Part 1: Introduction

1.1
District health boards (DHBs) spend a lot of money on supplies and services from external suppliers and providers, amounting to between 36% and 70% of all the money that each DHB spends each year. Information from a self-review questionnaire that we sent to all DHBs in 2007/08¹ indicates that, collectively, this spending amounts to about $6 billion each year.

1.2
Because this is a lot of money, and because there is a keen public interest in how this money is spent and whether it is good value for money, we have been looking more closely at the ways in which DHBs are spending money on supplies and services from external suppliers and providers.

1.3
We have identified four critical questions that DHBs need to ask themselves to determine whether they are managing the processes of spending money on supplies and services well and ensuring value for money:

• Are we spending money on the right supplies and services (the things we need to achieve our objectives/outcomes)?
• Are we purchasing supplies and services in the right way (appropriately managing risk and demonstrating value for money)?
• Do we know whether we are getting the supplies and services we thought we were buying (the right quantity and quality at the right time)?
• Are we paying enough attention to procurement?

1.4
This report provides examples of good practices that we encourage, and some examples of poor practices, to help DHBs consider their own practices in spending on supplies and services from external suppliers and providers.

Terminology and the district health board context

What is procurement?

1.5
Procurement refers to all of the business processes associated with purchasing. It spans the whole lifecycle (see Figure 1), from identifying needs to the end of a service contract or the end of the useful life and subsequent disposal of an asset. Procurement includes contract management as well as purchasing.

Figure 1
Purchasing and contract management phases in the lifecycle of procurement

What is purchasing?

1.6
Purchasing is spending money on supplies and services from external suppliers and providers. It is not spending money to employ staff, nor is it spending money to service debt. But it is spending money on almost everything else.

What is contract management?

1.7
A contract or agreement refers to the legally enforceable obligations, and any associated conditions, that two or more parties have agreed they owe to each other. The terms of a contract will often be recorded in writing but do not have to be. There will always be a contract in a purchasing relationship, even if the form of the contract is a purchase order.

1.8
In DHBs, contracts for funding non-hospital-based health services are often called "Health Service Agreements" or "Funding Agreements".

1.9
Contract management refers to all of those processes used to monitor and manage the external supplier's or provider's performance to assess whether the DHB is receiving, and paying for, supplies or services of the right quality and quantity, as agreed in the contract.

1.10
Contract management covers both managing the specific requirements of the contract and managing the relationship with the external supplier or provider of the supplies or services.

1.11
An assessment of the risks associated with the contract and the costs or benefits of the contract management processes determines the extent of contract management activity.

What supplies and services do DHBs spend money on?

1.12
DHBs have historically organised and referred to their spending on supplies and services in three categories:

• corporate;
• provider; and
• funder.

1.13
DHBs use the term corporate to categorise spending on the supplies and services needed for the efficient running of the DHB. These include, for example, support services for administration and patient management software systems, computer equipment, financial management software, photocopier paper, and legal services.

1.14
DHBs use the term provider to categorise spending on the hospital-based services that the DHB provides. In this category, money is spent on the supplies and services that the DHB needs to provide and operate the physical environment in which hospital-based services are delivered. These supplies and services vary considerably and include:

• supplies and services needed to manage the hospital buildings and infrastructure, including new building/car park construction (for example, architects' and building contractors' services), refurbishment and maintenance of existing buildings (for example, plumbing and electrical parts and services, and lift maintenance services), and landscape maintenance (such as lawn mowing and tree trimming services);
• supplies and services needed for the hospital to function (including laundry services, security, food services, linen supplies, toilet paper, and hospital beds);
• supplies that are consumed in delivering hospital-based services (including medicines, bandages, gloves, and blood products); and
• medical or surgical tools and equipment needed to deliver hospital-based services (including intravenous equipment, x-ray machines, scalpels, and sterilising equipment).

1.15
DHBs use the term funder to categorise spending on services that are not based in the hospital (non-hospital services) but are funded by the DHB. In this category, money is spent on funding external organisations to deliver non-hospital services. Examples of these services include residential care for the elderly, mental health services, and programmes for targeted populations (such as assistance for breastfeeding mothers, diabetes checks, immunisation programmes, "well child" checks, Pacific health programmes, and whānau-based care programmes).

1.16
DHBs refer to procurement for corporate and provider contracts as their "provider arm" procurement. They refer to procurement for funder contracts as their "funder arm" procurement.

1.17
Information we gathered from DHBs in 2007/08 indicated that funder purchases represent between 41% and 77% of all purchasing by DHBs. Smaller DHBs spend a larger proportion of their money funding external organisations to deliver non-hospital services. Larger DHBs spend proportionately more on providing hospital services.

1.18
There are some signs that these historical divisions of spending may be changing. For example, DHBs may include the purchasing requirements of some non-governmental organisations (NGOs) that deliver non-hospital services for the DHB, where there are efficiencies in doing so.

1.19
DHBs are increasingly purchasing hospital services from other providers (for example, from private hospitals in the district). In this case, the DHB is funding rather than providing hospital services.

Is purchasing the same as funding non-governmental organisations to deliver health services?

1.20
In providing funding for NGOs to deliver health services, the DHB is actually purchasing those services from the NGO. The DHB is still responsible for determining whether the services are delivered to the right groups of people and are of the right quality (that is, that they are achieving the desired results).

1.21
We know that DHBs may not have much choice about which organisations they can purchase some of these services from. For example:

• where an NGO has met certain quality standards for delivering some health services, the DHB may be obliged to provide funding for them to deliver those services (often under nationally agreed terms and conditions);
• the health services may be targeted at certain people and there may be NGOs that are already delivering other targeted health services to the same group of people;
• there may be only one NGO capable of delivering the health services; and
• the users of the health services may have an expectation about who they receive the health services from.

1.22
These circumstances do not mean that the funding arrangements are not purchasing activity. However, they may guide the DHB on the most appropriate way to purchase these services. The DHB may choose to use a relational purchasing approach, rather than a conventional purchasing approach, for these services (see Figure 2).²

Figure 2
The components of procurement

What is the difference between conventional and relational purchasing?

1.23
In a conventional purchasing environment, ordinary market disciplines (competition between suppliers or providers) can be expected to operate well to manage value for money. However, there may not be an effective market in place for some of the supplies and services that DHBs purchase. Therefore, DHBs may decide to give greater weight to the relationship with the supplier or provider and use means other than market-based systems to manage value for money. This is called a relational purchasing approach.

1.24
Other factors that suggest a conventional approach might not fit the purchase, and that the purchase might be better thought of as having a significant relationship dimension, include:

• the strategic importance to the DHB of the supplies or services (such as blood products) or of the relationship with the provider (such as a national provider of mental health services);
• the nature of the supplies or services purchased (such as health programmes targeted at specific ethnic groups), where the relationship with the provider is a significant aspect of effective service delivery;
• the continuity and duration of the relationship between the DHB or external party and the end user (such as a person receiving aged residential care services); and
• the specialist nature of the supplies or services (such as specialist professional advisory services).

1.25
A relational approach to purchasing does not change the fact that the purchase needs to be made in the context of the DHB's strategic direction, supporting its service delivery priorities, and that the underlying principles of procurement – accountability, openness, value for money, lawfulness, fairness, and integrity – still apply.

1.26
One model being created in primary health care³ is to take a whole-of-system approach to integrate, and make sustainable, the delivery of health services. This involves a new form of funding and managing the service delivery, based on a high level of trust in the relationship between the DHB and a range of NGOs.

1.27
The resulting contractual arrangement is not that the DHB purchases services from one provider. Instead, the DHB and many organisations work together to deliver non-hospital services in what is called an "alliancing" arrangement.

Relevance of this report

1.28
The Ministerial Review Group's report⁴ recommended changes to "consolidate back office functions across the 21 DHBs⁵ and harness the power of bulk purchasing". A Crown-owned company, Health Benefits Limited (HBL), has been set up to implement some of the recommended structural and procedural changes. One of HBL's objectives is to secure efficiencies in, and improve the effectiveness of, health sector procurement activity.

1.29
As a result of setting up HBL, changes are likely in the way in which the sector manages procurement. Regardless of the structural and service delivery changes that occur, there will still be a high level of purchasing and contract management activity for all of the supplies and services required by the 20 DHBs. Therefore, this report is relevant for any entity that is responsible for purchasing or contract management activity regardless of whether that entity is a DHB, a shared services organisation, a business unit of the Ministry of Health, or some other entity.

What we have looked at

1.30
This report is the result of a range of work on procurement policies and practices that we have completed in DHBs in the last three years (see Figure 3).

What we have learned

1.31
DHBs are increasingly focusing on improving the processes they use to spend money. In many DHBs, purchasing is currently given a greater improvement focus than contract management, though most DHBs recognise that contract management is also an important activity in making sure they are getting good value for money. DHBs are generally putting more effort into improving their provider and corporate purchasing than their funder purchasing.

1.32
There is a need to get procurement right both at the strategic level (throughout the DHB) and at the detailed level of each procurement. In presenting what we have learned from the work we have done in the last three years, we are seeking to help DHBs answer the four key questions we posed in paragraph 1.3. Therefore, we have structured our report as follows:

• What are the essentials of procurement that DHBs must get right? (Part 2)
• What are DHBs doing well (or what key improvements have we seen) and why is it good? (Part 3)
• What needs to improve and why does it matter? (Part 4)

1.33
We have identified five main improvements that DHBs should focus on. These are:

• recognising the significance of procurement;
• supporting procurement activity;
• making procurement easier;
• managing risk; and
• monitoring performance.

1.34
These improvements cannot happen without commitment and action from appointed Boards and senior management within DHBs. We have expanded on these five main improvements in the Appendix and the separate summary sheet that accompanies this report.

Figure 3
Work we have carried out, in the last three years, on DHBs' procurement policies and practices

1: Not all of the responding DHBs were able to provide a breakdown of their spending on supplies and services from external suppliers and providers.

2: For further discussion on the definitions and differences between conventional and relational contracts, see Part 4 of our June 2008 publication Public sector purchases, grants, and gifts: Managing funding arrangements with external parties, which is available at www.oag.govt.nz.

3: This model is being developed by the Canterbury Clinical Network, "[a] consortium of health care leaders, including representatives from urban and rural general practitioners and practice nurses, Manawhenua ki Waitaha, hospital specialists, district (community) nurses, pharmacists, physiotherapists, Canterbury DHB … Planning and Funding management, Primary Health Organisations … and Independent Practitioner Associations …". See: Summary Implementation Plan to deliver better, sooner, more convenient health care in Canterbury 2010–2013, Canterbury Clinical Network, page 2.

4: A Ministerial Review Group was established in January 2009 to recommend how New Zealand might improve the quality and performance of the public health system. Its report, Meeting the Challenge: Enhancing Sustainability and the Patient and Consumer Experience within the Current Legislative Framework for Health and Disability Services in New Zealand, was issued in July 2009.

5: After the amalgamation of Otago District Health Board and Southland District Health Board, there are now 20 DHBs.