Many hospitals now outsource the dispensing of outpatient medicines. There are many benefits from doing so, including financial. For a medium sized acute hospital, the financial benefits are typically a few hundred thousand pounds a year. Having recently completed an outsource deal for two hospitals in Essex, here is my summary of the commercial model. The advantages of outsourcing the dispensing of outpatient medicines include:
The commercial model is contingent upon two key points. Firstly, the continued access to NHS contract prices for medicines, and secondly the zero rating of dispensed drugs for self-administration. On the first point, all Trusts that have implemented outsourcing arrangements have been able to ensure that the outsourced provider can access the contracted prices obtained by the Central Medicines Unit (the CMU is the part of the NHS that leads on ensuring the effective procurement of medicines). The second point is a little more complex, as follows. For private healthcare providers, a supply of qualifying goods dispensed under a prescription from a medical practitioner for personal use away from a hospital or nursing home can be zero rated. This allows the private healthcare provider to recover the VAT incurred on medicines to be self-administered at home by patients. The dispensing has to be by a private provider though, as the dispensing of medicines to outpatients by NHS bodies is part of its statutory non-business activity, with no entitlement to VAT recovery. HMRC’s concessions on the zero rating of medicines for self-administration are explained in; VATHLT6010 - The zero-rate for dispensed drugs and subsidiary notices; VATHLT6020 Scope and coverage VATHLT6040 What is a prescription? VATHLT6050 What are qualifying goods? VATHLT6060 What is personal use? VATHLT6065 Qualifying goods supplied with medical care VATHLT6070 Concession for NHS prescriptions VATHLT6080 Concession for private prescriptions VATHLT6090 What is dispensing? Statutory healthcare provided by NHS bodies is a non business activity for VAT purposes. The purchase of medicines is a cost component of each Trust’s statutory healthcare activities and therefore the VAT paid on the purchase of medicines cannot be recovered. The zero rating of medicines for self-administration in this model therefore represents a considerable saving. However, as explained in the above VAT notices, the concession could be withdrawn or restricted at any time if there is reasonable cause to believe that it is being abused. In return for providing this service, outsource providers typically charge a management fee per dispensed item, and this can range from £3.50 to £7.00. Values at the lower end of this scale will be tendered by pharmacy providers bidding for large contracts (eg a large Trust or more than one Trust working together) or long contracts or where significant space is available to support a greater volume of retail sales. Some of the dispensed outpatient drugs will be within national tariff as part of Payment by Results (PbR), and therefore the reduced cost is a saving for the provider hospital. But many drugs, particularly the higher cost drugs with a greater VAT saving, are excluded from tariff and recharged to commissioners (NHS England and CCGs) at cost. With VAT charged at zero percent, this would transfer all of the saving associated with PbR excluded drugs to commissioners, but in practice providers and commissioners usually agree to share the benefit on a 50:50 basis.
Although a straight forward outsource via a restricted procedure is the most straight forward route to outsourcing outpatient dispensing, other commercial models are available. For example, Foundation Trusts are able to create separate legal entities and therefore could create a community pharmacy SubCo to dispense its outpatient drugs. This model can ensure contract compliance if the subsidiary buys all of its medicines from the parent Trust as the Trust has control of the supply chain. With a straight forward outsource, the customer contract will need to include clauses to prevent the outsourced provider purchasing alternative medicines and substituting these without notification. Joint venture models with existing pharmacy providers are also possible. My pathology blog explains the issues associated with setting up a joint venture, and therefore no further detail is provided here. Having successfully completed a pharmacy outsource deal in 2015, I have recent experience of the market and could repeat the exercise at low cost. Please do not hesitate to contact me if you would like assistance. Copyright © 2015 Magrath Consulting Limited, all rights reserved.
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Mark Magrath MBAI am a management consultant with 12 years experience as an executive director in an NHS Foundation Trust, including 10 years as Deputy Chief Executive. I only write blogs on projects and assignments that I have personally led. My aim is to write amazing content that combines real world experience with insightful advice. Categories
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August 2021
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