Yes,they paid too much of our money for these

Sure and isn’t it obvious that if the government is buying lots of something then it should get a pretty good price? Equally sure and isn’t it obvious that this isn’t quite how it does work out? For the annals of government procurement are packed jam full with stories of gross overpayments for items, gross inefficiency. So much so that there’s a phrase to describe such state buying – The Simple Shopper.

The real conflict here is between economies and diseconomies of scale. Yes, it’s obviously true that large orders for something can lead to better prices. This is the way that Aldi and Lidl’s own brand stuff is often so good, they buy vast amounts thus get good deals. But we’ve also got that lesser known diseconomy of scale problem. Organisations can – do – become too large and thus start to become more inefficient. It’s rare indeed that the natural scale of efficiency is everything, those are called natural monopolies.

In the case of buying for the NHS it’s not that there’s a natural righteous scale in surgical glove orders, not at all. Rather, that the organisation is sufficiently large that it just doesn’t do purchasing efficiently. It’s an internal diseconomy of scale:

A group of NHS hospitals has saved £400,000 a year simply by all agreeing to use the same brand of rubber surgical gloves, it has emerged.

Seven hospitals in Sheffield joined forces to buy in bulk and reduce overheads by collaborating on a price matching scheme for 11 widely used products.

The initiative achieved a total saving of £2 million, simply by choosing the same brands and negotiating lower rates, a success with highlights the huge losses the health service is making by not taking advantage of its buying power.

It comes after it emerged there are huge disparities in how much hospital trusts are paying for everyday items, with some paying more than double the price for equipment such as surgical scalpels.

There’s an amusement here. Try to guess where the budget to run the scheme is? No, I’ve no idea at all but I’d wager a small sum that the £2 million saving isn’t including the costs of the staff to run the scheme.

Even if it is note what the finding is. That just because they’re not being efficient about it they were wasting money. And the truth is that all government works this way. Simply because no one has the incentives to do it better. There’s no profit motive, thus none to save costs. Military equipment, motorways, computer systems, they’re all bought this way.

Which is rather why it all costs so much. It’s also why the argument for private providers on the government account. Such private providers will be profit orientated. Construct their incentives correctly – yes, obviously this will have to be a built market – and we could get to that nirvana, we save money overall as a result of the greater efficiency of prompted by their incentives.

Think it through for a moment. A buying organisation for 7 hospitals. What? Three peeps and a receptionist? Be worth offering them a pretty good cut of £2 million in savings to get the savings, no? And it would be a pretty neat little business to have as well. The incentive being some percentage of what is saved off previous bills?

That the NHS is making these savings is great. The advantage of the profit motive is that they would have been made earlier, and that they would be made everywhere.

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  1. Military equipment, motorways, computer systems, they’re all bought this way.

    See also HS2. Why does no-one (it would appear) look at a bill of £50 billion (it will, of course, end up at least double that) for a couple of hundred miles of track and say: “Hang on, that’s £200 million a mile! What are you building it from – gold bars, inset with diamonds?”

    For comparison, Oz extended the ‘Ghan’ from Alice to Darwin (nearly 1,000 miles) in 2004 for a couple of billion Australian dollars. Sure, the Ghan is no-one’s idea of a high-speed* train and the cost of land in NT is rather less than the Home Counties. But still, that’s getting on for three orders of magnitude cheaper per mile! Someone is taking the piss.

    * and don’t get me started on the obvious point that very high-speed rail is utterly unsuited to England, given its geography and demography (except to allow our betters to compete in willy-waving with their European colleagues)

    • Yeah, everyone talks about Japan and France having high speed, but they suit those countries: they have cities 300 miles away from each other. London to Birmingham isn’t going to make much difference. By the time it’s built, remote work will be so big that no-one will care.

  2. “A buying organisation for 7 hospitals. What? Three peeps and a receptionist?”

    But the thing is, I briefly worked for the buying section of a division of a major British company. Wouldn’t surprise me if the amount of buying going on was equivalent to those 7 hospitals. About 25 people in an open plan office, plus couple of management types in their own cubicles. Oodles of paper in lots of different colours.. Doddle of a job. Hadn’t the vaguest idea what I was supposed to be doing when I started & probably less when I left. Winged it because it was so gloriously inefficient nobody noticed. As long you showed up every morning & wandered around with a piece of paper in your hand, no one bothered you. Even wandered around with a piece of paper on overtime.
    What was the product? High tech weaponry for the British military.

  3. It sounds as though there is still not a buying organization for 7 hospitals (whether within or outside the NHS), but 7 buying organizations that have simply started to email one another. Most of the savings is yet to be had.

  4. Having once looked briefly at supplying the NHS a service and needing to apply to a central buying outfit and meet all kinds of stupid irrelevant requirements impossible for a six-person company to provide I don’t like central buying. Of course companies which want that kind of business do succeed in jumping through all the hoops but I always got the impression of being an outsider and not part of the game. That kind of thing happens, you know. It is surely happening with HS2, it is no more that a pile of money to be shared out by insiders. If a railway comes of it that will be purely incidental.

    • The irrelevant requirements are one aspect of the inefficiencies-of-scale that Tim mentioned, culminating in the military requisition process and $700 toilet seats. Meeting those requirements is a cost that the winner includes in the bid.

      Regarding HS2 and insiders, a reply last week cited Boston’s “Big Dig,” the absurd conversion of the Elevated Artery to a tunnel. There were funds budgeted to “achieve community buy-in,” a thinly veiled set of bribes to local potentates or their pet projects.

      • Meeting those requirements is a cost on everyone. The winner, the losing bidders who qualified, the non-bidders who gave up and the buyers who sit around making up such requirements not because of their relevance to anything but to use them as a way to winnow out the bids.

        I note that nowadays any bidder has to have a policy on human trafficking. WTF?

  5. ‘A group of NHS hospitals has saved £400,000 a year simply by all agreeing…’

    A hospital is a building and cannot agree anything. So the question is who agreed? Did the surgeons agree or purchasing department? Are tge gloves cheaper because they are a lowe quality? Past experience shows these decisions are often made without the input of clinicians or the actul users who then refuse to use the bulk bought item which then rots in stores whilst the clinican insists what they want is bought.

  6. About 25 years ago, I was taking tea and biccies with the MD of BT Research at Adastral Park. He pointed to the biscuits and observed that, even though BT spent over £1,000,000 a year purchasing biscuits, it was still cheaper for him to get his secretary to pick up a packet from Sainsbury’s (better quality, too).

  7. My sister used to write for an in-house hospital journal and covered a story whereby the NHS tried this before. Some hotshot consultants fresh out of university came in, reckoned they could save millions by buying surgical gloves centrally, and pu a scheme in place to take the purchasing away from the individual hospitals. Problem was, the dickheads doing the buying imposed one or two types on everyone, not realizing certain tasks require specific gloves that previously were bought by the hospitals who knew what they needed. Total cock up.

    The problem with the NHS isn’t that it needs reform, but that any reform will be done by spivs in flammable suits who will screw it up royally.

  8. This is what the Yorkshire Purchasing Organisation used to be before it circled the drain of self-sustaining bureaucracy. At my parish council we get better prices by just going to the trading estate.

  9. I don’t know whether the excellent Mike Denham first coined the phrase “simple shopper” on his much missed Burning our Money blog, but he certainly be credited withe making the term more widespread by providing some excellent examples.

    Another hidden cost of bulk purchasing is storage and distribution. You’ll certainly get an excellent price on delivering to a central location, but ask the supplier to do the distribution and you won’t be far off the original cost. Ask for the storage and distribution to be done by a government department and you’ll probably end up paying more.