"Are Microsoft well connected in the UK civil service, the Department of Health in particular?"
Yes and No. In my experience, Microsoft behave like any other supplier wishing to make a mutually beneficial relationship. Microsoft, VMware, Oracle, SAP, Dell et al are all doing similar things.
They'll appoint diligent contract managers who know a bit about customer requirements and are willing to learn. Customers will receive additional technical support -- e.g. accelerated connection to product specialists. Customers will receive free project consultancy -- bad if it is just about selling products, bloody brilliant when you get to work with independently-minded people who know their stuff. If you are in a position to participate in a product development programme as a working partner, they'll throw loads of resources your way.
Is this unfair to open source developers or small companies? A smaller outfit will never have the resources to match the big players. Sometimes modest resources are all that are necessary. If a company doesn't have to maintain 20+ years of cruft (e.g. VMware in year 2000), business can take off rapidly.
Congratulations to the NHSbuntu team for their work on smart cards and ID management.