Essential Drugs Monitor No. 025-026 (1998)
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“Contracting-out” drug procurement and distribution: experience with a primary distributor system in South Africa

R.S. SUMMERS1, H. MÖLLER2, D. MEYER3, R. BOTHA4

1 Bennett S, Quick JD, Velasquez G. Public-private roles in the pharmaceutical sector. Geneva: World Health Organization; 1997. WHO/DAP97.12

2 Central Statistical Services. Census ‘96: Preliminary estimates of the size of the population of South Africa. Central Statistics, Pretoria, 1997.

3 Summers RS, Suleman F. Chapter 8: Drug policy and pharmaceuticals. Chapter 8. In: South African Health Review 1996. Durban: Health Systems Trusts and California: Henry J Kaiser Family Foundation; 1996.

4 World Bank. Better Health in Africa. Washington: World Bank; 1994

PUBLIC/private sector relationships have been suggested as a means of achieving some of the goals of national drug policies and essential drugs programmes1. Because of work which showed that “contracting-out” the procurement and distribution of drugs can offer advantages and improve performance, two of the country’s nine provinces have opted for this approach. South African provinces have a considerable degree of autonomy.

1 Bennett S, Quick JD, Velasquez G. Public-private roles in the pharmaceutical sector. Geneva: World Health Organization; 1997. WHO/DAP97.12

In this method, structure, process and outcome specifications are established by a public sector authority and offered to prospective providers on “tender”. The authority, usually through a bidding process administered by a tender board, will then select and establish a formal contract with a provider.

Experience and some critical lessons learned in using this approach in South Africa are described here, providing valuable insight into one of the few documented primary distributor systems outside the USA.

BACKGROUND

South Africa, with a total population of just over 40 million2, had a pharmaceuticals’ expenditure of some 4.8 billion Rand in the private sector and 1.8 billion Rand in the public sector in 1996 (when R1 was approximately US$0.22)3. Annual per capita expenditure on drugs for the 85% of the population who rely on public sector health services was approximately R52 (US$11). For the remaining 15% served by the private sector the equivalent figure was around R792 (US$174). To place this figure in context, the World Bank quotes an average drug expenditure of US$2.1 for nine African Countries in the mid-1980s4. While in 23 Sub-Saharan African countries drug consumption was valued at less than US$5 per capita in 19905.

2 Central Statistical Services. Census ‘96: Preliminary estimates of the size of the population of South Africa. Central Statistics, Pretoria, 1997.

3 Summers RS, Suleman F. Chapter 8: Drug policy and pharmaceuticals. Chapter 8. In: South African Health Review 1996. Durban: Health Systems Trusts and California: Henry J Kaiser Family Foundation; 1996.

4 World Bank. Better Health in Africa. Washington: World Bank; 1994

5 Balance R, Pogany J, Forstner H. The world’s pharmaceutical industry. Aldershot, UK: Edward Elgar; 1992.

The procurement and distribution of pharmaceuticals in the public sector is centrally coordinated; the provinces provide estimated quantities to the National Tender Board, which then calls for and awards supply tenders. The provinces purchase their requirements from the successful tenderer through a provincial depot.

This system has encountered some major difficulties over the years. These mainly revolved around stock losses and inexplicable variations between recorded purchases and actual stock-on-hand. There was also a general lack of information, and the selection process was not rational, with around 2600 items on the national pharmaceuticals tender list. (This situation is currently being changed: the National Essential Drug List Committee, as part of the process of drafting standard treatment guidelines, has established a database of conditions and related medicines, which will lead to drug rationalisation in the public sector. The EDL currently comprises just over 900 items, and is being further streamlined.)

After the 1994 elections, the newly consolidated provinces had to integrate the various pharmaceutical services, in common with health and other services. Provinces generally had their own warehouses and sent estimates of their requirements to the Coordinating Committee for Medical Supplies (COMED), which coordinates the national tender. Payment is made by the provinces directly to the suppliers.

The government of the newly constituted Province A sought to integrate the drug supply systems of four authorities as part of its efforts to establish a single health authority. Following recommendations of a 1994 evaluation, Province A, (which has high unemployment, low average individual income and a predominantly rural population), decided in 1995 to contract out the procurement, warehousing and distribution of pharmaceutical supplies. These functions were contracted out to a private company at a commission of 8.05% of the value of the products. The contract also included a 2.2% commission for computerisation of hospital pharmacies and computer training of provincial pharmaceutical staff. From January 1996, medicinal supplies have been distributed from a single depot in the centrally situated provincial capital.

In Province B, an essentially rural area with less infrastructure than Province A, a similar contract was awarded early in 1997. A provincial warehouse was built on the western border of the province, in March 1997. A more central site would have facilitated distribution.

Contracting-out is one of the options described for public sector/private sector cooperation in drug supply1.

1 Bennett S, Quick JD, Velasquez G. Public-private roles in the pharmaceutical sector. Geneva: World Health Organization; 1997. WHO/DAP97.12

In South Africa all of these factors needed to be tackled:

The public sector does not insure stock against theft, fire or natural disasters, so all losses occur at government expense, if services are not contracted out. Theft is a major problem in pharmaceutical warehouses in South Africa.

Strikes have become increasingly common since the 1994 elections as trade unions are trying to negotiate new equitable rules and remuneration in the labour sector.

Vehicle maintenance, cost-effective staffing and management information are areas where the public sector has not always been efficient in the past. Government departments have been notoriously overstaffed, but employees were poorly paid and often underqualified. Many motivated workers found work more rewarding in the private sector. With limited financial and logistic resources, services in remote areas were not easy to manage.

The decision of two provinces to “contract-out” procurement and distribution to hospital level provided experience from which important lessons can be drawn.

TENDER SPECIFICATIONS

Against this background, clear structure, process and performance specifications are essential elements for success. Tender specifications may need to vary according to the needs of different provinces. In Province A, seven years’ experience - one of the former homelands had already used contracting out services prior to 1995 - have shown the following requirements to be necessary for a successful system:

Procurement: The province must manage the procurement database and have the final say on orders, including prices.

Warehousing and inventory management: At least one senior pharmacy manager should be on the provincial payroll for this task. The public sector should own the warehouse and equipment. This ensures independence so that if the contractor does not perform to specifications, the province has the facilities to continue operations. However, the contractor is responsible for the maintenance and insurance of the facilities and stocks.

The Department, in negotiation with the contractor, determines stock levels. This precaution ensures that adequate levels of stocks are kept in a situation where the contractor pays insurance coverage.

The contract should include the installation of adequate computer hardware and software for inventory management at hospital pharmacies, and for on-going staff training.

Distribution: The contractor’s own transport is to be used; courier and similar services are not acceptable. When other transport is used, medicines are not always regarded as priority by the transport contractor and deliveries may not be according to a schedule.

Management information: The contractor is required to supply comprehensive management information reports at agreed intervals.

Billing: As the contractor is paid a commission on items delivered to hospitals the billing structure must separate these costs from the cost of purchasing stocks into the warehouse. In an earlier South African experience with limited contracting out the company received a commission on stock purchased into the warehouse and not on stock delivered to clients. This arrangement left many opportunities to purchase inappropriate medicines and quantities.

Human resource development: The entire contract must be seen as a partnership between the Department and the contractor. The Department must also ensure that the contract is carried out according to the specifications. This necessitates the active involvement of provincial staff members in the entire process from database management, and procurement to receipt and distribution.

Some advantages of “Contracting-Out”

1. All losses by fire, theft or natural disasters are the responsibility of the contractor.

2. The staff required to run a warehouse efficiently and effectively is expensive. Cost-effectiveness of this component will be monitored closely by the contractor, because of the effect of poor performance on profitability.

3. Strikes and industrial disputes can be a major threat to the health services in a situation where all medicines are distributed from one depot. The service provider will be responsible for ensuring continuity of services.

4. Transport is a major cost component in the distribution cycle. Adequate vehicle maintenance and efficient scheduling of deliveries become the responsibility of the contractor.

5. Management information on drug availability and use can be improved without major investment by the public sector.

See Chapter 17 of Managing Drug Supply6 for a more detailed description of issues involved in contracting out pharmaceutical services.

6 Contracting for drugs and services. In: Quick JD, Rankin JR, Laing RO, O’Connor RW, Hogerzeil HV, Dukes MNG, Garnett A, editors. Managing drug supply, 2nd ed. West Hartford, CT: Kumarian Press; 1997. p. 256 - 269.

CURRENT CHALLENGES

Sufficient data are available to enable an evaluation of how the first two elements listed above have contributed to goal of improved drug supply 6.

6 Contracting for drugs and services. In: Quick JD, Rankin JR, Laing RO, O’Connor RW, Hogerzeil HV, Dukes MNG, Garnett A, editors. Managing drug supply, 2nd ed. West Hartford, CT: Kumarian Press; 1997. p. 256 - 269.

Procurement and financial control

Procurement was initially effective in Province A. Towards the end of 1997, however, and for approximately the first quarter of 1998, the situation deteriorated. This situation arose because of financial difficulties within the Province which led to the transfer of funds from Health to Education to offset overexpenditure on the Education budget.

In Province B, the situation manifested major difficulties from the start. Initially, accurate demand data had not been given to the contractor. Hence, order quantities did not match requirements. Cash flow problems surfaced as a result of a backlog in payments during 1997/1998. More recently, the health budget was decentralised to district management, which caused major difficulties with cash flow at the depot. Suppliers who had not been paid suspended deliveries.

Warehousing and inventory management

As described earlier there were significant differences in the location and available space of the two depots.

In addition to the poor siting and inadequate space at the depot of Province B, attracting (and retaining) professional staff to the area has been a major problem. These factors significantly influenced the performance of the depot which was, reflected in a relatively high number of out-of-stock items. Between March and June 1998, the percentage of 132 essential items listed as out of stock by Province B increased from 23% to 35%. Twelve critically important drugs were listed for virtually the entire period. We have rated procurement and stock control systems as ineffective when more than 15% of items are always out of stock. The situation at the depot of Province B is therefore very poor.

Over the first six months of 1998, Province A, which operates a similar system but has a provincial chief pharmacist at its depot at all times, had a stock-out rate between 7% and 22%. This performance was also far from ideal but better than Province B.

The reasons for the stockouts included poor selection of supplier, who may have overtendered and therefore could not deliver; payment difficulties (see above) and poor depot management. Province A faced mainly the first two problems, whereas all three applied to Province B from time to time.

RELATIONSHIPS BETWEEN THE PLAYERS

To obtain a perspective of the actual difficulties involved we examined the components of the procurement and distribution cycles in terms of the relationships between, and responsibilities of, the two role players (see Figures 1 and 2).


Figure 1 Procurement cycle


Figure 2 Distribution cycle

The provincial authority is involved in every element except receipt and checking of goods at the depot and distribution from the depot to facilities. It meets this responsibility by checking the performance of the contractor through the data in the management information system, without being involved in day-to-day procedures.


A health centre in a rural area of South Africa

Photo: WHO/H.V. Hogerzeil

Here the contractor plays the main role but is supported by important inputs from the province. In both provinces, the contractor’s responsibility extends only to the hospital level. Thereafter, to the clinics, the responsibility for effective delivery and inventory control becomes that of the province. Transport and management information at this level have often been problematic.

LESSONS LEARNED

Perhaps the core lesson learned is that what occurs in contracting-out is a partnership. If either partner does not deliver, and there are weak links in the chain, the process will fail!

There were differences in performance between the two provinces. These lay in the partnerships and inputs in each case. In the early stages of the process in Province A, there was extensive preparation by both parties. Facilities had adequate stock in place. Stock at different depots was checked and consolidated. This was not the case in Province B. The depot there had been newly set up and had encountered difficulties in establishing its own management information system. In addition the depot was too small for the Province B’s needs. It lacked adequate senior provincial supervision, which is essential for proper control of public sector resources and funds. Too many items were listed at the various levels of pharmaceuticals distribution in this province.

Towards the end of the financial year, both provinces faced payment difficulties which inhibited procurement. In Province A, where the budget was centralised, budget over-runs in departments other than Health and Welfare led to the withdrawal of funds from Health. In Province B, decentralisation of budgets and responsibility for payment to district level management, continued to cause major cash flow difficulties with consequent difficulty in paying suppliers. These difficulties were the main reason for the high number of out-of-stock items. Commendably, in some cases the contractor paid suppliers of critical stock out of its own funds in order to maintain services to patients.

For a project like this to succeed both parties need to have insight into, and understanding of, the functioning of a department of health. This will then be manifested in the acceptance and support of the service by its users. Here too there was a significant difference between the two provinces.

In conclusion we have attempted to identify critical issues, lessons and key success factors from these two cases, which had the common factor of the same supplier, but which differed markedly in performance.

An integrated approach and planning by the public sector provider and the contractor is essential.

The provincial drug list, which must have the support of its users, should be strictly applied and there should be a provincial veto on non list items.

The storage depot needs to be carefully sized and centrally located.

Appropriate facilities and systems need to be established for current and future requirements.

A management information system is needed to monitor order and delivery status.

Contractor selection should be based on previous performance and capacity to undertake the work, and include quality assurance for service delivery.

Contractual terms and specifications must be fully detailed.

Purchasing and payment methods need to be spelt out.

Finally, and perhaps most critically, there has to be a sustained cash flow from recipient to contractor to supplier.

* Professor Rob Summers, School of Pharmacy, MEDUNSA, Helene Möller, South African Drug Action Programme, Department of Health, Pretoria, Danie Meyer, Pharmaceutical Services, Northern Province, Pietersburg, Rainier Botha, Vuna Health Care Logistics, Johannesburg.

For further information contact: Professor Summers, Head, School of Pharmacy, PO Box 218, Medunsa 0204, South Africa.

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