Part 5: Procurement and legal advice on the draft contract

Inquiry into Waikato District Health Board’s procurement of services from HealthTap.

It was only after Waikato DHB received a copy of the draft contract on 11 April 2015 that its in-house legal and procurement teams became aware of the discussions that had taken place and the proposed contract with HealthTap.

During the next few days, discussions took place involving Waikato DHB's Corporate Solicitor, the Chief Executive, the Chief Information Officer, and HealthTap executives. Waikato DHB's Corporate Solicitor also sought advice from external specialist legal advisers on the draft contract. Legal advice was provided to the Chief Executive and the Chief Information Officer in April 2015.

It is evident from these exchanges, and from interactions that followed, that Waikato DHB staff had serious reservations about the terms of the draft contract and the procurement process that had been followed to date. As a result, it became clear that signing a contract before the end of April 2015 was not going to be feasible.

In this Part, we outline:

  • the requirements of Waikato DHB's procurement policy;
  • what Waikato DHB's normal practice was for a procurement of this type;
  • why Waikato DHB staff were so concerned about the terms of the draft contract and the procurement process that had been used; and
  • some of the steps taken in response to those concerns.

Waikato District Health Board's procurement policy

Waikato DHB's procurement policy required:

  • a business case for any procurement greater than $500,000 in total value that had significant strategic implications or that carried significant risk;
  • an assessment of the market conditions and business needs in the short term and long term;
  • a clearly documented rationale for the proposed procurement approach;
  • a planned and documented approach for deciding which supplier has the best capability to deliver and provide value for money before approaching the market;
  • a procurement plan for procurement more than $100,000 before any approach to the market; and
  • a due diligence process to be carried out on potential suppliers to assess their financial ability, technical ability, and capacity to fulfil the contract.

The policy also included the expectations that, as a general rule, market testing would be carried out through some form of competitive procurement process and that, if a competitive process was not adopted, the justification for not using a competitive process would be recorded in the procurement plan.

Waikato District Health Board's normal procurement practice

Waikato DHB staff told us that a normal process for procurement involving large expenditure followed the approach set out in Waikato DHB's policy.

Business requirements would be identified and inform the procurement process that was to be used (that is, whether a competitive process or direct procurement would be used and, if a competitive process was used, what form that would take).

Staff would then develop a business case and a procurement plan. The procurement plan would cover the procurement objectives, methodology, evaluation (including criteria and panel members), and reporting and monitoring arrangements, among other matters.

The procurement process used was usually driven by how clear the business requirements were. In some instances, the business requirements would be more fully developed after running a process to request expressions of interest. A request-for-proposal process would then follow.

We were told that, in nearly all instances where Waikato DHB was purchasing something unique, staff would run a request-for-proposal process. We were also told that Waikato DHB would generally carry out due diligence checks on the potential provider when it intended to contract with companies for IT services. The due diligence checks would typically include reviewing the provider's financial position and carrying out reference checks, and might include visits to the provider's premises.

Concerns from Waikato District Health Board staff about the procurement process

As noted in paragraph 5.3, Waikato DHB staff raised concerns about the procurement process and the proposed contract with HealthTap as soon as they became aware of it. Concerns that were raised included:

  • that Waikato DHB needed to consider whether the Rules applied and, if so, whether there were any exemptions that would permit Waikato DHB to take a direct sourcing approach rather than openly advertising the procurement;
  • that, if the Rules applied and the value of the contract was more than $5 million (as was likely), Waikato DHB was required to submit a procurement plan to the Ministry of Business, Innovation and Employment to review;
  • that Waikato DHB needed to consider whether the proposed purchase of the HealthTap platform was a capital investment in information and communications technology, because, if it was, the National Health IT Board needed to approve it;
  • that it was not clear from the terms of the contract whether the arrangement was, in fact, a trial, as those leading the negotiations had indicated was the intention; and
  • that it was also not clear whether the arrangement could be ended after two years.

Some of the staff present at the meeting told us that, when concerns were raised about whether a direct sourcing approach was permitted, those leading the HealthTap proposal appeared reluctant to contemplate seeking expressions of interest from other potential providers at that point in the process. We understand that this was because of the time it would take and a view that there was the need to move quickly.

The need to move quickly was because of concerns Waikato DHB would lose control of the idea and the perceived advantage of being first with the HealthTap platform. We understand that this was related to the provision in the draft contract under which HealthTap agreed to an exclusivity period of six months and concerns that, if Waikato DHB then went to market, it would lose the advantage of the exclusivity period it had negotiated with HealthTap.

Concerns about the draft contract

Waikato DHB's Corporate Solicitor sought specialist external legal advice on the draft contract. A summary of this legal advice was provided to the Chief Executive and the Chief Information Officer in April 2015. The content of the advice is legally privileged. We asked Waikato DHB whether it would waive privilege over this advice for the purposes of this report and it decided not to, which it is entitled to do.

The outcome of that advice was that the draft contract could not be agreed in its current form. It is nevertheless clear Waikato DHB staff had serious reservations about the terms of the draft contract and the procurement process that had been followed to date.

Steps taken in response to staff advice

It appears that, between April and June 2015, some steps were taken in response to advice from Waikato DHB staff. These included drafting a procurement plan and a due diligence process.

Draft procurement plan

We summarise the main points in the draft procurement plan in the paragraphs below. In doing so, we note that the plan was never finalised and that the draft we were shown, dated 21 April 2015, includes some information that was incorrect. This might be because it was written in anticipation of steps that needed to be taken or matters that needed to be approved, rather than as a record of these things having been done. However, the plan does provide some evidence of how the rationale for the procurement was being developed and presented at the time.

The plan describes how Waikato DHB had adopted a new strategic objective to make more of its virtual care services. One of the three cornerstones of this initiative was a two-year trial that would "build the knowledge of how to create sustainable virtual clinical services".

The plan said that the main objective of the virtual care initiative was to place "patient/whanau/citizen at the centre of the healthcare continuum" and to "rebalance the clinician patient relationship by increasing patient authority". It was noted that close integration would be needed with researchers from international universities to ensure that the clinical practice that was created was safe for patients and clinicians delivering the service.

The plan goes on to describe how the proposed innovation of personal virtual care using the HealthTap platform needed to be seen in the context of the need for change – such as the lack of medical services in rural areas and the "overreliance on treatment-based medical services rather than proactive patient-based public health services".

The plan also refers to the need for Waikato DHB to respond to the "disruptive pressure for change" that was being driven by the increasing use by patients of non-accredited, online medical services.

The main points recorded in the plan as at 21 April 2015 were:

  • The proposal was for an initial contract for two years, followed by a full request-for-proposal process. The contract was stated to have been negotiated by the "Waikato legal team" and its expected value was US$10 million over two years.
  • A budget had been presented to, and approved by, the Board.
  • Stakeholders were identified as being "all service units within the provider arm of Waikato DHB". The plan stated that these stakeholders would be part of a two-year study and would have representatives on the governance boards.
  • An exemption from the Rules was being sought – we assume from the requirement to openly advertise – on the grounds that Waikato DHB was carrying out a two-year study programme and that the identified system was needed to define the new clinical service after that programme.
  • The plan included a heading for "Market analysis & procurement strategy", under which was written the following statement:
    The review of the market and engagement with Harvard school of population health identified that at the present time only one vendor has the capability to provide the services required.
  • The plan also included a heading for "Procurement Method", under which was written:
    The process to select the supplier will be a closed procurement with a single provider given the unique nature of the work to be undertaken. It will be a fixed 2-year term of engagement after which a RFP process will be undertaken once the exact scope and need of the system to support virtual care is defined.
  • Risk management was described as part of the business case.

As noted above, the plan was never finalised.

Due diligence on HealthTap

We were told that a due diligence process was carried out on HealthTap. This included the following steps:

  • Staff at Waikato DHB reviewed media coverage of HealthTap.
  • They also got in touch with a lawyer based in Silicon Valley, who provided them with some suggestions about how to do due diligence checks in the United States. That lawyer provided some high-level information on the investment funding HealthTap had received in recent years and on some of its investors. He suggested that staff ask to speak to a HealthTap Board member and/or investor, and ask them about the financial position of the company. He also suggested that they ask to see a copy of HealthTap's financial accounts.
  • The Chief Information Officer called HealthTap's Chief Executive and asked to speak to a Board member or investor and to see a copy of their financial accounts. HealthTap's Chief Executive declined to provide this information.
  • The Chair subsequently telephoned a HealthTap Board member who represented one of HealthTap's main investors. The Chair told us that they spoke for more than an hour and that he was "reassured that they [the investor] were committed for the long haul". The only record relating to that conversation we have seen is an email from the Chair indicating that the conversation had occurred. It did not specifically record what was said during the conversation.
  • Waikato DHB's Chief Executive told us that he had discussions with doctors in the United States and Canada who used HealthTap's services and with a representative from the Mayo Clinic about the opportunities for capital reduction. He also told us that the due diligence process included face-to-face discussions with people in Australia, Canada, and the United States, including his visit to HealthTap in March 2015 to observe HealthTap's business culture. We have not been provided with any documentary records of those discussions.

Our observations about advice from Waikato District Health Board staff and the response to it

Waikato DHB's legal and procurement staff had no input until after HealthTap provided a draft contract for Waikato DHB's consideration

Waikato DHB's legal and procurement staff had no input into the procurement process until HealthTap provided a draft contract to Waikato DHB. We are concerned that Waikato DHB progressed so far with the proposed procurement without consulting its own legal and procurement staff.

Significant problems were identified with both the draft contract and the procurement process

Once key advisers became aware of the draft contract, they immediately identified several problems with the procurement process that had been followed to date, including potential non-compliance with the Rules and Waikato DHB's own procurement policy and significant problems with the draft contract.

Advice should have been sought on the procurement before HealthTap was approached

By approaching HealthTap and progressing discussions without understanding all the issues and risks that needed to be considered, Waikato DHB put itself in a difficult negotiating position. It also meant that, instead of enabling its staff to work in a proactive manner to help prepare a well-considered business case, procurement plan, and contract negotiation strategy, the legal and procurement teams were effectively required to operate in "damage limitation mode".

The procurement plan was drafted too late to be meaningful as a procurement plan

A procurement plan was subsequently drafted. However, this was several weeks after the draft contract was provided, the plan was never finalised, and it included information that might well have been inaccurate at the time it was written – for example, that Waikato DHB had adopted a new strategic objective to make more of its health services virtual health services, that a budget had been presented to and approved by the Board, and that the draft contract had been negotiated by Waikato DHB's legal team.

In any event, the procurement plan was written too late to be of any genuine help in guiding an effective procurement process. The sense we got is of a plan written after the fact, largely to justify a decision that had already been made, rather than as a genuine and well-considered analysis of Waikato DHB's needs, risks, and rationale for contracting with HealthTap.

The due diligence carried out on HealthTap was not well documented or as timely as we would have expected

The due diligence process that was carried out, in our view, was not well documented or as timely as we would have expected. The documentation that does exist does not generally record the specific details of the results of the due diligence work.

Fear of losing a "first user" advantage did not justify non-compliance with the Rules

We are particularly concerned about the apparent resistance Waikato DHB's advisers struck when they pointed out that a direct sourcing approach might not be permitted under the Rules or Waikato DHB's own procurement policy.

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.

Our concern is amplified by the resistance to reconsidering the direct-sourcing approach appearing to have been, at least in part, because of fear of losing a so-called "first user" advantage. For reasons explained in Part 3, given the context in which DHBs operate, the motivation for wanting to be seen to be first to implement the HealthTap platform in New Zealand is not clear to us.

Therefore, we are all the more concerned at the suggestion that protecting a "first user" advantage might have been considered justification for not complying with the Rules, Waikato DHB's own procurement policy, or good procurement practice generally.