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.