3.1 Monopoly providers and high transaction costs

A first set of issues relates to the characteristics of the market for products in the health sector. Procurement is ‘the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process’ (Laffont and Tirole, Reference Laffont and Tirole1993). The Directive 2014/24/EU describes it as ‘one of the market-based instruments to be used to achieve smart, sustainable and inclusive growth while ensuring the most efficient use of public funds’ (European Union, 2014). Often, procurement does take place in a competitive market. However, it can still operate where there is limited or no competition, as is often the case in smaller countries where there is limited international trade in the products in question (Nemec et al., Reference Nemec, Kubak, Krapek and Horehajova2020). This is important in health systems in several respects. First, many products purchased in the health sector are produced by monopoly providers. This is especially the case with medicines (Expert Panel on Effective Ways of Investing in Health, 2018). Thus, pharmaceutical companies are incentivised to invest in research and development by rules giving them exclusive rights to the intellectual property generated for 20 years after filing a patent, with provisions for extension in certain circumstances. During this time competitors cannot enter the market. Even when this period has expired, competitors may chose not to, for example where the market is small or where they face substantial regulatory hurdles. Of course, in many cases patents are not incompatible with competition between different products that satisfy the same health care need.

Second, the call for tenders may specify a reserve (or base) price, the highest price the purchaser is willing to pay. The benefits to the purchaser, faced with a fixed budget, are clear but it may inhibit potential providers from bidding. This may arise if the reserve price is low and, especially, if other provisions transfer risk to the provider, for example where the nature of what is being purchased is difficult to specify in a verifiable way (i.e. that can be observed by a third party). In these circumstances, there may be high transaction costs from specifying and evaluating what is offered. This consideration and the previous one together decrease the attractiveness of the procedure to potential participants and, while neither is specific to health systems, they are particularly common in them.

A further issue relates to high transaction costs, especially when contracts are renewed frequently. The concept of public procurement assumes that open competition will encourage new market entrants, providing more innovative products at lower cost. However, frequent switches to a new provider may involve set-up costs, for example the transfer of patient records to a new data system, or information to patients telling them that they should obtain care from a different provider. Again, while not specific to health care, it assumes particular importance because it risks creating disruption for patients who interact with the system, some of whom may be vulnerable and placed at risk by any interruption of services. Contracting with the same provider over a prolonged period of time thus offers certain benefits, especially where it is associated with trusted relationships that permit less expensive contract monitoring processes to be employed, but may limit market entry by competitors.

These features point to several issues with public procurement in the health sector that must be addressed. The first is the administrative cost involved. In principle, the cost of writing the tender document, evaluating it, undertaking due diligence on any potential providers, negotiating a new contract and monitoring its implementation should be outweighed by the savings incurred. Where any of these is complicated, this may not be the case. A related issue is the ability of the purchaser to specify in sufficient detail the quality of the good or service being purchased, while leaving sufficient flexibility for the provider to adapt to changing circumstances.

A second relates to the rapidity with which a contract can be executed. There will be times, for example in a pandemic, when speed is of the essence (Vlček, Reference Vlček2018). The negotiated procedure without prior publication may be used where public procurement rules designed to build in adequate time for potential providers to respond is insufficient. However, there are trade-offs involved, as hasty processes may lead to sub-optimal outcomes, including corruption (Teremetskyi et al., Reference Teremetskyi, Duliba, Kroitor, Korchak and Makarenko2021).

Finally, there is the problem of asset specificity. When a new contract is agreed, the provider may have to invest considerable resources in the means to deliver it and the assets produced might not be usable for a different purpose. Thus, they will find a way to recoup the costs within the first contract period as they cannot be sure it will be renewed. This will tend to increase the price. Similarly, a purchaser seeking an alternative provider in the next contract round must accept additional costs if another firm has to make the same investment. Thus, asset specificity may require long-term relationships to maintain incentives for investment, but this is incompatible with the requirement to lower barriers to market entry.

3.2 Life-cycle costing

When purchasing equipment, it is important to consider not only the upfront costs, but also those that will accrue throughout its lifetime. Thus, the tender process should include a mechanism by which all future cost components can be quantified, including operation, maintenance and consumables. There are well-established techniques for ‘life-cycle costing’ referred to in the Directive (European Union, 2014). However, there is an inevitable uncertainty when estimating long-term costs of technologies, given changing patterns of disease and clinical indications, potential substitutions due to technological progress, productivity changes and decreasing learning costs. This is especially the case where new technology, as it increasingly does, comes in the form of bundled products, for example as combinations of medicines and monitoring systems, diagnostic equipment and operating contracts or telemetry devices and remote monitoring. These bundles pose particular challenges for those estimating lifetime costs given the high degree of asset specificity and potential for changes in patterns of disease or technological advances that make existing equipment obsolete.

3.3 Interoperability

Lack of interoperability of equipment, and particularly information technology is problematic (Pronovost et al., Reference Pronovost, Johns, Palmer, Bono, Fridsma, Gettinger, Goldman, Johnson, Karney, Samitt, Sriram, Zenooz and Wang2018; Kuoppamäki, Reference Kuoppamäki2021). In the latter case it is the ability of two or more systems or components to exchange information and to use the information that has been exchanged (Sheikh et al., Reference Sheikh, Anderson, Albala, Casadei, Franklin, Richards, Taylor, Tibble and Mossialos2021). It has two elements, technical, referring to the ability to move the information, and semantic, which is the ability to understand it. Problems of interoperability came to the fore during the COVID-19 pandemic when, for example, contact tracing Apps developed for Android phones could not work on iPhones (Du et al., Reference Du, Raposo and Wang2020).

There have been several initiatives to address this but there are major barriers. These include lack of agreement on standards; divergent incentives and agendas among vendors and disparate and inconsistent characteristics in purchasing strategies and practices. In practice, interoperability is still very low on the agenda and a product that in other respects is superior may be incompatible with existing systems. This contrasts with other sectors where it is relatively highly developed, often out of necessity. For example, the ability of mobile phones to move across different networks has demanded common standards. The same is true of the banking industry, allowing customers to obtain cash from different companies' ATMs. For this to happen in the health sector, however, will require leadership that brings purchasers and providers together to commit to the achievement of interoperability, identifying goals and requirements, and developing mechanisms for collaboration on common standards and specifications (European Commission, 2014). It will also be important to ensure that those providers committing to interoperability are rewarded, for example by including a requirement that systems be interoperable within tender documents.

3.4 Technical performance

Pharmaceuticals are subject to rigorous evaluation before being placed on the market. However, many forms of technology (such as medical devices) do not go through the same process of evaluating their technical performance, other than to establish their safety. Moreover, even when such information is available it seems that it is rarely used. A recent Swedish study of procurement of health and welfare technologies found that relevant evidence was used in under a fifth of tenders (Richardson et al., Reference Richardson, Landerdahl Stridsberg and Wamala Andersson2022).

An area of particular concern is the growth of mobile health (mHealth) applications. The number of mHealth applications on the market is increasing rapidly. While they offer many advantages, especially in terms of patient empowerment, few have been subject to any formal evaluation of their ability to produce health gain. One problem is the frequent failure to collect and analyse evidence on a product's performance over time, principally because data systems and information infrastructure do not support this. In this respect, there are opportunities for greater use of patient-reported measures. Health information systems are good at collecting data on health care activity, but often lacking when it comes to collecting information on the outcomes of this activity. Some have begun to capture different types of Patient-Reported Measures – PROMs (Outcomes), PREMs (Experience) and PRIMs (clinical safety Incidents) (De Rosis et al., Reference De Rosis, Cerasuolo and Nuti2020). In the near future, the use of Real World Data with information coming from multiple and diverse sources could play a role in generating outcome measures (e.g. although this should not preclude the rigorous evaluation required for approval of pharmaceuticals) (Löblová et al., Reference Löblová, Csanádi, Ozierański, Kaló, King and McKee2019). However, such data, along with evaluations of characteristics such as ease of use, accuracy and acceptability to health care workers, can inform procurement decisions (Huddy et al., Reference Huddy, Ni, Misra, Mavroveli, Barlow and Hanna2019).

3.5 Application of MEAT Criteria

Given these issues, there are several particular challenges with application of the MEAT criteria for procurement. Silo budgeting is one of the greatest barriers to applying MEAT, even if decision-makers are theoretically supportive of taking a value-based approach (Expert Panel on Effective Ways of Investing in Health, 2019). It is difficult for procurement officials to spend more this year if the benefits show up on someone else's balance sheet now or at some point in the future. In addition, political cycles tend to be short so there is no incentive for policymakers to take a long-term view. A mechanism to incentivise the use of a broader approach to measuring value, with a clear signal from policymakers, is needed. Otherwise, it makes public procurement a very difficult mean to achieve health outcomes which are usually seen after several years. Finally, there are challenges in measuring value. Trying to monetise value and weigh long-term benefits or broader socio-economic factors is difficult. The longer the time frame, the greater the uncertainty but in some specific cases a degree of risk-sharing between supplier and purchaser can mitigate this uncertainty.

3.6 Beyond the health sector

The health sector represents a substantial share of the overall economy in many places and the decisions it makes when procuring products and services can have implications that go beyond its boundaries. Increasingly it is seen as a potential lever for achieving policy goals, such as innovation, regional development, growth of small and medium enterprises (SMEs) and environmental goals (Edquist et al., Reference Edquist, Vonortas, Zabala-Iturriagagoitia and Edler2015). A 2015 OECD Survey on Strategic Procurement for Innovation documented the growing inclusion of procurement to support innovation has been included in national or sub-national innovation strategies (OECD, 2017). Green public procurement has been defined the European Commission as a ‘process whereby public authorities seek to produce goods, services, and works with a reduced environmental impact through their life cycle when compared to goods, services, and works with the primary function that would otherwise be procured’ (European Commission, 2008). These considerations can be incorporated into procurement through inclusion and technical specifications, award criteria and contract performance conditions (Testa et al., Reference Testa, Grappio, Gusmerotti, Iraldo and Frey2016; Fuentes-Bargues et al., Reference Fuentes-Bargues, González-Cruz and González-Gaya2017, Reference Fuentes-Bargues, Ferrer-Gisbert, González-Cruz and Bastante-Ceca2019). SMEs can be supported through innovation partnerships, such as one in Lombardy that identified three areas of innovation that could be met by local suppliers, automated equipment for moving beds and stretchers, Information and Communications Technology (ICT)-based remote systems for control, monitoring and home assistance to disabled and chronically ill people and robotic systems for blood sampling (Vecchiato and Roveda, Reference Vecchiato and Roveda2014).

4.1 Pharmaceuticals

In the vast majority of cases, procurement of pharmaceuticals is straightforward and there is clear guidance from the World Health Organization on best practices (Table 1), with several elements already enshrined in EU procurement and other single market law, designed to ensure transparency, equal treatment, proportionality and mutual recognition. However, pharmaceuticals have several characteristics that make transactions complex. First, those involved in protecting and improving health (hospitals, primary care centres, health professionals, etc.) require very large numbers of product lines. The number of unique medicines has increased dramatically and, while some can be substituted for others, increasing targeting of individual molecules means that ever greater numbers of medicines have a unique mode of action. To add to the problem, the demand for individual product lines can often be difficult to predict (De Maeseneer and Boeckxstaens, Reference De Maeseneer and Boeckxstaens2012).

Table 1. Features of successful procurement of pharmaceuticals

Source: WHO EURO (2016).

A second set of complex transaction problems arises especially, but not exclusively, when procuring products that are new to the market (Expert Panel on Effective Ways of Investing in Health, 2018), with a growing number being offered at high prices. Current solutions involve developing policies to contain pharmaceutical costs, including overall budget constraints or spending caps. Possible future directions involve earmarking funds for medicines used in particular settings (e.g. oncology) with caps beyond which companies selling products financed through these funds are required to pay rebates. However, it is also necessary, especially in countries where the pharmaceutical industry is a major player in the economy, to take account of the need to incentivise innovation. This is a very complex area that goes far beyond the scope of this paper. Reports of shortages of medicines, even in advanced industrialised countries (Goldsack et al., Reference Goldsack, Reilly, Bush, McElligott, Bristol, Motanya, Field, Vozniak, Wong, Schwartz and Domchek2014; EAHP, 2018), offer further evidence of the complexity of their procurement.

Medicine shortages also highlight the challenge regarding power imbalance. Distortions of the market, such as exploitation of a dominant position by manufacturers to increase prices or divert supplies to more lucrative purchasers, or even withdrawal entirely from the market, can occur (Van Malleghem and Devroe, Reference Van Malleghem and Devroe2013; Wickware, Reference Wickware2020). A high proportion of medicines that are used have been on the market for many years, with many having lost their patented protection. Often, there will be a number of providers of a generic medicine and, even when patents have not yet expired, there may be scope for substitution of medicines within classes. One factor to consider when agreeing a contract is the security of supply, especially where manufacturers have outsourced manufacture or depend on complex arrangements for obtaining components, creating a risk of shortages. In practice, it is quite difficult for the purchaser to ensure that there will not be problems in the availability of the purchased pharmaceutical product during the contract period (Ferner et al., Reference Ferner, Aronson and Heneghan2019). Finally, even though, in theory, there are few barriers to the market entry when shortages do occur, evidence of profiteering with generic medicines shows that this is a real problem (Wouters et al., Reference Wouters, Kanavos and Mckee2017; Competition and Markets Authority, 2016).

Pharmaceutical pricing is high on the policy agenda because expenditure on medicines comprises a substantial share of health budgets. While comparisons should be undertaken with caution, the most recent data collected by OECD reports figures ranging from 6.4% of health spending (Denmark) to 34.4% (Bulgaria) (OECD, 2022). The corollary of this is that the pharmaceutical industry is an extremely important player in the economy. There is a tension between ensuring the sustainability of an industry that can reap the rewards of innovation while at the same time providing medicines that are affordable (OECD, 2020). This is complicated because of uncertainty about the true costs of research and development, reflecting a lack of transparency (Wouters et al., Reference Wouters, McKee and Luyten2020).

4.2 Health technology

In many cases, procurement of health technology is straightforward. There are agreed technical specifications for many of the more commonly used items. Once purchased, running costs are relatively low as a proportion of the initial outlay. Maintenance is also often straightforward. However, there are situations where this is not the case. Transactions become increasingly complex. Complex health technology is bundled with services, or requires large volumes of consumables, giving the manufacturer a powerful incentive to limit the potential for substitution with cheaper versions. There may also be substantial running costs and costs of disposal when the equipment is replaced. An extreme example is where it contains radioactive material. For these reasons, it is important to employ life-cycle costing, while recognising that this involves considerable uncertainty, especially where the item is expected to be in use for a long period.

Another example of the complexity of the transaction is the inclusion of quality or non-price dimensions, with purchasers not only deciding what criteria to use but how to weight them. The public procurer must know the product very well before designing the tender specifications and thus the award criteria. As noted previously, MEAT can include a wide range of criteria, including aesthetic and functional characteristics, consumer service, technical assistance, environmental sustainability and disposal costs. However, operationalising these criteria and allocating scores against them can be a very complex task, involving many difficult judgements. Each acquisition may have to develop its own set of weights and indicators, increasing transaction costs. Also, use of multiple criteria can lead to a situation where none of the criteria is significant in reaching the decision. There are, however, a number of examples in the literature that can be drawn upon to show what is possible. Some of these are described in Table 2 (Gerecke et al., Reference Gerecke, Clawson and Verboven2015).

Table 2. Public procurement processes that have applied wider MEAT criteria

Source: Gerecke et al. (Reference Gerecke, Clawson and Verboven2015).

Other considerations, such as acceptability to staff and patients, go beyond the usual technical assessments that are available to the purchasers. When procuring e-health solutions the selection process must be able to ensure that the clinical and technical needs are addressed while taking account of the corresponding regulatory and financing contexts (Mathews et al., Reference Mathews, McShea, Hanley, Ravitz, Labrique and Cohen2019). Recent examples of such complexity can be found in accounts of purchasing electronic health records systems (Hertzum and Ellingsen, Reference Hertzum and Ellingsen2019). Except in the most straightforward cases, purchasers are likely to require assistance from specialist procurement advisors. The identification, description and mapping, in an interdisciplinary way, of the organisational complexity and care pathways of the hospital or care system will be key in the process of procurement process of an e-health solution. This includes assessment of the compatibility of the e-health solution with the billing and regulatory policies of the care system or state where the solution should be implemented (Snowdon et al., Reference Snowdon, DeForge, Axler, Pierre and Kolga2019). As a consequence, the transaction costs may increase, especially if this is the first time the product is being procured or if the purchaser is not drawing on experience of others that have been in this position. It will be necessary to make a judgement as to whether the benefits of the increased evaluation that is required outweigh the costs of undertaking it, recognising that a poor procurement may cost more in the long run, especially if it has to be repeated.

Beyond these criteria, it is possible to include social and environmental criteria. This adds a further level of complexity and, while there may be sound policy reasons for taking them into account, the cost of doing so will fall on the purchaser while the benefits accrue to society as a whole. For this reason, it is unlikely that they will be included unless there is a requirement, normally embedded in legislation or regulations, as in Sweden (Streng, Reference Streng2018). Otherwise there will be the risk of free riders.