Select Committee on Health Written Evidence


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 rates—with 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 Costs—including 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:

    —  Clinical.

    —  Infrastructure.

    —  IM&T.

    —  Human Resources.

    —  Legal.

    —  Financial.

  3.4  The six stages of the Bid Evaluation Phase included:

    —  Stage 1: Bid Receipt.

    —  Stage 2: Evaluation.

    —  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 region—GC5E 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




 
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