Auditor-General's overview

District Health Boards (DHBs) play an essential role in ensuring that New Zealanders have access to high-quality health and disability services. They are also stewards of significant public funds. Faced with funding constraints and increasing demand for services, DHBs are looking for innovative ways to provide more or better healthcare for their communities with the resources available to them.

This report outlines the findings of our inquiry into the decision of Waikato District Health Board (Waikato DHB), in 2015, to enter into a contract with the United States-based company HealthTap Inc (HealthTap) to provide "virtual care" services through an online service. Virtual care uses various communication and information technologies to improve patient access to care, health engagement, and health outcomes. The services were available as a web-based service and as a downloadable application (an app) for cell phones.

In entering into the contract with HealthTap, Waikato DHB was seeking to find an innovative way to deal with some of the pressures it was facing – in particular, the challenge of providing health services to remote and rural communities.

Waikato DHB's contract with HealthTap required Waikato DHB to pay about $16 million in licence fees over two years. The contract was pitched as a two-year trial of virtual care. Waikato DHB then intended to go back to the market using what it had learned during the trial phase to formulate a more detailed analysis of its needs, followed by a formal tender process.

On the evidence available to us, Waikato DHB did not carry out any formal market testing or any form of competitive tender process when selecting HealthTap as a provider.

Towards the end of the two-year term of the contract, Waikato DHB commissioned a review of the project. That review concluded that virtual care represented an important strategic direction for health organisations in Waikato and New Zealand and that, where the services met a particular clinical need, HealthTap performed well. However, it also identified issues with the implementation of the service – including a lack of collaboration with internal and external stakeholders. The review found that the overall cost to Waikato DHB was about $26 million.

When the review was released by Waikato DHB, it said that it considered that the platform was introduced too quickly and without proper collaboration with staff. Waikato DHB also said that the community, its staff, and the organisation were not ready for this change.

In March 2018, Waikato DHB decided that it would not renew its contract with HealthTap when it expired later that year. It stated its intention of continuing to invest in virtual care "on a basis to be determined". That remains the situation at the time of writing this report.

Our findings

Our decision to inquire into the procurement of the HealthTap platform was prompted by concerns about the procurement that my appointed auditor identified as part of our annual audit of Waikato DHB for 2016/17. Those concerns included the lack of an open market procurement process, compliance with the Government Rules of Sourcing (the Rules), and Waikato DHB's inability to demonstrate value for money.

The work we have done during our inquiry shows that all of these concerns were justified and that, overall, the procurement process Waikato DHB carried out fell well below the standards expected of a public organisation. The failure in the procurement process meant that Waikato DHB could not prove that it obtained the best value from public money.

Fundamental aspects of good procurement that we would expect to see in a procurement of this type, and that were missing, defective, or carried out too late in the process to be effective, include the following:

• There was no formal planning for the procurement before HealthTap was approached. That meant there was no formal identification of business needs, no risk analysis, and no identification of internal or external stakeholders. There was also no documented analysis of the market and what other options might be available. Waikato DHB's former Chief Executive (the Chief Executive) told us that he performed comprehensive market testing at the time of the procurement and that "there were no other credible platforms that met the criteria". We have not been provided with any documentary records of the market testing or of the selection criteria at the time.
• The Chief Executive made the initial approach to HealthTap about potentially using its services in New Zealand at the request of the Chair of the Board. This followed a discussion between the Chair of the Board and HealthTap's Chief Executive. Early discussions about a possible agreement with HealthTap appear to have been primarily carried out by the Chief Executive. There was no evidence of governance or oversight at this point of the process. No advice was sought from Waikato DHB's legal or procurement teams until after a draft contract had been prepared.
• There is no evidence that, before approaching HealthTap, any consideration was given to the Rules, the specific rules DHBs were required to follow at the time, or Waikato DHB's own procurement policy. In particular, there is no evidence that those initiating the discussions with HealthTap thought about whether Waikato DHB was permitted to carry out a selective procurement process (that is, whether it was permitted to approach a single provider without opening up the procurement to other potential suppliers). Despite eventually seeking advice on this matter, Waikato DHB never formally recorded its response to that advice and proceeded with a selective procurement anyway. There was some apparent resistance to that advice. The apparent resistance might have been based on a desire to move quickly with the procurement.
• The business case was deficient. A business case was eventually prepared, but only after negotiations had taken place and a draft contract with HealthTap drawn up. There appears to have been no input into the business case from anyone in Waikato DHB's legal or procurement teams. In addition, the business case was written primarily as a strategic business case for virtual care, rather than as a business case explaining and justifying the rationale for entering into a contract with HealthTap. Therefore, it outlined a rationale for adopting virtual care but included little discussion about how the services Waikato DHB would acquire from HealthTap would align with that rationale or about the costs, benefits, or risks of selecting HealthTap as a provider rather than any other party.
• The procurement plan was also a problem. Like the business case, a procurement plan was not written until after a draft contract had been drawn up. The information it contained on market analysis and the chosen procurement approach (that is, selective procurement) was, in our view, unconvincing. The procurement plan was also never finalised. The sense we got is of a plan written after the fact, largely to justify a decision that had already been made.

There are some obvious problems with this approach. Lack of proper planning in the early stages of a procurement means that all subsequent decisions might end up being built on shaky ground. Expert legal and procurement advice came too late. Not getting expert advice at the outset means you risk failing to identify issues that might be fundamental to how you need to carry out the procurement. Writing your business case and procurement plan after you are already in contract negotiations with a potential provider means you risk writing to justify a decision you have effectively already made, rather than one that – viewed objectively – can be seen to be in the best interests of the organisation.

Our concern is not just about "not following the Rules". It is about the apparent disregard shown for the principles underlying those Rules – namely, the importance of fair practice, sound decision-making, and being able to show value for money when making procurement decisions.

There are other problems with Waikato DHB's approach that are perhaps less obvious but that, in our view, contributed to the problems that were encountered after the contract with HealthTap was signed.

• The first problem is the lack of collaboration with other parts of the health sector.
  
  

  Each DHB is an independent entity, with its own responsibilities and interests that it needs to attend to. However, there is also an expectation and, in some situations, a legal requirement for DHBs to collaborate when planning, funding, and providing health services.

  In this instance, given the nature and scope of what Waikato DHB was trying to do, its potential to fundamentally alter the way services would be provided, and the need to get buy-in from clinicians and others who would be expected to use the service, it is unclear why Waikato DHB did not seek to engage with other DHBs, providers of health and disability services, clinicians, and the National Health IT Board much sooner.

• The second problem is the lack of clarity about what Waikato DHB was trying to achieve and how the associated costs and benefits would be measured.
  
  

  The proposed contract with HealthTap was presented to the Board as a two-year trial. It was intended to help Waikato DHB improve service delivery and to achieve cost savings, with a view to paying for itself.

  However, it was also pitched as part of a bigger plan to establish Waikato DHB as a "virtual health care hub" for Australia and New Zealand. That would have included setting up a partnership with universities to create a new model of study based on virtual care and some form of academic research that would guide and validate the change to a virtual care model.

  These other aspects of the plan did not eventuate. For reasons explained in this report, a formal evaluation process requested by the National Health IT Board – specifically, to ensure that, at the end of the trial, the advantages and disadvantages of the initiative could be objectively determined – also never eventuated.

  The end result is that Waikato DHB cannot show that the desired improvements in service delivery or cost savings were achieved. It is also unclear what benefits it can show from implementing HealthTap as a trial of virtual care in New Zealand.

• The third problem concerns the lack of oversight of the project after the contract was signed.
  
  

  We acknowledge that, from the perspective of Waikato DHB's overall budget, the amounts involved in this procurement might appear small, and that the Board of a DHB cannot be expected to have direct oversight of all projects and activities going on in their DHB at any one time.

  However, this procurement was a strategically important initiative for Waikato DHB and one that, in the Chief Executive's words, was intended to be a "step change" for the way it went about providing services.

  When giving approval to the project, the Board asked several questions about matters that still needed to be resolved, including substantive matters such as the proposed implementation strategy and engagement with the Medical Council, clinicians, and staff. The Board also wanted confirmation that the legislative framework in New Zealand would allow the service to be established as envisaged. It specifically asked for reporting on these matters.

  During our inquiry, we did not see evidence of reporting to the Board on any of the issues it had raised when approving the contract or of the Board seeking to follow up on these matters. The high-level governance structure that was proposed to provide oversight of the project was never implemented.

  Given the nature of the project and the Board's own questions and concerns about it, we consider that greater oversight of the project, whether at Board level or through some other form of governance structure, was warranted.

Why good procurement is important

A good procurement process supports responsible and fair spending of public money. It also helps manage the risks associated with obtaining and providing public services and promotes accountability and increases transparency. As set out in the Rules, important principles provide the overarching values for procurement by public organisations. Those principles are:

• plan and manage for great results, including identifying your needs, understanding the market, and choosing the right process;
• be fair to all suppliers, which creates competition and gives all providers a chance to participate;
• get the right supplier, which includes selecting one that can deliver what is needed at a fair price and on time, and where risks are identified and managed by the right person;
• get the best deal for everyone, which includes getting value for money, considering the social and economic effects, being able to monitor and measure the outcomes, and being accountable for the results; and
• play by the rules, which includes being accountable and transparent, and all parties acting responsibly.

These principles and the rules that support them are not simply requirements for their own sake. They help guide an organisation to make good procurement decisions that provide the best outcome for the public. It is important that New Zealanders have trust and confidence that the public sector makes good decisions on their behalf and is being a good steward of its resources. Being able to demonstrate through a good procurement process that those decisions have been well made supports that trust and confidence.

Good procurement practice includes properly documenting your decisions. A major concern for us with our inquiry, and a factor that contributed to the amount of time it took, was the lack of documentation for significant parts of the procurement process.

Final comment

The events described in this report are now in many ways historical. However, there are important lessons about a good procurement process that can be learned and applied to other procurements in the public sector – in particular, when seeking to be innovative.

Innovation in the public sector is important. It can lead to new and better services for the public and more efficient ways to deliver current services. However, when public organisations seek to innovate, it is all the more important to respect the disciplines of good procurement. Innovative service delivery and good procurement practice are not mutually exclusive.

Respecting good procurement disciplines helps a public organisation have assurance that its procurement will deliver value for money, and that valuable public resources will not be wasted regardless of the innovative nature of what is being procured. Without enough assurance that its procurement will deliver value for money, there is a greater risk of the procurement wasting valuable public resources.

Nāku noa, nā John

John Ryan
Controller and Auditor-General

20 September 2019

Photo acknowledgement: Wilma Smith