Implementation of PbR Existing fixed contracts with Foundation Trusts & ISTCs What this means in the NHS

Initial thoughts on processes Processes In very broad terms the options for contracting with providers fall into three areas: 1.A laissez faire approach which allows for negotiated contracts on a case by case basis 2.Centralised negotiation of National Contracts allowing for some flexibility for local & regional needs 3.Structured engagement model using framework agreements which can be flexed & tailored to suit local circumstances

Initial thoughts on processes Having reviewed the complexity, cost and timeliness of implementation of the various models our initial thinking leads us towards favouring the following process: Core national framework contracts developed centrally but with adequate flexibilities to enable tailoring to local requirements. These contracts could be developed in a relatively short period of time and could apply equally to NHS FTs and other providers Whilst it is beyond the scope of this project to comment on the future design of PbR we would also suggest that these contracts include an option to reward or penalise financially purchaser behaviour as appropriate

Summary of key issues & options Procurement Structures: The role of purchasing needs to be re-defined and professionalised A range of models exist that need to reflect the needs of DH, Provider Market, Commissioners and Patients Contracting approaches: Local contracts meeting local needs Vs National contracts meeting DH targets Central negotiation Vs Framework contracts Performance management: Measurement must take place at patient & GP level Information needs to be consolidated at highest contractual level to drive provider performance

Open Discussion Questions?: What might be some of the practical constraints around the proposals? Implications of PbR? Existing fixed contracts with Foundation Trusts & ISTCs Do they work? What would you wish to change?