The Department of Health has been savaged by the National Audit Office for the handling of its £12m deal with healthcare information analysts Dr Foster.

The public health watchdog said the joint venture between the DoH Information Centre and Dr Foster, announced a year ago, could not demonstrate value for money because the DoH did not go out to competitive tender for the work, ignoring Treasury and Department of Trade and Industry guidance.

The NAO said the DoH paid up to£4m more than the value of a 50 per cent share in the joint venture called Dr Foster Intelligence, and up to£1.7m in professional fees. The Information Centre did not obtain a controlling interest in Dr Foster Intelligence in return for this premium - as normally expected.

Since the deal was signed, Dr Foster Intelligence has projected profits 50 per cent lower than presented in the business case. In addition, the NAO estimates the size of the health informatics industry at closer to£20m a year than the£325m projected by financial advisers KPMG during contract negotiations.

The report expresses particular concern about a£50,000 payment to Dr Foster Ltd for advice about a possible relationship between the Information Centre and the private sector, agreed in March 2005, the same month that the DoH commissioned KPMG to carry out initial due diligence on Dr Foster Ltd and develop a business plan for the joint venture.

Discussions began a month earlier, when analysis from the DoH commercial directorate suggested no tender exercise would be required. Group director of strategy and business development Hugh Taylor, now permanent secretary, gained approval from ministers to open up a commercially confidential and without prejudice dialogue with Dr Foster Ltd, the report said.

The NAO described an 'urgency' to complete the deal, and confusion about the roles and accountabilities of the Information Centre and the DoH. There was a 'potential for conflict' in the roles of advisers, who were asked to help define the specification for working with the private sector, consider the options among the private sector and start dialogue with Dr Foster.

Its conclusion was damning about the damage caused to the current market in healthcare information and the possibility of restoring a level playing field.

'We consider there is a real risk this joint venture may result in a less competitive market, certainly over the three years of the agreement. While the Information Centre has now taken steps to try to ensure equal and fair access to data and that further procurement of services is subject to competition, other providers feel Dr Foster Intelligence has 'first mover advantage'; and are not convinced there can be a level playing field.' Overall, 'we believe the rewards are not equal to the risks'.

In future, it said the DoH should use a competitive bidding process or ensure adequate benchmarks in the absence of appropriate competitors. Financial and corporate governance processes of arms length bodies should be clarified and monitored. It also called on the Information Centre to re-evaluate its investment and the annual performance of the venture.

The DoH defended its actions. Its response forms part of the report, an unusual move that is indicative of the high level of disagreement between the two parties.

The NAO first looked at the venture in October 2005 when a whistleblower wrote with concerns about its legality. The Information Centre reacted by removing a service level agreement from the contract. This lessened the need for a public tender, but removed any measurable services expected from the joint company, says the NAO.

The DoH said it had followed legal advice. The venture was not primarily about financial gain, but 'to harness private sector dynamism, efficiency and effectiveness'. It said it was not persuaded a competitive exercise would have produced a different outcome. Dr Foster Intelligence made no comment.