7 April 2022
Liberal government decides it might just nationalise our digital health industry
Strange thing to do just prior to an election, but a tender just released by the Department of Health for the future running of the electronic scripts ecosystem in Australia technically outlines a plan to nationalise one and perhaps even a few of our privately (and well) run digital health companies in Australia.
Just when you thought things couldn’t get much stranger in how much micro-control the Department of Health (DoH) seeks to exert over every part of our healthcare system (GP education and training, PHN influence and power, rural health doctor placements, to name a few).
Just six weeks out from a federal election, the Department have put out a tender which overtly expresses the intent of the government to exert near complete control of two well running and successful private digital health companies, and with them, a crucial and evolving piece of our digital health infrastructure; electronic scripts.
You’d have thought that a Liberal government seeking to radically rewrite a pricing deal and appropriate all the IP and commercial value of one (or both) of two long running privately held eScript exchanges might be a risky play in the run up to an election.
The idea that a federal government department is setting out to, in essence, have a go at nationalising a few key private companies that run a major part of our e-health infrastructure, should scare the whole business sector – not just those in health tech.
At the very least, the existence of a tender with this intent will significantly dent the confidence of anyone thinking about investing privately into digital health innovation in Australia.
It will also have come as a shock to the many long established private local medical software vendors and their investors that underpin much of our healthcare system with key EHR, billing and other patient data platforms.
Who will be next to be subsumed by the DoH at a whim when they want something more to their liking?
In eScripts, the DoH is the primary direct funding body for both companies involved, so it has always had a large degree of power in the background of our eScripts ecosystem.
But, this tender proposes pricing up to 65-80% less than what the government has been paying for eScripts for 10 years now, which threatens the two existing long term vendors with extinction.
It suggests the Department can pick a new provider if they like, and mandates that anyone who wins their tender will have to hand over all of their hard earned IP to the Department (though this is a boiler plate type term in federal health contracts, it’s a real consideration for anyone wanting to tender their services and offer up their IP).
The reality is the DoH thinks they indirectly fund a lot of our other important healthcare tech vendors, like our patient management system companies, via the MBS.
A tender like this makes one think the department is developing a God complex.
If this tender process keeps going, and the price paid for eScripts in the country is reduced by 65-80%, a big chunk of that reduction will come off the margins of our PMS vendors and our pharmacy dispensing vendors. This is because, of the current 15c per valid script that the DoH pays the Rx exchanges today, nearly 60% is remitted by the Rx exchanges to other vendors as key partners in the ecosystem.
The tender is not only threatening to stifle the two main Rx exchange vendors; it is going to rip away good chunks of margin from at least six other key PMS and dispensing vendors in the country.
In other words, there is going to be a very bad ripple effect.
In this awkwardly timed and constructed tender, the DoH is pulling the rug from under our entire commercial digital health sector, their investors, and anyone thinking of investing in the sector.
Who would privately invest in building anything of import to our digital health infrastructure – and we need a lot of new investment, innovation and thinking, given we have stranded ourselves on the rocks of the My Health Record legacy – if they thought that at any point the DoH might move the goal posts using their funding power (direct or through the MBS), radically attempt to rewrite pricing to suit the government, and even appropriate all your IP in the process, which is what this tender describes?
You can’t build and run a business with this sort of uncertainty.
If you’re not familiar with our electronic script ecosystem, how it has evolved, and what it has done for you as a patient, a doctor, a tech entrepreneur, an investor or company, here is a quick potted history of eScripts in Australia, all the way up to this tender.
The really weird thing in this story is that eScripts is probably the only truly successful digital health interoperability project that the government has been involved in in the past 20 years. It is demonstrably saving lives and money (see further down for some stats).
Why is the DoH happy to put a wrecking ball through what has been achieved so far and with it and other key parts of our digital health sector?
See if you can work out the logic in what the DoH is doing.
Showing some admirable foresight, the DoH decided more than 10 years ago that having some form of centralised electronic script data exchange in order to facilitate far more efficient, accurate and well governed medication management across the healthcare system (although not hospitals) was a good idea.
The Department seed funded a couple of private companies to build the exchanges, with the promise of funding at 15c per valid electronic script that was used in the system. Ten years ago we started using the system via bar codes on all paper scripts, which when taken to a pharmacy could be validated as being correct against the scriptwriter.
In the last ten years the DoH might have paid these companies about $100m via this 15c fee. Perhaps the DoH thinks of this as investment money that entitles them to be ghost owners of these companies. But it’s not. It’s payment for services. And the service has been great.
Along the way, the Australian Digital Health Agency (ADHA) provided moderation and guidance, as eventually the government wanted scripts to be fully electronic (as they now can be).
Between the DoH and the ADHA, and the two vendors who took the risk on such a complex and important infrastructure project – ERx and Medisecure – we managed to develop a ‘point of the spear’ medication management system which is properly interoperable on a national basis . This means that today, after covid forced the hand of various parties to get their act together even faster, we have a system where a patient can accept a token on their mobile from their GP, go to any Pharmacy in the country, and get their script.
It’s an amazing system with a lot of potential still to build out better healthcare services for patients, doctors and pharmacists. Already there is quite a bit of innovation riding on the back of system and the data it generates – in things like aged care medication management in the cloud, consumer-controlled app based medication management, and consult to the home script delivery for patients through services such as Chemist 2U.
If you think about the importance of medication management in avoiding clinical decision making and system error, this was a great project to pick and move to full operational capability within just 10 years.
Kudos is due to all parties involved. It works, and it is saving us a mass of money in things like avoidable hospital admissions, controlling problems like doctor shopping for opioids and benzodiazepines, and in the time and effort of pharmacists, doctors and patients.
But the best bottom line of this set up is that it is saving a lot of lives.
Recent research has calculated that the electronic transfer of paper prescriptions (ETPs) and now Electronic Prescriptions (EPs) are preventing between 6,000 and 12,00 avoidable admissions to Australian hospitals each year.
The direct costs of such admissions is between $40m and up to $70m a year and a lot more when you start adding indirect costs.
Put that saving up against the current annual budget for the electronic prescribing, which has been $13m per annum under the 6th Community Pharmacy Agreement, rising to $18m in the first year of the 7th CPA.
Bottom line, ETP and EP is today saving the Australian Healthcare system a minimum of about $100m per year.
At this point everyone should be high fiving each other.
We should even be high fiving the the ADHA and the DoH for coming up with this project, and somehow managing to help facilitate the two main private vendors to the point where the system works like it does, and saves lives and significant system dollars.
But while we do this we must remember that although eScripts were a DoH initiative, and the project was helped by the ADHA, the real hard yards of development, testing, investment risk and building of unique IP was done by two private digital health companies, MediSecure and ERx (owned by FRED IT).
We should also keep in mind the DoH deliberately handed over this task to the vendors willing to take the risk, with the promise of future reward, based on the 15c per script fee.
In the end this project relied on some pretty hard working, innovative and determined private individuals. They took on huge risk in committing to the project way back then.
It turns out the biggest risk they took was how erratic the DoH would end up being as their major source of funding for the services they provide.
This tender contemplates reducing what the government has agreed to pay, and had been paying these companies, by up to 80%.
And the way the tender is worded, if MediSecure or ERx don’t like it, they can literally bite their respective rear ends. The DoH is the payer, and the DoH, for some reason thinks it’s Ok to demand that their trapped vendors pay that much less now everything seems to be working.
Why upend all this with the ridiculous and radical reset that this DoH tender contemplates?
First, let’s outline how ridiculous and radical this tender reset actually is.
Currently, the DoH pays 15c per valid ETP or EP that is processed through the system.
We process nearly 320 million scripts per year, but a good chunk do not end up as making the grade for the DoH as valid point-to-point electronic transactions for the purposes of payment. Only 91% of PBS prescriptions are carried through the national ETP infrastructure and the DoH only pays for 38% in total currently.
In one sense here, the DoH already has a big discount.
In money terms, the DoH is paying just nearly $20m per annum to the exchanges for this 38% of end-to-end ETPs and EPs delivered as valid, which feels already like a bargain if you accept that so far this platform is probably saving thousands of lives each year and at least $100m in direct costs in the hospital system.
Remember, of this $20m, the exchanges have to pay the PMS and Pharmacy Dispensing vendors about 50% for their part in the chain. So, for all their hard work, the exchanges are only getting about $9m really between them.
In the tender the DoH has set a base amount of $1.7m for any provider processing more than 17 million scripts, and then 3c per script. That works out as an approximate 65% cut in the price the department is prepared to pay the exchanges going forward.
Other important elements of this tender include:
- The DoH can pick one, two or three vendors to do the job; I.e., if you don’t play with us, we can kill your company stone dead with this tender, we can even kill both existing companies if we find someone with enough money and who is mad enough to outbid the two incumbents. One thing this term does is gags the two incumbents almost entirely. Their life as companies depends on them now behaving, as well as somehow trying to work out how to run everything on 65-80% less revenue.
- The tender is for four years. If you partake, you have to assign all your IP in everything you have already done and do moving forward to the DoH. Some people have pointed out that this is just a nutty ‘boiler plate’ term in all DoH and many other federal government department contracts you can ignore. But can you? It’s a significant legal term of a major government contract. You do hand over all your IP and they can do with that whatever they like in the terms outlined, if they want. You are handing over everything.
- The 3c is not set in stone. It’s guidance. The DoH seems to be signalling to the two existing vendors to eat each other alive as far as they can, otherwise perhaps miss out. They are at liberty to pick only one incumbent, or none.
- It is split up into options to provide a delivery service only, or a combination of delivery and maintain the active script list (ASL).
- The contract is for four years. After that all bets on pricing, and whatever other key terms you end up with are off again. And you don’t own your IP anymore. At that point the DoH could do the same trick again on pricing.
So why is the DoH trying for something so potentially destabilising to our only good national interoperable healthcare platform?
It appears to be attempting to save some (very little), but mostly it is stamping its foot on ERx, which being commercial, has run with the project over the years in a manner that has made it a near monopoly, and is therefore likely taking margins that monopolies tend to take.
In other words, the DoH thinks that ERx is making too much money, and looking forward they see that when we get to 320 million scripts, all valid, then they will be making a lot more again based on the current 15c fee.
Based on the above ratios ERx might one day end up taking revenue of 45% of 90% of 15c times 320 million scripts per year, or about $20m per annum.
At that amount, if you take into account how much continuing development the exchange will need, and basic infrastructure and labour costs, yes, ERx is going to be a very profitable business.
But so what?
They took most of the risk of getting into this game.
Does ERx owe the DoH or is it the other way around?
And if ERx is this bad, and we think we might save a few million, why not reign in Accenture and the outrageous $650m we have spent with this global behemoth to achieve precisely nothing with the My Health Record?
The sad answer is ERx, as a relatively small local software vendor is an easy target for the DoH. Taking on the major global consultants, which they spend hundreds of millions of dollars with each year is fraught with risk for any senior public servant.
The DoH somehow thinks that because they fund electronic scripts, ERx should have somehow behaved a little better, allowed for more innovation and done less profit taking.
That’s a pretty naïve position to adopt. ERx is a commercial operation. It works to return a sustainable and optimal bottom line to its investors.
Risk versus reward. ERx took a lot of risk opting to get into this game more than 10 years ago.
Maybe ERx should have behaved a little better though. After all, now the DoH is threatening to cut them off at the knees.
This tender is a terrible look for the government in how they might end up treating any private sector partners. The DoH will want to hope that the consumer business press does not get wind of the tender and work out what it means for any business wanting to work with the federal government.
And at least ERx isn’t a total monopoly.
Our understanding is that over time, MediSecure – which didn’t play its cards right early in this ecosystem evolution and lost traction to the point where it only is 10% of the market against ERx’s 90% – is now being a smarter competitor, and making some share inroads.
So, we do have some competitive tension starting to work in this ecosystem.
Why then does the DoH still want to persist in pulling the rug out from under the sector in such a radical manner?
In its tender document the Department says it is taking the opportunity to review and optimise the ecosystem to:
- improve the customer experience for prescribers, patients and dispensers
- support further scale and innovation
- ensure the effectiveness and sustainability of its operating and funding model
- ensure alignment with broader healthcare reform processes and integration where possible with related digital architectures and initiatives.
Addressing each point here:
- further scale is not a problem. It’s happening already and as doctors and pharmacists systems are updated and their users become educated, eventually all scripts will run through the system (consider, 91% do now, but not completely point-to-point as the DoH would like).
- improve customer experience for prescribers, patients and dispensers? It’s hard to see how this tender is going to achieve that. In a worst case scenario, they might blow up everything that they have, and no one will have anything. Would the DoH really risk shifting to an entirely different vendor after 10 years of development with ERx and Medisure? Did anyone in the DoH stop to think what would happen if MediSecure and ERx somehow uniformly decided to arc up and withdraw services as a protest to how badly they are being treated? What if both company’s boards met independently and came to the conclusion that, given how onerous and in bad faith this tender is, they should just work out a way exit when they can as there is no real future in operating with such an unstable funding body. The DoH does not own their IP yet and even if they did they couldn’t do what ERx and Medisecure do. In the current budget $325m has been committed to pharmacists working within aged care for better medication management. That can’t happen if this system is disturbed. In some respects, the DoH is playing with fire.
- Ensure the sustainability of the funding model? Again, the DoH is doing the opposite here. They are shouting from on high, this is an emotional and unstable single funding body you are dealing with and anyone who invests can’t expect stability of any kind. Outside of this, is $20 million moving to $45m really that much to pay for a service that is working in interoperability infrastructure to deliver you more than $100m each year in savings, and saving thousands of lives? The DoH has spent over $2 billion on the My Health Record and it is not used at all. There is nothing anyone can easily use it for. This system on the other hand is saving lives every day in real time and processing 320 million transactions of high value, every year. What is really wrong with it that it needs a radical reset?
- Ensure alignment with the broader healthcare reform process? The DoH is now surely in the realm of taking the mickey with a statement like this. What is the broader reform processes and structures the eScript eco system is going to work with? The My Health Record? The eScript ecosystem is the tip of the spear as far as government and private sector innovation and interoperability and progress go. Things should be aligning with it, not the other way around.
Maybe you can work out why the DoH put this tender out, without any real warning, to the key vendors and the broader digital health vendor sector, just prior to an election.