The NHS needs to think long term about contracts

There are a number of important trends in the design of payment systems and contracting that suggest the need for some new approaches. The risk is that short-term contracts and fragmented payment models will hold back the creation of integrated care and methods such as prime contractor and alliance contracting that can be used to deliver more integrated care.

Similarly the problems with the current tariff regime are noted in John Appleby’s King’s Fund report on payment by results. 

‘Short contracts increase the risk to bidders and commissioners’

These problems could force the adoption of more structural approaches to integration, which would be unhelpful as research suggests these should be at the end of any process of integrating systems, processes and ways of working. 

Worse still, the short-term nature of contracts and excessive procurement can undermine the development of innovation, investment to make change and new models. Short contracts increase the risk to bidders and commissioners.

Ways of working together

First, the costs of tendering and of bidding are significant and very frequent procurements increases costs without necessarily creating a commensurate improvement in value.

Three-year contract terms can also be seen as anti-competitive because the cost to new providers can be prohibitive. The investment required to create new models of delivery or to redesign the workforce often cannot be recovered over the duration. This may well deter potential providers, which paradoxically would mean the potential for challenging incumbents would be reduced.

‘Procurement turnarounds are often long despite government assurances it would reduce the length of the process’

The growing trend for commissioners to want to commission on outcomes and to develop more integrated services requires a different approach. If commissioning is focused on separate elements of the supply chain rather than a complete product then the current model may be appropriate.

However, alliance contracts, prime contractor models and other methods for bringing providers together to create often quite complex types of integrated provision take time to develop. They are much more dependent on the development of relationships and the different parties finding ways of working together.

Burdensome process

Furthermore we are uncertain exactly how these models should be constructed, paid for and held to account and so time is needed to develop this too and there are risks about making judgements too early, driven by the procurement cycle. Outcome-based contracts in many areas may also take longer to be able to demonstrate that they are succeeding.

In the US, the Centres for Medicaid and Medicare have a large innovation unit that runs these as demonstration projects and can grant waivers to allow projects to be developed where they might run afoul of competition law. Similar systems are required here and proposals announced by Norman Lamb might provide some of this.

‘Strategic change models need to reflect the extent to which hospital costs are less variable than we like to think’

These approaches are particularly problematic for small companies because of the burdensome nature of the process and the time and expertise involved in completing 30 to 50-page tender forms.

Procurement turnarounds are often long despite government assurances that it would reduce the length of the process; many are still taking up to 120 days and some of largest projects have taken several years to procure. This creates a difficult level of uncertainty for the bidder.

Longer-term contracts can also be used to create a secure financial framework in which major change to the infrastructure and cost structure of a provider can be achieved.

Strategic approach

The process for closing the psychiatric institutions in the 1980s often set a sum to cover costs that were fixed over a long period, with downward steps at intervals as staff were laid off or relocated, buildings were closed and land was sold. 

Strategic change models need to reflect the extent to which some hospital costs are less variable than we like to think. In a situation where providers can backfill lost income and activity with work from other payers this is not a significant problem. However, where this is not an option, some form of long-term and binding arrangement is needed that provides space for hospitals to change. 

‘Long contracts can mean parties are stuck with each other and care needs to be taken not to remove incentives for improvement’

The NHS tends to be quite short-termist and much of its procurement policy is based on buying goods and services from quite different markets than the market for health and social care. This has the danger of adopting a tactical rather than a strategic approach to purchasing − for example, one in which short-term price reductions and the fragmentation of the pathway are allowed to trump a more strategic approach to more integrated commissioning. 

Moving to new models of provision will require new models of contracts, different relationships and a more strategic approach to procurement.

This is not without dangers; long contracts can mean parties are stuck with each other and care needs to be taken not to remove incentives for improvement. Nevertheless, a wider repertoire of contracting approaches is going to be needed.   

Nigel Edwards is a senior fellow at the King’s Fund, Robert Breedon is a partner at Wragge & Co