Pharmacy Procurement Practice
Overview
Richard C. Ponder, Jr., CPhT, CPP, CEPP, BBA, BS(Bio)
Pharmacy Supply Chain Supervisor
East Jefferson General Hospital
13th PPNC
Agenda
1
Introduction
2
Knowledge, Skills, & Abilities
3
Laws & Regulations
4
Order Cycle
5
6
Cost Management Program
7
Questions
8
Referances
Page  2
Metrics & Tools
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Statements about Pharmacy Procurement
 Drug-cost containment initiatives must never compromise patient safety or
quality of care.
 Four primary factors drive growth in overall drug expenditures: price,
utilization, mix, and innovation.
 Medication cost continue to increase faster than other healthcare
expenditure.
 Four strategic objectives: procure the most cost-effective drugs in the right
quantities, select reliable suppliers of high-quality products, ensure timely
delivery, and achieve the lowest possible total cost.
 Information is the lifeblood of procurement and is needed at every stage if the
procurement process is to be optimal.
 Even if appropriate policies and procedures are in place, lack of properly
trained staff in key positions can doom any procurement system to failure.
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Procurement - Defined
Complete process of obtaining goods and services from preparation and
processing of a requisition through to receipt and approval of the invoice
for payment. Also called sourcing, it commonly involves (1) purchase
planning, (2) standards determination, (3) specifications development, (4)
supplier research and selection, (5) value analysis, (6) financing, (7) price
negotiation, (8) making the purchase, (9) supply contract administration,
(10) inventory control and stores, and (11) disposals and other related
functions.
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Pharmacy Procurement
Quote by Eva Ombaka
“Procurement is not simply the acy of buying, but
encompasses a complex range of operational, business,
information technology, safety and risk amagement, and legal
systems, all designed to address an institution’s needs.”
Americal Journal of Health-System Pharmacy, Vol. 66, Issue 5 Supplement 3, s20
-s28, 2009.
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Procurement – ASHP Policy Position #0524
 To support existing laws and legitimate practice that ensure product
integrity and allow organized health care settings to purchase drug
products and related supplies at prices that minimize health care costs;
further,
 To support the principle of purchase of pharmaceutical products and
related supplies by public and private entities using appropriate
professional practice to achieve that end; further,
 To encourage government acknowledgement of existing local
professional activities already in organized health care settings that are
methods of promoting quality and cost-effective pharmacist patient-care
services.
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Nine Principles of Pharmacy Procurement
 1 – Transparency
 2 – Cost Containment
 3 – Technical Capability
 4 – Operational Principles of Good Pharmaceutical Procurement
 5 – Purchasing for Safety
 6 – Ensuring Appropriate Selection
 7 – Timely, Accurate and Assessable Information
 8 – Ensuring Quality Products
 9 – Proper Budgeting and Financing
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Pharmacy Procurement
Knowledge, Skills, & Abilities
1
General knowledge of operations, regulations, and
terminology
2
Supply Chain Management
3
BOK – Accounting, Economics, Business Mathematics, Business
Law, Negotiations, Quality Assurance, & Statistics
4
Interpersonal Skills
5
Continous Education
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Pharmaceutical Supply Chain
Manufacturing
 Source of pharmaceuticals: Pfizer, Wyeth, Mylan, Bedford
 Wholesale Acquisition Cost - WAC
 Brand, Generic; Dropship; cGMP; Recalls; Failure to Supply
Wholesale
Distributors
 Distributors of pharmaceuticals: Morris and Dickson, Cardinal, Reliance
 WAC +/- a negotiated %; GPO Contracts
 Pedigree; VAWD; NCPD; HIDA
Pharmacies
 Dispences pharmaceuticals: Hospitals, Infusion, Retail, Mail-order
 Average Wholesale Price – AWP
 Internal Supply Chain Management System
Patient
Page  9
 End User of pharmaceuticals: Inpatient, Outpatient, Family Members
 AWP +/- a negotiated %; Pharmacy Benefit Managers – PBM
 PBMs: Caremark, Medco, Express Scripts
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Laws and Regulations
Procurement
Pharmacy
 Uniform Commercial Code
 Pure Food and Drug Act
 Sherman Act
 Harrison Narcotics Tax Act
 Clayton Act
 Food, Drug, and Cosmetic Act
 Robinson-Patman Act
 Durham-Humphrey Admendment
 Sarbanes-Oxley Act
 Kefauver-Harris Amendment
 Federal Trade Commission Act
 Comprehensive Drug Abuse
prevention and Control Act
 Uniform Computer Information
Technology Act
 Local Laws
 Poison Prevention Packaging Act
 Drug Listing Act
 Drug Regulation Reform Act
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Laws and Regulations
Pharmacy
 Orphan Drug Act
 Drug Price Competition and Patent
Term Restoration Act
 Prescription Drug Marketing Act
 Omnibus Budget Reconcillation Act
 FDA Safe Medical Devices Act
 Anabolic Steroids Control Act
 Dietary Supplement Health and
Education Act
Page  11
Pharmacy
 Health Insurance Portability and
Accountability Act
 FDA Modernization Act
 Medicare Prescription Drug,
Improvement, and Modernization Act
 Isotretinoin Safety and Risk
Management Act
 Combat Methamphetamine Epidemic
Act
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Laws and Regulations
Agencies
Agencies
 Bureau of Alcohol, Tobacco, and
Firearms (ATF)
 Environmental Protection Agency
(EPA)
 State Boards of Pharmacy (BOP)
 Food and Drug Administration (FDA)
 Centers for Medicare and Medicaid
Services (CMS)
 Joint Commission on Accreditation of
Health-care Organization (JCAHO)
 Drug Enforcement Agency (DEA)
 National Association of the Boards of
Pharmacy (NAMP)
 Department of Transportation (DOT)
 Institutional Review Boards (IRB)
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Contract Fundamentals
Four Elemets: Offer, Consideration, Acceptance, & Mutuality
 Offer – one of the parties
made a promise to do or
refrain from doing some
specified action in the
future.
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 Consideration – Something of
value was promised in
exchange for the specified
action or nonaction. This can
take the form of a significant
expenditure of money or
effort, a promise to or not to
perform some service, &
reliance on the promise.
 Acceptance – The offer
was accepted
unambiguously.
Acceptance may be
expressed through words,
deeds, or performance.
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Contract Fundamentals – Continued
 Mutuality – The contracting parties had “a meeting of
the minds” regarding the agreement. This means the
parties understood and agreed to the basic
substance and terms of the contract.
 Additional Terminology: Market Basket; Force
Majeure; Intellectual Property; Disclaimer Warranty;
Indemnification, Errors and Omissions Insurance,
Parol Evidence; Jurisdiction, Termination
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Group Purchasing Organization (GPO)
Examples: Amerinet, Broadlane, Consorta, Med-Assets, Novation, Premier
Considerations
 Fees; Allowable distribution methods; Payment terms; Return policies; Supplier
performance requirements; Rebates; Market-share agreements; Single-agent
contracts; Services; Letters of commitment
Advantages
 Standardization of products; Reduction of contract labor cost; Enhancement of
member institution’s purchasing program, information sharing, & purchasing
expertise; Protected periods of price protection
Additioanl Note
 Some GPOs return a portion or all of the contract administrative fee (CAF) to its
members.
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Procurement Process
Processes
Subprocesses
Individual Tasks
Page  16
 Receiving; Accounts Payable;
Inventory Control
 Creat a RFP; Issue a PO; Select a
Supplier; Recieve a Good; Pay an
Invoice
 Complete Requisition Form; Verify
Requirment; Input Data; Create a
PO; Sign Documents
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Inventory Management
The search for one solution is a waste of resources.
Wholesaler; Formulary;
Government; Manufactures;
Pharmacy,
Point of Sale; Reorder
Points; Automated
Counting/Filling Device;
Dispensing Machines;
System Care and
Maintenance; Order
Entry Devices; System
Backup
Automated; Manual;
Electronic; Shipping;
Material Safety Data
Sheets; Pedigrees;
Credits/Returns; Receiving;
Controls - 222
Unit-Dose; Barcoded;
Physical Organization;
Refrigeration; Point of
Use Stations; Spoilage;
Shrinkage; Turnover;
Reorder Point - EOQ
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The Order Cycle
Trannsparency;
Exception Reporting;
Price Validation; Right
First Time;
Consolidated
Deliveries; Invoice
with Goods or
Electronic
Validated Computer
System; Manage
Supplier Base; Stock
Profiles up to Date;
Monitored Stock and
Performance; Audit
Trails
Inventory
Management
Page  18
Order
Initiation,
Validation,
Transmission
Electronic Process;
Minimal Manual
Intervention;
Electronic Records;
Electronic link from
Pharmacy
Management System
to Trransmission;
Electronic Audit Trail
Supplier
Processes
and
Delivery
Electronic Process;
Complete within 2
days; Electronic
Transfer; Prompt
Payment
Goods
Received
Processing
Invoice
Clearance
and
Payment
Bar Coded Receipt
and Expiry Dating;
Instant Notification of
Discrepancies;
Delegation of
Authority
13th PPNC
Procurement Value –Added Assessment
Traditional (Transaction) Procurement
 Purchase on price alone, Order processing, Target pricing, Multiple sources,
Many suppliers, Contract preparation, Order follow-up, Invoice reconciliation
Tactical (Best Price) Procurement
 Leverage volume for multiple to single source, Goals for price, quality, and
delivery, Supplier reduction programs, Supplier meetings, Technical planning for
negotiations, Conducting negotiations, Functional skill development
Strategic (Integrated) Procurement
 Total cost, Total value, Strategic suppliers, Optimizing supply base, Aligning with
business strategies, Developing organizational strategies to meet future needs,
Supply performance and relationship management
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Componets of a Cost Management Program
Pharmacy Directed Activities
Interdisciplinary Activities
Reimbursement Charging
 Purchasing
 Medication Utilization
Program
 Reimbursement
 GPO Contracts
 Facility Contracts
 Wholesaler
Contracts
 Inventory Management
 Wholesaler Ordering
Programs
 Clinical Pharmacy
Services
 Assessment of Drug
Cost
 Formulary
Management
 Storage
 Therapeutic
Interchange
 Waste Reduction
 Interventions
 I.V. Waste
 Returns
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 Protocol
Development
 340B Programs
 CMS
 Commercial
Insurance
 Outpatient Infusion
Center
 Charging
 Coding and
Processing
 Indigent Care
Programs
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Reporting Tools
Report
 Wholesaler/GPO Reports
Consideration
 Direct Reports
 For 80/20 analysis, by therapetutic
class, monthly trends, benchmarks
 Cost per medical service
 Available from accounting/finance
 Cost per adjusted patient day
 Drug-utilization data
 Adjusted patient days are calculated
with standard formula that modifies
patient days with a ratio of outpatient
to inpatient revenue to correct for
volume changes and severity of
illness.
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Reporting Tools – Inventory Management at a Glance
2005
2006
2007
2008
Total
Purchases
$16,078,980
$19,704,733
$21, 703,184
$20,859,723
Year End
Inventory
$1,826,846
$2,877,065
$1,667,966
$1,680,824
Turns
8.80
6.85
13.01
12.41
% Change in
Purchases
Base Year
22.55%
10.14%
-3.89%
% Change in
Inventory
Base Year
57.49%
-42.03%
0.77%
% Change in
Turns
Base Year
-22.18%
89.98%
-4.62%
Page  22
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Reporting Tools – Variance Report
2008 Average vs. February 2009 Actual (Therapeutic Classes)
Description
2008 Avg
Qty/
Month
2008 Avg
Spend/
Month
2008
$APD
(109.85)
Feb
09
Qty
Feb 09
Spend
Feb 09
APD
(111.00)
%$
Change
% APD
Change
Antineoplastic Agents
509
$307,607.06
$2,800.25
463
$316,009.91
$2,846.94
2.73%
1.67%
Hematopotic Agents
183
$212,645.92
$1,935.78
141
$173,850.31
$1,566.22
-18.24%
-19.09%
Antibacterials, Misc.
535
$100,788.21
$917.51
481
$113,425.62
$1,021.85
12.53%
11.37%
Anticoagulations
474
$105,059.17
$956.39
418
$105,066.31
$946.54
0.01%
-1.03%
Enezymes
33
$47,859.00
$435.68
51
$77,935.96
$702.13
62.84%
61.16%
Penicillins
445
$59,818.23
$544.54
420
$62,870.95
$566.40
5.10%
4.01%
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Pharmaceutical Procurement Summary
 Patient Safety > Cost Savings
 9 Principle of Pharmaceutical Procurement
 Must have trained procurement professionals dedicated to the
procurement process
 Metrics are a useful tool; however, you must understand how the
metric is created
 Continuous Education
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Do You Have
Any Questions?
Email: Rponder@ejgh.org
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References
 American Society of Health-System Pharmacist. ASHP guidelines on medication cost management
strategies for hospitals and health systems. Am J Health-Syst Pharm. 2008; 65:1368-84.
 American Society of Health-System Pharmacist. Current status of medicines procurement. Am J HealthSyst Pharm. 2009; 66: 5: Supplement 3 s20-s28.
 CPSP Study Guide, American Association of Pharmaceutical Sales Professionals, Round Rock, TX, 2007.
 CPM Study Guide, 7th edition, Institute for Supply Management, Tempe, AZ, 2001
 CPP Study Guide, 6th edition, American Purchasing Society, Aurora, IL, 2007.
 Deegan, A. & O’Donovan, T. Management by Objectives for Hospitals 2nd edition, Aspen Publication,
Rockville, MD, 1982.
 McKeller, John. Evaluating the Purchasing Process. NAPM InfoEdge. 1996; Vol. 1 No. 9.
 Moini, Jahangir. Law & Ethics for Pharmacy Technicians. Delmar, Clifton Park, NY, 2009.
 Puckett, William. Recruiting a manager for financial activities in pharmacy. Am J Health-Syst Pharm.
2008; 65: 2014-15.
 Raedels, Alan. The Supply Chain Process, Institute for Supply Management, Tempe, AZ, 2000.
 Sanderson, Edwards. Hospital Purchasing and Inventory Management. Aspen Publication, Rockville, MD,
1982.
 Wilson, Andrew. Financial Management for Health-System Pharmacists. ASHP, Bethesda, MD, 2009.
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