Part 3 : Good or improving practices

Spending on supplies and services by district health boards: Learning from examples.

In this Part, we discuss good or improving practices and provide some examples of these practices. We considered these aspects to be good or improving because they help DHBs to answer the critical questions about their procurement activity (see paragraph 1.3) and to understand whether they are spending money well.

Spending money on the right supplies and services

Access to good information on procurement

The key to knowing whether money is spent on the right supplies and services is knowing where money is being spent, on what supplies and services, in what volumes, and with which suppliers or providers. Some DHBs either have or are currently implementing good information systems to help them gather and report information about what is being purchased throughout the DHB.

Analysing this information can identify how the DHB is purchasing its supplies and services and whether there are opportunities to improve the way in which purchases are made or to alter what is purchased (see Example 1).

Example 1
MidCentral District Health Board's new contract management system

MidCentral DHB recognised that its fragmented contract registers were not enabling it to fully understand procurement throughout the DHB. The individual registers did not include the same information about the contracts, and were not able to provide complete information about all of the contracts on which the DHB was spending money.

MidCentral DHB also recognised that some purchasing was taking place without a formal contract. The DHB did not know the full extent of what was purchased in this manner, who the suppliers were, how frequently these supplies were needed or by whom, or how well the suppliers were responding to the DHB's needs.

As part of its procurement project, established in 2006 to enhance a range of aspects of procurement, MidCentral DHB began to assess its information needs and determine an appropriate solution.

In late 2008, the Board approved the purchase of a new contract management system. The new system will link with the DHB's financial management information system.

The DHB started using the new system in the first half of 2009.

Linking purchases to business requirements and reviewing existing contracts

The contribution of any function is measured against an organisation's strategic agenda: what that function is doing to help the organisation to achieve its strategic goals. It is essential that procurement is aligned with the DHB's strategic goals.

Purchases of health and disability services by the funder arms of DHBs are usually justified by strategies for addressing health issues in the population. Referring to national health and disability strategies or local population health needs' assessments establishes a clear rationale for purchasing the services.

Example 2
Canterbury District Health Board's business case template for funded services

Canterbury DHB's funder arm identifies new service requirements through an assessment of the health needs of its population and through health service development processes.

Each proposed new service or renewal of an existing service is prioritised for funding using a screening tool. DHB staff prepare a business case for proposed new services, or a streamlined business case for existing services, that meet current priorities for funding. The leadership team considers that business case when it makes decisions about how it will allocate funding. There is a standard template for all such business cases.

The business case is the formal documentation of how the services align with Canterbury DHB's strategic direction and priorities, and why funding for the service should be approved. The business case specifically requires the service to be linked to the current District Annual Plan, and also requires an assessment of how the service will remain relevant given the major trends in service development and health service planning models of care.

We identified some very good work being done to review existing funder contracts against strategic priorities. We understand that the review process may have been prompted by a restriction on the amount of "new" funding available to DHBs recently. In our view, however, the review process is good practice in any DHB that purchases health and disability services from external parties.

Example 3
Auckland District Health Board's contract review programme for funded services

Auckland DHB's funder arm has recently implemented a major contract review process for all existing contracts for service delivery over which the DHB has discretion (which excludes some contracts, such as those directly funded by the Ministry of Health).

The DHB started by assessing service contracts that were due for renewal around 30 June 2010 (six months from the start of the review process). It assessed the link between the services and the DHB's – and the Minister's – current priorities. Based on that review, contracts were put in one of four categories.

The first category contained contracts for services that clearly aligned to Auckland DHB's or the Minister's priorities. These contracts were renewed for Auckland DHB's standard three-year term and scheduled for further review at their next renewal dates.

The second category contained contracts for services that did not align with current priorities. Steps were taken to advise the service providers about the review process and to put in place strategies to end the contracts.

The final two categories contained contracts for services that were still strategically aligned, but where further work was needed:
  • In the first of these categories, the services were still in keeping with DHB priorities but the DHB needed to review them further to determine whether the method of delivery and the service specifications could be better aligned to priorities. These contracts were extended for 12 months to enable that review to take place.
  • The second of these categories represented contracts for services that might not be delivering the benefits that were expected. These contracts were extended for six months and subject to a detailed review.
The service providers in all categories were told about the review process and timetable (including a meeting between providers and the Chair of Auckland DHB).

The DHB plans to review all remaining contracts early in 2010/11.

Unless purchased services are consistent with the DHB's health priorities, the DHB could achieve better outcomes by redirecting the money to other services that do align with its current priorities. Therefore, DHBs are progressively reviewing the services they are purchasing to determine whether the services meet current needs.

Collaborating with other DHBs and other organisations in procurement

Increasingly, DHBs are acting together to buy supplies and services. DHBs are also actively seeking to identify other DHBs and organisations with similar purchasing requirements, and looking for opportunities to work together to buy specific supplies or services. For example, the Lower North Island purchasing group has been formed that includes the New Zealand Defence Force and six DHBs.

Many government agencies are now including clauses in their purchasing contracts that enable other government organisations to opt in to the terms and conditions. This is referred to as "syndication". DHBs are also considering whether to enter syndicated contracts with other non-DHB organisations with similar purchasing requirements.

The advantages of collaborative and syndicated purchasing arrangements include:

  • greater purchasing power, leading to better value for money than an individual DHB could secure on its own;
  • cheaper purchasing processes, because a number of parties share costs;
  • sharing purchasing knowledge between organisations, leading to improved purchasing practices for all participating organisations; and
  • standardising supplies for a number of DHBs, reducing the familiarisation time required for staff transferring between DHBs (and, in some cases, within individual DHBs).

DHBs have also entered into national contracts for supplies through the purchasing processes managed by District Health Boards New Zealand.9 HBL, set up after the Ministerial Review Group report (see paragraph 1.28), also aims to contribute to the effectiveness and efficiency of DHB purchasing by taking a national approach to some purchases based on a strategic assessment of benefit.

The Government Procurement Reform programme is also under way (see paragraph 2.27). This programme has started processes to make the most of the purchasing power of the collective State sector by negotiating all-of-government contracts. The State sector (excluding schools) comprises all government departments, Crown entities (including DHBs), and State-owned enterprises – in total, about 200 entities. The Ministry of Economic Development reports that, of these, 175 entities have expressed an interest in participating in one or more of the procurements under way.

At present, three procurements have resulted in all-of-government contracts – for single and multi-functional print devices, passenger vehicles, and office consumables (stationery). An additional procurement is in the last stages of negotiation for an all-of-government contract for computer desktops and laptops. These contracts have been established so that any State agency can elect to participate at any stage.

Collaborative purchasing can save money, not just by pooling volumes (allowing for better pricing from suppliers) but also by avoiding many of the administrative costs of the purchase process (though the individual agency will still be responsible for contract monitoring). It also enables organisations to share good practices.

Employing procurement staff with a clinical background as well as procurement skills

We often hear from staff working in DHB procurement about the risk to the procurement process of subjective "clinical preference" overriding an objective assessment of value for money. Obviously, clinicians need to be involved in writing the description of clinical supplies (or services) that are required, because the supplies need to be fit for their clinical purposes. Clinicians are often also required to be included in the evaluation process.

The issue, often, is that procurement staff are not clinicians and do not understand the clinical issues that may arise for particular purchases. Similarly, clinical staff are not procurement professionals and do not understand the requirements of fair and transparent purchasing processes. One solution is to engage procurement staff with a clinical background.

Example 4
healthAlliance's procurement staffing

In its procurement function, healthAlliance* prefers to employ staff who have a clinical background, so that they can more easily and effectively work with clinical professionals. Staff with a clinical background can:
  • better appreciate where clinical judgement may end and personal preferences begin;
  • challenge clinicians if personal preferences appear to be overriding objective decision-making;
  • challenge suppliers' sales pitches;
  • more easily identify non-price-related value in suppliers' proposals;
  • provide better targeted contract management and review (as they have a better understanding of operational issues); and
  • develop better relationships with clinical customers, as they can "speak the same language".
healthAlliance provides its staff with training in procurement if they do not already possess those skills.

* healthAlliance is a subsidiary of Counties Manukau DHB and Waitemata DHB. It provides shared services arrangements for both DHBs, including most provider and corporate purchasing.

Mechanisms to evaluate new products or technologies

Another way in which clinical preferences can be made less subjective is to establish clinical product evaluation committees. These committees are set up to assess any new product or technology promoted by a supplier that is not currently used by the DHB. They usually have a common core membership, with additional staff representing those specialist clinical areas most directly affected by the new supplies.

In a manner similar to a tender evaluation, the committee's purpose is to identify the significant aspects of the new supplies to determine whether they are fit for their intended purposes. These are then compared with any similar supplies that may be replaced by the new supplies to determine the relative merits of the new supplies. The product evaluation committee then either endorses or rejects the supplies for use in the DHB. The decision is passed on to procurement staff to assess whether a purchase arrangement is needed for the supplies and how this might be best incorporated into current purchasing arrangements (or whether new purchasing arrangements are required).

The benefit of a product evaluation committee is in the clinical assessment of all innovations before any purchase process begins. This makes it clear in any subsequent purchase that the supplies will be clinically acceptable.

It also provides a defined path for suppliers to introduce new products or technologies to the DHB, avoiding concerns about suppliers approaching individual staff members or circumventing current contractual arrangements.

National product evaluation may be a mechanism that HBL chooses to use to help find efficiencies in procurement for all DHBs.

Making the most of procurement staff

As noted in Part 2, experienced and capable procurement people are scarce, and in demand from both the public and private sectors. Instead of recruiting new procurement professionals, some DHBs are instead investing in developing their own procurement people. This investment has benefits for both the DHB (more knowledgeable and better skilled staff) and for the staff (development of their professional skills and a sense of being valued by the DHB).

Example 5
Auckland District Health Board's Chartered Institute of Purchasing and Supply training

Auckland DHB has enabled its procurement staff to qualify as members of the Chartered Institute of Purchasing and Supply (CIPS). CIPS is an international organisation, originally launched in the United Kingdom but with branches worldwide, providing a wide range of services to the purchasing and supply profession.

The services include professional training courses, access to a wide range of resources (including an online library and guidance on current practice from specialist consultants), and the latest news and updates in purchasing and supply matters.

CIPS offers internationally recognised professional qualifications over six levels, from diploma through to degree level (which results in membership and the designation MCIPS).

Example 6
Nelson Marlborough District Health Board's PRINCE2 training

Nelson Marlborough DHB has begun a programme to put its funder arm staff through the PRINCE2 project management qualification. PRINCE2 is a project management methodology developed by the Office of Government Commerce in the United Kingdom.

Nelson Marlborough DHB identified a need to develop the skills of its funder arm staff after an external review of project management practices. The project management principles, themes, and processes of PRINCE2 are applicable to procurement activity (especially the risk management aspects).

The additional training will help the funder arm staff to understand the benefits of a structured and well-documented approach to projects (including procurement).

Sharing staff knowledge and experience

Because knowledgeable and skilled procurement people are scarce, it makes sense that DHBs make the most of the knowledgeable and skilled procurement staff they have, especially where procurement is carried out in a number of places within the DHB.

Example 7
Canterbury District Health Board's Supply Department

Canterbury DHB's Supply Chain Enhancement Project (begun in 2007) is a strategic initiative to "professionalise" the DHB's procurement approach to enable efficiencies and save money to put into the clinical side of the DHB.

Part of this project saw Canterbury DHB increase the number of, and increase the training and support of, specialist staff in purchasing and contract management/implementation in the Supply Department.

Since 2007, the Supply Department has been increasingly seen as a source of expertise and advice on procurement. The Supply Department provides advice and expertise to help other departments with their purchasing or contract management issues. It operates almost like a central helpdesk for any other procuring area within the DHB.

This is not a centralisation of all procurement with the Supply Department, but a source of good practice and interpretation of the DHB's procurement policy and procedures.

Purchasing supplies and services in the right way

Planning the procurement programme

Establishing a programme for purchasing activity that needs to occur during the year helps to ensure that the purchasing processes are well timed. Following an annual programme for purchasing can eliminate gaps between the end of one contract and the start of the next. It also helps the DHB to manage the workload of staff directly involved in purchasing and other staff who might be involved in a purchase (such as clinicians).

Example 8
healthAlliance's annual procurement work programme

healthAlliance prepares a formal annual work programme of purchasing requirements. It uses the programme for purchasing corporate and hospital supplies and services (provider arm contracts), but not for services that its shareholding DHBs fund (funder arm contracts).

The programme is based on information about upcoming end dates of existing contracts from the contracts register, and healthAlliance's knowledge of the likely approach to the purchase and time frames required for completing the purchase before the contract's end date.

The programme provides an advance indication of the purchasing workload in each purchasing area within healthAlliance, and what input is needed from staff involved in delivering hospital services.

healthAlliance reports that the benefits of planning its annual work programme include:
  • reducing the number of ad hoc projects;
  • awareness of the programme within the operational areas of the DHB;
  • ownership by the DHB; and
  • clarity of roles and responsibilities for all parties expected to contribute to the work programme.

In our view, an annual programme for the purchasing activity that has to occur is a simple and essential component of well-managed purchasing. However, the effectiveness of an annual programme can be undermined by a lack of engagement from the wider DHB staff required to contribute to the purchasing process. Therefore, it is essential to consult and obtain senior management's agreement to ensure that the programme is acceptable to the wider DHB business.

Providing clear guidance to staff through purchasing policy and procedures

We have noted a general improvement in the standard of policies and procedures to guide purchasing in the three years that we have been looking into procurement. Policies have been lifted from mere financial thresholds for tendering to statements about the overall purchasing philosophy of the DHB and its expectations for the way in which purchasing is carried out.

Policies now include:

  • direction on the financial thresholds for tendering;
  • a preference for competitive purchasing;
  • an expectation of ethical behaviours and legal compliance in purchasing activity;
  • direction on how the concept of sustainability is to be given effect in purchasing; and
  • requirements for confidentiality and good record-keeping.

Procedural guidance identifies purchase methods and when they may be appropriate. It also sets out evaluation approaches, and detailed requirements for giving effect to the policy (such as procedures for identifying conflicts of interest).

Sharing good policy and procedures documents

With 20 DHBs, there are definite efficiencies to be gained from sharing procurement policies and procedures that are consistent with good practice. Each DHB is then able to tailor the good practice policies and procedures to its circumstances (including purchasing and contract management structures and information systems).

We have noted two ways in which DHBs share policies and procedures:

  • collaborative development of policies or procedures, which are then applied in a number of DHBs; and
  • transfer or purchase of policies or procedures that have been recognised as good practice.

Example 9
Regional contracting guidelines developed for Auckland-based district health boards

The three Auckland-based DHBs (Auckland, Counties Manukau, and Waitemata) have collaborated with the Northern DHB Support Agency (NDSA) to produce regional contracting guidelines.

The guidelines were prepared for use predominantly by the funder arms of each of the DHBs. The guidelines provide clear guidance to funder arm staff purchasing services from NGOs. The guidelines provide for consistent practices and forms for funder arm procurement in the three DHBs.

The guidelines mean that any supplier that is providing services to more than one of the three DHBs knows that they will be treated consistently and will receive contract documents that are consistent, regardless of which of the three DHBs they provide services to.

Example 10
Hawke's Bay District Health Board's Procurement Toolkit

We noted that at least four DHBs have formally adopted Hawke's Bay DHB's comprehensive Procurement Toolkit and have tailored, or are tailoring, it to their organisation.

Adapting a similar entity's policy and procedures is an effective way of reducing the administrative time in preparing policy and procedure documents, particularly where those policy and procedure documents have been externally reviewed and rated as complying with good practice. Hawke's Bay DHB recognises this potential for administrative efficiency and has therefore been active in sharing its Procurement Toolkit.

Hawke's Bay DHB is continuously improving the documentation and templates to reflect changes in good practice, and circulates those updates to DHBs that have adopted the Procurement Toolkit. It reports that this process has been positive for all DHBs concerned – including Hawke's Bay DHB – as improvements and information flows both ways to inform changes and improvements for the wider group of DHBs.

We also note the work of the Government Procurement Reform programme in producing tools and templates available to all procurement practitioners, and the ongoing programme of standard document development. These tools, templates, and standard documents can also reduce the amount of time that individual DHBs spend on developing guidance for their procurement staff.

Documenting agreements

DHBs use appropriate forms of contract for almost all of their purchases. There is evidence that contract documents for complex purchases have been subject to legal review before the documents were completed.

Well-documented contracts for purchases provide certainty about what was agreed to be purchased (quantity, quality, and price), how it was to be delivered and paid for, and the mechanisms that are available should anything go wrong with the purchase delivery.

We noted the use of standard Sector Services10 (previously HealthPAC) contract documents for most purchases of services from NGOs. These standard contracts establish consistency between DHBs for organisations providing services to more than one DHB.

However, standard documents cannot be used without careful consideration of whether they are an appropriate standard for the circumstances and without being tailored accordingly.

The Government Procurement Reform programme includes developing standard contract documents for possible use throughout the whole of the State sector. To date, two standard contract documents have been written for low-value, low-risk purchases (one for supplies and the other for services). The draft documents were circulated for consultation before being finalised and made available on the Ministry of Economic Development's website.

Recognising their limitations

Many DHBs acknowledge that managing large building projects is not a core skill for their employees. Therefore, when they are planning for a large building redevelopment project, they employ consultants who have those skills either to support the DHB's own staff through the process or to provide specialist skills and experience.

These external consultants are usually qualified project management professionals. Part of their knowledge and experience in project management is in purchasing the services necessary to complete the project and in managing the delivery of the project in keeping with the contracts for purchase of services. As a result, we noted that large building projects are usually managed well.

Example 11
Lakes District Health Board's "Lakes Health Service Improvement Project"

In 2006, Lakes DHB began a project to enable better service delivery at its Rotorua and Taupo hospitals.

The business case for the project identified that the Rotorua facilities needed to be significantly redeveloped to support Rotorua's growing health needs. The business case also identified a need to reconfigure some services at Taupo Hospital. Both redevelopments involved constructing new buildings and refurbishing existing buildings for different uses.

Lakes DHB identified early that redevelopment projects were not its usual business. After first receiving approval of its business case, Lakes DHB sought help in 2008 – through a competitive purchasing process – from an external project manager to complete the building project. The project manager reports to a designated Lakes DHB staff member (the Project Director).

Therefore, Lakes DHB has a professional project manager to ensure that the building works are completed in keeping with the objectives of the business plan (including costs and timetable). It also has an opportunity for its staff to enhance their skills in project management by learning from the external project manager.

Identifying and managing informal spending

To understand the full picture of procurement within DHBs, it is important to understand not only those purchases that are subject to formal contracts but also the details of informal spending to determine whether this spending is managed efficiently. One means of obtaining information on informal spending is to analyse the accounting system that processes payments against the contract information system.

Example 12
healthAlliance's monitoring and management of informal spending

healthAlliance has established a catalogue of supplies for which it has negotiated purchase arrangements with various suppliers. Any DHB staff member with delegated authority to purchase supplies for the DHB can access this catalogue. When a staff member requires supplies, they raise a purchase order using the information on supplies and suppliers from the catalogue. If the supplies they require are not listed in the catalogue, they can contact healthAlliance to discuss the need for the supplies and whether new purchasing arrangements need to be established for those supplies.

healthAlliance also processes payments for supplies on behalf of its shareholding DHBs. Staff who process payments are able to compare the invoices received for payment with particular supplies described in the catalogue to check pricing and other details. When an invoice is received from a new supplier or for a product not contained in the catalogue, healthAlliance contacts the originator of the purchase to find out why the catalogue suppliers or supplies were not used.

In this way, healthAlliance is able to monitor and manage informal spending by:
  • reducing variation and increasing standardisation of supplies used in each DHB;
  • identifying "spend areas" for future procurements; and
  • deriving efficiencies from purchasing by controlling the catalogue.

Getting the supplies and services you thought you were buying

Providing tools to help contract managers

We know, from the self-assessment data provided by DHBs in 2007/08, that they have large numbers of contracts (the smallest DHB had 70 contracts worth about $50 million; the largest had more than 2000 contracts worth about $700 million). Managing this volume of contracts needs to be tailored to the risk and scale of the contracts. DHBs have different ways of determining the effort required to appropriately manage the risks and scale of their contracts.

Example 13
Contract management tool linking risk to response

We noted some good work under way by one DHB to develop a tool to help contract managers understand the link between contract risk and the appropriate contract monitoring response.

The DHB expects the tool to enable contract managers to identify the risk components of their contracts, and attach a score to the risk. This risk score, together with an assessment of the value of contracts, will be used to classify contracts into categories to guide the level of monitoring required and the appropriate mechanisms for monitoring.

The mechanisms will include reactive monitoring after an issue is identified, low-level proactive monitoring after self-reporting by the supplier, and full proactive monitoring at a transaction level and of the overall supplier relationship.

The tool is in its early stages of development. We have not identified the DHB concerned, to allow it time to finish developing the tool before sharing the results with the sector.

Using independent parties to help assess the delivery of services

A large number of DHBs engage external parties to review the processes that providers have in place for delivering services according to the specifications in their contracts with the DHBs. This is an efficient way for DHBs to review a number of contracts for the same or similar services, particularly where they do not have the capacity to perform the review work themselves.

Review methodologies can be developed and agreed, and a schedule prepared to ensure that the reviews target those providers whose performance may not be known to the DHBs (such as new providers delivering services for the first time) or concerns raised about aspects of performance.

Example 14
Canterbury District Health Board's independent review of providers

Canterbury DHB's funder arm engages several different independent auditors to carry out periodic reviews of the providers of its services.

Canterbury DHB agrees a programme of reviews that is based on a risk assessment of the providers and their service delivery performance history. The programme is amended for new information about increases or reductions in concerns about performance (from additional complaints or results of previous periodic reviews).

The scope and methodology for the reviews, and the responsibility for follow-up action, has been clearly agreed between the independent auditors and Canterbury DHB.

Canterbury DHB is currently reassessing the scope of these reviews to ensure that they meet the DHB's objectives for monitoring the service delivery performance of providers.

In such review arrangements, DHBs need to be clear about the aspects of service delivery performance that need to be covered and who is responsible for following up any review findings.

Knowing whether enough attention is being paid to procurement

Getting independent oversight for significant purchases

Some DHBs recognise the benefit of obtaining independent confirmation that large, important, or complex purchases are completed in keeping with good practice. This independent oversight is sought more frequently where such purchases do not occur regularly, when the DHB is amending its purchasing process, or when it is using a particular purchase or evaluation method for the first time.

Example 15
Counties Manukau District Health Board's independent review of large building project procurements

Counties Manukau DHB has engaged an independent party to oversee the application of its policies and procedures, and good purchasing practice, for the purchase of services associated with its large building project programme.

The independent party provides reports to the particular governing body responsible for overseeing the projects (such as a steering group), but works alongside DHB staff and consultants to ensure that any concerns raised are addressed before they adversely affect the purchasing process.

Example 16
Waikato District Health Board's "Service and Campus Redevelopment" project management assurance

In 2004, Waikato DHB embarked on a large-scale development of its hospitals in Thames and Hamilton. Waikato DHB engaged a "probity auditor" to provide independent assurance to senior management and the Board that:
  • procurement processes for the selection of consultants and contractors were in keeping with good practice and appropriately addressed probity risks; and
  • the project management processes conformed to good practice, minimising the risk of failure because of poor management practice or weak processes. This included assurance that key project risks had been identified, action had been taken to reduce and manage them, and they had been reported to the Campus Redevelopment Committee.
The services secured by Waikato DHB provide a level of comfort to senior management and the Board about both the purchase and contract management aspects of this major redevelopment project. As the project is not yet complete, this assurance work is continuing.

The benefits from such reviews do not rest solely with the additional comfort to senior management and the Board that the processes were sound. Many DHBs express appreciation of the learning passed on to their procurement staff from being exposed to independent oversight. This oversight role raises staff awareness of the risks to the underlying principles of purchasing (particularly fairness, value for money, and integrity) that they may have previously and unwittingly accepted.

Paying appropriate attention to their own practices

In recent years, we have seen DHBs paying an increasing amount of attention to procurement matters. In some DHBs, procurement is becoming a regular agenda item on the internal audit programme.

In some DHBs, this attention has started because of concern about a particular procurement that was not managed well. In others, it has arisen from a need to understand where the DHB's money was spent and whether there were efficiencies to be gained from improving practices.

Regardless of the reason for this additional attention, in our view it is only proper that DHBs focus attention on reviewing their procurement practices. It is a means of determining whether the purchases they are making are fit for purpose and represent good value for money. It is also a means of ensuring that the processes they use are in keeping with the underlying principles of procurement.

9: District Health Boards New Zealand was formed in December 2000. It is a sector group DHBs can co-ordinate their activities through.

10: Sector Services is a business unit of the Ministry of Health, providing payment, agreement, and compliance services to funders such as DHBs.

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