Editor’s Note: As is often the case when the hands of time tick relentlessly forward into another new year, we take this opportunity to look ahead to what the next 12 months might hold in store for us both personally as well as for the purchasing industry as a whole.
In this the second installment of our 2013 Prognosticators Series, in which we will call upon the Procurement Insights’ guest columnists to share their insights and expertise Colin Cram will, through his post titled “2013 AND ALL THAT JAZZ,” tell us what we should look for in the year ahead.
Whether it makes headlines in both the UK and USA in 2013, the costs of medical care will become an increasing issue in both countries in the next few years. In the UK, the cost of the National Health Service is about $170bn (£110bn) a year. In the USA, the cost of Medicare, which provides health care to those aged over 65 and for certain medical conditions for those aged under 65, is about $490bn. In the UK this works out at nearly $3000 per person (including children and babies) a year. The cost of Medicare per person works out at about $10,000 per person entitled to it. It would require some pretty good analysis of the coverage of both schemes to establish how they compare with each other in offering value for money. For example, the NHS provides for long term care and recuperation, plus treatment for a range of rather less obvious medical conditions such as obesity. It also fully funds the cost of drugs for people aged 60 and over and certain other groups in society. Medicare, being almost exclusively for the over 65s will have a higher proportion of eligible people using its services. Also, one would need to compare the quality of care.
What is clear, however, is that the costs of both will continue to rise at above the retail price inflation rate, due to the continuous improvements in medical treatments and the increased longevity of the population as a whole. This will present a challenge to both governments, which are running huge budget deficits in order to subsidise services to their citizens. The situation is made more complicated in that the main users of NHS services in the UK are the elderly – who are also most likely to vote in a general election. So any government that wishes to be re-elected needs to look after the NHS.
It seems to be accepted in both countries that it is not feasible to continue to run large budget deficits. There is also a debate in both countries about whether the budget deficit should be eliminated – and debts paid off – through increased taxes, reduced spending on public services or a combination of both. However one plays around with the figures, if governments wish to make big savings, they have to make them in the big spend areas. Making big percentage savings on small areas of expenditure, however inefficient, will still not deliver much. The NHS accounts for almost one 6th of UK government spending. Medicare accounts for a little under 20% of the Federal budget. So, if the budget deficit is to be reduced, healthcare has to be part of the equation.
So how does one square the circle of above inflation cost increases, increasing medical treatments available and rising demand with the need to keep costs down or even reduce them? The government in the UK is attempting, rather unsuccessfully, to keep costs rising in line with the retail price index, i.e. no real term cost increases, through demanding £20bn ($32Bn) efficiencies in the next few years. How one can measure those efficiencies is not clear. However, one of the key areas for securing efficiencies is procurement. NHS procurement costs amount to some $64bn (£40bn) a year of which 50% is procurement by hospitals, including drugs and medical equipment. The problem with the NHS is that its hospitals are run pretty independently and that independence is increasing. There is also a certain amount of competition between them to attract patients – in crude terms, the more patients, the more financially viable the hospital. That means they like to do their own procurement, though centralised procurement of drugs is mandatory for reasons of value for money and health and safety. The difficulty of securing value for money in such a devolved environment is illustrated in that there have been 4 procurement strategies in the past 10 years designed to solve this problem. Last summer, the government commissioned a new review, run by Sir Ian Carruthers. The terms of reference included how money could be saved, but also how innovation could be procured more effectively. The report of the review, to which I contributed, was due to be released in December and has been written. It will be being circulated to various interested parties for comment and the fact that it looks as if it will not be released for another 2 months at least indicates that at least part of it will be contentious. Hopefully it will be, as the only way major procurement savings will be delivered is if there is a fully integrated procurement organisation which all NHS hospitals will have to use.
It is reasonable to presume that Medicare procurement forms at least the same percentage of costs as that of the NHS – probably much more as there would appear to be a much greater procurement of medical services from the private sector. That means that, despite some recent initiatives to tackle the cost of procuring drugs, there will have to be a major step change in the management of its procurement if costs are to be kept affordable.
©Colin M Cram FCIPS