The $26 million virtual care flop SmartHealth was rushed through without proper process and in breach of national rules, an inquiry into its procurement has found.

The Waikato District Health Board online doctor service failed to attract targeted users and was axed after the two-year contract with the United States-based company that powered the app, HealthTap, ended in May last year.

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Now the Herald can reveal a 21-month inquiry by the Office of the Auditor-General into the 2015 procurement process has found a litany of errors and blatant disregard for government rules to the detriment of patients and taxpayers.

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Driven by then chief executive Dr Nigel Murray and board chairman Bob Simcock, who both later quit amid Murray's expenses scandal, the procurement "fell well below the standards expected of a public entity", the inquiry said.

Former Waikato DHB chairman Bob Simcock was the first to approach HealthTap, flying to its Californian base in November 2014 with no business case or procurement plan. Photo / Christine Cornege
Former Waikato DHB chairman Bob Simcock was the first to approach HealthTap, flying to its Californian base in November 2014 with no business case or procurement plan. Photo / Christine Cornege

Fundamental aspects of good procurement were either missing, defective, or carried out too late in the process to be effective, a draft report seen by the Herald shows. These included:

• No formal planning before HealthTap was approached - which meant no business case and risk analysis, no identification of stakeholders and no evaluation of other options in the market.

• The DHB's legal and procurement teams were not notified of the process and there was no evidence of governance oversight until after a contract was already drafted.

• No evidence that before approaching HealthTap any consideration was given to either specific government rules, including whether the DHB was permitted to approach a single provider, or the DHB's own procurement policy.

The DHB should have provided a business case to the Ministry for Business, Innovation and Employment and though it eventually received advice that it should have sought permission to only approach HealthTap, it never did.

It also should have got permission from the then National Health IT Board for spending on IT above $500,000 and to store patient information offshore.

But in March 2015, five months after Simcock and Murray became aware of HealthTap and had both visited its Silicon Valley premises separately, Murray agreed an "in principle" deal under which the DHB would purchase a license for 2500 users for two years.

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Nigel Murray [centre] and Bob Simcock [right], and other DHB staff spent at least $91,000 travelling to HealthTap's Palo Alto premises in the United States. Photo / Christine Cornege
Nigel Murray [centre] and Bob Simcock [right], and other DHB staff spent at least $91,000 travelling to HealthTap's Palo Alto premises in the United States. Photo / Christine Cornege

The cost of that was US$2100 per user, or US$5.25 million each year. On top of that there was a US$10 fee for each completed virtual consultation, while integration and customisation would be billed separately.

HealthTap, then in its start-up phase, wanted to announce the NZ$16m deal at a telemedicine conference in Australia at the time.

As part of the contract, Murray negotiated a six-month "exclusivity" clause with HealthTap, which agreed not to supply any other healthcare provider in New Zealand or Australia with the platform.

Murray was intent on Waikato DHB becoming a virtual care "innovation hub" for Australasia, wanted to partner with Auckland and Waikato universities to create a new model of study based on virtual care, and believed legislative change might be required to protect doctors conducting the virtual consultations.

Of the 7000 documents the inquiry was provided, it did not find "any clear explanation of the rationale for the exclusivity period, how this would support the DHB's goal of becoming an innovation hub, or why being an innovation hub was important to the virtual care strategy".

Murray, who made the inquiry wait until January 2019 before it could interview him, said the exclusivity was to prevent HealthTap "ratcheting prices up", talking to other DHBs without his knowledge, to support the goal of becoming an "innovation hub", and that if other DHBs wanted the platform Waikato DHB would get a commercial benefit.

But the inquiry found the exclusivity period did not give the DHB the right to act as a reseller or broker of the HealthTap platform and it was unclear how being a "first mover" in virtual care would bring any advantage to the DHB.

Only after the DHB received the draft contract on April 11 did its legal and procurement teams become aware of the negotiations.

Staff expressed "serious reservations" about its terms and the process, and external legal advice - which the DHB refused to waive privilege on, meaning it could not be included in the inquiry - was that the draft contract could not be agreed.

HealthTap's US-focused virtual care platform was not clinically suited to New Zealand and Waikato Hospital doctors were largely not consulted. Photo / Alan Gibson
HealthTap's US-focused virtual care platform was not clinically suited to New Zealand and Waikato Hospital doctors were largely not consulted. Photo / Alan Gibson

The DHB drafted a procurement plan and tried to undertake due diligence on HealthTap by speaking to a Silicon Valley lawyer, who suggested talking to a HealthTap board member or investor and seeing a copy of its financial accounts.

When the DHB's chief information officer made these requests of then HealthTap chief executive Ron Gutman he declined.

Simcock spoke to an investor by phone and was "reassured they were committed for the long haul", although the DHB would later say his two trips to HealthTap were for "due diligence".

The need to rush the process was also questioned by the inquiry, which said there was a concerning resistance to reconsidering the direct approach to HealthTap because of a fear of losing a so-called "first user" advantage.

"... the motivation for wanting to be seen to be first to implement the HealthTap platform in New Zealand is not clear to us."

Board members were given a memo at a meeting on June 24, 2015, setting out a case for virtual care and saying there was an expectation of speed on the part of other interested parties.

The inquiry found there was no evidence of who the other interested parties were and that the memo did not mention the DHB had already approached HealthTap and negotiated a draft contract.

Although Murray told the inquiry HealthTap was a start-up, this detail was not made known to the board.

Board members raised questions about the urgency and other concerns and a few days later Simcock emailed them and asked them to attend a workshop on the subject.

At the next meeting, on July 22, a business case was given to board members behind closed doors, which the inquiry said was strategic and not procurement.

Board members again asked questions including whether the spending was prudent and whether predicted financial savings were realistic.

Dr Clyde Wade, Pippa Mahood, Crystal Beavis and Martin Gallagher were some of the board members who approved virtual care and supported negotiations with HealthTap. Photo / Alan Gibson
Dr Clyde Wade, Pippa Mahood, Crystal Beavis and Martin Gallagher were some of the board members who approved virtual care and supported negotiations with HealthTap. Photo / Alan Gibson

The board approved a move toward virtual care but it was not unanimous, as the DHB would later claim, with at least two board members voting against it.

The inquiry found the board requested further reporting including on the scope, benefit, cost and risks, monitoring and confirmation legislative framework supported the service.

However, it said there was no real oversight of the project when the board did not pursue those answers, and the National Health IT Board was absorbed back into the Ministry of Health with no formal evaluations ever being done.

"Our concern is not just about 'not following the [government sourcing] rules'," the inquiry said.

"It is about the apparent disregard shown for the principles underlying those rules, namely the importance of fair practice, sound decision-making and being able to show value for money when making procurement decisions."

Timeline of key events

October 2014:

Bob Simcock and Nigel Murray meet US academic at Waikato University who suggests HealthTap for online doctor consultations.

November 2014: Simcock visits HealthTap in Palo Alto, California.

March 20, 2015: Murray visits HealthTap.

March 28, 2015: HealthTap sends Murray and Simcock draft letter of intent to enter agreement in April, 2015.

April 11, 2015: Draft agreement sent to DHB with intention to conclude contracts by end of April. Procurement and legal teams alerted and express concern. External advice not to sign contract.

April 21, 2015: Draft procurement plan prepared by DHB.

June 4, 2015: Chief information officer calls HealthTap CEO for due diligence checks but request for financial details declined.

June 24, 2015: Board given memo about virtual care strategy two days after being told of discussions between DHB and a US-based organisation.

July 9, 2015: Board workshop about virtual care which not all members attended.

July 22, 2015: Strategic business case for virtual care presented behind closed doors at board meeting. Business case would not be released publicly for almost three years despite repeated media requests. Board approves move to virtual care. Decision not unanimous despite DHB later claiming it was.

September 24, 2015: Agreement between DHB and HealthTap signed and 60-day implementation period begins followed by launch in late November.

March 28, 2018: Board resolves not to renew contract with HealthTap at expiry in May, 2018.