The audit objective was to assess the effectiveness of the Department of Health’s management of the National Medical Stockpile.
1. The National Medical Stockpile (the Stockpile) is a strategic reserve of medicines, vaccines, antidotes and protective equipment available for use as part of the national response to a public health emergency. It is intended to augment state and territory government reserves of key medical items in a health emergency, which could arise from terrorist activities or natural causes such as the 2009 influenza pandemic.
2. The Stockpile is intended to increase Australia’s level of preparedness and self‑sufficiency during a health emergency, by storing items that may not otherwise be available in Australia in the quantities required, and which may not be accessible from overseas suppliers in the event of an international health emergency.1
3. The Stockpile was originally established in 2002 as part of the Australian Government’s response to the threat of international terrorist attacks. Since 2002 the Stockpile has expanded from a relatively small reserve valued at approximately $11 million intended to deal with chemical, biological, radiological and nuclear (CBRN) threats, to a resource with a reported value of almost $196 million in 2012–13.2 The Stockpile, comprising 42 products and over 110 million items3, is now dominated by products associated with human influenza pandemic preparedness.
4. The Department of Health is responsible for the planning and management of the Stockpile, while state and territory governments are responsible for deploying Stockpile items within their jurisdictions in the event of a national health emergency.4 The Stockpile is warehoused at facilities operated by logistics firms, under contracts administered by the Department of Health.
5. Key challenges in planning for and administering the Stockpile include effective: stock selection and procurement; warehousing to maintain the efficacy of items5; stock‑control to account for and locate items; and dealing with items as they reach their expiry dates.6 Unlike other inventories which are continually being recycled, an emergency stockpile is infrequently deployed and significant volumes of unused goods need to be disposed of on expiry.7
6. The limited shelf life of medicines and equipment and the long‑term maintenance of emergency stockpiles constitute a significant cost for government, with over $750 million allocated for the Stockpile in the past ten years.8 In 2011, the Department of Finance completed a strategic review9 which recommended a number of significant changes to Stockpile management, including a more commercially focussed ‘prime vendor’ arrangement for outsourcing some management functions under a single contract. In September 2011, the Department of Health also finalised a review of the Australian health sector’s response to the 2009 pandemic. The key finding relating to the Stockpile was that while it met the relatively limited demands of the 2009 pandemic, which was considered to be of moderate intensity, it may not meet the more intense demands of a severe pandemic. The review made 25 recommendations including two related to the Stockpile’s deployment. Implementation of the Department of Finance and Health reviews remains ongoing.
Audit objective, criteria and scope
7. The audit objective was to assess the effectiveness of the Department of Health’s management of the National Medical Stockpile.
8. To assist in evaluating the department’s performance in terms of the audit objective, the ANAO developed the following high level criteria:
- the Department of Health has sound governance arrangements in place for the management of the Stockpile, including an integrated and systematic approach to risk management and performance reporting;
- the Department of Health’s procurement and contract management arrangements for the Stockpile demonstrate a focus on getting the right outcomes and achieving value for money;
- the Stockpile’s inventory management system reflects value for money—it provides an assurance that the right items in the correct amount are being purchased, and stored appropriately, until they are either deployed, or they are disposed of on expiry; and
- the deployment plans and processes provide a high level of assurance that the Stockpile can be reliably deployed within agreed timeframes to agreed locations.
9. The ANAO did not assess processes for the disposal or destruction of expired stock.10 While the audit examined aspects of the deployment strategy for the Stockpile, it did not seek to assess Australia’s general preparedness to respond to a national health emergency. Nor did the audit assess the clinical efficacy of stockpiled items.
10. An ANAO performance audit in 2007–08 on Australia’s pandemic preparedness concluded that the Stockpile was established without high level planning, assessment of risks and an appropriate management framework.11 The ANAO recommended a shift from a short term ‘supply and store’ strategy for the Stockpile to a longer term management strategy. The current audit was not intended to assess implementation of all the earlier audit recommendations. However, in the course of the audit the ANAO considered the extent to which the Department of Health has implemented recommendations relating to the Stockpile.
11. The maintenance of the National Medical Stockpile (the Stockpile) since 2002 represents a significant government investment in the nation’s preparedness for public health emergencies resulting from terrorist activities or natural causes such as pandemics; with over $750 million allocated for the Stockpile in the past decade. In 2012–13 the Stockpile comprised 42 products and over 110 million items, with a reported value of almost $196 million. The effective management of this large strategic reserve, comprising pharmaceuticals and personal protective equipment with a limited shelf life, relies on planning and administrative arrangements geared to: select and procure appropriate items; warehouse and control the stock; and deal with expiring items. Effective deployment arrangements are also required to augment state and territory reserves of items from the Stockpile in a timely manner.
12. Overall, the Department of Health’s management of the National Medical Stockpile has been generally effective in recent years, benefiting from improvements introduced since 2010. There remains scope, however, for improving the department’s strategic framework, operational management and deployment arrangements for the Stockpile.
13. Since 2007, when the ANAO concluded that the department had not developed an appropriate framework for managing the Stockpile12, the Department of Health has implemented a more structured management approach, including: the development of strategic and operational risk management plans in 2010; the rationalisation of previously fragmented storage contracts in 2010; the application of an evidence‑based approach for the selection of appropriate stockpile items; and the maintenance of formal deployment arrangements with states and territories. Strategies have also been adopted or examined for the cost‑effective replenishment and disposal of expired stockpile items. However, there remains scope for improving key elements of the department’s management arrangements, including: updating the strategic and operational risk management plans; clarifying aspects of the storage contracts to strengthen reporting and performance monitoring; improving the integrity of data used to manage the stockpile; and planning to test Stockpile deployment arrangements. Key issues relating to the Stockpile’s strategic framework, operational management and deployment are discussed in the following paragraphs.
14. The department adopted a more strategic approach to the Stockpile’s management with the introduction of a strategic plan in 2010, albeit some eight years after the Stockpile was established. While the plan broadly describes the governance, funding and administrative arrangements for the Stockpile, it should be updated to identify objectives, priorities and strategies for the Stockpile’s management—key elements of a strategic plan. High level outcomes for the Stockpile agreed to in 2011 by the then Government should also be reflected in an updated plan.
15. Operational management of the Stockpile benefited from the introduction of an operational risk management plan in 2010, which should be updated to reflect risks identified in the Department of Finance’s 2011 Strategic Review of the Stockpile.13 Operational management was further improved with the consolidation of warehousing arrangements into two longer‑term contracts with logistics firms, relating to pharmaceutical items and personal protective equipment. However, management reports have not been regularly provided, as required under the contracts, and the department should clarify reporting obligations. Further, there is scope to address weaknesses in some system controls and shortcomings in manual processing, which have contributed to the emergence of data integrity issues such as discrepancies between information held in the Stockpile database and warehouse system records.
16. The department has developed a deployment framework with states and territories, although these arrangements have not been recently tested. To provide assurance that deployment arrangements will be effective in a national health emergency, the department should undertake planning to test deployment arrangements, in consultation with other jurisdictions.
17. While there remains scope for further improvement as indicated above, the department’s work in recent years demonstrates a more active approach to management of the Stockpile, as does the recent focus on the findings of the 2011 Strategic Review. The ANAO has made four recommendations aimed at improving the effectiveness of the department’s management of the Stockpile, by: improving strategic planning and risk management; enhancing performance reporting by contractors; reviewing information management arrangements; and planning to test deployment arrangements.
Key findings by chapter
Strategic Framework (Chapter 2)
18. The ANAO’s 2007–08 audit observed that the establishment of the Stockpile in 2002 occurred without the high‑level planning, assessment of risks and management processes that would usually be put into place by an agency to manage policy initiatives. This was partly due to the immediacy of the Stockpile’s formation in an environment of rapidly changing and unexpected international events.
19. The department developed a Strategic Management Plan for the Stockpile in 2010, eight years after the Stockpile was first established. The plan broadly describes the governance, funding and administrative arrangements for the Stockpile. However, it does not identify objectives, strategies and priorities to be implemented in the short term and over the longer term—key elements of a strategic plan. Moreover, the plan does not incorporate the high level outcomes for the Stockpile which were agreed to by the then Government in March 2011, an important step towards developing a more strategic approach to managing the Stockpile. The department should update the 2010 Strategic Management Plan to reflect this development and to include objectives, priorities and strategies.
20. In its 2007–08 performance audit, the ANAO also recommended that the department develop a risk management plan for the Stockpile that is reviewed regularly. The department’s enterprise‑level risk management plan identifies one strategic risk for the Stockpile; inadequate government funding to maintain stock holdings.14 The department also developed an operational risk management plan for the Stockpile in July 2010, which documents risks, risk ratings and treatment strategies. The operational risk management plan ranks the most significant risks as: security of information on the location and contents of the Stockpile; stored stock being misplaced or destroyed; and stock incorrectly dispatched during deployment. There would be merit in updating the risk management plan to reflect more fully the additional risks identified in the Department of Finance’s 2011 Strategic Review of the Stockpile.15
21. The ANAO further recommended, in its 2007–08 audit report, the development of a performance management and reporting framework for the Stockpile, to provide ongoing assurance about the content, storage, security and management of the Stockpile. While quarterly reports were subsequently prepared for senior management, the department advised the ANAO in the course of the current audit that quarterly reporting on the status of the Stockpile was discontinued from April 2011 in favour of issue specific updates. The department will need to exercise judgement that the revised approach provides an adequate basis for senior management to assess performance.
Procurement and Contract Management (Chapter 3)
22. The department currently manages 31 contracts relating to the supply of items and services for the Stockpile. The ANAO examined the department’s procurement processes for the supply and storage of stockpile items, as well as contract management arrangements for the two national storage contracts.
23. The department employed a limited tender process for 18 procurements relating to the purchase of pharmaceuticals, on the basis that there was only one organisation that manufactured or was licensed to supply the particular product in Australia. While a limited tender approach in such circumstances is provided for in the Commonwealth Procurement Rules (CPRs)16, advice to the delegate on the key issue of value for money17 was generally limited; focusing on concerns that existing stocks of the relevant pharmaceuticals were reaching their expiry date and required replacement to maintain the Commonwealth’s capacity to respond to health threats.
24. Thirteen procurements relating to the purchase of pharmaceuticals and personal protective equipment (PPE) were conducted through open tender processes advertised on AusTender.18 The tenders were subject to evaluation and ranking by a departmental panel according to previously approved criteria, and advice regarding value for money was based on, and consistent with, the panel’s recommendations for the preferred tender.
25. The ANAO’s 2007–08 audit identified a number of issues with the department’s storage contract arrangements for the Stockpile. Subcontracting arrangements had resulted in inconsistent standards and practices that were poorly controlled through the contract arrangements. The department responded through a process which consolidated short‑term storage contracts into two longer term contracts relating to pharmaceutical items and to non‑pharmaceutical items. An open tender process was conducted for the storage of pharmaceutical items, with three submissions received and one submission assessed as fully compliant. While the successful tenderer was offered a contract in December 2007, the contract was not executed until October 2010, some three years later, due to differences over indemnity issues. A second tender, to consolidate the storage of non‑pharmaceutical items, attracted two submissions but issues identified by the tender evaluation committee19 prompted the department to cease the procurement process and directly procure the services of an existing warehouse provider on the basis that an approach to the market had failed. The department cited the provider’s positive performance history with the department as the reason for directly approaching this provider.
26. The ANAO also noted in its 2007–08 report that the department’s contracts for warehousing in place at that time did not provide a clear statement of contract requirements. In the current audit the ANAO assessed the 2010–14 contract for the pharmaceutical warehouse provider to assess the clarity of contract deliverables. While the contract requires six‑monthly performance reports, these are not always submitted to the department, and the weekly stock‑on‑hand reports received by the department do not provide routine management information.20 Further, the bi‑annual stock cycle counts and annual visual inspections of the stock, also required under the contract, are not currently being carried out and the outcomes are not reported. The department should review and clarify contract reporting arrangements as a basis for more effectively monitoring performance under the contract.
27. The contract for warehousing personal protective equipment has a measurable set of contract deliverables, and the monthly inventory report provided for in the contract provides a reasonable basis for the department to manage the contract and monitor the status of stockpile items. However, some performance information is not being provided monthly as required, and over time, the monthly inventory management report has also become a weekly stock‑on‑hand report.21 This arrangement has evolved without a formal contract variation—an ad hoc approach which can give rise to inconsistency with contract requirements.
28. The department’s annual stocktake of warehoused items has two purposes: to check the accuracy of its information on the Stockpile; and to identify any contract management issues. The stocktake involves physically checking stock against departmental records, identifying any variation and accounting for those variations. Significant contract management issues were identified during the 2011–12 and 2012–13 stocktakes, concerning the management of Stockpile inventory in two warehouses. The department advised the ANAO that it has recently approved alternative sites for these warehouses and the relevant contracts have been varied to reflect the new arrangements.
Inventory Management (Chapter 4)
29. The department has completed two reviews of the CBRN components of the Stockpile, in 2004 and 2008. The 2008 review made nine recommendations, including obtaining government agreement on the purpose of the Stockpile. The then Government agreed to high level outcomes for the Stockpile in March 2011, while a number of other recommendations are still being progressed; such as the development of criteria for item selection and pre‑deployment of CBRN items with state governments.
30. The initial stockpiling of antivirals in Australia was carried out in 2003–04 as a response to increasing concerns about avian influenza and the potential for an influenza pandemic. In its 2007–08 audit report, the ANAO concluded that Australia had addressed the minimal and desirable elements of the WHO planning framework for a pandemic including stockpiling of antivirals. In the current audit, the ANAO examined the Department of Health’s recent evidence gathering to support decisions for inventory selection and the quantity of antivirals and PPE purchased in preparation for an influenza pandemic. The department has commissioned two modelling projects—one on antivirals and one on PPE—to inform its consideration of the evidence base for the pandemic component of the Stockpile. The department’s approach is intended to provide assurance that the items and quantities purchased to maintain the currency and capability of the Stockpile are informed by appropriate evidence.
31. The 2011 Strategic Review identified significant costs associated with expiring stock and the lack of cost-effectiveness analysis in the selection of the Stockpile’s inventory and quantities.22 The main focus of the department’s activities since the Strategic Review has been on replenishing expiring stock and responding to the review’s recommendations. The department has commenced development of a more systematic approach to selecting items for the Stockpile, including a draft inventory selection framework. The Department of Health and stakeholder agencies have also explored a range of strategies to reduce Stockpile management costs, including: shelf life extension; stock cycling and rotation; returning expired pharmaceuticals to manufacturers in return for fresh stock; and purchasing generic antivirals as they become available. The department has also conducted progressively larger destruction programs to reduce the costs of storing expired items.
32. The ANAO assessed the effectiveness of selected controls for the management of the Stockpile, including processes for monitoring, reconciling and reporting on stock levels. The ANAO did not assess processes for the disposal or destruction of expired stock as this was the subject of an internal audit by the department in 2012.23 The internal audit report identified weaknesses in some of the controls associated with the department’s processes for disposing of expired stock, such as disposal guidelines, disposal planning, stock reconciliation and management reporting. The department advised the ANAO that the recommended process improvements for disposing of expired stock had been implemented.
33. The ANAO reviewed controls for the identification, recording and deployment of stock, with weaknesses in some controls resulting in data integrity issues. The department relies on a number of information management systems and processes to administer the Stockpile.24 In the absence of system interfaces to support automatic data transmission between the information management systems, the department employs emails and attachments (including manual forms and spreadsheets) to transmit key information. This has affected the completeness and accuracy of data stored for individual items in the department’s Stockpile database resulting in information discrepancies between the Stockpile database and the contractors’ warehouse system records.
Deployment (Chapter 5)
34. The department has developed a deployment framework that includes: memoranda of understanding (MoUs) with the states and territories; a departmental deployment plan, policy and procedures; and relevant provisions in contracts with the Stockpile warehouse providers. The states and territories have also developed stockpile distribution plans, a specific requirement of the MoUs. All MoUs were current, having been updated in 2010, with the requirement for a review every five years. However, the department held current distribution plans for only four of the eight jurisdictions, and there would be benefit in the department liaising with jurisdictions which have not updated their plans, to address this deficiency.
35. The department advises its warehouse providers to select stock for deployment which has not exceeded its expiry date, and has adequate stock life for at least a month before its expiry date. The PPE warehouse provider’s warehouse management system is capable of selecting unexpired stock on a First‑In, First‑Out (FIFO) basis; an approach which can provide an effective basis for selecting unexpired stock for deployment. However, the efficacy of this approach can be affected by factors such as: not all PPE stock having a recorded expiry date; the PPE warehouse provider’s FIFO date resetting when stock is moved from one warehouse to another; data integrity issues arising from inconsistencies between the department’s information management systems and warehouse provider data; and warehouse providers not consistently attaching to pallets labels that record expiry details.
36. The 2011 Strategic Review of the Stockpile observed that there was ‘no recording mechanism that can accurately determine how returned stock was treated after deployment, thereby guaranteeing its condition prior to its receipt’. The relevant Australian code requires that medicines which have left the care of warehouse providers should only be returned if they are examined and assessed by a person authorised to do so, and ‘there is no reason to believe that they have been subject to adverse environmental conditions’. The ANAO’s analysis of a deployment of a CBRN poison antidote, which was subsequently returned to the national Stockpile, indicated weaknesses in a number of controls. There was no consideration of the conditions under which the item had been transported and stored after deployment. Further, the item was returned to the Stockpile a month later without examination and assessment by an authorised person as required by the Australian code.
37. In its 2007–08 audit, the ANAO recommended that the Department of Health adequately test its deployment plans in conjunction with states and territories. In September 2012, the department’s audit committee considered progress in implementing the ANAO’s recommendation, noting that while there had been no testing between 2009 and 2012, testing would occur in late 2012 or early 2013. In the course of the current audit, the department advised the ANAO that it had not conducted any operational testing of the deployment of pandemic items since the last pandemic in 2009. The department also informed the ANAO that no testing of the deployment of CBRN items had been conducted in the last five years. To provide assurance that deployment arrangements will be effective in a national health emergency, the department should undertake planning to test the Stockpile’s deployment arrangements, in consultation with other jurisdictions.
Summary of agency response
38. The Department of Health provided the following summary response to the proposed audit report:
The Department of Health notes the audit report and agrees with the recommendations. To date, the Department of Health has invested significant resources, including approximately $4 million and a dedicated taskforce, to the development of reforms to enhance the efficiency and effectiveness of the management and operation of the National Medical Stockpile. Reform activities, that will address all of the recommendations in the audit report, will now be implemented under the 2014–15 Budget Measure ‘Reinforcing Australia’s Health Protection’ that provides funding of $15.4 million over four years.
39. The department’s full response is included at Appendix 1.
To strengthen the management of the National Medical Stockpile, the ANAO recommends that the Department of Health:
(a) update the strategic management plan to identify objectives, priorities and strategies to be implemented in the short term and over the longer term; and
(b) review the operational risk management plan to incorporate emerging risks.
Department of Health’s response: Agreed
To gain additional assurance that contract requirements are being met, the ANAO recommends that the Department of Health review and clarify reporting arrangements for its warehousing contracts with external service providers.
Department of Health’s response: Agreed
To improve the management and integrity of data relating to the National Medical Stockpile, the ANAO recommends that the Department of Health review its information management arrangements for the transfer of Stockpile data.
Department of Health’s response: Agreed
To provide assurance that deployment arrangements will be effective in a national health emergency, the ANAO recommends that the Department of Health undertake planning to test the current Stockpile deployment arrangements, in consultation with state and territory health authorities.
Department of Health’s response: Agreed.
 The Stockpile is comprised of specialised pharmaceuticals and personal protective equipment from overseas suppliers. Securing an adequate supply of relevant items in the timeframes required can be a challenge if there is a global surge in demand, as would be the case in a pandemic.
 Department of Health and Ageing, Annual Report 2012–13, Audited Financial Statements, p. 349. The Department of Health advised in June 2014 that the value of the Stockpile in 2013–14 is approximately $192 million.
 Ernst & Young, ‘Department of Health and Ageing: National Medical Stockpile Stocktake 2012–13’, 30 June 2013.
 The Department of Health has entered into Memoranda of Understanding with each state and territory for the receipt, storage and use of pharmaceuticals and equipment from the Stockpile.
 Certain items must be stored in a controlled environment.
 The notes to the department’s financial statements for 2012–13 indicated that $4.36 million in Stockpile inventory would pass its expiry date during the period July to September 2013. See Department of Health and Ageing, Annual Report 2012–13, p. 349.
 $145 million worth of stock had expired in 2010–2011. The expired stock comprised some 2,352 pallets in storage, the bulk of which were PPE, influenza antiviral and antibiotic. The department advised that the cost of storing expired stock in 2010–11 was $160 000.
 Department of Finance advice to the ANAO, dated 8 August 2013, based on analysis of Commonwealth Budget Paper 2: 2003–04 to 2013–14.
 Department of Finance, ‘Review of the National Medical Stockpile’, 2011.
 For example, the ANAO did not undertake control testing of the disposal or destruction of expired stock. The disposal of expired stock was the subject of a 2012 internal audit by the department.
 ANAO Performance Audit Report No.6 2007–08 Australia’s Preparedness for a Human Influenza Pandemic, pp.20‑21, p.99.
 ANAO Performance Audit Report No.6 2007–08 Australia’s Preparedness for a Human Influenza Pandemic, pp. 20–21, pp. 95–99.
 These included a lack of logistics and inventory management expertise within the Department of Health and shortcomings in the Stockpile’s information management systems.
 This was rated as a ‘high’ risk for the department.
 The Strategic Review identified a range of issues in the management of the Stockpile such as the: inadequacy of the information management system for accurate recording and reporting on the Stockpile’s inventory; lack of logistical and inventory expertise within the department to manage the Stockpile; and lack of documented plans and policies including a long-term strategic plan.
 The CPRs provide that an agency may approach a single entity through a limited tender process where ‘the goods and services can be supplied only by a particular business and there is no reasonable alternative or substitute … due to an absence of competition for technical reasons’. See CPRs, paragraph 10.3(d) (iii).
 Achieving value for money is the ‘core rule’ of the CPRs, and financial approvers must be satisfied, after reasonable enquiries, that the procurement achieves a value for money outcome. See CPRs, paragraph 4.4.
 One supplier of PPE was identified as the preferred provider following an open tender process. The Department of Health established a Deed of Standing Offer allowing for the purchase of this PPE item as necessary and in accordance with an approved fee schedule.
 An independent financial check of one of the organisations identified viability concerns, while the proposal from the other organisation quoted relatively high fees.
 For instance, on new stock, damaged and expired stock and stock movements.
 The report provides information on the number of pallets stored, as a basis for weekly payments to the contractor.
 The expiry of stock and the need to replenish items to maintain operational capability has emerged as a key issue in the management of stockpile inventory in Australia and around the world. The pharmaceuticals and nearly all other stockpile items have a finite shelf life which means that they may need to be disposed of at the end of that life without being used. Further, the storage of expired stock incurs a cost.
 Department of Health, ‘Audit of the Management of the Disposal of National Medical Stockpile Expired Stock’, Audit Report No.19 of 2011–12, Audit and Fraud Control Branch, January 2012.
 Including a standalone Stockpile database which records stockpile items and quantities; a range of supporting spreadsheets; and the external warehouse contractors’ inventory management systems.