Hospital procurement and the application of EU legislation

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Chapter: Hospital pharmacy : Purchasing medicines

Overlaid on this background and history has been the impact of EU legislation. The UK is a member state of the EU and an aim of the EU is to create a single European market devoid of all trading restrictions and barriers a marketplace in which all businesses have an equal opportunity to compete.

Hospital procurement and the application of EU legislation


Background and requirements


Overlaid on this background and history has been the impact of EU legislation. The UK is a member state of the EU and an aim of the EU is to create a single European market devoid of all trading restrictions and barriers a marketplace in which all businesses have an equal opportunity to compete. The EU regulates and monitors all large-scale public sector procurement through EU directives covering the supply of goods, services and works. In the UK the directives apply to all NHS contracting authorities and NHS trusts.


As a result of EU membership, hospital procurement is subject to the directive within the Treaty of Rome, including Article 12 (prohibition of discrimination on grounds of nationality), Article 28 (free movement of goods within the EU) and Article 81 (prohibition of agreements that prevent, restrict or distort competition).


The main requirements are:


·      the advertisement of large public contracts to a standard format in the supplement to the Official Journal of the European Community (OJEC) so that suitable suppliers from all EU and government procurement agreement countries have the opportunity to declare their interest. Prescribed minimum periods for responses


·      the use of technical specifications which are non-discriminatory and which refer to EU or other recognised international standards wherever possible


·      the use of objective criteria for selecting participants and awarding contracts.


The directives only apply where the value of the procurement exceeds a given threshold. This is quoted in euros but, as a rule of thumb, means any contract with a value of £100 000 is included. It should be noted that the figure is for the contract’s lifetime, not an annual figure; thus, a contract for £30 000 per year for 3 years must go through this process.


Types of procedure


The regulations recognise three contracting procedures open, restricted and negotiated. These have slightly different requirements and advantages, and are summarised in Text box 3.1.


Box 3.1 Types of contracting procedure


Open procedure

Available in all circumstances and involves only a single stage. All offers received must be considered, provided that candidates have passed any minimum short-listing criteria. The open procedure can be conducted more quickly than the restricted procedure but there is no possibility of limiting the number of bids received.


Restricted procedure

Available in all circumstances but involves a two-stage procedure. From amongst the candidates expressing interest (the first stage) it is possible to shortlist a limited number from whom to invite offers (the second stage).


Negotiated procedure

The most flexible but the least transparent of the three procedures. It is used only in very limited circumstances (for example, where goods are needed urgently due to reasons that were unforeseeable by, and not attributable to, the buyer).


Offer evaluation


The directives require that any contract must be awarded to the candidate who submits the lowest-priced tender or the tender that is the most economically advantageous (buyers almost invariably select the latter because it gives greater flexibility). The factors that may be used to determine economic advantage include price, quality of service and running costs: the chosen factors must be stated in the OJEC notice or the contract documents.


Negotiation within the process


Where the open or restricted procedures are being used, the rules forbid buyers to engage in post-tender negotiations with candidates. These are defined as negotiations with candidates on fundamental aspects of their bids, for ex-ample, price. Discussions aimed as clarifying or supplementing the content of the bids are, on the other hand, permitted, provided all candidates are treated equally. Pre-tender discussions with potential suppliers, conducted on an equit-able basis, are critical to designing contracts that will perform and deliver.


Types of contract


There are two types of contract: the commitment contract and the framework contract. The commitment contract commits a legal entity (such as an NHS trust) to purchase a defined quantity of product at a defined price; the frame-work contract does not guarantee to deliver commitment. Rather, based on estimated volumes it provides (for example, on behalf of a group of hospitals represented as a purchasing group) a framework against which purchase orders will be placed by hospitals covered by the agreement. The framework agreement sets the terms and conditions of the purchase by the hospital, including price/pricing schedules, with the trust contract being formed when individual hospitals place their purchase order.


Framework contracts are normally used on behalf of purchasing groups in recognition that an agent (such as the NHS CMU) or a hospital within the purchasing group cannot deliver absolute commitment to volume on behalf of the group.


The strengths of the contracting process


It may appear sometimes that the contracting process is cumbersome and bureaucratic. However, recognition must be paid to its inherent strengths. These are that the process is auditable, is legal (so minimising the risk of challenge, particularly when the lowest bid is not accepted), provides a frame-work for equal treatment for all bidders, establishes a clear trading basis between the NHS and its suppliers (through standard terms and conditions) and provides a fair test of value for money on behalf of the NHS.


The organisation of hospital contracts


Hospitals have contracts at various levels: purchasing group, trust con-tracts, national. The principles of purchasing group contracts are straight-forward. Hospitals aggregate their purchasing power through their pharmacy purchasing groups and the NHS CMU then competitively tenders, awards and manages the resulting contracts, as an agent, on behalf of the groups. Each trust must nominate an individual to represent the interests of its hospital managers, clinicians and budget-holders (as well as its local relationships with primary care trusts) on its purchasing group. The nominee’s roles include sharing information, adjudicating contracts and participating in collective dialogue with the NHS CMU buyer dedicated to work with the group.


The nominees use their knowledge and experience that originate in man-aging medicines on a day-to-day basis (particularly through formulary management systems that are linked to drugs and therapeutic committees, and input into the prescribing process) to direct the management of the contracts.


In England there are six main purchasing groups operating on a geographical basis with some, varying by main group, being divided into smaller groups. Each main group ‘owns’ contracts of between 1500 and 2000 lines, representing upward of 200 suppliers. Whilst the contracts on behalf of these groups are framework contracts that do not guarantee commitment, the ownership of the contracts (through the participation of their member trusts) ensures that these contracts are highly effective.


The framework contracts on behalf of each purchasing group can vary in length. However, typically they last for a maximum period of 2 years and include options to extend for an additional 2 years.


Following SCEP the NHS now supports a nationally coordinated programme to contract for the supply of its generic medicines. This is organised to reflect the characteristics of the generics that are involved and is sum-marised in Table 3.2.


Alongside the generic contracting programme there are tenders for branded medicines in the same way but by local agreement with NHS CMU, making awards to reflect volume discounts. This enables the NHS to benefit from competition between therapeutically similar medicines where this exists. Some product ranges can be separated out from the model to reflect the strategic development of their procurement; these are shown in Table 3.3.


Table 3.3 Specific contracting activities for certain product type

Product range : Contract

Infection control products : By National Health Service supply chain to enable direct-to-ward supply

Clotting factors : On behalf of haemophilia centres through a direct relationship

Immunoglobulins : Through a single national tender; to match supply against commitment by purchasing group

Vaccines : Through commitment contracts on behalf of the Department of Health to support the delivery of its national vaccination programmes


Pharmacy purchasing groups branded medicines and other activities


Contracts at purchasing group level are more important when decisions around the clinical choice of medicines can be influenced at a local level. Product ranges contracted for at this level include: branded medicines; bulk fluids; therapeutic tenders (where branded medicines have the same therapeutic outcome); service contracts (for example home care, aseptic com-pounding and overlabelling services).


Trust contracts


Some medicines will still be contracted for at trust level, though the driver is to move as much contracting to purchasing group and national level as possible, where aggregation of usage improves purchasing power.


Systems and processes


Pharmacy specialists and working relationships with procurement


The technical and procurement specialists within pharmacy strengthen the contracting arrangements, especially where they are employed by a trust to support and work with a purchasing group. Pharmacy quality control (QC) arrangements are involved in assessing product quality as part of the tendering process, as well as on a day-to-day basis (see Chapter 7 for further details on QC services).


Specialist involvement, combined with day-to-day working relationships between trusts and their buyer, minimises duplication of effort through shared access to central contract management and associated procurement expertise.


NHS CMU management systems


NHS CMU manages the contracting process using a system called Phacter. Phacter maintains a database of all suppliers and product lines. It generates invitations to tender (through an electronic format that suppliers access through an electronic portal Bravo) and produces comparative evaluations to support contract adjudication before finally generating award notices to suppliers and contract details to trusts through a web-accessed catalogue.


NHS CMU also collects, at each month end, in electronic format, hospital pharmacy purchasing information through a system known as Pharmex. Pharmex data are used to scope NHS secondary care business for tender. They also provide individual trusts and NHS CMU with measures reporting the performance of the contracting arrangements.


Through a third system, PharmaQC, NHS CMU collects and stores product images and supply chain information from suppliers. The QC pharmacists access this system to record their product assessments. Available at adjudication, via the system, this information ensures that QC product quality and risk assessments are reflected when contracts are awarded.


Meeting structures


The totality of the contracting arrangements is underpinned through meeting arrangements and communication structures. The pharmacy purchasing groups, elected chairs and their buyers meet regularly to share information, adjudicate contracts and monitor performance. At the national level the Pharmaceutical Market Support Group (PMSG), consisting primarily of the specialist procurement pharmacists and NHS CMU specialists, brings pharmaceutical expertise around a focus of contract management, making sure that security of supply is placed above savings. PMSG is supported by various working groups dedicated to specific workstreams. It reports to the National Pharmaceutical Supply Group (NPSG). NPSG membership consists of NHS trust chief pharmacists and PCT advisors. Its role is to provide advice to NHS CMU to ensure that it manages and develops its service in line with NHS requirements. Lastly, the chairs of both NPSG and PMSG attend regular meetings with the Department of Health chief pharmacist, the NHS CMU general manager, amongst others, to ensure that there is an exchange of information with Department of Health col-leagues working at policy level.


Recent changes


All of the following changes will have long-term impact.


Home care


The growth in the supply of medicines to patients at home, either as compo-nents of packages of care or just simply as a route of supply, has been dramatic. Home care now represents a major part of NHS business. The NHS focus lies with the National Homecare Committee.


Other service contracts


Stimulated by policy, by National Patient Safety Agency guidance and increasing demands on its finite capacity, the NHS is increasingly outsourcing other services such as outpatient dispensing, the provision of aseptically prepared products and ‘specials’ in addition to home care. Over time these changes will have an impact on contracting and procurement.


Payment by results and NICE


As described in Chapter 1, for England, payment by results has started to change the dynamics within the market for those high-cost medicines that are not included in the payment by results tariff (and particularly those approved by the National Institute for Health and Clinical Excellence (NICE): see Chapter 11). The PPRS 2009 allows pharmaceutical companies to pro-pose patient schemes to improve the cost-effectiveness (cost per quality-adjusted life-year) of medicines. If NICE approves or partially recommends the medicine, these schemes become operational in order to achieve the cost-effectiveness approved by NICE. Types of scheme include free stock, rebates, straight discounts (applied to invoices at order point) and dose caps. Whilst providing access via the NHS to a wider range of medicines at cost-effective rates, these schemes have added a not inconsiderable burden to NHS medicines purchasing teams.


Security of supply


Globalisation within the pharmaceutical industry, associated with company mergers, rationalisation of manufacturing capacity, product discontinua-tions, extended supply chains, strengthened regulation and shifts in the sour-cing of active pharmaceutical ingredients from China, are all contributing to increasing stresses within the supply chain, increasing risks to supply. The risks associated with the supply of counterfeit medicines are also increasing. The Department of Health (supported by the Medicines and Healthcare products Regulatory Agency), the PMSG, NHS CMU and the trade associations all work together to minimise these risks.


Product coding


The establishment of the Dictionary of Medicines and Devices, its acceptance and increasing application mean that the NHS has, for the first time ever, access to nationally recognised coding and product descriptions. Linked to bar coding (GS1), which is currently underutilised within hospital pharmacy, this will create unprecedented opportunities to improve hospital pharmacy supply management.


Local arrangements


The majority of pharmacy departments now use information technology systems for ordering, goods receipt and invoice processing. These systems are configured so that the audit requirement for segregation of these tasks between different staff members is delivered. Procedures must be consistent with the trust’s standing financial instructions. Manual systems are occasionally used but these will be phased out and will not be covered here.




Items which need to be ordered will be identified by the computer system or by pharmacy staff. Computer systems maintain live stock levels and, as these fall to the reorder level, the item is flagged for reorder. The reorder level is either fixed or can be calculated by the system based on an algorithm of average daily usage, time it takes to be delivered (lead time) and a preset safety factor. Infrequently used items may be flagged so that they are only placed on order by authorised staff.


The system will allocate these items to a preferred supplier that will be one of the following:


·      the contract holder


·      the manufacturer offering an NHS price


·      a short-line store


·      a wholesaler


These lists of items will be reviewed and amended by an authorised mem-ber of staff and orders generated. The supplier may be charged if the lead time is not appropriate for patient needs or the preferred supplier is out of stock. The orders will be sent to the supplier by one of the following methods:


·      verbally by phone this method is useful if the item is urgent or patient-specific. If used routinely, verbal ordering is labour-intensive and subject to transcription errors


·      faxing: this reduces transcription errors but requires re-entering of data by the supplier and is dependent on the quality of the faxed copy


·      electronic data interchange: this is exchange of electronic order data. It is the objective of all NHS ordering. The accuracy is dependent on the upkeep of product codes and so on, but it has the potential for rapid, accurate transfer, with minimal time commitment for staff. Examples include use of the Pharmacy Messenger system and Medecator


·      post: this route is now rarely used due to time delay and cost.


Goods receipt


On receipt, goods will be checked visually for damage and expiry date. They will then be checked against the delivery note and against either a hard copy or computer copy of an order. The aim is to ensure that quantities and products are correct and that there are no obvious defects. Any discrepancies will be notified to the supplier immediately. Many trusts collect data on errors and timeliness of deliveries since supplier performance is a key consideration at contract adjudication. Once checks are complete, items will be entered into the computer system and stock levels updated.


Batch number details are recorded in some trusts, although the benefit of this is reduced by the inability to track batches to the end-user. There is a requirement to do this with blood products and medicines used in reproductive health services.


When controlled drugs are ordered and receipted, the requirements of the Misuse of Drugs Regulations must be followed. Records of receipt are made in a register and the balance of stock received updated (see Chapter 5 for a more detailed discussion of controlled drugs)




Practice varies between trusts: this function is carried out by pharmacy staff in approximately 80% of trusts and by finance staff in the remainder. Wherever it is carried out, the system requires input of invoice data into the computer system and checking of price invoiced against price expected on the original order. Most trusts require exact matching of contract line prices and agreed tolerances with non-contract prices but use last purchase price on the orders.


Historically, invoices have been received in hard copy with details manually entered into the computer system. The receipt of electronic invoice files and subsequent matching of items is developing rapidly and is used to some extent in 20% of trusts. These systems automatically process items with complete matching of data and allow trust staff to focus on price or delivery discrepancies.


Acceptance of invoice details will update the unit cost of the item(s) on the computer system and also authorise payment to the supplier.


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