Assistive Devices Program

Transcription

1 Assistive Devices Program Pricing and Supply Chain Review Final Report June 24, 2011

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3 Project Background and Scope Despite rising costs, funding of assistive devices and provision of high quality services to individuals with long-term physical disabilities in Ontario continues to be a priority for the Ontario government. However, the process in which the Ministry of Health and Long Term Care (MOHLTC) funds the Assistive Device Program (ADP) seems to be costly based on the findings from the 2009 ADP audit performed by the Office of the Auditor General of Ontario (AG). The AG identified issues of over-pricing and spend management across the Program, and concluded that the Program s pricing reviews were not completed on a timely basis and did not take into account potential for capturing rebates or volume discounts. In order to address the AG findings, ADP has engaged in several initiatives including a Modernization Project that seeks to address program opportunities. A specific focus of the Modernization Project is to review the funding and pricing of the various device categories, to identify solutions for mitigating value for money risks and ensure that the vendors are compensated equitably and the clients are paying a fair price. PricewaterhouseCoopers LLP (PwC) was retained by ADP to support the Modernization Project in achieving its mandate by conducting a supply chain and funding / pricing evaluation. The scope of the review was as follows: General: o Determine and document opportunities for ADP to play a role in the supply chain of assistive devices; o Evaluate current ADP funding framework and models, and evaluate other appropriate funding models; o Document alternative options and impact analysis, and recommend new funding and pricing framework; o Present action plan to Senior Management; and o Provide an arms-length, transparent evaluation of current funding models. Specific to the Supply Chain Review: o Conduct a detailed evaluation of the supply chain for devices funded by ADP to identify opportunities that can drive supply chain efficiencies; o Provide sustainable options and alternative models for ADP to expand its role in the supply chain; and o Outline recommendations and corresponding business impacts and requirements of implementing each option. Specific to the Funding / Pricing Review: o Document in detail and evaluate the current funding and pricing models used by ADP for all categories of devices; o Identify costs drivers and their impact on pricing of the devices categories; o Conduct a review of the funding and pricing models and make recommendations on future state funding / pricing models that would provide ADP with best value for money while supporting ADP s objective of providing client-centred support and funding to Ontario residents who have long-term physical disabilities; and o Conduct a jurisdictional review (comparable assistive device programs) to identify other models that might be adopted. PwC 3

4 Project Approach The work plan below illustrates the collaborative approach taken to address the requirements listed above and to outline the findings, recommendations, a business case for change and an implementation roadmap that will help facilitate the achievement of the Modernization Project s mandate. The project was 8 weeks of effort across 3 months of calendar time. N/A Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Current State Assessment Confirm scope, key dates, roles, work plan and communications plan Mobilize team and conduct Kick-off Meeting Desktop review of documentation Interviews with ADP Staff Interviews with external stakeholders Documentation of the current state models Confirmation with ADP Staff Jurisdictional Scan Interviews with Jurisdictional Representatives Analysis and Opportunity Identification Current State Confirmation and Recommendation Development Workshop 2 nd Recommendation Development Workshop Current State Evaluation highlighting strengths and opportunities Gap Analysis Recommendations and Final Report Final Report Development 2 Final Report Feedback Meetings Review available documents to obtain overview of current state business process and systems Analysis of data collected Identification of Funding / Pricing Model and Supply Chain Options Refinement through discussion with ADP staff Weekly project status meetings with discussion of recommendation development Validation events PwC 4

5 Project Approach The project was completed over an eight week period, during which PwC interviewed internal ADP staff and conducted internal future state development workshops to solicit input from the staff members on future state options. As well, PwC interviewed external stakeholders which included: Other departments within the Ministry; Manufacturers; Vendors and Health Service Providers; Equipment Pools; and Clients. PwC also conducted a jurisdictional review to compare and contrast the ADP program with other comparable programs. Jurisdictions that were included in the review included: Alberta (Alberta Aids to Daily Living Program); Saskatchewan (Saskatchewan Aids to Independent Living Program); Quebec (Régie de l'assurance maladie du Québec); New Zealand (Accessable and Enable) ; and South Australia (Domiciliary Equipment Service). ADP s Supply Chain was assessed from both a qualitative and quantitative perspective in order to identify advantages of the existing supply chain structure as well to highlight potential opportunities for ADP to expand its supply chain roles and capabilities. The qualitative assessment involved a review of qualitative data including interviews, existing documentation and a comparison of ADP s current supply chain against a targeted future state. The quantitative assessment involved an analysis of ADP s financial data including Accounts Payable spend and spend with the Transfer Payment Agencies. Quantitative information will provide a baseline against which any future solution can and will be measured. PwC 5

6 Summary of Key Findings PwC found that the ADP structure and business processes that are employed, are generally effective and aligned with ADP s mandate of providing client-centered support, access and funding to Ontario residents who have long-term physical disabilities. Over the last number of years ADP management and program staff have been successful in driving internal improvements and have positively impacted service delivery to clients. The following are some initiatives that have been implemented or in the processof being implemented: Implementation of a new information system that seeks to increase the level of automation in the claims process, improve cycle time, reduce Accounts Payable backlog and improve ADP s ability to monitor the authorizer and vendor network; Improved transparency of the procurement of home oxygen services by establishing a vendor of record list and establishing clear requirements for vendors; Internal process improvements as part of the Modernization Project to drive efficiencies; Standardization of claims processing; Issuance of customer satisfaction surveys every 2 years which highlight the fact that 87% of respondents reported overall satisfaction with the program; Use of standing committees to facilitate input on policy development and overall program direction; and Increasing the quality and amount of information on the program s website to improve program transparency. Although ADP has been successful in driving some improvements, PwC observed a number of current state challenges which, if addressed, would lead to further improvements in compliance, overall cost-effectiveness, improved program management and address the issues raised in the 2009 Auditor General s Report. PwC understands that it has been a strategic decision by ADP not to play a significant role in the supply chain. As such, the supply chain evaluation highlights current state implications of that decision, and focuses on opportunities where ADP can increase its supply chain involvement and capabilities. The following section will outline findings from the PwC review, including what elements of the program are working well and some challenges that are impacting ADP s ability to maximize its effectiveness. PwC 6

7 Summary of Key Findings The following are advantages of the current pricing / funding models and supply chain structure observed: Current State Advantages Equipment Pool Model PwC noted a number of advantages associated with the equipment pool model: The Equipment Pools are contractually obligated to competitively tender and establish contracts with the manufacturers to get best value for money. The Equipment Pools (e.g. Ventilator Equipment Pool) have been successful in securing volume rebates as part of the contract negotiation process. Consolidated purchasing allows the Equipment Pools to take advantage of bulk buying from the manufacturers in order to further drive down pricing. Freight efficiencies are realized by consolidating deliveries at a central warehouse which further drives down pricing. Refurbishment program promotes recycling and drives savings by maximizing asset longevity. Ongoing Audits The Verification and Testing Unit (VTU) conducts detailed audits of transactions on behalf of ADP. In the last three years, $2.4M* in vendor overpayments have been recovered through this process. Current Funding Models PwC noted a number of advantages associated with the current funding models: The grant model maximizes client choice and minimizes transactional costs for low dollar value, high volume transactions. The maximum contribution model allows the market to establish the price. The fixed price model establishes a consistent price for all ADP clients. Current Pricing Models PwC noted a number of advantages associated with the current pricing models: The establishment of a Vendor of Record in the procurement of home oxygen services sets forth clear requirements for vendors at a price that is mutually agreeable. In most cases, guarantees the vendors a defined markup and ensures fair compensation. Implications Drives value for money by competitively tendering for manufacturer pricing, consolidation of purchasing and shipments and refurbishment of assets. Recovery of overpayments. Drives value through reduced transactional costs. Client satisfaction metrics indicate positive outlook of the program. Establishes a price based on clearly defined requirements of the vendors. PwC *Based on Recovery Report provided to PwC. 7

8 Summary of Key Findings Current State Advantages Expert and Dedicated Staff ADP staff members have significant knowledge and experience with respect to the products that are funded, as well as overall program administration. They provide high levels of customer service, addressing and resolving client issues as they arise. The processes employed by ADP and its staff members are highly consistent with ADP s vision of providing clientcentered support and funding to Ontario residents who have long-term physical disabilities and to provide access to personalized assistive devices appropriate for the individual s basic needs. Commitment to Running a Cost-Effective Program ADP is committed to continue its efforts to strengthen program accountability, to ensure the efficient use of resources and the provision of high quality devices at competitive prices. Many accomplishments have been made to-date, and ADP is focused on implementing sustainable processes that drive value for its stakeholders. Implications High levels of clientcentred support consistent with ADP s mandate. High focus on improving program accountability and cost-effectiveness. PwC 8

9 Summary of Key Findings During the review, a number of challenges were observed. These challenges appear to be impacting ADP s ability to maximize its cost-effectiveness. ' Current State Challenges Implications Managing Conflicting Priorities Conflicting strategic priorities appear to be impeding ADP s ability to maximize its cost-effectiveness. ADP aims to provide comprehensive access and client-centered support to clients. This strategic imperative can conflict with an alternate focus of securing the best pricing for assistive devices, especially if client choice or access is limited as a result of achieving these prices. Striking the right balance between customer service and achieving value for money will be paramount in determining future direction. Guiding Principles While ADP staff appear to have a good understanding of requirements that drive funding / pricing decisions, a set of funding / pricing guiding principles does not exist. Guiding principles should link to ADP s overall strategic objectives and be formalized to support its mandate. Spend Management While there are a formal registration contracts and agreements in place with all vendors there is opportunity to leverage spend more effectively in order to drive maximum value for money. Challenges and observations related to spend management are outlined below: Limited strategic sourcing activities. Price setting is primarily based on manufacturer self reported landed costs to vendors as opposed to contracting for prices via a competitive tendering approach. ADP is not taking advantage of commercial terms such as rebates and early payment discounts which are prevalent within the industry. The Ventilator Equipment Pool is taking advantage of manufacturer rebates and early payment discounts. Other buying groups within the industry (e.g. VGM) have been successful in establishing secondary discounts with manufacturers. Of the 1502 vendors, 103 vendors represents 80% of ADP spend. This long tail indicates an opportunity to leverage ADP volumes in order to establish favourable commercial terms with manufacturers and vendors and work more strategically with a rationalized supply base in exchange for improved rates / prices. If leveraged effectively, it is expected that pooling of ADP volumes would drive significant value given ADP s 35% market share within Canada s Assistive Devices Market.* Challenge in maximizing cost-effectiveness Difficulty in meeting strategic objectives Lack of consistency in pricing / funding decision making process Excess Manufacturer / Vendor margins Inability to obtain competitive price for clients Client dissatisfaction Challenge in adequately addressing all of the AG s concerns PwC *Informed by PwC assistive devices market sizing review. 9

10 Summary of Key Findings Current State Challenges Pricing Optimization The current approach to the pricing of ADP devices lacks robustness in some areas and limits ADP s ability to ensure maximum value for money. Several challenges were noted: In the current Cost Assessment Mark-up Model, a fixed mark-up percentage (33 1/3) is applied on the quoted manufacturer to vendor device price to allow for the vendor cost. There are inherent challenges and risks imposed by this model: The vendor cost becomes proportional to the manufacturer s price of the device. For example, if the manufacturer s price increases by 10%, the value attributed to the vendor s cost is automatically increased. The model assumes that devices with a higher manufacturer s price require greater resources on the part of the vendor. For example, the vendor receives a higher price for personalizing a device that has a higher manufacturer price. The model provides for a 25% margin for the vendor to cover service and overhead costs and make a profit. In practice, margins can vary quite considerably (e.g. market conditions, volume discounts the vendor may have with the manufacturer. A high level review of WSIB procurement practices and pricing highlighted the fact that WSIB has been successful in leveraging its volumes to drive down prices with manufacturers, and has been able to achieve lower prices than ADP in some sampled products. In some categories (e.g. mobility, CPAP, insulin pumps, etc) pricing is set for a group of devices within the category as opposed to establishing a true cost for each device type. Vendors are incented to sell clients a lower model in order to maximize margins. The risk of vendor up-sell is mitigated since the authorizers are required to specify the exact device required by the client. For the cost assessment mark-up model, the data is self-reported from the manufacturer and there is no mechanism to validate the accuracy of this data. Almost 50% of total ADP spend is driven by this pricing model. Where manufacturer information is not available, ADP applies a 30% flat discount to manufacturer MSRP prices and takes a weighted average price across several manufacturers. There does not appear to be a definitive understanding of the vendor services included in the price (e.g. service, warranty period, etc). Implications Not achieving best value for money Manufacturer / vendor overpayments Challenge in adequately addressing all of the AG s concerns Client dissatisfaction PwC 10

11 Summary of Key Findings Current State Challenges Supply Chain Resources ADP staff members have significant knowledge and experience with respect to the products that are funded, as well as overall program administration. Given ADP s decision not to focus on supply chain, ADP has not invested in supply chain resources with experience in financial/market analysis, strategic sourcing, contract negotiation, spend analytics, or vendor management. Contract and Vendor Management - Several challenges related to contract and vendor management were noted during the PwC review: With the exception of the Equipment Pools, Insulin pumps and Home Oxygen products there is limited focus on establishing contracts with manufacturers to obtain the best value for money. Data was limited, but based on the review PwC approximates that 30-40% of spend is on contract, primarily due to the Home Oxygen VOR. Pricing for the remainder of the spend is primarily based on manufacturer self-reported landed cost data or online research of MSRP costs. There is no mechanism in place to ensure that the vendors are complying with all the terms of the contract. Spot audits are conducted and have identified areas of non-compliance, but they are reactive in nature. There is no process in place to analyze vendor spend and consolidate the vendor base to drive value (e.g. driving higher volumes to vendors in exchange for cheaper rates). All vendors are able to register as long as they meet ADP prescribed criteria. Based on a review of the vendor base, Hearing Aids, Mobility and Visual Aids had the highest number of vendors of all products. This trend is relatively stable across all regions. Although the widespread number of vendors and high degree of commonality indicate a potential opportunity to consolidate, any consolidation exercise will need to ensure that accessibility is not impacted. There is no evidence of robust analytics on device longevity (e.g. depreciation) prior to setting policy and replacement periods. Vendors are incented to replace products (even if not defective) once eligibility is renewed rather than refurbishing the current device (e.g. CPAP equipment can last 10 years but clients are eligible for an exchange after 5 years). Replacement, however, is not automatic as ADP evaluates the merit of refurbishing vs. buying new based on vendor quotes. Implications Challenge in obtaining best price for clients. Challenge in adequately addressing all of the AG s concerns Vendors not fully delivering on their commitments Client dissatisfaction Challenge in adequately addressing all of the AG s concerns PwC 11

12 Summary of Key Findings Current State Challenges Product Standardization There is no process in place to analyze product spend and consolidate the product catalogue to drive value (e.g. product standardization can lead to increased volumes and cheaper prices with manufacturers). All devices are approved as long as they meet ADP prescribed criteria. There is no formal, consistent process in place to check for existing substitute devices. There is, however, a formal delisting process (e.g. if the product is no longer manufactured ). Of the 8,000 devices that are managed by ADP, spend in FY09 was observed against only 2,373 of the devices, which represents only 30% of the product catalogue (analysis includes grant codes, e.g. DHGRANT, OGGRANT). This indicates that there may be an opportunity to consolidate the product catalogue. Budgeting / Forecasting No formal budgeting / planning / forecasting process in order to develop a budget reflective of market demand at the device level. Forecasted annual spend /growth is based on a percentage increase year-over-year as opposed to conducting a detailed bottom-up build to facilitate accurate demand and supply planning. ADP has identified improvement opportunity in its budgeting/forecasting process and is currently developing a robust, bottom-up forecasting model and approach that accounts for its spend profile and industry statistics. Process Opportunities Process inefficiencies within ADP processes appear to be driving up vendor costs and ultimately the pricing (e.g. manual faxing of insulin applications / orders to the vendor results in the vendor incurring a great deal of customer service costs and delays in delivering products to clients). In an effort to address opportunities for improving efficiency, ADP is presently engaged in a lean assessment which seeks to identify areas for improving efficiencies within the program. Implications Not achieving best value for money Challenge in adequately identifying and addressing variances Challenge in accurately forecasting demand and supply needs Improving efficiency can result in cheaper prices lower cost to serve Client dissatisfaction PwC 12

13 Summary of Current Pricing Models Current Pricing Models ADP currently employs three overarching strategies for setting the price: cost assessment, market price assessment and competitive tendering. ADP has adapted each according to the description provided below. Pricing Model Cost Assessment Mark-up Method Time and Materials Description Manufacturer to vendor quoted cost + fixed mark-up percentage Applies a percentage increase to the quoted manufacturer to vendor device price. The goal is to cover all costs incurred in producing and delivering the device and to provide a margin to cover an allocation of the vendor / health service provider s direct costs and a level of profit for the vendor / health service provider. Fixed mark-up percentage is currently 33 1/3. For some devices, price is set for specific grouping of devices type within category, irrespective of manufacturer or model. Price is averaged for data collected from manufacturer and/or group of manufacturers for the device. If manufacturer quote is not provided, a 30% discount to MRSP pricing is applied. Assumes that the direct costs of the vendor/ health service provider are proportional to the cost of the device. Price is based on a Time and Materials Study Legacy cost* Market Price Survey, RFI, etc. Assessment Competitive Tendering Price was based on an estimate of the total cost the assistive device(s) to the client. There is no reconciliation between total actual cost and total amount funded. Price is based on a review of vendor costs. Prices is negotiated with manufacturers/vendors usually through a competitive tendering process. rice was established based on an assessment of costs at point in time. Depth of assessment conducted to establish price has not been defined. PwC 13

14 Summary of Current Funding Models Current Funding Models ADP currently employs three overarching models for funding the device: a Fixed Price Model, a Maximum Contribution Model, and a Grant Funding Model. A description of each is provided below. Funding Model Fixed Price Funding Maximum Contribution Funding Grant Funding Description ADP funds a defined percentage of the ADP price. ADP prices are listed in the ADP Product Manuals. Clients can only purchase specific products from registered vendors. ADP controls the market as the registered vendor can set a retail price lower than the ADP price, but may not charge more. Funding is paid to the registered vendors once the client application has been approved and the device delivered to the client. The client (or third party payer) is responsible for the balance. ADP funds a defined percentage up to a maximum contribution, based on the price ADP expects a vendor to charge ADP clients. Registered vendors are able to establish their own retail prices. The client (or third party payer) is responsible for the balance between the funded amount and the vendor s retail price. Funding is paid to the registered vendors once the client application has been approved and the device delivered to the client. The client receives a defined sum of money, either one-time or at recurring intervals, as a contribution towards the cost of their assistive device / medical supply. The device / medical supply is most often purchased in an open market environment. The client may purchase their assistive device / medical supply from their vendor of choice. No claw back and/or verification of actual spend, although client is to maintain receipts in the event of audit. PwC 14

15 Supply Chain Gap Analysis: Business Area The table below outlines ADP s current involvement in each of the supply chain business areas and an assessment of the gap to the desired future state. The future state was developed during the workshop with ADP staff. Area R A C I Key Activities Budgeting / Forecasting Sourcing and Pricing Contract Management Purchasing Customer Service / Issue Management Returns Management Vendor Management Vendor / Product Catalogue Maintenance Invoice Validation and Payment Establishing budgets and forecasts that sets targets for the business Identifies anticipated volumes in order to plan activities Market research Spend reviews to identify opportunities for reducing prices Competitive Tendering Managing contract timelines, expiry dates, negotiations, etc. Process of buying and receiving the products Application process Taking calls and resolving vendor / client issues Process of managing product returns, warranty, recalls Process of ensuring that vendors are complying with their contractual terms. Approving vendors and products for listing Process of adding & removing vendor / products from the catalogue Validating invoices and paying vendors Indicates range of As-Is capabilities Indicates anticipated future state capabilities RACI Definitions Responsible: the individual who performs the work Accountable: the individual who has the power to modify the business process Consulted: the individual who is involved in the process for additional information Informed: the individual who needs to be informed about the outcome of the process PwC 15

16 Supply Chain Gap Analysis The table below outlines a maturity assessment of ADP s Supply Chain. The assessment is based on PwC s Supply Chain maturity framework as well as benchmarking against other jurisdictions and a target ADP future state. Area Developing Practicing Optimizing Leading ADP Challenges and Opportunities Strategy Governance Structure / Organization Performance Management Process Information Systems / Technology No evidence that strategic directives or goals translate into specific operating-level actions for the supply chain. There does not appear to be a mechanism in place to measure supply chain performance against overarching goals and objectives. Some policies are in place (e.g. conflict of interest) but a comprehensive set of supply chain policies and procedures does not appear to exist. As ADP takes on more supply chain responsibility, it will need to There is good coordination and alignment of ADP resources. Resources appear to be highly skilled clinicians with significant experience in program administration, but are not experts in financial analysis and supply chain management. This presents a risk for ADP given the level of spend that they are managing. There are examples of collaboration with the Ministry of Government Services (e.g. Home Oxygen VOR), but these appear to be adhoc in nature. Does not appear to be a process to analyze supply chain performance on a routine basis in order to drive improvements (e.g. spend analytics, contract vs. non-contract spend, vendor scorecards, etc). Supply Chain metrics are not leveraged to drive performance. There is a process to review pricing every two years, but limited market/spend analytics are performed. With the exception of the Equipment Pools, there are gaps in supply chain processes including strategic sourcing and contract management. Spend does not appear to be leveraged or controlled effectively in order to drive value (e.g. competitive tendering, product / manufacturer / vendor standardization, contract management, etc). Currently, supply chain processes are primarily manual. ADP is in the midst of an IT implementation that aims to automate a significant amount of front office processes to drive efficiencies. Go-live date is set for June 13, Indicates range of Assessment Definitions As-Is capabilities Developing: Base maturity levels, opportunity for substantial improvement in practices. Practicing: Some mature practices with some challenges to deliver benefits / mitigate risks. PwC Indicates anticipated future Optimizing: Mature and efficient practices with the ability to deliver benefits and mitigate risks. state capabilities Leading: In alignment with leading practice, mature practices with little room for improvement. 16

17 Pricing Model Gap Analysis Pricing Model Assessment: Evaluate against ADP strategic objectives and identify opportunities The table below reflects PwC s understanding of ADP s strategic objectives and identifies current pricing challenges that may be impacting ADP s ability to fully realize its strategic objectives. ' Pricing Model Challenges and Opportunities Evaluation Cost Pricing Market Price Assessment Mark-up Method Time and Materials Legacy Cost Survey, RFI, etc. Competitive Tendering Relies on good faith of manufacturer for accurate cost information. Does not encourage efficiencies by the manufacturer. Mark-up percentage has not been formally and recently supported or validated. Benefits vendors who are able to negotiate lower manufacturer costs, discounts/rebate. Inevitably leads to margins that may be higher than the market may otherwise dictate them to be. Opportunity for ADP to leverage buying power of all clients and vendors for best manufacturer price and for dedicated vendor management ensures service delivery needs are consistently met. Significant investment of resources required. May be able to refresh hourly rates without re-evaluating standard times. Refresh hourly rates may increase price. 2 Opportunity to reflect impact of new materials/technologies used in manufacturing which may result in decreased prices. Price is based on historical cost and has not been updated / does not take into account a changing environment. A change in price may be required to maintain the 25/75 cost share relationship, if this is the desired state. Relies on good faith of vendors for accurate cost data. Opportunity for ADP to collaboratively engage with vendors and formulate definitive service requirements and compensate vendors based on this supported data. Obtain the best price Build market and price expertise and leverage leading supply chain practices. 4 Best positioned to meet objectives 1 Significant opportunity, somewhat suited to meet objectives 3 Some opportunity, well positioned to meet objectives 0 Significant opportunity, not suited to meet objectives PwC 2 Opportunity to better meet objectives

18 Funding Model Gap Analysis Funding Model Assessment: Evaluate against ADP strategic objectives and identify opportunities The table below reflects PwC s understanding of ADP s strategic objectives and identifies current funding challenges that may be impacting ADP s ability to fully realize its strategic objectives. A full circle implies that the model is best positioned to achieve objectives and is a leading practice, while an empty circle implies that the model is not best suited to meet the objectives. Funding Model Challenges and Opportunities Evaluation Fixed Price Funding Maximum Contribution Funding Requires a definitive price which controls the market. Ensure underlying pricing model obtains best value for money 3 Client (or third party payer) absorbs variance May not achieve 75 / 25 cost sharing relationship Ensure underlying pricing model obtains best value for money Requires ongoing market research to manage client portion 2 Grant Funding Client (or third party payer) absorbs variance Requires appropriate, functioning internal controls to ensure recurring payments are made to only eligible individuals Requires regular audit to ensure grants spent in accordance with guidelines Opportunity to consolidate buying power of ADP to achieve a lower price for the client 4 Best positioned to meet objectives 3 Some opportunity, well positioned to meet objectives 2 Opportunity to better meet objectives 1 Significant opportunity, somewhat suited to meet objectives 0 Significant opportunity, not suited to meet objectives 2 Note to reader on the 75 / 25 Cost Share Structure ADP was designed with a 75 / 25 cost share structure, and evaluation of this structure was not part of the scope of this review. (ADP funds 100% of the device cost for clients receiving social assistance.) The evaluation presented here within does not consider this cost share structure. The challenges and opportunities identified, retain the assumption that ADP will continue to funds 75% of the device price and the client is responsible for the remaining 25%. PwC 18

19 Supply Chain Opportunities The table below outlines advantages and challenges associated with ADP s current supply chain, and outlines some opportunities for improving capabilities. Examples where other jurisdictions have leveraged some of these opportunities are indicated below. Advantages Challenges& Opportunities Opportunity Considerations in Developing Solutions Other Comparable Jurisdictions Description Current sourcing and pricing process tends to maximize client choice. Some examples of tendering with manufacturers (e.g. Equipment Pools). Wide vendor group & diverse product catalogue allows for maximum access and choice across the province. In some cases, vendor requirements are clearly established and defined (e.g. VOR for Home Oxygen). ADP administers client satisfaction surveys and conducts vendor audits to ensure the client received the device and appropriate service level. Lack of rigour in the sourcing, contracting and price setting process may be contributing to excess manufacturer / vendor margins and an inability to obtain competitive pricing for clients. Lack of supply chain consolidation (sourcing, purchasing, logistics) drives duplication of efforts and impedes ADP s ability to effectively leverage its spend, leading to extra costs within the supply chain network. ADP does not have internal supply chain expertise (e.g. strategic sourcing and contract management). Improve spend and market analytics and implement sophisticated strategic sourcing and contract management techniques (e.g. competitive tendering) to leverage spend to drive maximum value for money. Consolidate products and manufacturer / vendor base to drive value for money. & Need to establish a clear balance between client choice and driving value for money (e.g. through product standardization, manufacturer / vendor rationalization). These initiatives cannot limit access of services to a point where there would be a conflict with ADP s strategic mandate. & ADP must balance decreasing costs to clients, with the need to ensure a network of viable vendor businesses around the province that can serve disabled clients in rural and Northern areas. & In some categories there are limited number of manufacturers and vendors and ADP may not have sufficient leverage to drive down prices. Programs in other jurisdictions have leveraged their buying power and have competitively tendered and established contracts directly with manufacturers for the landed cost of the device. Vendor buying groups have been successful in establishing secondary discounts with manufacturers. WSIB competitively tenders with manufacturers for pricing (e.g. hearing aids). & Programs in other jurisdictions have consolidated the supply chain and realized savings/efficiencies (Australia) PwC 19

20 Pricing and Funding Opportunities The table below summarizes the advantages and challenges associated with ADP s current pricing and funding models, and outlines some opportunities for improving capabilities. Advantages Challenges Opportunities Opportunity Considerations Other Jurisdictions Description Current funding models are enablers for ADP in achieving its strategic objectives. Current pricing models tend to maximize client choice and does not restrict access. Current pricing model for HOP was a collaborative process which obtained valuable input from the vendors. Equipment pools are an effective strategy for consolidating purchasing power to drive value through the competitive tendering process. Lack of rigor in the price setting process may be contributing to excess manufacturer / vendor margins and an inability to obtain competitive pricing for clients. Lack of accurate and reliable data from vendors on their costs incurred to personalize the device for the client does not support or validate the current 33 1/3 mark-up. Engage in competitive tendering to leverage spend to drive maximum value for money. Attribute a value to the vendor cost to ensure maximum value for money and appropriate compensation for stakeholders. Create a sustainable framework reflecting the underlying pricing and funding guiding principles for selecting the best-fit pricing and funding model to drive value. & Need to establish a clear balance between client choice and driving value for money (e.g. through product standardization, manufacturer / vendor rationalization). & Any rationalization initiative (e.g. competitive tendering) cannot limit access of services to a point where there would be a conflict with ADP s strategic mandate. & Programs in other jurisdictions have leveraged their buying power and have competitively tendered and established contracts directly with manufacturers for the landed cost of the device. & Programs in other jurisdictions have established a vendor cost separately from the manufacturer device cost. PwC 20

21 Future State Options to Close the Gap In order to address the current state gaps that were identified as part of the review, several options were developed in collaboration with ADP staff and management to outline opportunities for ADP to increase its role in the supply chain. As well, a revised funding and pricing framework was developed that will allow ADP to make funding and pricing decisions using a robust, analytically-driven process that will drive value for money while maintaining ADP s mandate of providing client-centered support and funding to Ontario residents who have long-term physical disabilities. Supply Chain Options Several options for a future state ADP supply chain operating model were considered and are outlined below. A discussion of the options, including the scope, advantages, disadvantages and impacts of each option follows. The options have been categorized into three overarching options, some of which have several sub-options within. # Option Name Brief Option Description 1& Status Quo Option 1: Continue as-is with enforced existing policies. 2& Address AG Concerns 3 Address AG Concerns and Implement Leading Practice to drive Value for Money Option 2: ADP to improve robustness and frequency of pricing reviews to ensure that market realities are taken into consideration when setting pricing (e.g. technological advances). Option 3a: ADP to invest in and expand its Strategic Sourcing and Contract Management capabilities. Option 3b: Leverage a 3 rd Party for Strategic Sourcing and Contract Management. ****Note: It is assumed that Options 3a and 3b would include adoption of the proposed future state pricing and funding framework recommended as part of the report. This will be discussed beginning on page 28. PwC 21

22 Future State Options to Close the Gap Supply Chain Options These options are illustrated on the continuum of increasing effort and benefit below. Each option and sub-option builds upon the previous option both in terms of anticipated benefits as well as anticipated costs and change management efforts. As ADP moves up the curve, assistive devices are more strategically sourced and better value for money is achieved. Required Inputs Expected Benefits PwC 22

23 Future State Supply Chain Options Option 1 A discussion of the supply chain options, including the description, key requirements, advantages and disadvantages is outlined below. Option 1 Description Key Requirements Status Quo Continue with current state processes with enforced existing policies. Maintain existing price setting processes. ½ to 1 FTE to ensure that existing policies are enforced. Advantages Minimal investment required Minimal risk Minimal change/impact to clients and vendors Challenges Risks Limited hard savings Difficulty in achieving best price for clients Difficulty in addressing AG concerns PwC 23

24 Future State Supply Chain Options Option 2 Option 2 Description Key Requirements Address AG Concerns ADP to improve robustness and frequency of pricing reviews to ensure that market realities are taken into consideration when setting pricing (e.g. technological advances). Continue to establish pricing by collecting vendor and manufacturer cost data. To improve the robustness of the pricing review process ADP should incorporate the following two elements on a go-forward basis: Conduct market research to understand how device pricing fluctuates, and overlay the findings of the market research against the vendor and manufacturer cost data to establish a fair price that is based on manufacturer/vendor costs as well as market realities; and Conduct jurisdictional price benchmarking against other provinces or international jurisdictions to compare Ontario prices against prices established by other jurisdictions. This jurisdictional comparison should consider Ontario s purchasing advantage relative to the other jurisdictions. Develop a pricing review schedule for all devices that ensures that all devices are reviewed every two years at a minimum. Apply the 80/20 rule and review devices with high spend and/or high price volatility on a more frequent basis (e.g. once per year). Consider hiring a Business Analyst to assist program staff with market research and benchmarking analytics. Advantages Will address AG concerns at a minimum Low change Some purchase price savings by enhancing pricing review analytics No change management efforts required Compliance driven Challenges Risks Does not address the gaps as identified in the gap analysis Does not obtain best value for money (e.g. relies on good faith of manufacturer/vendor for accurate cost information and benefits vendors who are able to negotiate lower manufacturer costs, discounts/rebate. Inevitably leads to margins that may be higher than the market may otherwise dictate them to be). Lack of supply chain consolidation (sourcing, purchasing, logistics) drives duplication of efforts and impedes ADP s ability to effectively leverage its spend. PwC 24

25 Future State Supply Chain Options Option 3a Option 3a Description Key Requirements Advantages Address AG Concerns and Implement Leading Practices - ADP to invest in and expand its Strategic Sourcing and Contract Management capabilities. ADP to invest in and expand its Strategic Sourcing and Contract Management capabilities, which includes establishing leading practice processes (e.g. expanded use of competitive tendering with manufacturers, issue surveys and RFI s to vendors to establish pricing, routine spend/market analysis, establishing contracts directly with manufacturers and vendors for the procurement of goods and services, contract negotiation, manufacturer and vendor performance management, manufacturer/vendor/product standardization, etc). ADP to establish an internal Supply Chain team and will need to invest in additional resources to accommodate the extra workload. It is assumed that the level of effort would require at least 6 FTE s, including 1 Manager, 3 buyers and 2 analysts. Will require some investment in technology (e.g. business intelligence software to facilitate proper data analytics and a contract management system). The Supply Chain team would be responsible for the following: o Strategic sourcing including research, tendering and manufacturer/vendor selection to consolidate spend and establish pricing for devices; o Recommendations on vendor costs based on vendor surveys, RFI s and time and materials studies; o Product standardization including selection of preferred manufacturers and products for funding; o Negotiating manufacturer and vendor contracts; o Maintaining a centralized database of all contracts and a centralized product and vendor catalogue; and o Ongoing market / spend analytics to continuously identify improvements. Addresses some of the gaps as identified in the gap analysis Will fully address AG concerns Relatively low change Growth contributes to more jobs internally at ADP Some savings through consolidation of spend Relatively low change management efforts required Will achieve value for money cheaper pricing for clients Challenges Risks Would likely be a lengthy implementation with longer time to benefits, as ADP would be building this from scratch. May not be maximizing supply chain leading practices. Supply chain is not a core competency for ADP and this may result in conflicts between operations and policy. Increased operating costs and complexity of the ADP business. PwC 25

26 Future State Supply Chain Options Option 3b Option 3b Description Key Requirements Advantages Address Auditor General Concerns and Implement Leading Practices - Leverage a 3rd Party for Strategic Sourcing and Contract Management. Strategic sourcing and contract management to be centralized with a third party supply chain shared services organization (SSO). This is similar to equipment pool model except without the warehousing component. The SSO could be an internal government organization (e.g. within the Ministry of Health or within another Ministry/agency) or an external vendor. Ultimate controls rests with ADP. Accountability, compliance and strategy is never outsourced. The SSO would perform the same scope of services as outlined in Option 3a. The relationship between ADP and the SSO and performance targets are set out in an SLA, and would require governance oversight (please see page 82 for more details). Although it is expected that this option will drive the highest degree of benefits for ADP based on PwC s experience with other SSO s, a business case is required to evaluate the cost-effectiveness is recommended. As part of the business case ADP will need to consider some of the following: anticipated savings, costs and return on investment, governance and accountability, risk management, SSO funding model and implementation plan. For further details on the business case, please see Appendix A.9. Faster implementation, speed to benefits and highest savings. SSO is contractually obligated to fulfil its mandate. Will provide ADP with the assurance that procurement activities are consistent with Ontario s Procurement Directives. Through its partnership with an SSO, ADP will benefit from supply chain leading practices (e.g. processes and technologies such as e-procurement) that will improve supply chain efficiencies and drive value for clients. Allows ADP to focus on its core competency of program administration rather than supply chain. Scalable solution that provides ADP with the flexibility to consider centralized purchasing, warehousing, logistics and refurbishment of equipment as a potential long-term strategy. Expanding the program to include purchasing/warehousing would allow ADP to realize savings from bulk buying and shipment consolidation. Challenges Risks Potential for high costs (need to be evaluated against anticipated savings) Higher level risk Higher degree of change PwC 26

27 Future State Pricing and Funding Proposed Pricing and Funding Framework Overview The proposed pricing and funding models are built on a foundation which requires ADP to: 1.Examine Pricing and Funding Objectives; 2.Conduct Market Assessment; and 3.Select the Pricing and Funding Model. In the following pages we present a framework for selecting the pricing model which values the device price separately from the vendor cost to arrive at total price. The decision points in the framework are established around key criteria, which is informed by ADP s pricing and funding objectives and the market assessment. The framework allows an informed selection of a competitive tendering, time and materials or market price assessment pricing model as these pricing models were evaluated to most closely align with ADP objectives. Our analysis supports continued application of the following funding models: fixed price, maximum contribution, and grant funding. The decision criteria in selecting the best fit funding model for each of the device type has been developed based on synthesis of data collected and is set forth within the section. PwC 27

28 Future State Pricing and Funding Setting the Foundation for Pricing and Funding Decisions Our proposed pricing and funding models are built on a foundation which involves the following three steps: 1.Examine ADP Pricing and Funding Objectives A selected model should reflect the organization s goals and strategic objectives. For example, ADP s strategic objective to provide access to personalized assistive devices would inform a strategy which was not prohibitive to vendors providing access to clients in underserviced regions. Through our documentation review, key stakeholder interviews and workshops, PwC has drafted a framework for selecting the strategy supported by the following ADP Pricing and Funding Objectives: Provide ADP with best value for money while supporting ADP s objectives of providing customercentered support and funding to Ontario residents who have a long-term physical disability. Provide access to personalized assistive devices appropriate for the individual s basic needs. Ensure that ADP obtains competitive prices. Ensure that the clients receive appropriate services related to their device. Ensure that stakeholders in the ADP funding process are compensated appropriately. 2. Conduct Market Assessment It is critical for ADP to continually assess the market in which it operates. This involves possessing intimate knowledge of the devices and the key elements of the market, such the manufacturers who are active in the space and the devices they offer. A market assessment for each of the 26 device categories may include: market sizing; market attractiveness assessment; competitive analysis and benchmarking; market definition and segmentation; and a trend analysis. Pricing is a marketing decision and market research is critical to selecting the most appropriate pricing strategy to meet the pricing objectives. PwC 28