SAP-PRELIM states and events (not just diseases) in specified

populations (neighborhood, school, city, state, country,

SOCIAL AND ADMINISTRATIVE PHARMACY global). It is also the application of this study to the
control of health problems (Source: Principles of
Social Pharmacy is the multidisciplinary field of education Epidemiology, 3rd Edition).
and research that focuses on the role, provision,
regulation and use of medicines in society. The scope is
broad, covering the social, psycho-social, economic, and
organizational aspects of medicines.

Administration Pharmacy
→ It is an applied field of study that deals with the
research, evaluation, and management of the patient,
the drug, and the health care practitioner as they all
relate to patient care.

Social and administrative pharmacy is used loosely to

describe a collection of different interests, which outline
the social aspects of pharmacy, sometimes labeled social
pharmacy, other times administrative pharmacy but also
pharmacy management.

PHARMACOEPIDEMIOLOGY

→ Pharmacoepidemiology is the study of the

utilization and effects of drugs in large numbers of
people; it provides an estimate of the probability of
beneficial effects of a drug in a population and the
probability of adverse effects.
→ It can be called a bridge science spanning both
clinical pharmacology and epidemiology.

→ Pharmacoepidemiology concentrates on clinical

patient outcomes from therapeutics by using methods of
clinical epidemiology and applying them to
understanding the determinants of beneficial and
adverse drug effects, effects of genetic variation on drug
effect, duration-response relationships, clinical effects of
drug-drug interactions, and the effects of medication
non-adherence.

Epidemiology is the method used to find the causes of

health outcomes and diseases in populations. In
epidemiology, the patient is the community and
individuals are viewed collectively. By definition,
epidemiology is the study (scientific, systematic, and
data-driven) of the distribution (frequency, pattern) and
determinants (causes, risk factors) of health-related
Latin America and Caribbean Regional Health Sector Reform Initiative

PHARMACEUTICAL SYSTEM
PERFORMANCE WITHIN THE
CONTEXT OF HEALTH
SECTOR REFORM

Edgar Barillas

May 2005

LACHRS R EPORT N O . 70
 Pharmaceutical System Performance within the Context of Health Sector Reform

HEALTH CARE SYSTEMS AND PHARMACEUTICAL SYSTEMS

Assessments of health system performance often include questions of the availability of key
pharmaceuticals at the facility level as a measure of quality of care (Knowles et al, 1997). Indeed,
it is widely recognized that the ability of health care systems to successfully address most
modern health problems rests largely on the availability of these products, and that people will
seek care when they are available. As such, we can conceptualize the pharmaceutical supply
system as a critical subsystem of the larger
health system whose effective functioning is
essential to access to and use of health care
services (see Diagram 2).

Pharmaceutical management is defined as the set

of practices around four key functions that are
aimed at ensuring the timely availability and
appropriate use of safe, effective, quality
pharmaceutical products and services in a given
health-care setting. A pharmaceutical supply
system is defined by the procedures and methods
used to accomplish these key functions.
Diagram 2: Health and pharmaceutical systems

The parameters that determine how these

practices may be performed are determined by prevailing laws and regulations such as those
regarding the import/export, manufacture, sales and use of medicines, as well as laws that govern
general labor, commercial and financial matters. How and, to a great extent, how well a
pharmaceutical system performs is mitigated by the availability and quality of human and
financial resources, and the relative priorities for these scarce resources are expressed through
national development, health and pharmaceutical policies.

The next section describes the key functions of the pharmaceutical system. Many of these
functions are often directly addressed through reform initiatives where as in other cases they are
impacted indirectly. The following section discusses how the performance of a pharmaceutical
system may be measured to identify how opportunities for improvement and impact of health
sector reform initiatives.

5
 Pharmaceutical System Performance within the Context of Health Sector Reform

DESCRIBING THE FUNCTIONING OF A PHARMACEUTICAL SYSTEM

This section provides an overview of the key functions of a pharmaceutical system. These
functions must be carried in any system, although how they are accomplished may vary from
system to system, and many health reform initiatives can be observed to directly and indirectly
impact on these functions. One reason for this is that the management of pharmaceutical supply
is cyclical in nature. As such these functions are characterized by dependent relationships
whereby the quality of one function can affect the quality or outcome of another (see Diagram 3).

Selection

The number of pharmaceutical products S election

marketed in any given country can be in

the thousands, yet only a few may be of U se
M anagem ent
direct relevance to the most important S upport
public health problems in the country. P rocurem ent
Being able to distinguish between those
that are most useful and restrict D istribution
practitioner choices to these selected
products is of clinical and financial
P olicy and Legal Fram ew ork
significance to health systems.

The selection function includes the

Diagram 3: Functional components of a pharmaceutical system
decisions and actions required to
determine which products will be
permitted to circulate in the system. The priorities and criteria for selection are typically detailed
in a national health or drug policy and should correspond to the clinical and therapeutic needs of
the population, as well as meeting acceptable standards for product safety, efficacy, quality, and
cost-effectiveness (WHO, 2002). Selection should also reflect appropriateness for the level of
care (products needed at the clinic level are different than those needed at the hospital level). The
output of a selection process may take the form of a national formulary or essential medicines list,
typically with the pharmaceutical products listed by international non-proprietary name (INN).

The use of INNs aids in avoiding reliance on any single brand name and helps to focus on the
particular molecule of interest. When used to guide procurement, much like a shopping list,
essential medicines lists are cost control tools by preventing purchases of non-essential or
“luxury” items. Health systems seeking to improve efficiencies to be able to improve some
dimension of effectives (availability, affordability, access, acceptability) will always be well
served by implementing or updating and maintaining national essential medicines lists.

The primary responsibility for the selection of pharmaceuticals for most public health systems is
at the national level, to take advantage of the expertise and technical resources available at that
level, although there may be mechanisms to allow for some local adaptation. There are strong
forces that may not support the concept of a national essential list, most notably pharmaceutical
manufacturers that feel that they will be blocked from accessing a potential market for their

7
 Pharmaceutical System Performance within the Context of Health Sector Reform

goods. Selection committees need adequate training and recognition, and the support of a
national policy or legislation to be able to carry out their function in a transparent manner.
National regulatory processes, particularly registration, should support the selection function to
ensure that selected products are available to be marketed in the country and that adequately
trained health professionals are available to ensure their appropriate use.

Procurement

The goal of the procurement function is to assure that the right quantity of quality products are
purchased at the best price possible and that they are delivered when expected. Key activities
under the procurement function include quantification of needs, purchase, receipt, and payment.
In established systems with centralized procurement, quantification usually involves a
methodology of obtaining information from the facility level on actual consumption and
aggregating it to the level where procurement is realized. Weaker systems however, may need to
rely primarily on historical data, previous quantities sent to the facilities, or population based
estimates rooted in expected services utilization used to determine quantities to be ordered at the
national level.

The strategies (e.g., centralized or decentralized) and methods (e.g., international competitive
tenders, restricted tender, competitive negotiation, direct procurement) that may be employed to
procure supplies are determined by the prevailing laws and regulations that govern the system,
and should be appropriate for the types of products sought, budgetary cycles, and available
financing mechanisms. As most centralized systems are based on an annual fiscal cycle,
procurement is typically an annual exercise, although small procurements throughout the year
may take place for emergency purposes or for special products. These large procurements lend
themselves to international competitive bidding and benefits of economies of scale. However,
one of the problems with highly centralized systems is that they may be too cumbersome to be
responsive to local variations; needs and incentives are often not in place to curb waste and loss
at the local level.

Some reform initiatives have sought to improve efficiencies and grant more autonomy to the
local levels through decentralization and deconcentration of procurement functions. However,
specifically with respect to pharmaceutical procurement, this can be problematic. The potential
problems associated with complete decentralization and deconcentration include loss of
economies of scale, decreased access to suppliers, lack of local expertise to evaluate needs,
prepare procurement documents and make purchases, as well as reduced access to quality
assurance mechanisms (e.g., Barillas, 2005b).

In the course of realizing larger reforms that aim to achieve the benefits of more decentralized
management of public health services, some countries have opted to retain some procurement
functions at the central level. For example, public tenders with qualified suppliers can take place
at the national level to preserve economies of scale and to address critical quality assurance
issues, while actual purchases are made from these pre-selected suppliers at the tendered price
(e.g., Brazil, Guatemala, Ecuador, and Peru). Where fiscal responsibilities are deconcentrated,
resources may also be pooled at subnational levels to create buying groups in order to gain some
economies of scale, as has occurred in Peru and El Salvador. Regardless of the plan, there

8
 Pharmaceutical System Performance within the Context of Health Sector Reform

remains a need for local fiscal controls and functional management systems to ensure that needs
estimates and quantifies for procurement are accurate, reliable and up to date, and that funds are
available as planned.

Distribution

The distribution function covers both storage and transportation of items procured and it should
aim to ensure the flow of products to the facilities with a minimum of waste and loss. Inventory
management, a core responsibility in this component of the cycle, involves close monitoring of
the movement of stock both into and through the system. This information is used to guide
procurements, as well as to ensure that there are no stock outs of gluts throughout the chain.

Centralized systems are characterized by one or two central medical stores that receive procured
items and process orders from lower level facilities. Larger countries are more likely to have
multiple stores. A multi-tiered system generally requires greater consideration of expiry periods,
and offers increased opportunities for loss due to damage and theft associated with transportation
from one level to the next. Transportation may be the responsibility of the central store or of the
lower levels.

Storage and transportation represent significant recurrent costs for Ministries of Health and, as
such, are the most obvious for consideration for privatization or contracting out. Options to this
effect are limited by laws regarding disposal and replacement of government property,
restrictions on privatization and contracting of services, and civil service laws. For this reason,
however, opportunities to explore alternatives arise when countries undergo larger reforms that
may not be specific to the health sector. For the distribution component, for example, one
alternative to the classic medical store model is to have supplies delivered directly from the
supplier to the service delivery point. Stipulations for this can be written into the procurement
documents. This type of distribution system requires that suppliers have the capacity to make
programmed deliveries and the capacity on the part of the facility to appropriately program
shipments and to receive and store supplies. It also requires that allowances be made to otherwise
make use of public facilities and personnel.

Use

This function of the pharmaceutical system refers to the behaviors and practices associated with
prescribing, dispensing and actual consumption of pharmaceuticals. The concept of rational drug
use encompasses the constellation of factors that lead up to the availability of pharmaceuticals
(selection, procurement, distribution) as well as ensuring that the desired therapeutic outcomes
are achieved. Whereas public health systems might focus on public sector provider behavior,
many countries also aim to align the behaviors of private practitioners with public health
concerns.

Interventions to improve the use of pharmaceuticals include development and enforcement of

laws and regulations regarding selection and the sale of certain products or the actions of
prescribers and dispensers. Drug laws specify the types of facilities that may dispense or sell

9
 Pharmaceutical System Performance within the Context of Health Sector Reform

drugs, and who may prescribe certain products. Registration and inspection procedures aim to
support enforcement of these laws and regulations. In many countries however, the ability to
conduct these activities is weak to non-existent.

Other types of interventions may be educational or informational in nature, or managerial. The

development and use of standard treatment guidelines represent a type of intervention that aims
to influence prescribing behavior through information. Providers may be trained with these
guidelines, but when supported by managerial interventions (such as supervision and drugs and
therapeutics committees), the desired behavior is more likely to be achieved and sustained.

Managerial Support

The component of managerial support includes the financial, human and informational resources
required to ensure the effective functioning of the supply system. Many of the targets of sectoral
reform and “modernization” in general impact directly on this component. Of particular
relevance to the pharmaceutical system are questions about changing financing systems, civil
servant reforms, and changes in the locus of decision making for all other components of the
pharmaceutical system. Without the requisite management support, the entire system can screech
to a halt. Health sector reforms typically will heavily impact on this function of the supply cycle.

Among the greatest challenges facing health systems is the shortage of qualified human capacity
in management and clinical areas. The causes of shortages include the maldistribution of staff
(concentration in urban centers), lack of resources to recruit, train and support health workers,
and migration of qualified staff to areas that offer more opportunities for professional growth and
development (MSH, 2004). This has also impacted the availability of staff to carry out the
functions of the pharmaceutical system. Shortages of pharmacists and other pharmacy
professionals have forced the question of what functions can be responsibly carried out by other
health care staff, such as nurses or pharmacy assistants, provided they receive appropriate
training.

10
 Pharmaceutical System Performance within the Context of Health Sector Reform

EVALUATING THE PERFORMANCE OF A PHARMACEUTICAL SYSTEM

A significant portion of all health expenditure is related to the pharmaceutical system and, for
this reason, health planners, whether within the context of health sector reform or not, should be
concerned about being able to measure the performance of their pharmaceutical system. Within
the context of health sector reform, being able to compare the performance of the incumbent
system with an alternative or modified model is extremely informative for decision-makers
responsible for proposing or accepting reform initiatives. Evaluations of performance will allow
the determination of whether or not initiatives have had the intended impact.

The performance of a pharmaceutical system may be evaluated in terms of effectiveness (are the
outcomes achieved) and efficiency (the level of inputs are required to achieve outcomes).
Evaluations are necessarily comparative in nature. Comparisons may be made with the
performance of other health systems (social security versus Ministry of Health versus private
sector). Being able to measure and monitor performance over time is clearly useful to determine
if targets are being met and if adjustments are merited. To the extent that pharmaceutical systems
support the larger health care system, the performance of the latter system is dependent on the
performance of the former and for this reason, many of the criteria for evaluation of each system
correspond to each other.

The following sections define important performance dimensions for the pharmaceutical system.
Key indicators are presented. The data needs for these indicators may be obtained from standard
reports generated from health information systems, health accounts information, and drug
management information systems. However, in many cases, data is simply not available for
various reasons: information systems that were created prior to reforms did not allow for some of
the line items of interest following said reform; information is not available in the format needed
for analysis; information is too incomplete because the systems in general are weak and
ineffective (often an area for improvement under reform). As such, to obtain data required from
the facility level requires a special effort.3

Effectiveness (Access)

The effectiveness of a pharmaceutical supply system may be defined by the degree to which it
achieves access to essential, quality pharmaceuticals and pharmaceutical services (those services
required to ensure the appropriate use of pharmaceuticals).

Access to pharmaceutical products and services has been operationalized to reflect four critical
dimensions of access, each of which impact on overall health services utilization: availability,
geographic access, affordability, and acceptability.4

3
The detailed methodology for how to conduct a pharmaceutical sector assessment is available in Rapid
Pharmaceutical Management Assessment: An Indicator-Based Approach by MSH (1995) and is available on
http://erc.msh.org/mainpage.cfm?language=English&file=8.60.htm&module=toolkit
4
See MSH/Strategies for Enhancing Access to Medicines (SEAM) background documents and country programs
using this approach at http://www.msh.org/seam/3.1.htm .

11
 Pharmaceutical System Performance within the Context of Health Sector Reform

● Availability: The continuous presence of the desired/selected product in the necessary quantities
in the facilities where they should be found.

● Geographic accessibility: The relationship between where the product or service is located and
the location of the eventual user of any of these (coverage).

● Affordability: The relationship between the price of the product or service and the ability of the
user to pay for it.

● Acceptability: The relationship between the characteristics of the products and services offered
and the user’s/providers attitudes and expectations about the products or services.

♦ Availability of pharmaceuticals and pharmaceutical services

Health services depend heavily on the availability of essential medicines. For this reason, the
regular availability of pharmaceuticals is considered a key indicator of quality health services.
The regular availability of quality pharmaceuticals, and the services associated with their proper
use may considered the quintessential measure of the effectiveness of a pharmaceutical system.
The key indicators to measure availability are:

• Average percentage of a set of unexpired tracer pharmaceuticals available in a sample of

pharmacies/dispensaries at a particular moment in time (day of visit).

• Average percentage time out of stock over a period of one year (at least as long as one
procurement period) for a set of unexpired tracer pharmaceuticals in a sample of
pharmacies/dispensaries.

• Presence of qualified provider/dispenser at the time of visit

Tracer pharmaceuticals are a subset of essential products that should be available at the type of
facility studied. For this reason, the tracer list that would be used in primary care facilities will be
different that the list that would be used at tertiary level facilities. It is also important to note that
expired products that may be on the dispensary shelves are not considered to be available
(although in reality they may be used anyway).

The determination of appropriate qualifications for providers and dispensers is based on the local
laws and regulations and licensing requirement related to these functions. These qualifications
should relate to the formal training received as well as any additional training that might be
received, including continuing education.

Low levels of availability of pharmaceuticals may be related to failures in the procurement

function, from inadequate quantification and budgeting through to poor supplier performance.
Low levels of qualified providers may reflect low levels of enforcement, but may also reflect real
human resources shortages.

12
 Pharmaceutical System Performance within the Context of Health Sector Reform

♦ Geographic accessibility

This dimension of access reflects the issue of the distribution of services and equity. Geographic
accessibility takes into consideration the time and distance required to access essential
pharmaceuticals and services. Of particular interest are differences between urban and rural
populations, but there may be other relevant comparisons in any particular context. The specific
criteria for determining acceptable time and distances should be relevant for the particular
context being evaluated. Indicators that may be used to assess this dimension of access include:

• Percent of population living more than two kilometers from a legitimate source of
pharmaceuticals.

• Average time to walk to the nearest legitimate source of pharmaceuticals.

• Ratio of the average time to travel to nearest legitimate source of pharmaceuticals for
urban and rural populations.

In many countries the private sector has a broader geographic reach than the public sector and for
this reason partnering with the private sector, in particular with private pharmacies may be an
interesting option for countries that aim to expand their geographic reach. The investment in
public sector facilities may be better focused in areas where there are no natural market forces to
attract private sector activity.

For the supply of pharmaceuticals in particular, it is important to note the distinction between
legitimate and illegitimate sources of pharmaceuticals. In many countries, pharmaceuticals may
be found in every marketplace, in the baskets of street vendors, and all varieties of shops.
Although these sources of pharmaceuticals may be well distributed, they are not considered to be
legitimate. Poor geographic distribution of legitimate sources may be related to adverse market
forces, lack of qualified human resources, and poor enforcement of laws and regulations
regarding the dispensing and sale of pharmaceuticals. Alleviating this problem inevitably
requires strong political support to redirect resources to compensate for adverse market forces,
and/or an investment in upgrading the skills and qualifications of illegitimate dispensers.

♦ Affordability

Economists define affordability as a relative concept that includes an appreciation of the notion
of willingness to pay and price elasticity. From a pharmaceutical system perspective however,
the measure of affordability is operationalized to consider comparative prices to the patient by
unit and by treatment. Key indicators include:

• Average unit price differential between public sector and private sector for a set of
unexpired, quality tracer pharmaceuticals.

• Average number of days of work required to pay for a standard recommended course of
therapy for tracer conditions (indexed to income category).

13
 Pharmaceutical System Performance within the Context of Health Sector Reform

• Ratio of average percent of income required to pay for a standard recommended course of
therapy for tracer conditions between highest and lowest income quintiles.

As countries sought to expand services without being able to increase the public coffers,
charging patients for health services, including pharmaceuticals became a more common way to
finance health care. Various types of payment and cost recovery schemes were developed
accordingly. Some schemes covered all pharmaceuticals as a flat fee, irrespective of the actual
unit costs, and others charges separate fees for the clinical visit and the pharmaceuticals provided.
Allowances may have also been made for special groups such as the indigent, women with small
children, and the elderly. These different ways that prices are determined and how patients may
have to pay for their treatments should be considered in the selection of appropriate indicators of
affordability.

High price differentials may be related the penchant for branded or imported products in the
private sector. If the procurement function in public sector is able to take advantage of
economies of scale, the unit prices should reflect this relative to the prices in the private sector.

♦ Acceptability

This dimension of access relates most directly to the concepts of quality and satisfaction both
from the provider and the client/patient perspectives. Indicators of acceptability include:

• Percent of clients/patients that report satisfaction with the outcome of the last visit to the
public or private facility that dispenses pharmaceuticals.

• Percent of prescriptions that reflect current standard treatments for tracer conditions.

• Percent of facilities with source of up-to-date unbiased information about

pharmaceuticals for providers

• Percent of facilities with source of up-to-date unbiased information about

pharmaceuticals for patients.

• Presence of expired or unregistered products in dispensaries/pharmacies.

Reporting on levels of client/patient satisfaction with pharmaceutical services requires an

understanding of the expectations for the services. This can be a problem when there is a very
limited notion of the potential for the services and expectations are very low. For this reason
movements that aim to defend client/patient rights also have an educational component to raise
awareness, and expectations.

Improving access to services, and therefore medicines, is one of the main goals of most health
sector reforms and as such, is the most commonly measured indicator. As reforms gain
momentum and experience with implementation, increasing numbers of studies are being
published that examine the effectiveness of the reforms using clear measures of access (e.g.,
Restrepo et al, 2002; Romero, 2002). There is much less information about the impact of reform
initiatives on the efficiency of the pharmaceutical system.

14
 Pharmaceutical System Performance within the Context of Health Sector Reform

Efficiency

Efficiency is a measure of effectiveness that specifically focuses on the relationship between

inputs (generally financial and human resources) used to achieve desired outputs (effect). In
terms of pharmaceutical systems, we can consider measuring the efficiency with which each
major component or function of the cycle is accomplished in order to ensure that quality
pharmaceuticals are available where and when needed. Measures of efficiency compared over
time or across systems are used to identify opportunities for cost reduction or the need for cost
increases. Ultimately, as pharmaceuticals and the management of the pharmaceutical system
represent one of the biggest costs to the health system (financial costs as well as the political
costs associated with nonperformance) the efficiency of a pharmaceutical system impacts on the
sustainability of the larger health system. For this reason, ensuring that efficiencies are regularly
addressed should be a central concern for those involved in the design of health reform initiatives.

♦ Allocative Efficiency

Many health sector reforms seek to expand the reach of health services to previously underserved
populations. Allocative efficiency refers to whether or not the health budget and expenditures
reflect the priorities of the system. For example, a system that aims to assure access to primary
care services to the population, the larger share of the drug budget would be expected to be spent
on essential drugs as opposed to drugs typically used only in specialized tertiary care facilities.
There are several indicators that may be used to compare spending on pharmaceuticals to address
the question of “how much” is enough. Many of these indicators do not allow for separating the
costs of managing the pharmaceutical system from the prices paid for pharmaceuticals, but they
may be used to gauge performance against programs in countries in the same region and with
similar levels of development and gross domestic product. Comparisons between relevant
subgroups of the population (by income level or special interest group) will also yield
information that may influence allocative decisions:
o Per capita pharmaceutical expenditure
o Pharmaceutical expenditure as a percentage of GDP
o Private spending for pharmaceutical as a percentage of total spending on pharmaceuticals
o Pharmaceutical expenditure as a percentage of total health expenditure
o Out-of pocket expenditure on pharmaceuticals as a percentage of household income

♦ Technical Efficiency

Technical efficiency refers to how well each function of the pharmaceutical cycle performs. It is
much more difficult to measure and yet where many health reform initiatives have a significant
impact. Technical efficiency addresses both therapeutic decisions (selection and use) and
operational issues (management, procurement, and distribution).

15
 Pharmaceutical System Performance within the Context of Health Sector Reform

Therapeutic efficiency is addressed through the establishment and maintenance of essential drugs
list or formularies and drug utilization reviews. Expenditure and consumption data can be
evaluated by therapeutic category to determine if use reflects what would be expected or is
appropriate given morbidity data. Savings might be incurred by identifying therapeutic
duplications or by substituting less costly products for more costly ones from the same
therapeutic category. Drug utilization reviews may also reveal irrational prescribing practices
that result in more expensive treatment costs. Because this type of evaluation requires access to
good information and skills to evaluate it, the responsibility for ensuring therapeutic efficiencies
rests with qualified pharmacy and therapeutics committees (PTCs), which may exist only at the
national level in several countries, and even then the PTC may not have the skills to conduct this
type of evaluation.

Health sector reforms that raise the possibility for contracting and privatizing services are
generally based on the notion that greater operational efficiencies will be gained. The initiative is
related to efforts to “modernize” traditionally heavily bureaucratic systems stymied by civil
servant laws and the recognition that the private sector, particularly in a competitive environment,
has incentives to maximize efficiencies. However, options for working with the private sector
should always consider the strength and maturity of the private sector and the level of
competitiveness. Reform planners that do not conduct a serious evaluation of the private sector
prior to designing and implementing initiatives calling for a larger role of the private sector may
be very disappointed.

There are four cost categories from which key indicators of pharmaceutical system performance
are derived. 5 These are:

Acquisition costs: the cost of making the regular planned purchases of pharmaceuticals in a
period reviewed (usually a budget cycle, or one year). This is not just the prices paid for the
products but also includes any additional fees and charges (such as those for shipping and
insurance) associated with the procurement. This information is usually readily available from a
procurement office. If procurement is conducted at lower levels, this information should also be
captured for the analysis.

Purchasing costs: as opposed to the acquisition costs, these costs are related to the act of
realizing the purchases. It includes the salaries of those involved, supplies, and communication
costs related to managing tenders, placing purchase orders and receiving goods. This information
is often difficult to obtain, in part because it is unlikely to be available in any one place or
compiled in a way that is easy to assess. Personnel costs may not be tracked in a way to
determine who is involved in the procurement process, how much of their time is actually spent
on these activities, and what portion of all supplies are used specifically for procurement. In
these situations (which is very common) estimates need to be determined based on available data.

Inventory holding (distribution) costs: all costs associated with managing inventory, including
rent for warehouses, utilities, salaries, communications, equipment (including depreciation),
other supplies, as well as transportation-related costs (fuel, maintenance, repairs), costs
associated with inventory loss due to wastage, theft, and expiry. Many of these costs may be
5
A more comprehensive discussion is presented in MSH, Managing Drug Supply. (1997), pp 645-649.

16
 Pharmaceutical System Performance within the Context of Health Sector Reform

available at a medical store, but some are costs that are only captured at the national level so
estimates would be required. The costs should be obtained from all levels of the system (e.g.
regional and district stores).

Shortage costs: quantifiable costs include expenditures on emergency purchases (generally

available) and estimates of revenue loss (if cost recovery is in place); more difficult to quantify
are costs associated with increased morbidity and mortality that may result from stock outs, and
the political cost of loss of goodwill from beneficiaries.

A comparative analysis of the performance of the incumbent system with another system in
operating in the same country is extremely useful for identifying potential areas for improving
efficiencies. Public and private for-profit sector comparisons are the most common, although
comparing the performance of NGOs is also very useful. Key indicators of efficiency to assess
include:
♦ The average percentage difference between unit prices paid for a set of selected items
and comparable prices paid (at appropriate levels). Although the acquisition costs
include the prices paid and any associated fees, the prices alone can be evaluated.
Factors impacting on prices include economies of scale and level of competition.
International competitive bidding, for example, tends to maximize opportunities for
competition among suppliers for most products. Prices paid for products obtained
through local or emergency purchases can be compared with prices paid for tenders,
but it would not be appropriate to compare international tender prices with retail
prices. 6
♦ Purchase costs as a percentage of drug acquisition costs, to compare the efficiency of
the purchasing function. As each procurement implies purchase costs, the number of
procurements should be minimized.
♦ Inventory loss (due to expiry, theft, damage, etc.) as a percentage of average
inventory value. Private sector values tend to be lower than those of the public sector.
♦ Average inventory turnover, calculated as the value of products distributed divided by
the average inventory value. Although influenced by the procurement cycle to some
degree, it is an indicator of whether the holding cost is reasonable. In the private
sector, the turnover may be nearly monthly, while three to six turnovers per year are
more common in public systems.
♦ Personnel costs, space costs, transport costs, and other direct operating costs as a
percentage of total holding costs. These measures are used to evaluate the relative
proportion of total costs attributable to each category of costs.
♦ Total holding cost as a percentage of the value of pharmaceuticals distributed (or
average inventory). This is a measure of cost-effectiveness of maintaining in-house
services as opposed to contracting out some or all aspects of storage and distribution.

6
For example, the MSH International Drug Price Indicator Guide, published regularly, posts the tender results from
reputable souces by product, and generates an average or median prices paid against which other programs can
compare their own results. Available on-line at: http://www.msh.org/resources/publications/IDPIG_2004.html

17
 Pharmaceutical System Performance within the Context of Health Sector Reform

♦ Shortage costs (e.g. value of emergency purchases) as a percentage of total costs, as a

measure of the cost-effectiveness of procurement practices. High shortage costs
relative to total costs should generate questions about why shortages occur (may be
due to poor quantification, “mis-matched” budget cycles, excessive inventory loss
due to expiry, theft or spoilage).

Armed with these various measures, the health system analyst is ready to characterize the
effectiveness and efficiency of the pharmaceutical system and with an understanding of the
functioning of the supply cycle, identify sources of those problems. Unfortunately, it may seem
that such analyses cannot be performed properly because quality data is very difficult to come by,
and in some cases it does not exist. When data is not available (non-existent or inaccessible) it
may be possible to derive reasonable estimates by taking the time to become familiar with the
cost structures in other agencies or organizations in the same or otherwise comparable context.
With this information and a solid understanding of the particular socio-economic and political
context, health planners can consider options for more realistic interventions.

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 Pharmaceutical System Performance within the Context of Health Sector Reform

IDENTIFYING OPPORTUNITIES AND CHALLENGES PRESENTED BY HEALTH

SECTOR REFORM

The approach presented in this document begins with an understanding of the key functions of a
pharmaceutical system and how to measure system performance. This provides the basis for the
definition of performance problems and how they might be addressed through reform initiatives.
Performance goals and targets, derived from the strategic prioritization of problems, ethical
review, political and technical analyses, need to clearly defined and operationalized to be useful.

One of the challenges that planners and managers face is not to atomize the pharmaceutical
system. Focusing on only one or two performance areas can blind one to the unintended impacts
of initiatives in all components and levels of the system. While there are several opportunities for
win-win situations, trade-offs are often required, especially when performance goals are not
based solely on economic efficiencies. By the same token, although reform efforts that
specifically target the pharmaceutical system share the same principals of the larger sector
reform, analysts should be sensitive to the possibility of the existence of duplication of functions,
unexpected gaps, and unnecessary costs (Romero, 2002).

This section discusses types of strategies for improving system performance. This section ends
with a brief presentation of two country examples.

Instruments of reform applied to the pharmaceutical system

Four types of instruments or strategies through which reform initiatives aim to achieve their
goals are described by Roberts et al (2004) and presented in Diagram 1. Specific to the reform of
pharmaceutical systems, the instruments most commonly relevant to pharmaceutical system
performance include:

Policy and legal framework: National medicine policies define the principles and values that
guide the development of a pharmaceutical system such as the concepts of essential drugs,
rational drug use, and equitable access. They should be consistent with or support the overall
health policy. National medicines laws and regulations (such as national generics laws and
registration) lay out the parameters for how specific functions and activities within the
pharmaceutical system will be accomplished. This includes, for example, determination of what
cadres of professionals and facilities are permitted to prescribe and dispense, what products will
be permitted to circulate in the marketplace (public and private sectors), and how to import and
export products. A common difficulty countries have in this regard is the lack of sufficient
resources or political will to follow-through or enforcement.

Many initiatives may be seriously delayed or never implemented because they are not supported
by or are contrary to a national policy or law. Existing laws that may need to be addressed are
civil servant laws, importation and sales of pharmaceuticals, laws and regulations regarding
qualifications of dispensers, and pricing procurement and policies. In some cases, the process for

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 Pharmaceutical System Performance within the Context of Health Sector Reform

introducing a new or change of a law is lengthy and initiatives risk proceeding before having the
sanction of law, as is the case with the in Ecuador where several reform initiatives were
implemented before a comprehensive supporting legal basis for them was adopted (Barillas,
2005b).

Financing mechanisms: Prior to reforms, most health systems in Latin America financed their
pharmaceutical systems completely through the central MOH budget. Under reform initiatives
that aim to expand access to previously unprotected populations these funds were clearly no
longer sufficient, leaving two options that are not necessarily mutually exclusive: find new
sources of revenue and improve the management (efficiency) with which existing funds are used.
Reform initiatives have introduced alternative mechanisms that tend to shift some of the
responsibility and burden and for financing closer to the facility and the user levels for cost
recovery (revenue generating) purposes. Where financial responsibilities are decentralized or
deconcentrated to lower levels, options include pooling resources for procurement (e.g., El
Salvador). Cost recovery and cost sharing mechanisms that affect the patient include patient fees
that cover medicines, pharmacy benefits programs, revolving funds. Unfortunately, many funds
fail due to inadequate design or poorly implemented management controls (e.g., Peru).
Pharmaceuticals may also be financed through donations in the form of capital or in-kind. For
some countries, donated funds can account for as much as 40% of the budget for pharmaceuticals
(e.g., Nicaragua). However, there are costs associated with receiving donations, and if donations
are of products that are of poor quality or do not conform to the clinical needs of the population,
they can cost more than they are worth.7

Organization of services: In order to meet the objectives of expanding access to quality care and
to increase efficiencies, many health reforms in Latin America have considered options for
privatizing or contracting for services. In those countries in which there is local capacity in the
private sector and contract management capacity in the public sector, options could include
contracting with the commercial sector for all or some of the key management functions. For
example, systems may consider contracting with prime vendors or prime distributors for
pharmaceutical procurement management, distribution (storage and transportation) management,
and pharmaceutical utilization review. Other options include providing incentives for alternative
sources of affordable essential medicines in regions neglected by the traditional commercial
sector such as access to lower cost products (e.g., in Guatemala and Nicaragua).

Provider and consumer behavior: Behaviors that reforms aim to influence related to the use of
pharmaceuticals, or, the demand side of the system, as much as the supply side related to the way
resources are managed. The two key behaviors that are of particular relevance are prescribing
and medication use. In general, there are three main types of interventions that aim to change
behavior: managerial, educational and regulatory. Managerial interventions aimed providers are
designed to guide diagnoses and prescribing and include tools such as standard treatment
protocols, restricted formularies (such as essential medicines lists), audits and corresponding
incentives. Managerial interventions to guide patients similarly include incentives for seeking
generics instead of more expensive brand names. Educational interventions are based on the

7
A guideline document to help programs develop and enforce pharmaceutical donations has been developed by
WHO may be found on http://www.who.int/medicines/library/par/who-edm-par-1999-4/who-edm-par-99-4.pdf.

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 Pharmaceutical System Performance within the Context of Health Sector Reform

assumption that when properly informed about appropriate behavior, people will change their
behavior accordingly. Educational interventions include various types of continuing education
programs for health care staff, informational brochures and pamphlets for both providers and
patients. Regulatory interventions aim to coerce individuals to behave appropriately. Greater and
more sustained changes are achieved when combinations of two or more types of interventions
are used (Le Grand, et al., 1999; Radyowijati A and H Haak, 2003). Within the context of health
sector reform in particular, opportunities for ensuring that providers and patients understand the
need for rational pharmaceutical management (from selection through to use) are presented
through the formation of multisectoral and local health councils and committees that include
representatives from the community.

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