I have been asked to comment on the European Court of Justice decision of October 18 relating to the application of public procurement rules to a drug supply arrangement between a privately owned hospital and a public hospital.
This is almost becoming a tradition for the national healthcare service in Italy. Comes September… and a new spending review hits the pharmaceutical and medical device industry.
On August 4, 2015 a law decree has been approved by lawmakers, which introduces a number of new mechanisms for monitoring and reining in public spending in the healthcare sector. In particular, the new legislation has introduced several measures:
While measures aimed at cutting spending in connection with general supplies and medical devices have been entrusted in principle to local authorities and healthcare providers, the national pharmaceutical agency (“AIFA”) plays a central role in the envisaged mechanism to achieve savings for pharmaceutical products. In accordance with the provisions of the new decree, AIFA has indeed conducted negotiations throughout the month of September 2015, with the aim of decreasing overall spending. The new legislation provides the grouping of products in several “clusters” that include therapeutically similar products, regardless of their active principles. The lowest price in each cluster is then used as the reference price for direct negotiations between AIFA and manufacturers.
The new measures also provide that, in case of failure to reach an agreement, reimbursement by the national healthcare service may be withdrawn. However, it is also expressly provided that generic products are not admitted to reimbursement until any patents and supplementary protection certificates of branded products are definitely expired, thus providing the industry with assurances in connection with their protected drugs.
The reiterated attempts by public authorities to renegotiate prices with suppliers appear to clash not only with basic contractual principles (“pacta sunt servanda”), but also with fundamental rules of public procurement legislation. As the government (in fact, almost yearly) demands discounts on existing contracts, reliance on such contracts is affected, along with transparency and open competition in public procurement procedures. The truth is that the need to cut public expenditures is increasingly overriding basic tenets of contracts and public procurement law.
Med Tech and Pharma industry associations have voiced their concerns, while suggesting that efficiency and savings may be obtained by the national healthcare service through internal reorganization processes rather than by demanding additional discounts to suppliers. In fact, if we step aside from the conflicting commercial interests of suppliers (who want to maximize their revenues) and purchasers (who need to minimize their costs), we cannot but note that, again, the government appears to use cost cutting tools that focus on quantity rather than quality. On the contrary, we would expect that more emphasis should be given to Health Technology Assessment and innovation. We surely need to spend less money, but also to spend it more wisely.
Recent rulings by two administrative courts in Italy have restricted the discretion of public entities in the award of public contracts without open procurement procedures, in particular in the healthcare sector. The two decisions reaffirm the Courts’ policy of restricting recourse to in-house contracts and extensions of expired contracts.
The first decision, issued on May 7, 2015 by the Supreme Administrative Court in Rome, invalidated the award of a service contract to a company established and owned by the regional government of Puglia for the provision of in-house services to healthcare facilities in the region. The contract was awarded without a public procurement procedure, on the basis of the fact that it was an in-house service contract. The Court, deciding upon an appeal brought by a competitor who was not granted the possibility to submit its offer, held that a procurement procedure open to competitors must always occur, even if a governmental entity has established a specific vehicle for the purpose of providing in-house services. The Court left a limited room for in-house services, i.e., services provided by an entity fully controlled and managed by the same administration awarding the contract, as if it was one of its internal departments.
On a different occasion, the regional administrative Court of Turin had the chance to reiterate that the extension of expired public contracts is prohibited by public procurement legislation, as it prevents competitors from participating in new public procurement procedures. In addition to stating again this general principle, the Court in its decision of April 3, 2015 no. 573 also held that governmental entities should proceed with calls for tenders whenever the goods or services they intend to procure are not covered by a national or regional framework agreement. In an effort to curb public spending, the Italian government has implemented in several sectors a centralized negotiation process, whereby a central governmental agency (“Consip”) enters into framework agreements for the supply of goods and services to local administrations. Local administrations are generally bound to adhere to such framework agreements and, if they do so, no call for tender needs to be issued. Public hospitals, on the other hand, must adhere to healthcare-specific regional framework agreements and to Consip agreements; only if no such agreements exist they may proceed with the issuance of a call for tenders.
In the case the before the Court, a local healthcare office postponed the validity of an expired supply contract, after assessing that the framework agreement entered into by Consip would have only partially covered the needs of the local administration and – most importantly – would have entailed a higher cost than the expired agreement. Regardless of the potential savings that the extension of the existing contract would have granted the public administration, the Court held that no exceptions can be envisaged to the issuance of a public procurement procedure. Clearly, more than by savings, the Court must have been guided by the desire to sanction a widespread practice of extending expired contracts, which in most cases stifles competition and does not guarantee lower prices.
It is expected that this policy, increasingly adopted by many administrative Courts, will be one of the highlights of the new public procurement legislation that is currently being examined by Italian lawmakers. The new public procurement code is, in fact, expected to provide new instruments for a more effective fight against corruption and inefficiencies within the public administration.
“Not only must we punish corrupt companies but also encourage healthy businesses“. The statement released by Mr. Raffaele Cantone, Chairman of the Italian Anti Corruption Authority, summarizes the rationale underpinning the so called “legality rating”, i.e. a score that the Italian Antitrust Authority assigns to companies who apply for it. In fact, Law no. 62/2012, converting Law Decree no. 29/2012, requires the Italian Antitrust Authority to assign a score ranging from one to three “stars”, to any applying company who complies with a series of legal requirements (inter alia, the absence of criminal sanctions or preventive/precautionary measures against key personnel of the company, no judgments pursuant to Legislative Decree No. 231/2001, no breaches in the field of health and safety at work, and no definitive tax assessments against the company).
The instrument, available to entities generating a turnover in excess of Euro two million per year, is completely optional, but continues to be widely utilized. A statement of the Antitrust Authority shows in fact that, in January 2015, the Authority received respectively 14% more applications than in the previous month and the trend seems to continue.
So, companies line up as schoolboys in order to show that they are worth a certain number of “stars” in an effort to demonstrate the soundness of their compliance program: is it worth it? To respond, we have looked into the benefits of the legality rating to understand the actual relevance of a practice that is becoming widespread. Below is a summary of the alleged benefits.
In conclusion, if public procurement tenders give some weight to the legality rating, then obtaining it may actually be a good idea.
The risk is, as with any type of certification, that it will become a merely formal requirement, which does not attest the actual compliance efforts or a corporation’s culture.