Part 9: Our views on the procurement

Inquiry into Waikato District Health Board’s procurement of services from HealthTap.

9.1
In this Part, we set out our views on Waikato DHB's procurement process. In summary, we have concerns that many of the important elements of procurement we expect to see from a public organisation were missing or carried out too late in the process. Specifically, we consider that:

9.2
We are also concerned about the lack of documentation for the early stages of this procurement. Although we were provided with many documents from Waikato DHB's files, many of the details about the procurement had to be obtained from personal recollections of those involved or of staff and Board members who became involved later in the process. Not only does this make a subsequent review or inquiry challenging but it also means that Waikato DHB cannot rely on its records to enable public trust and confidence in its processes.

Procurement rules that district health boards must follow

9.3
Like other organisations in the public sector, when DHBs carry out a procurement process, they are spending public funds. As a result, they must operate within the procurement framework that the Government has put in place to ensure effective, fair, and transparent procurement processes that support accountability and ensure value for money. They must also comply with their own procurement policy.

9.4
The Government's procurement framework is broadly made up of:

  • a set of procurement principles that underpin how public organisations will go about sourcing the goods and services it needs and how it will engage with the suppliers it contracts with;
  • the Rules, which are designed to support good practice for procurement planning and good market engagement, leading to better outcomes for agencies, suppliers, and taxpayers; and
  • a range of information and guidance, including a toolkit of resources (including templates for preparing business cases and procurement plans).

9.5
The Rules are mandatory for a large part of the public sector, including DHBs from February 2015. Public organisations can be audited for compliance with the Rules, and suppliers have a right to complain if they consider that an agency has not complied with the Rules.

9.6
Waikato DHB also had its own procurement policy that, consistent with the Rules, required:

  • a business case for any procurement that was more than $500,000 in total value, had significant strategic implications, or carried significant risk;
  • an assessment of the market conditions and business needs in the short term and long term;
  • a clearly documented rationale for the proposed procurement approach;
  • a planned and documented evaluation approach before approaching the market;
  • a procurement plan for procurements with a value of $100,000 or more before any approach to the market;
  • a due diligence process to be carried out on potential suppliers to assess their financial ability, technical ability, and capacity to fulfil the contract; and
  • a written record of any decision to depart from the usual market testing requirements.

The business case was deficient

9.7
A business case is not required for every procurement. However, it is generally advisable when a procurement is of higher value or risk. The Rules state that:

… all procurement covered by the Rules should be supported by a business case or procurement plan that has a level of detail reflecting the size, value and complexity of the procurement.

9.8
Also, Waikato DHB's own procurement policy required a business case to be prepared because the proposed procurement was likely to be more than $500,000 in total, had significant strategic implications, and carried significant risk.

9.9
A good business case will provide the justification for a project. It will evaluate the costs, benefits, and risks of alternative options and present a recommendation for a preferred approach. A business case should set out the business need, describe how critical the services are, and how the services will deliver the strategic business objectives. It should also demonstrate an understanding of the market and price drivers, and estimate the whole-of-life cost for the project.

9.10
Waikato DHB prepared a business case that went to the Board in July 2015. However, it was (and was presented as) a strategic business case for implementing virtual care. As we have explained earlier, the business case set out the challenges facing Waikato DHB at the time, argued for a need to make a significant change in service delivery to address those challenges, and set out the rationale for a move to virtual care. The business case did set out some targets, identified risks, and estimated costs – however, the discussion of these issues in the paper was focused on the implementation of virtual care generally, rather than on a specific proposed option for delivering it.

9.11
The business case included a short section on "Procurement Compliance" that stated that there was only "one identified supplier, being Health Tap, which has been confirm[ed] by several independent sources such as Forbes". It also noted that:

[t]o minimise risk and in recognition of the fast paced market in this service provision the initial agreement will only be for a period of 24 months. This will allow the opportunity for market maturity to occur and completive [sic] pressures to be created when the contract is available for review.

9.12
The business case presented a rationale to the Board for adopting a virtual care approach at Waikato DHB. However, it did not provide a full and comprehensive description of the market at the time. It did not set out all the possible options that could be considered, and it did not explain why the HealthTap platform was considered the preferred option.

9.13
As a result, there was no discussion in the business case of how the services proposed to be purchased from HealthTap aligned with the strategy to move to a virtual care model. Nor is there any discussion about any of the costs, benefits, or risks of selecting HealthTap as a provider. As we have outlined above, an organisation following a good procurement process will first identify its strategic objectives and priorities, and then plan a procurement approach designed to achieve those objectives.

9.14
Even more importantly, the business case was presented to the Board in July 2015, after discussions had been had with HealthTap, a letter of intent had been proposed, and a draft contract had been provided from HealthTap that included an in-principle agreement about the services to be provided and a proposed contract price.

9.15
It was described to us that the business case was informed by what the contract said. This is the wrong way around. Creating a business case at such a late stage in the process risks the rationale for the procurement being written to reflect a deal that has already been done, rather than setting out a proposal for a deal that meets an organisation's business objectives and priorities.

9.16
In our view, the business case that went to the Board did not meet good practice in many respects. Overall, it lacked evidence and authority for the decisions it was seeking to justify.

The procurement plan was also a problem

9.17
A separate procurement plan is not always needed for every procurement. In some instances, it can make sense to combine a procurement plan with a business case. For high-value or high-risk procurements, a procurement plan is a good discipline because it will (ideally) outline the entire proposed procurement process, from a sourcing plan to a contract team and exit strategy.

9.18
As noted above, the Rules require a robust business case or procurement plan to be completed for all procurement subject to the Rules. Waikato DHB's procurement policy required a procurement plan for procurements with a value of more than $100,000 before any approach to the market.

9.19
A good procurement plan will build on a business case, setting out an organisation's objectives and how it intends to achieve them, as well as an outline of what is being procured and the cost involved. The plan should include a proposed strategy for engaging the market and a description of the type of procurement approach to be used. It should also record how the procurement complies with an organisation's procurement policy and the Rules. Where an exclusion or exemption is proposed, the rationale should be clearly outlined in the procurement plan.

9.20
During our inquiry, we were provided with a draft procurement plan that was prepared at some point between April and June 2015. Again, importantly, the plan was prepared after discussions with HealthTap had progressed to the point that a draft contract had been prepared. The plan was never finalised.

9.21
As a result, the plan did not cover all the matters we expect to see in a robust procurement plan. The draft plan included a cursory reference to a review of the market and a direct closed procurement method, but no analysis was provided to support the proposed approach on either of these issues.

9.22
There was a brief reference to the fact that an exemption from the Rules was requested, and we assume that this related to the requirement to use an open competitive procurement process unless a specific exemption applied. The plan did not make clear what the exemption was, state why the exemption would apply, or record whether a final view had been reached on whether the direct procurement approach to HealthTap was consistent with the Rules.

9.23
In summary, the plan did not contain a robust description of the matters we expect to see set out in such a plan. It was created too late in the process to be effective as a procurement plan, and it was never completed. Its main purpose appears to have been to try to show that good practice had been followed rather than because it actually had.

Expert procurement and legal advice came too late

9.24
The planning phase of a good procurement process will consider the skills and experience required in a procurement team. Importantly, the right expert advice (including legal and procurement advice) should be sought at the very beginning of the process.

9.25
From the evidence we have seen, it does not appear that either the procurement team or the internal legal advisers at Waikato DHB were aware of the proposed procurement with HealthTap until after a draft contract was provided in April 2015.

9.26
At that point, several procurement issues were raised, including:

  • whether the Rules applied to the procurement;
  • if so, whether there were any exemptions to the requirement to advertise openly;
  • whether Waikato DHB was required to submit a procurement plan to the Ministry of Business, Innovation and Employment; and
  • whether approval was required from the National Health IT Board.

9.27
At that stage, Waikato DHB's Corporate Solicitor also sought external specialist legal advice.

9.28
We have not taken a view on the accuracy of any of the advice. However, it is clear that, once Waikato DHB's legal and procurement staff became aware of the draft contract with HealthTap, they took appropriate steps to ensure that robust advice was provided.

9.29
Once again, the advice was sought too late in the process. Waikato DHB's advisers were providing advice on which rules related to the procurement process after discussions between Waikato DHB and HealthTap had already progressed to the stage of a draft contract. Not only is this far from good practice but it also created significant risk for Waikato DHB. In essence, regardless of the quality of the advice, it came too late to help shape a good procurement process, to ensure compliance with relevant procurement requirements, and to sufficiently manage any risks associated with the terms negotiated with the provider.

9.30
Further, the evidence we have seen does not make it clear whether Waikato DHB ever reached a final view on many of the matters its staff raised. There is no record of a final decision about whether any of the exemptions in the Rules applied that would allow it to carry out a direct procurement approach with a single supplier. Waikato DHB did not submit a procurement plan to the Ministry of Business, Innovation and Employment as required by the Rules. We did not see any evidence to indicate why this did not occur.

Waikato District Health Board did not collaborate sufficiently

9.31
DHBs receive public funding to plan, fund, and provide health and disability services for the population of a district. To fulfil those functions, they cannot work in isolation. They have to work with other providers of health and disability services, their communities, and other DHBs.

9.32
The New Zealand Public Health and Disability Act 2000 (the Act) requires DHBs to collaborate with relevant organisations and to foster community participation in health improvement. Waikato DHB is expected to work with the other DHBs in the Midland region, which includes the Lakes, Tairawhiti, Bay of Plenty, and Taranaki DHBs, on a regional services plan (with some information technology context) and a regional IT plan.

9.33
DHBs have an annual funding agreement with the Minister of Health. Part of that funding agreement is the Operational Policy Framework. As well as requiring Waikato DHB to prepare an annual plan, the Operational Policy Framework requires Waikato DHB to prepare a regional services plan, to follow certain processes if making significant changes to services, and to work with other DHBs in the region to develop, maintain, and implement a regional IT service plan.

9.34
The Act also outlines requirements for DHBs to consult on specific matters (such as strategic planning changes, on proposals for a significant change to policies, outputs, or funding for outputs stated in an annual plan, and on land sales). DHBs also have general consultation requirements under the Act, which means that consultation might be required in a variety of circumstances and on other issues.

9.35
There is some uncertainty about whether Waikato DHB's use of the HealthTap platform would have triggered the process requirements related to making a significant service change – but we saw no evidence that Waikato DHB considered this. We also saw no mention in Waikato DHB's annual plan or regional services planning of its intention to use the HealthTap platform.

9.36
It was not until 19 February 2016 that the Chief Executive emailed the Midland region DHB chairs and chief executives with information about Waikato DHB's virtual care developments. This was about 12 months after Waikato DHB began exploring HealthTap's services. It is also about five months after the contract with HealthTap was signed and well after the strategic business case was approved. As EY noted in its report:

The DHB's business case did not position virtual care within a context of either Midland Regional collaborative information system and service planning, or primary health care model of care development – both of which were (and remain today) important factors in the operating environment.3

9.37
Given the strategic importance of the initiative and its implications beyond the hospital setting, it is not unreasonable to expect that, to some extent, Waikato DHB might have signalled the initiative to other DHBs earlier and through the relevant planning mechanisms, as well as consider whether it was a significant service change. It did not do that.

It is unclear what Waikato District Health Board was trying to achieve

9.38
We are left in some doubt about what Waikato DHB was trying to achieve with this procurement. In the evidence we have seen and the interviews we carried out, it was often described as a trial of a platform to learn what virtual care delivered by Waikato DHB might look like. At the end of a two-year trial, Waikato DHB would be in a better position to approach the market and carry out a more competitive process.

9.39
On the other hand, some people, including the Chief Executive, described a desire to make the platform available to other DHBs and obtain a commercial benefit from its initial investment in buying the services from HealthTap.

9.40
This possible commercial benefit is reinforced by the draft letter of intent, which refers to Waikato DHB becoming the "innovation hub" for the delivery of end-to-end healthcare using the HealthTap platform. It is also reflected in the contract, which includes an exclusivity period during which HealthTap would not supply any other healthcare provider in Australia or New Zealand.

9.41
The information that went to the Board explained that, after a six-month "exploratory stage", there would be a roll-out of virtual care throughout Waikato DHB and it would be embedded as a new way of working. Virtual care was presented to the Board as providing a "step change" in service capability that would achieve operational savings that would fund it.

9.42
A good procurement process will include a review, so that an organisation can understand whether the anticipated benefits have been received, whether the services achieved value for money, whether there are opportunities for further improvements, and what lessons can be learned for the future.

9.43
In our view, the deficiencies in the procurement planning stages we have identified mean that Waikato DHB did not clearly identify the intended benefits of procuring the HealthTap platform from the start. That makes it very difficult for Waikato DHB to carry out meaningful measurement of those benefits.

Greater governance oversight was warranted

9.44
When the Board approved the strategic business case for virtual care in July 2015, it asked for further detailed reporting on several matters. This included reporting on the negotiations, scope, benefits, cost, risks (including an implementation strategy), key performance indicators and deliverables, engagement with the Medical Council and staff, the monitoring mechanism, financial and budgetary impacts, and confirmation that the legislative framework allowed for the service to be established. Later, in October 2015, the Board asked for future reporting on how the project was tracking against budget, achievements, and a benefits analysis.

9.45
Once the contract with HealthTap was agreed, a separate Virtual Health Change Steering Committee was put in place and was responsible for governance and monitoring of the project. We note that, in its report, EY did not consider that the steering committee, in practice, had overall ownership of the programme.

9.46
Reporting to the Board on progress with the HealthTap platform did not routinely include systematic analysis about the actual progress of the project, its risks, and how those were being managed. We did not see documentary evidence of the Board being provided with reporting on the matters outlined in paragraph 9.45, although we saw evidence that some reporting to the Board was verbal.

9.47
We accept that, in the context of an organisation of the scale and complexity of Waikato DHB, it is not realistic or practical to expect the Board to directly govern and track the progress of every project or initiative. Annual expenditure on the HealthTap platform was less than 1% of Waikato DHB's annual budget, and a separate steering committee was set up to govern and monitor the project.

9.48
Having said that, this initiative was strategically important and had the potential to fundamentally alter the way services were provided in all parts of Waikato DHB. The Board had expressed concerns about several issues and asked for subsequent reporting on them. There is evidence that the Board was given some level of briefing about the progress of the project but not that their specific concerns had been addressed. In light of the significance of the project and the concerns that the Board had raised previously, our view is that greater oversight was warranted.

3: Ernst & Young (17 May 2018), Waikato District Health Board Assessment of Implementation of the HealthTap Solution, page 4.