Cambridgeshire, contracting and the importance of information

Following the collapse this month of the one of the biggest contracts ever put out to tender by the NHS, Andrew Taylor – a specialist advisor on competition issues in the NHS – argues that contracting will always be risky business in such an information-poor environment. 

The contract for Integrated Older People’s Pathway and Adult Community Services in Cambridgeshire, awarded following one of the largest ever competitive tenders for NHS services, collapsed last week.

UnitingCare Partnership, a consortium made up of Cambridgeshire and Peterborough Foundation Trust and Cambridge University Hospitals Foundation Trust, walked away from the £800 million, five-year contract saying that the arrangement was no longer financially sustainable.

Questions are rightly being asked about why the contract collapsed so quickly.

Its collapse must also call into question the viability of other similarly large contracts, such as the ten-year £687 million cancer, and £536 million end-of-life contracts in Staffordshire, where services across multiple, previously separate, providers are also being bundled up and tendered.

Integration and transformation is being built on sand

The design and tender of these contracts is being used to drive service integration and transformation, realise major efficiencies, and shift demand risk from the commissioner to the provider through outcome based payment mechanisms.

Piling so much risk into a single contract is bound to cause problems, and at the root of these problems is one common denominator, a lack of information.

The services included in the Cambridgeshire contract ranged across both acute and community services and this will typically be the case with pathway based contracts.

Bidders need a good understanding of the level of activity and the cost of providing the services that are being put out to tender. But, there are major problems in getting accurate data on the cost and volume of services that are provided to NHS patients.

A recent audit by Monitor found that half of the 75 acute trusts supplying reference cost information had made materially inaccurate submissions. Further, half of these trusts were rated ‘red’ or ‘amber’ for the governance of their clinical coding (through which activity levels are measured). The situation in relation to community services is even less clear, where activity and cost measurement is less advanced than in the acute sector.

Even if bidders were being asked to tender for the provision of existing services under existing payment models, the difficulties in getting accurate cost and volume data would present challenges for bidders in constructing sensible bids.

On top of this, however, bidders are being asked to make firm financial bids based on estimates of the cost savings that can be derived through, for example, preventing admissions (when current cost and activity information is likely to be unreliable).

The winner’s curse

In this information-poor environment, providers have to make their best estimates, and in these circumstances it almost inevitably follows that the provider with the most optimistic assumptions will make the winning bid.

(This contrasts with what should ideally happen in a tender, when the most efficient and/or highest quality provider should win the contract.)

Those providers that are most conservative in their assumptions will have dropped out of the bidding process along the way.

The bidders that have dropped out are likely to be those with the most to lose. Foremost in this category, and perhaps counter-intuitively, are likely to be private companies with established healthcare businesses. The risk of financial ruin and reputational damage from a failed contract is not attractive.

Private companies that win these high-risk contracts will often be those that are seeking to expand in the provision of NHS services, and are prepared to risk losing some money on an initial contract so as to get a foothold in the sector.

Circle’s Hinchingbrooke strategy, for example, appears to have been predicated on it being the forerunner of many similar future contracts, over which the costs of an initial loss making contract could be spread.

NHS bidders are similarly likely to divide between those with greater, and lesser, risk appetites. Where an incumbent provider (usually an NHS provider) faces the loss of a large part of its business due to the size of the contract that has been put out to tender, then this can also ratchet up the pressure to make optimistic assumptions about what can be achieved in order to retain their existing services.

Other considerations may also come into play for both NHS and independent sector providers. Some bidders may be confident in their ability to renegotiate the contract once it has been awarded and thus put in an offer that is too good to refuse. The prospect of pushing an incumbent NHS provider out of the market may also be an additional incentive for an extra attractive offer.

Finally, bidders can simply get their sums wrong, and those bidders that are the most wrong are the most likely to win, a phenomenon known as ‘the winner’s curse’.

What’s the alternative?

The information problems observed above do not mean that a move to outcome based payments, the search for efficiencies, or the integration of services along care pathways is wrong.

However, trying to do all of these things at the same time, and expecting sensible commercial bids for the resulting contract when the underlying information is not robust, is a recipe for failure.

Further, the urgency of the financial challenge and service change requirement facing the NHS does not mean that these problems can somehow be magically overcome.

There is, unfortunately, no obvious substitute for the slow and steady slog of incremental improvement, based on solid information, effective relationships and ongoing learning based on smaller scale change, which can then be rolled out in a stable institutional environment.

This is the real challenge for an NHS that operates in a policy environment where the search is always on for the next big idea.

Please note that the views expressed in guest blogs on the Nuffield Trust website are the authors' own, and do not necessarily represent the views of the Trust.