Further supplementary memorandum submitted
by the Department of Health (ISTC 1E)
SUPPLEMENTARY QUESTIONS
TO THE
DEPARTMENT OF
HEALTH
1. What was the methodology for determining
Value for Money with regard to ISTCs?
1.1 The value for money methodology used
in Wave 1 of the procurement is very similar to the approach adopted
for Phase 2. The independent sector market know that a benchmarking
exercise involving NHS tariff is carried out but do not know the
detailed process. To release information on the detailed process
would jeopardise the ability of the Department and the NHS to
secure the best value for money in the next phase of procurement.
1.2 What follows is a high-level description
of the process adopted and its origins, and the steps taken to
ensure that the process is robust.
1.3 Wave 1 was the first time that a national
procurement of clinical services on this scale had been undertaken.
As a consequence, a methodology had to be developed whereby the
value for money for each scheme could be determined. In the absence
of an accepted public sector comparator for providing these clinical
services, value for money was assured by:
running an open and competitive procurement;
selecting the best value (compliant)
offer received; and
rejecting any scheme that failed
to significantly better the prevailing "spot-purchase"
rates.
1.4 It should be noted that value for money
is the optimum combination of price and qualitative factors. For
the remainder of this answer we focus on the financial aspects
of value for money, however approval of any of the Wave 1 schemes
involves an assessment of all relevant factors.
1.5 In order to ensure that each scheme
offered better value than the prevailing spot market, a benchmarking
process was devised. An NHS Equivalent Cost (explained in more
detail below) is calculated for each scheme and compared against
the bid price. The percentage variance between the two is known
as the VfM of the scheme.
1.6 Independent sector providers face costs
which are not borne by the NHS such as staff recruitment to comply
with the additionality rules, establishment costs (for example,
the cost of funding new builds), the costs associated with bidding,
and of direct taxation (including corporation and value added
tax). These additional costs that are borne by providers are the
reason why a premium above the NHS Equivalent Cost has been necessary.
1.7 A VfM threshold above the NHS Equivalent
Cost was set at a level substantially lower than the prevailing
spot rateswith no schemes progressing that showed VfM above
that level. The average achieved for Wave 1 is 11.2% in comparison
with the historical "spot-purchasing" rates of in excess
of 40% above NHS Tariff.
1.8 NHS Equivalent Cost is a calculation
of the amount that would be paid to an NHS provider for delivering
the same activity in the same location as the provider with the
same care pathway. It is necessary to provide a baseline against
which bids from the independent sector can be compared.
1.9 NHS Equivalent Cost is derived from
NHS National Tariff (which is based on average costs within the
NHS for providing clinical procedures), with specified adjustments
to reflect the IS provider's delivery model (including restrictions
on the type of patients that can be admitted), the cost of out-patient
appointments etc, anticipated inflation rates and the Market Forces
Factor ("MFF") that would apply for NHS Providers in
that (geographic) health economy.
1.10 The following seeks to clarify a statement
made in the Department's reply to the Committee's supplementary
questions issued on 7 March (point 3.11 (d) concerning residual
values). Where a Wave 1 scheme necessitates a new build, and where
this new build may revert to Secretary of State at the end of
the contract, a "residual value" payment may be made
to the provider. The residual value payment was subject to competitive
tender, and so varies as a proportion of the total build cost
from one scheme to another.
1.11 To ensure that the VfM methodology
takes into account the residual value payment, the anticipated
value of the property to the NHS at the end of the contract is
calculated and the difference between this and the residual value
payment (known as the residual value adjustment) is included in
the VfM calculation. If the residual value payment is greater
than the calculated value to the NHS the residual value adjustment
is positive and worsens the VfM position.
1.12 The difference between the original
capital cost of the scheme and the residual value payment will
be borne by the provider through the annual depreciation charge,
which will be recovered through the provider's price.
1.13 In practice the VfM calculation entails
detailed spread sheets for each part of each scheme showing the
NHS Tariffs including outpatient appointments etc; and agreed
adjustments to derive NHS Equivalent Costsincluding taxation,
MFF etc. The results of the VfM calculation for each scheme are
then consolidated to give the total position for the whole of
Wave 1.
1.14 The same model (ie the spreadsheets
and consolidation referred to above) is used for each scheme,
tailored only to take account of differing casemixes and delivery
models, to ensure that the calculation is applied consistently
across all schemes in the procurement. This approach to assuring
Value for Money has been agreed with HM Treasury.
1.15 An independent review of the application
of the VfM Methodology was commissioned in October 2004. The purpose
of the review was to establish whether the agreed methodology
was being correctly and consistently applied in practice. This
review did not raise any material issues. Some of the recommendations
from this review are being adopted for Phase 2 of the programme.
2. Will you provide copies of the Full Business
Cases which successful Phase 1 bidders submitted?
2.1 Full Business Cases (FBCs) were prepared
by the Department and were not submitted by the bidders. Bidders
submitted responses to the Invitations to Negotiate (ITNs) that
the Department issued. We have not published full FBCs or responses
to ITNs for schemes as:
they contain commercially sensitive
information;
if we released commercially sensitive
information, we think that would be likely to reduce the bidder
pool. We think that would be contrary to the public interest as
reduction in competition would affect our ability to obtain best
value for money; and
unlike one-off procurements (eg PFI
projects), we are undertaking a programme of related procurements.
Thus, (i) information may remain sensitive after a scheme reaches
financial close because its release could affect value for money
on further schemes; and, (ii) disclosure could lead to unequal
treatment of bidders and breach procurement rules.
2.2 Provision of a redacted version of each
of the FBCs and responses to the ITNs would require line-by-line
review of each of them. This would require a significant investment
of time and money, including external legal costs.
2.3 In relation to the responses to the
ITNs, we believe the cost of reviewing and extracting the information
requested is likely to be very large indeed and lead to a requirement
for significant extra resource in the Department. Our estimate
is that the ITN responses of successful bidders amount to four
800-page volumes per ITN response, so a total of approximately
45,000 pages for the successful Wave 1 responses. In addition,
we consider it likely that detailed liaison with each Wave 1 provider
is likely to be required as part of the process.
2.4 The Committee might wish to clarify
what information within these documents it wishes to receive.
We could then establish whether the provision of a redacted version
of each of the documents (or the documents in either category)
would be sufficient, or whether the information desired would
in any event be withheld in accordance with an exemption under
the Freedom of Information Act.
3. For each Phase 1 ISTC, how many bids were
received?
3.1 The Wave 1 ISTC Programme was advertised
in December 2002, from which a total 147 companies expressed interest
in the schemes. In response to this the Department issued Pre-Qualification
Questionnaires (PQQ) and Memorandum of Information (MOI) documents
to all those showing interest.
3.2 The PQQ documents were received back
from bidders on 14 February 2003. Pre-qualification for the ITN
stage of the procurement was decided by assessing bidders' technical
and financial capability (experience) and capacity (resources)
in order to evaluate whether they are likely to be able to deliver
an effective scheme. Those bids that were successful were short-listed
to proceed to the ITN stage of the procurement.
3.3 The ITN documents were issued to short-listed
bidders in April 2003 and were received back during May to June
of that year. Each bid was subject to evaluation on the following
criteria:
3.4 The six stages of the Bid Evaluation
Phase included:
Stage 3: Clarification.
Stage 4: Bidder Convergence.
Stage 5: Final Evaluation.
Stage 6: Preferred Bidder Selection.
3.5 The aim of this phase is to evaluate
and compare all ITN submissions from qualified bidders in order
to select a Preferred Bidder (PB) for each scheme after which
negotiations take place to close contracts with the Preferred
Bidder.
3.6 The following table shows the number
of bids for each scheme.
|
Scheme location | Number of PQQ
Bids received
| Number of ITN
documents issued1
| Number of ITN bids
received1
|
|
Local Schemes | |
| |
Bradford | 11
| 3 | 2
|
Burton | 10
| 3 | 2
|
Trent | 10
| 3 | 3
|
Daventry | 8
| 3 | 2
|
Somerset | 12
| 3 | 3
|
Manchester | 8
| 3 | 3
|
Plymouth | 14
| 5 | 5
|
| | |
|
Chain Schemes | 322
| | |
Spine Chain | | 5
| 5 |
North West Chain3 | | 4
| 4 |
Maidstone | | 4
| 4 |
London4 | 12
| 5 | 2
|
South East Chain | | 4
| 3 |
Ophthalmic Chain | 31
| 5 | 5
|
|
NOTES 1 To ensure a competitive
procurement it is important to have more than 1 potential provider
involved in the procurement process. For each of the Wave 1 schemes
a minimum of 3 bidders received ITNs. This struck the balance
between ensuring a robust competition on each scheme and that
each bidder had a reasonable probability of winning the bid (as
each bidder will incur significant bidding costs).
2 The general scheme advertised in the OJEU notice was
split in to chain schemes once the PQQ responses had been received
back and prior to issue of the ITN documents.
3 An ITN bid was issued for the GC5 North West scheme
but once bids had been received back the scheme split in to two
schemes based in the regionGC5E Nottingham QMC and GC5W
comprised of two sites each based in Worcestershire and Cheshire
and Merseyside.
4 GC7 London was re-advertised in summer 2004 in which
19 expressions of interest were received.
4. Will you provide copies of the contracts which were
signed with Phase 1 ISTCs?
4.1 We have previously provided in relation to individual
FOI requests a redacted version of each of the following:
the Project Agreement dated 27 September 2003
for the provision of clinical services on behalf of Daventry and
South Northamptonshire Primary Care Trust made between Daventry
and South Northamptonshire Primary Care Trust and The Birkdale
Clinical (Rotherham) Limited; and
the Project Agreement dated 23 December 2003 for
the provision of clinical services to the Ophthalmology Chain
made between the Secretary of State for Health, Netcare Healthcare
UK Limited and various NHS Trusts.
4.2 A copy of each of those documents is annexed to this
response. Information that is commercially sensitive or otherwise
subject to an exemption to disclosure under the Freedom of Information
Act has been struck out of the document in the redaction process,
but this should provide a useful indication of the level of information
likely to be available from redacted Wave 1 contracts.
4.3 Provision of a redacted version of each of the contracts
would require line-by-line review of each of the contracts. This
would require a significant investment of time and money, including
external legal costs.
4.4 We are therefore keen to ensure that, if the Committee
wishes this work to be undertaken, the redacted documents would
significantly assist it. If the Committee could identify what
information within the contracts it wishes to receive, we could
establish whether provision of a redacted each of the Wave 1 contracts
would satisfy those requirements or whether the information sought
would in any event be withheld in accordance with an exemption
under the Freedom of Information Act.
Department of Health
March 2006
|