Victorian Auditor-General’s report
26 October 2011
 
Procurement Practices in the Health Sector 
Audit summary
Victoria’s public hospitals bought more than $1.6 billion of goods and services in 
2010–11, their second largest cost after salaries and wages, accounting for almost 15 per cent of expenditure. Such a significant outlay of public funds means procurement activity should demonstrate integrity, transparency and value-for-money.
Health Purchasing Victoria (HPV) is the central procurement agency for the public hospital sector. Set up in 2001 under the Health Services Act 1988 (the Act), it was expected to improve hospital system effectiveness by:
·	facilitating public hospital collaboration to get the best value in purchasing
·	reducing inefficient or inappropriate duplication of functions, particularly in tendering 
·	improving purchasing practices by developing policies and practices that assure probity and improve supply chain management.
HPV procures centrally on behalf of hospitals for high volume, commonly used goods and services. Its contracts cover around 23 per cent of the public hospital procurement spend. For the rest, hospitals manage their own procurement and may buy locally, subject to the conditions of HPV central procurement contracts and policies. The Department of Health (the department) is the state’s system manager and is responsible for overseeing the model.
A 2005 audit by this office, Health Procurement in Victoria, found that while central procurement had saved hospitals money they could get better value still, and that there was a need for cooperative action to address data and other challenges. The department, HPV and hospitals accepted the audit recommendations. In 2008, the Ombudsman identified probity deficiencies in hospital procurement practices. 
The objective of this audit was to determine whether procurement practices in the public hospital sector deliver best value and are conducted with probity and transparency. It assessed the performance of the department, HPV and four hospitals.
Conclusions
HPV performs central procurement well, has expanded the range of products centrally procured and is making significant savings. However, 10 years after it was established, HPV is yet to implement all its functions under the Act or exploit its full potential. HPV by not undertaking its probity assurance function under the Act, and having only limited involvement in procuring medical equipment has missed opportunities for greater savings and better procurement practice. As system manager, the department should have done more to address these issues.
The responsibilities and performance measures set for HPV in its Memorandum of Understanding (MOU) with the state, as negotiated by the department, addresses only a selection of the functions assigned to HPV in the Act. The department only monitors and reports on HPV’s performance against the performance indicators in the MOU. Therefore HPV focuses on fulfilling this agreement and, in so doing, it neglects other important legislative functions.
In 2005, HPV unsuccessfully sought significant additional funds from the department to fulfil its statutory obligations. The HPV board also raised this issue with the department in a board meeting in late 2006. Since then, the department has supported HPV with a series of mostly non-recurrent grants for specific projects. However, these projects have not been aimed at addressing the gaps between HPV’s activities and its statutory functions. 
As HPV does not assure the probity of public hospital procurement the department lacks information necessary to understand whether the sector’s procurement practices are properly conducted. Given the large annual procurement spend, and that section 131(g) of the Act requires HPV to ensure probity, this is a significant shortcoming. The need for oversight is demonstrated by the fact that almost one in five of the hospital procurement processes we reviewed had weaknesses in the transparency and appropriateness of decision-making.
Findings
Performance of Health Purchasing Victoria
Despite being established to save money and improve probity in public hospital procurement practices, HPV is not fully discharging its role and responsibilities.
Nevertheless, it has built credibility and improved its relationship with the public hospital sector in recent years and has more than doubled its coverage of sector spend since 2005. HPV’s estimate of $40 million in savings for the sector in 2010–11 is reasonable. Its tendering processes and practices are robust, transparent and well managed with only minor room for improvement.
Its resources, however, are devoted almost entirely to central procurement operations for public hospitals, leading to neglect of its other roles:
·	it has not assured the probity of public hospital procurement practices and has not given adequate assurance that hospitals that are asserting compliance with HPV’s mandatory contracts are actually complying 
·	it has not effectively discharged its data sharing and education roles
·	it has not exploited the potential for significant additional savings by centrally procuring more complex medical items and equipment 
·	it has not actively managed contracts to identify and alert all hospitals to additional savings available under these contracts, nor has it measured actual savings 
·	it has not effectively addressed data challenges raised in this office’s 2005 audit despite assurances in its response to that report and in the Minister for Finance’s response to the Auditor-General’s 2005–06 reports.
HPV started addressing these performance issues during 2010–11 with support from the department. HPV’s future success relies on more effective coordination between the department, HPV and hospitals.
Performance of the Department of Health
The department has not provided HPV with sufficient support for the discharge of its full legislative responsibilities. It influences and monitors HPV through an MOU, signed in October 2006. The responsibilities and key performance indicators for HPV do not address all of the functions assigned by the Act. For example, there are no key performance indicators for HPV’s probity monitoring role. The initial MOU expired on 30 June 2011 and the current draft replacement MOU still does not fully address HPV’s responsibilities as set out in the Act.
The department actively oversees HPV, with regular meetings to examine performance. However, the oversight is limited to the terms of the MOU and so does not adequately address how well HPV performs all its legislative functions.
The department has not effectively resolved issues with planning for hospital medical equipment asset replacement, or the lack of robust, consistent data on purchasing across the health sector. This prevents HPV, the department and the sector, from fully realising the potential of the central procurement model.
HPV does not have a comprehensive and accurate database of hospital expenditure on which to base its forward tender program. This means it cannot get reliable data on hospital expenditure by product categories and types in time to identify opportunities for future procurement. Our 2005 report found the sector was hampered by the same data deficiencies, including the lack of comparable data being further complicated by having no standard product names, descriptions and codes. To address this, HPV has been developing a Victorian Product Catalogue since 2009, in line with Victoria’s commitment to the National Product Catalogue for the health sector. The Victorian Product Catalogue should address the lack of a common product catalogue when it is introduced in 2013.
Lack of information on medical equipment assets across the hospital sector and the absence of an overarching framework and rolling multi-year medical equipment replacement plan also hinders HPV from identifying, and acting on, central procurement opportunities. The department has been developing a medical equipment asset management framework to, in part, enable coordination of equipment purchases, since 2005. The framework is still in draft form although the department made tools available to the sector in 2007 to assist hospitals prioritise medical equipment replacement and develop related business cases.
Notwithstanding the absence of a statewide medical equipment asset management and replacement framework and plan, more could have been done by the department to involve HPV in procuring high volume medical equipment such as beds, ventilators, patient monitors, and high value equipment such as imaging equipment. Around $145 million has been spent on replacing medical equipment in the past four years but there has been minimal involvement by HPV.
Oversight of hospital procurement probity
Under the Act, HPV is responsible for ensuring the probity of public hospital procurement practices. The department, also under the Act, is charged with advising the minister on the Act’s operation to assure its objectives are met. The objectives of the Act include proper use of public funds and value-for-money procurement. This gives the department a role to oversee the operation of the Act, which includes whether HPV is performing its statutory function of ensuring probity in procurement.
Neither agency is fulfilling these obligations. HPV does not assure the probity of hospital procurement, and while aware of this deficit, the department has demonstrated no action to address it. In addition, the department has not included this function in the MOU with HPV, has not responded when HPV has raised this issue, and advised against HPV’s 2007 attempt to issue a probity policy for procurement in the public hospital sector.
The department does not accept that it has an oversight role in relation to health system procurement. The department argues that HPV and hospital boards are empowered to comply with the requirements of the Act and are responsible for meeting those requirements, such as assuring probity in procurement. However, the department can be active in supporting better procurement practices having regard to its role as system manager, and given its powers under the Act: including advising the minister of the Act’s operation and doing ‘anything else that the Secretary considers appropriate’ to ensure the objectives of the Act are met. 
On several occasions, the department has facilitated better procurement practice by:
·	guiding hospitals on procurement and facilitating a customised probity training program for public hospital staff
·	imposing requirements on hospitals for procurement as a condition of funding and requiring hospitals to certify compliance with them
·	advising the Ombudsman that it will monitor hospitals’ progress in implementing his recommendations on procurement practices and then requiring hospitals to report on their progress.
The department is therefore well placed to actively support HPV and health services to meet legislated requirements regarding probity in procurement.
Hospital procurement 
Procurement policies and practices in the four public hospitals audited are variable, with instances of poor practice and insufficient transparency. This requires attention because hospitals self-managed procurement accounts for around 77 per cent of the $1.6 billion spent by the sector in 2010–11.
While the hospitals’ procurement policies and procedures are broadly consistent with Victorian Government Purchasing Board guidelines and better practice there are opportunities for improvement, particularly at the two non-metropolitan hospitals examined.
Board oversight of procurement was ad hoc and typically limited to approving major decisions or responding to emerging issues.
A representative sample of over 200 procurement decisions from the four hospitals showed 38 (19 per cent) did not meet public sector standards of transparency. In these cases hospitals had failed to regularly test longstanding arrangements against the market or had not obtained sufficient quotes. While the incidence of poor procurements varied among the hospitals, the number of issues indicates that public hospital procurement practices can still improve.
The sample of procurement decisions also revealed numerous cases where hospitals had exempted themselves from going to tender or calling for multiple quotes. Although the exemptions granted were adequately justified in almost all instances, hospital management should be vigilant when granting exemptions as this practice cannot become the norm as it clouds transparency and limits the potential to gain the value‑for-money that an open, competitive process offers. 
Hospitals struggle to extract meaningful management information on procurement and supply activity from the HealthSMART financial and procurement computer modules. Action to correct this has been slow but is now underway.
Hospitals can improve their procurement efficiency with more active and purposeful supply chain management, including active monitoring and consolidation of suppliers and by assessing and standardising the variety of commonly bought products.
Recommendations
Number	Recommendation	Page	
1.	That the Department of Health complete and implement the medical equipment asset management framework. 	20	
2.	That the Department of Health resolve public hospital procurement data problems by expediting the effective implementation of the Victorian Product Catalogue.	20	
3.	That the Department of Health oversee whether Health Purchasing Victoria is performing the functions assigned to it under the Health Services Act 1988. 	20	
4.	That the Department of Health review resourcing for Health Purchasing Victoria to undertake its full legislative responsibilities in partnership with them. 	20	
5.	That Health Purchasing Victoria aligns its plans, resources, and performance monitoring with its functions under the Health Services Act 1988.	20	
6.	That Health Purchasing Victoria purposefully leads procurement improvement in the public hospital sector by actively fulfilling all its legislative functions. 	20	
7.	That Health Purchasing Victoria actively assures the probity of public hospital procurement practices.	31	
8.	That public hospitals revise their procurement strategies, policies, activities and monitoring to demonstrate consistently robust and transparent procurement practices.	31	

Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Health, Health Purchasing Victoria, Melbourne Health, Peninsula Health, Latrobe Regional Hospital and Castlemaine Health with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments, however, are included in Appendix B.