In 2015, Lord Carter published an independent report on operational performance and productivity for the UK national health service (NHS)¹. Recommendations outlined how the NHS could save £5 billion by improving operational consistency between trusts. Over the last 18 months, the NHS has set about implementing these recommendations and, in January 2017, a new procurement initiative was announced: the ‘purchase price index and benchmarking tool’ (PPIB).

The tool is a database listing products by supplier, price and volume for every NHS Trust in England. The PPIB allows procurement managers to evaluate whether supplier-negotiated prices are too high (by volume relative to other trusts) aiming to facilitate better purchasing decisions². NHS Improvement refers to the PPIB as using ‘the purchasing power’ of the NHS to get the best price.

For those outside the trust–supplier/manufacturer relationship, the ability to compare prices and unify procurement process looks attractive, but what is lost in this line-by-line price comparison, is the context of the individual trust-level agreement and added-value package agreed for that particular item, for example:

• Supplier A sells product X to NHS Hospital Trust One and several other trusts
• The Procurement Manager at Trust One spots on PPIB that University Hospital Trust Two are buying the same volume of Product X at 10% less and triggers re-negotiation
• The supplier must then explain the apparent price differences vs Trust One; for example:
  • they sell 3 other products into Trust Two in much greater volumes than Product X; consequently, they have a portfolio volume-based deal which has lowered the price of product X to Trust Two
  • they have a research/development collaboration, giving added-value components, which affect the price of product X
• The outcome could go one of two ways:
  1. Trust One procurement understands, and the issue is dropped, or perhaps the supplier re-evaluates the price as a gesture of good will
  2. Trust One want their price to look the same as Trust Two on the PPIB and hold strong, wanting a discount – they could be performance assessed on these types of outcomes
• In scenario 1 both parties understand each other, but in scenario 2, relationships get damaged
  • The supplier is unlikely to lower prices because a Trust comes to them asking for a reduction; this sets a precedent that could damage their business across the NHS
• The long-term implication is reduced collaborative goodwill and loss of partnerships

These examples demonstrate that PPIB does not capture all components of added value that may be important to the NHS Supply chain.

When the PPIB was launched, it was stated that products would be uploaded in waves – the first wave was high volume, low unit-cost items such a neoprene gloves, pads, and other consumables. However, all procurement data are available on the PPIB, and the waves refer to products that will be reviewed for centralised procurement. Anecdotal evidence shows that manufacturers in the diagnostics and device sectors are being contacted by procurement managers regarding diagnostic test prices vs those paid by other NHS Trusts. With such a broad scope of products for comparison, what does this mean for confidential discounting on a local level in the UK? Will the scope spread to generic pharmaceuticals – paracetamol, antibiotics, biosimilars?

Another complication for the NHS is that several Trusts across England have managed service agreements, outsourcing procurement to third parties. These procurement partners run all purchasing and hold all pricing/volume data – the Trust does not have access to these data and so cannot upload to the PPIB. The consequences of this are that the PPIB has big data gaps and so is an incomplete picture of procurement across the NHS. Trusts that have managed service deals not only spend money on the service contract, but have little control over benchmarking and cost saving.

The introduction of the PPIB has already led to considerable change in the NHS, and it is apparent that its influence on procurement practices is picking up pace. Two of the most interesting implications for industry are considered below.

Centralised procurement

NHS Improvement are working with NHS Supply Chain to control the number of suppliers on the PPIB database for any one product. To date, only 2 or 3 products have been centrally contracted, but as the scope of the PPIB grows, this will surely increase. For small to medium-sized enterprises (SMEs), where profit margins are low, prices established with each Trust are based on careful risk–benefit calculations. National procurement, therefore, poses a significant risk of commoditisation of the market, and the potential for suppliers to pull out of the UK supply chain.

Procurement league tables

NHS Improvement published the first procurement league table in November 2017³, setting out how NHS Trust procurement teams will be assessed and ranked based on ‘process efficiency’ and ‘price performance’. The former is assessed on the extent to which the PPIB is used (including how often the tool is accessed by procurement staff), the latter is assessed on:

• The % saving if all goods had been purchased at the minimum price paid by any provider
• The % saving if all goods had been purchased at the median price paid by any provider
• The % saving if the provider’s top 100 products, based on expenditure, had been purchased at the average of the median and minimum price³

Procurement may try to achieve these goals through unit-based pricing; for diagnostics and devices, this minimises perception of value through unit efficiency; If Diagnostic X is 50% more effective than Diagnostic Y (fewer false-negatives and false-positives, increasing early diagnosis and avoiding resource-heavy late-stage treatment) but costs more to produce, should the cost of Diagnostic X not be higher than Y?

In this scenario, procurement may say that diagnostics X and Y do the same thing, so price parity is all they will accept, but if manufacturer of Diagnostic X decides to pull out of the UK and patients are missed due to the poorer outcomes of Diagnostic Y, the cost of treating these patients is ultimately much greater to the NHS than the differential price of the two tests. Ultimately, purchasing has to consider more than just unit cost – the value of each item to the patient and the healthcare system has to be considered, with a view to long-term gain – but this is difficult to measure in ‘right here, right now’ cost saving exercises.

Using NHS Improvements ‘process efficiency’ and ‘price performance’ parameters, there are three ‘scores’ available for NHS procurement teams:

• Meets expectation
• Exceeds expectation
• Below expectation

Using a carrot and stick analogy, the league table is clearly the stick being used to drive the utilisation of the PPIB tool, or risk a low ranking that peers within the procurement sphere will see. The carrot is the greater ‘good’ of saving the NHS money.

Of the two, centralised procurement presents the greatest risk to pharmaceutical, device and diagnostic manufacturers; the PPIB will grow and, although the future product scope remains unclear, several things are clear for manufacturers:

• Be ready to negotiate
• Be proactive in shaping the tendering environment for your product
• Raise the skill of your teams to be able to demonstrate excellence in risk mitigation, negotiation and tendering within the UK

To learn more about how you can achieve this, call us at +44(0) 203-750-9833 or email us at discover@validinsight.com.

References

1. Operational productivity and performance in English NHS acute hospitals. UK Government website. https://www.gov.uk/government/publications/productivity-in-nhs-hospitals Published June 11, 2015. Updated February 5, 2016. Accessed November 21, 2017.
2. Churchill. Price matching could save NHS £120m. Chartered Institute of Supply and Purchase website. https://www.cips.org/supply-management/news/2017/january/120m-nhs-savings-realistic-though-price-matching/ Posted January 6, 2017. Accessed November 20, 2017.
3. A quick guide to the procurement league table. NHS Improvement website. https://improvement.nhs.uk/uploads/documents/Procurement_league_table_guide_jw.pdf Published November 2017. Accessed November 20, 2017.