REVISTA DE LA UNIVERSIDAD DEL ZULIA. 3ª época. Año 12 N° 34, 2021

Marina V. Shmeleva // Public procurement in the healthcare sectors of Russia and EEUU, 150-166

DOI: http://dx.doi.org/10.46925//rdluz.34.10

Public procurement in the healthcare sectors of Russia and EEUU

Marina V. Shmeleva *

ABSTRACT

The aim of the study is to analyze public procurement issues in the field of healthcare.

Dialectical, logical, and comparative methods have been used. The author has studied the

best practices of such procurement and conducted a comparative legal analysis of Russian

and the US public procurement systems. The following results have been achieved: it has

been found that public procurement in the healthcare sector is considered more complex

than that in other sectors of the economy since there are more barriers and travails. This is

because through healthcare public procurement the state purchases medical equipment and

medications for state and municipal healthcare facilities. The author concludes that one of

the main problems in the regulation of healthcare public procurement is that budget holders’

supply agreements for medical equipment, medications, and medical products are often

competition-free. Covering the efficiency of public procurement in Russia, the author

highlights the main violations typical of the system at all levels (from regional authorities to

municipal institutions). There are also some practical recommendations to improve Russian

public procurement legislation.

KEYWORDS: Russian Federation; USA; health services; innovation behaviors; budgets.

*PhD in Law, assistant professor Civil Law Department Saratov State Law Academy, Russia,

ORCID: https://orcid.org/0000-0002-1628-8366 . Researcher ID: Р-6997-2017. E-mail:

civil2012@mail.ru

Recibido: 07/06/2021

Aceptado: 20/07/2021

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Contratación pública en los sectores sanitarios de Rusia y EEUU

RESUMEN

El objetivo del estudio es analizar cuestiones de contratación pública en el ámbito de la

asistencia sanitaria. Se han utilizado métodos dialécticos, lógicos y comparativos. El autor ha

estudiado las mejores prácticas de dicha contratación y ha realizado un análisis jurídico

comparativo de los sistemas de contratación pública ruso y estadounidense. Se han logrado

los siguientes resultados: se ha comprobado que la contratación pública en el sector sanitario

se considera más compleja que la de otros sectores de la economía ya que existen más barreras

y tribulaciones. Esto se debe a que a través de la contratación pública de atención médica, el

Estado compra equipos médicos y medicamentos para los centros de salud estatales y

municipales. El autor concluye que uno de los principales problemas en la regulación de la

contratación pública de atención médica es que los acuerdos de suministro de equipos

médicos, medicamentos y productos médicos de los titulares del presupuesto a menudo están

libres de competencia. Al cubrir la eficiencia de la contratación pública en Rusia, el autor

destaca las principales violaciones típicas del sistema a todos los niveles (desde las

autoridades regionales hasta las instituciones municipales). También hay algunas

recomendaciones prácticas para mejorar la legislación rusa en materia de contratación

pública.

PALABRAS CLAVE: Federación de Rusia; Estados Unidos; servicios de salud;

comportamientos de innovación; presupuestos.

Introduction

Medical services are a social good. That is why effective healthcare public

procurement tools are extremely important. In the OECD countries, the public sector

provides about three-quarters of the total health system funds. In a number of countries, for

example, in Denmark, the UK, and Sweden, up to 80% of budgets at all levels are spent on

health (OECD, 2013).

The main source of healthcare financing in any country is budget funds. Since each

country bears the high cost of healthcare, the state is interested in making it more efficient

through the procurement of high-quality goods, works and services.

Such violations as miscalculation of the agreement price, its incorrect justification, or

the lack of its justification are numerous and costly for the state. As a rule, the vast majority

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of the violations are associated with the purchase of high-tech medical equipment, modern

medications for severe and rare diseases as well as foreign-sourced medical products.

The purpose of this study is to assess the efficiency of Russian healthcare public

procurement and produce proposals for improving corresponding legislation. The results of

the study provide valuable information for the state policy developers and implementers of

national strategic plans in the healthcare system.

1

. Research Methods

The study is based on general scientific methods. The comparative legal method has

been used to analyze and compare the characteristics of procurement legislation in Russia

and the US. Specific scientific methods have also been applied, e.g. the method of analysis has

been used for collecting and summarizing the data from Russian and foreign studies together

with the methods of deduction and classification.

2

. Results and Discussion

Currently, the health systems of most countries of the world are facing daunting

challenges even if their priority objective remains the same. The objective is to ensure an

effective and sustainable healthcare system in the context of current and projected

demographic changes and the needs of the population. The quality and efficiency of medical

care and high standards of medical services have always been crucial. Of course, the quality

and efficiency of medical care depends on medical equipment. Consequently, the equipment

should be procured in a timely manner. This is a long-standing economic and procedural

problem in many healthcare systems, which is evidenced by many reports on public

procurement as well as scientific works of Russian and foreign researchers.

In recent decades, the health systems of many countries have solved many complicated

problems. However, the process of demographic aging of the population requires the proper

development of legal rules to maintain the healthcare system. It is also necessary to develop

effective tools for public procurement. Today, population aging is leading to a decreased

portion of working-age people per pensioner. Trends in health indicators among older people

are mixed. Severe disabilities have been cut down in some countries but expanded in others.

Mild disabilities and chronic morbidities are gradually increasing.

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A decline in the number of able-bodied population will result in a shortage of financial

inflows to healthcare systems. An aging population is more susceptible to numerous chronic

diseases. Consequently, people will need more medical care. The need to procure high-

quality medical equipment triggers strong pressures on the state budget.

In the future, the share of public health spending in GDP is expected to grow. This is

also confirmed by the population aging forecasts by 2060. The main factors inducing this

avalanche are the following: the demand for high-quality medical services, rising

expectations, and steady technological progress.

In Russia, while procurement is being conducted, there are often violations on the part

of the health management authorities. At the municipal level, healthcare procurement

legislation is regularly violated by public authorities (health departments, ministries, or

administrations). At the regional level, potential violators are the local authorities that

manage and conduct procurement procedures.

Public inspections often reveal omissions on the part of healthcare duty holders. The

omissions are expressed in the lack of control over the execution of agreements, improper

registering of agreements, and escaping penalties for non-execution or improper execution

of agreements.

At the level of the ultimate beneficiaries, i.e. public (state-owned) and municipal

(

state-owned) healthcare facilities, the range of procurement legislation violations is much

wider. The scope of purchases made by those customers is very extensive: from the repair of

medical facilities to the purchase of food for them.

The level of competition lags far behind most countries of the world, even though

recently there have been many positive changes in the Russian healthcare public

procurement legislation. In Russia, the low efficiency of public procurement stems from

many factors, including the abuse of the lowest price criterion while conducting

procurement, arrangements for public procurement without any preliminary study of how

effective this procurement would be, etc. Nonetheless, public procurement procedures in the

Russian healthcare system can get better and more efficient through the use of advanced

diagnostic tests and treatment methods.

Up to the present, medical facility managers are likely to make agreements on terms,

which are different from the ones specified in the procurement documents and approved by

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the customer. There are also violations of the legislation related to the protocols on the results

of the procurement procedures.

This is only a small sample of violations detected in the field of public procurement of

medical services, medications, and equipment. Unfortunately, the current Russian legislation

does not make it possible (as it has been planned by the legislators) to fully eliminate public

and municipal agreements with suppliers, contractors, or implementers affiliated to

customers. Thus, the Russian legislators failed to bring new, competitive and transparent

relationships into public procurement.

At the same time, violations in the way medical equipment, medical products and

medications are supplied have had true negative impact. For example, by extending the

delivery time, suppliers unintentionally accelerate a patient’s disease progression and

provoke geographical, class and racial discrimination in the field of healthcare. Ensuring the

supply of high-quality medical products is crucial to address the disparities in the spread of

diseases and the related outcomes.

The main goal of each state, conducting procurement for healthcare facilities, is to

purchase medical equipment and medications. But at the same time, the state solves other

problems, e.g. supporting the development of competition and innovation, helping domestic

manufacturers, etc. The regulatory function of the state in the field of public procurement is

increasing not only in Russia, but also in the countries where private medical services are

very well developed (Improving Public Procurement, 2012). Thus, when the directors of

medical facilities conduct procurement, they face a bunch of tasks, including ensuring the

quality of purchased medications, treatment tools, and equipment. They also get involved in

developing competition, stimulating small and medium-sized businesses, and implementing

the imports phase-out policy (Sirotkina and Skrebtsova, 2013).

Many Russian and foreign authors are engaged in research on the efficiency of public

procurement. Their main goal is to study the determinants of public procurement and to find

ways to make procurement procedures more efficient. As a rule, the contents of the studies

is often contradictory. However, these works are rather valuable because they analyze and

compare all the ways to solve emerging problems. Most studies analyze such factors as

corruption, competitiveness, and transaction costs that affect the efficiency of public

procurement (Huculová, 2018; Baldi and Vannoni, 2017; Ochrana and Maaytová, 2012).

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“

In the US, patients depend on medical supplies and prescription drugs, which are

mainly produced by international companies located in Southeast Asia and Europe. With

each US hospital sourcing these products alone, hospital procurement officers are running

into a bewildering array of middlemen, international procurement rules, import quotas,

and exorbitant freight charges. The quality of public procurement supplies is also a concern,

as hospitals face unverified brokers and counterfeit goods.Moreover, as the crisis transitions

into a chronic concern, the finances of hospitals, particularly those that serve the safety net,

are now at risk. For some hospitals and communities, the purchasing of potentially needed

supplies at exorbitant “crisis” prices can become an existential threat. Hospitals require

many medical products including PPE and prescription drugs on a regular basis. Most

hospitals maintain a procurement officer or department to manage their inventory and order

when needed. They do this themselves or through their parent institution. While hospitals

can source products themselves through wholesalers, most contract with group purchasing

organizations (GPOs), such as Premier Inc. GPOs aggregate demand across many hospitals,

buy supplies in bulk, and in many cases obtain better prices for products than individual

hospitals can by themselves. In exchange, hospitals pay membership fees to GPOs. GPO

memberships are rarely exclusive arrangements, and it is common for a hospital to be a

member of multiple GPOs. GPO contracts feature characteristics that make them

challenging partners for hospitals when there is a surge in demand or shortage in supply.

First, larger purchasers of medical products, including regional/national hospitals, tend to

receive preference over smaller hospitals in traditional GPO arrangements. This can lead to

disparities in access across hospitals, even in the same city or country. Second, most GPO

contracts do not contain “failure to supply” arrangements that would hold them accountable

for failing to supply products that they are unable to procure and that hospitals require. This

leaves hospitals to source needed products on their own.

Third, there are no product price guarantees in a typical GPO contract. This means

that manufacturers of these products can and do charge prices above the contracted amount

and what may seem reasonable when there is a surge in demand or in the prices of base

products and ingredients. While US states have price gouging laws, cross-border federal

laws fall under the umbrella of trade and tariffs and don’t prohibit price gouging. Fourth,

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GPO contracts do not guarantee the quality of products that they procure for hospitals. For

some products, minimum quality standards set by regulators serve as a backstop. For

example, the Food and Drug Administration (FDA) regulates the quality of most prescription

drugs and maintains a database of approved PPE manufacturers as a resource to hospitals.

However, many products procured by GPOs are not regulated by federal agencies, which

incentivizes suppliers to maintain very low-quality standards or even cheat. There is also no

public information about the quality of products sold by manufacturers. GPOs and

wholesalers have no legal or contractual obligation to provide this information to their

members” (Devaiah et al., 2020).

In our opinion, an important element of healthcare public procurement is innovation-

oriented public procurement (IOPP). Among other tools, it is considered extremely effective,

since it allows the state to act as a leading buyer, stimulating the innovative development of

domestic companies and achieving social goals.

Innovative public procurement can be defined as the purchase by a medical facility of

equipment and medications, which do not yet exist but can be produced by the supplier

within a reasonable period. The equipment and medications are to be manufactured on the

basis of additional or new research as well as science and technology.

In addition, innovative public procurement contributes to the development of

innovations in many ways, e.g. through the use of new methods of treatment that are more

effective and painless.

Innovative public procurement is being actively debated all over the world. Though

this issue has been studied a lot in Europe, there are very few research papers on this issue in

the US. Moreover, American public procurement primarily embraces innovations in the

sphere of national defense and security. Most of the strategic procurement in the US is aimed

at achieving social goals, e.g. environmental protection, energy conservation, and assistance

to socially vulnerable groups.

Thus, the US government encourages the procurement and the development of

innovative solutions to meet various social needs. However, a direct reference to the purchase

of advanced technologies through federal procurement was found only in one US Executive

Order No. 13834 of 17 May 2018. In this Executive Order, “the Congress has enacted a wide

range of statutory requirements related to energy and environmental performance of

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executive departments and agencies (agencies), including with respect to facilities, vehicles,

and overall operations. It is the policy of the United States that agencies shall meet such

statutory requirements in a manner that increases efficiency, optimizes performance,

eliminates unnecessary use of resources, and protects the environment. In implementing this

policy, each agency shall prioritize actions that reduce waste, cut costs, enhance the

resilience of Federal infrastructure and operations, and enable more effective

accomplishment of its mission” (Presidential Document by the Executive Office of the

President, 2018).

Public procurement can be classified in different ways according to what is procured,

for whom, and why.

On the first classification level, there is general and strategic procurement. Any public

procurement implemented to meet the buying agency’s need for finished products refers to

general public procurement. Procurement is considered strategic when the demand for

certain technologies, products, or services is spurred in order to boost a certain market.

The next basis for classification is the forms of innovative public procurement. They

depend on the level of promoted innovations. Development procurement refers to the

acquisition of technologies that must be developed almost from scratch. Adaptive

procurement refers to the acquisition of innovations, which are necessary to refine some

specific technology when the basic technology already exists (Edquist, Hommen and

Tsipouri, 2000).

Another classification of public procurement is based on the end-user of acquired

goods, services, and works. Direct public procurement takes place when the final consumer

of the things purchased is the Government itself. Cooperative public procurement is defined

as joint purchasing, i.e. state-owned companies buy something jointly with private buyers.

Afterward, both public and private parties use the purchased innovations. Catalytic public

procurement happens when a public agency initiates a purchase, but afterward, the

innovation is used exclusively by a private person.

On top of it, three main roles of innovative public procurement have been identified.

The creation of a market occurs if there is no market for a procured technology. Market

escalation is triggered when there is a stable market for the technology, but it requires further

development to attain commercial success. Market consolidation helps to standardize the

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criteria or technical specifications for the technology to be used in the public sector. This

entails similar changes in the private sector.

Moreover, serious risks are provoked by restrictions related to public procurement of

high-tech medical devices, for example, ultrasound machines. It should be noted that Russia

has legislative restrictions for foreign suppliers on the delivery of medical devices and

equipment. That is why not all the devices are equally good since in most cases only foreign

equipment provides for quick and efficient diagnostics.

We believe it is really good that there are no such restrictions on foreign medications.

The reform of the Russian public procurement system has become an urgent issue in

recent decades. It is also essential to realize that investing in innovations is an expensive and

risky gamble. An emphasis on minimizing costs and risks in the procurement legislation may

impede innovations. Similarly, the tightening of financial management can increase an

administrative burden, which would keep the most innovative organizations away from

participating in procurement.

The Russian procurement legislation is characterized by a pronounced antimonopoly

orientation. Russian procurement procedures seem to be tailored only to one criterion, i.e.

the low price. The rules that ban any limitations on the number of participants in

procurement apply to almost all purchases in medical facilities, but special attention is paid

to the procurement of medications under the Federal Law on the Contract System. Thus, in

accordance with Article 33 (1) (6) of the Law, the procurement documents must reveal

international unlicensed names of medical drugs. If the procured medications do not have

such names, the documents must specify the chemical names and the grouping names of the

medications. There are exceptions to this rule, i.e. there are cases where the legislation allows

the procurement of medications under their trade names.

First, the procured medicinal product must be on the list of medications approved by

the Government of the Russian Federation. The procedure for forming the list is defined by

the Government Decree No. 1086 “On approval of the rules for forming the list of medications

procured under their trade names and on amendments to the Regulation on the Government

Commission on Public Health Protection” of 28 November 2013.

Second, the procurement of medications must be conducted through a request for

proposals under Article 83 (2) (7) of the Law on the Contract System. The Article covers the

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