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Allan Karr is pharmacy business services manager at
University College London Hospitals NHS Trust and chair of the Procurement
and Distribution Interest Group of the Guild of Healthcare Pharmacists |
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All pharmacy staff may find that they need to develop a basic understanding
of the key drug procurement processes and the medicines supply chain
in the NHS. With current budgetary pressures in mind, clinical pharmacists,
in particular, are now more frequently asked questions about medicines
supply and drug costs. Queries about the comparative costs of medicines,
cost pressures (ie, volume change multiplied by price change), dates
of patent expiries of branded medicines, changes in product selection
and annual use are becoming common. The challenges faced in managing
the “Payment by results” systems look set to increase the
need for this knowledge.
Hospital medicine expenditure in the NHS is approximately £2.8bn
per year, so a small percentage discount can potentially release significant
savings for hospital trusts. There is a need for clinical pharmacists
to add “cost efficiency” skills to their existing portfolio
of clinical and other skills.
Procurement practices have always had the potential to impact on the
work of clinical pharmacists since they affect the supply of medicines
to wards and patients.
However, the focus of trusts on saving money means that procurement services
seem, at last, to have come of age. NHS managers are now seeing effective
medicines contracting, in particular, as a key practice in their armoury
to reduce overspent budgets.
Who procures medicines?
Experience has shown that an in-depth knowledge of medicinal products,
suppliers, stakeholders and the clinical market is essential in order
to take maximum commercial advantage of any potential medicines contract.
Therefore trusts and regions currently employ specifically trained or
experienced pharmacy procurement staff to ensure that this important
pharmacy service is undertaken in a professional and competent manner
and within trust clinical networks. It is worth noting that many independent
consultancy firms and other organisations have seen an opportunity to
capitalise on the demand for savings and are trying to establish if further
savings can be made. So far it appears that they have identified limited,
if any, savings to be made. This may be because of the skills of procurement
staff and the effectiveness of existing systems which have already been
in place at local, regional and national level for many years.
The medicines market is complex as there are many stakeholders involved
who can all potentially affect the supply chain. A selection of issues
are discussed in this article, to illustrate the complexity of medicines
procurement and the supply chain and to help clinical pharmacists gain
the knowledge they look set to need to know.
Contracting for medicines
The contracting process that trusts use will differ depending on whether
the medicine is generic or branded.
Generic medicines Generic medicines can be defined in several ways.
They can, for example, be described as products that have “lost
their patent and are manufactured in large volume and at low cost”.
These medicines are characterised as being in a competitive market and
should consequently, in theory, have many suppliers. Recently, the NHS
has been fortunate to have seen a number of major branded medicines lose
their patents (eg, clozapine, paclitaxol, simvastatin and omeprazole).
Branded products have a 20-year patent period so there will always be
new generics entering the market and savings released. Whether or not
these savings should offset the cost of the new branded products that
are regularly entering the market is regularly debated.
Past and existing generic contracting arrangements aim to maximise purchasing
power by developing collective arrangements between trusts. Over the
past few years, procurement tendering at a regional level has been superseded
by tendering at a national level under the direction of the Supply Chain
Excellence Programme (SCEP) which was instigated by the Department of
Health (see p397).
In England, the SCEP generic contracts are administered by the NHS Purchasing
and Supply Agency (NHS PASA). Tenders from suppliers hoping to sell medicines
to the NHS are administered by NHS PASA. Regional pharmacy procurement
staff adjudicate the contracts, together with quality assurance pharmacists,
on behalf of individual trusts. Adjudication of tenders, although mainly
based on the tendered price, also takes into account other factors such
as packaging and labelling and the efficiency of the supplier’s
customer support services.
Such is the effectiveness of the nationally co-ordinated generic contracting
process, that the prices offered can occasionally be driven too low,
which can force suppliers out of the market or make the market
unattractive for new entrants. The national Pharmaceutical Market Support
Group (PMSG) has systems in place that aim to ensure that a sufficient
number of suppliers are in the market for each product and that competition
is fair and appropriate.
Following adjudication, NHS PASA provides details of the contract and
any subsequent amendments electronically so that they can be used by
trusts to update their pharmacy computer systems. Updating can take a
considerable time, because of the potential number of changes to suppliers
and prices that need to be incorporated. Delays in doing this, however,
can cause unnecessary invoice queries and can result in trusts not taking
advantage of new lower prices. Therefore it is important that trusts
have adequate staff resources within their pharmacy department to complete
this task within the agreed time frames.
All trusts should adhere to generic medicine contracts. Failure to do
so will result in reduced volumes being sold by suppliers and thus increased
prices.
From experience, fragmented procurement arrangements also serve to confuse
suppliers and to increase risk to trusts, because adequate product quality
assurance support may not be in place. Non-adherence to generic contracts
is therefore being monitored by the PMSG. A data monitoring system called
PharmEx has been developed by NHS PASA,
which is able to collect purchasing information directly from hospital
pharmacy computer systems on a monthly basis. Benefit tracking and contract
adherence tables can then be provided to every hospital’s purchasing
department for monitoring purposes and to enable auditing.
Some trusts also undertake their own local validation of the data generated
by PharmEx to calculate annual savings. This approach will ensure improved
data accuracy, especially if the data is to be used directly to impact
on medicines budgets or be added to procurement saving targets.
Branded medicines Contracting for branded (ie,patented) medicines is
perhaps more complicated than generic tendering. A number of patented
products have no competition (ie, they have a monopoly) or have limited
therapeutic competition (ie, they are in an oligopoly). Those involved
in contracting for branded medicines will need to ensure that prescribers
and other key stakeholders are an integral part of the decision-making
process or are, at least, willing to comply with the adjudication decision.
In light of the difficulty of getting consensus views with many prescribers,
adjudication for branded medicines tends to take place at local or consortia
level.
When contracting for branded medicines it is important to establish the
extent to which different products can be used to treat the same clinical
condition (ie, the level of interchangeability). Close negotiations are
required with stakeholders such as the
pharmaceutical industry, prescribers, the clinical directorate, primary
care trust and formulary pharmacists. A clear understanding of medicines
management, stakeholders views, clinical issues and industry marketing
practices, such as product differentiation techniques, will assist NHS
staff in this type of contracting process.
Public procurement law The procurement by public bodies (ie, NHS hospitals)
of products or services that are valued above a certain amount is regulated.
The law is intended to ensure that the EU’s public procurement
contracts are not constrained by national policies and are open to the
widest competition.
The threshold for EU contracting rules is approximately £100,000
depending on the pound to Euro exchange rate. Amounts below this threshold
still need to be tendered in line with general EU
principles (including non-discrimination, transparency and proportionality).
Trusts will therefore have developed their own local standing financial
instructions or orders to ensure compliance with all of the relevant
public procurement regulations.
Contracts subject to EU regulation are advertised by the form of an EU
notice. This states which of the three main award
procedures applies: open procedure, restricted procedure or negotiated
procedure. Each of these procedures has its own rules and contract time
frames.
Those without experience of EU procurement laws may view them as daunting.
However, they can be simplified if the key principles can be understood.
The key principles are:
• Be open and transparent and explain to suppliers what you are going
to do and how you will do it
• Ensure that suppliers are treated
equally — all suppliers should have a fair and equal chance of
winning a contract
• Be consistent with any action and do what you said you would
do
Stock holding Although “just in time” delivery systems may have proved
useful for some manufacturing industries, demand and supply must be totally
predictable for these systems to work effectively — a situation
not found in the medicines supply chain where, for example, supplier
product shortages are common.
There is a need for stocks of medicines to be stored in appropriate facilities
in dispensaries and wards to ensure that patients receive these critical
supplies when needed. Items of stock are treated by trust accountants
as though they are “cash” because they are not fixed assets.
Pressure may therefore be exerted to keep stock holding to a minimum.
Stock levels should be reviewed regularly, especially those relating
to slow-moving (ie, infrequently used) bulky, expensive or short-dated
items.
The average stock holding for the hospital pharmacy sector appears to
be about one month’s supply. This figure can also be expressed
as a stock turnover of 12 times per year. Experience has shown that reducing
stock levels below this, and therefore increasing the frequency of stock
turnover, may help the cash flow position but can be detrimental in other
ways (eg, resulting in increased orders, more invoice queries and an
increased risk of becoming out of stock, particularly if a shortage occurs).
Medicine pricing
Branded medicines The national prices of all new branded medicines are
established at their launch as part of the Pharmaceutical Price Regulation
Scheme (PPRS). This voluntary scheme is managed by a section of the DoH
following five-yearly negotiations between the Government and the Association
of the British Pharmaceutical Industry. PPRS is intended to balance the
needs of a variety of stakeholders:
• Pharmaceutical companies — want to cover their research and
development costs and generate profit for
shareholders and for further research to bring more medicines onto the
market
• Government — wants pharmaceutical companies to invest in UK facilities
and, for example, to receive taxes from enhanced export sales
• NHS — wants to obtain affordable new medicines
The UK is often used as a reference source for other EU countries’ pricing
systems. Pricing in the UK can therefore be critical to a supplier. After
product launch, any price increase can only be obtained by a manufacturer
following agreement with the DoH. Manufacturers can modulate prices between
products in their portfolio to achieve their market objectives.
The last round of PPRS negotiations achieved an overall medicines price
reduction of 7 per cent for the NHS. Any hospital contracting needs to
be considered in light of these negotiations.
Unlike Drug Tariff prices in primary care, Hospitals’ medicine
prices include VAT. This cost variation may immediately disadvantage
the hospital sector if they do not receive similar or greater discounts
from suppliers.
Price discounts Pharmaceutical companies are sometimes prepared to offer
a range of discounts to hospitals and primary care trusts in order to
promote their products and increase sales. Discounts may increase the
market size for the supplier or take market share from their competitors.
The
discounting mechanism should, under EU procurement law, be transparent
and be applied to all purchasers in a market segment. Examples of the
types of discounts offered include:
• Settlement discounts (price reductions given for timely payment)
• Quantity discounts (reductions for ordering large volumes)
• Seasonal discounts (eg, to meet a
supplier’s year-end targets)
• Loss-leader pricing (very low prices offered to break into new markets)
• Sliding-scale discounts (variable pricing depending on the quantity
purchased)
• Captive-product pricing (eg, discounts given on a blood glucose meter
to encourage purchase of the blood
glucose strips)
• Discount to compete against parallel imports
“What is the price of a medicine?” is the most frequently
asked question by trust managers. A medicine may have many different
prices (see Panel 1 below).1 A clear understanding of what price is required
and where the pricing data can be found is essential to answer this question
properly.
Panel 1: Different prices of
medicines
• Price with or without VAT
• Standard hospital discount price
• Special contracted hospital price
• NHS tariff price with or without VAT
• Standard monthly pack price or other pack type (eg. bulk pack)
• Prepack or overlabelled pack price with the cost of this overhead
included
• Price with or without dispensing fee and other overhead cost
• Home delivery price
• Average stock value or first-in stock price
• Price during clinical evaluation of product or clinical trial |
Stock valuation Medicine prices are not always fixed.2 Product prices
vary over time. A lower price may become available through favourable
contracting or prices may increase. It is therefore important to establish
what the value of a product is if the stock has been purchased at different
times with different prices.
There are two legal methods of valuing the stock due to price variations.
These are:
• AVCO (average cost)
• FIFO (first-in, first-out)
For the AVCO method, the average value of all stock is established.
This price may not reflect any of the purchase prices and is automatically
calculated using trusts’ computerised stock management systems.
Sometimes AVCO prices take several months to settle down to match the
true purchase cost, especially if infrequent bulk purchasing occurs.
Average prices often include VAT.
For the FIFO method, the price follows the stock through the supply chain.
The first stock issued to a cost centre will not be the same price as
that of the last stock purchased. Stock issued from different pharmacy
areas, such as distribution and the dispensary, may therefore have different
prices for the same product.
Benchmarking Benchmarking is a useful practice to compare the procurement
efficiency of different organisations. However, a thorough knowledge
of the causes of price variances is necessary. Also, the accuracy of
comparator price data needs to be established to adequately benchmark
prices between any two organisations. In the past, common errors in benchmarking
practices have been made. Some of these have been made by experienced
management consultancies.3 These can give the wrong impression of the
efficiency of the pharmacy service. These common benchmarking errors
include:
• Using the wrong price, for example, using the “off-contract” price
(caused by suppliers’ failure to supply), instead of the contract
price
• Not taking the timing of contracts and market changes into account
• Not taking into account low use of a product versus the benefits of
a contract
• Not being aware of whether or not prices include VAT
• Not comparing different pack sizes and presentations of medicine accurately
• The AVCO price being mistakenly compared with the FIFO price
Management
and financial accounting All purchased products or services are managed
by the financial accounting team within a trust. The responsibility
of this team is to ensure that the externally-based financial systems
of a trust, such as those with their suppliers and purchasers, are both
accurate and appropriate. Financial management systems will focus on
a trust’s year-end financial reports.The yearly pharmacy medicine
stock take and invoice matching processes are important issues for the
financial accounting systems.
Once funds become available to the trust through the financial systems,
senior managers decide how the funds should be applied to the different
cost centres. Management accountants assist senior managers by the allocation
of monthly pay and non-pay budgets. These budgets can be altered according
to the business needs of the trust and are applied not just to pharmacy
but to all significant cost centres.
A financial coding system, which may incorporate specialist centres,
consultants, wards and departments can be used to ensure that internal
medicines charges are transferred to specific budget holders. As trusts
change their clinical structures, their coding systems will alter. It
is therefore important that pharmacists ensure that accurate medicine
charges, part of the directorates/consultants’ non-pay costs, are
made to the correct cost centres through the right coding structure. Conclusion
Procurement and supply chain management may not be high on the priority
list of clinical pharmacists, but it does appear to be of great importance
to trust managers. In order to achieve beneficial financial savings for
trusts, a close partnership between clinical pharmacists and pharmacy
procurement professionals is essential. Such a working relationship may
already exist in some trusts. Other trusts may look to developing this
cultural relationship.
Clinical pharmacists will also need to extend their existing skills base
and take the time and trouble to understand more about procurement and
the supply chain. The new learning required by clinical pharmacists in
this speciality is fast becoming an essential requirement to satisfy
the cost-efficiency demands as well as the clinical effectiveness demands
of the new NHS.
References
1. Karr, A. Which drug price is right? Hospital Pharmacy Practice 1993;(November):547.
2. Karr, A. What price should be paid? The Pharmaceutical Journal 1991;247:HS32.
3. Karr, A. Beware of strangers bearing gifts. The Pharmaceutical Journal
1994;253:847. |
Hospital Pharmacist