Health Reform and Drug Financing. Selected Topics - Health Economics and Drugs Series, No. 006
(1998; 49 pages) [French] [Spanish]
Table of Contents
View the documentAcknowledgements
View the documentExecutive summary
Open this folder and view contents1. Introduction
Open this folder and view contents2. Financing reforms
Open this folder and view contents3. Affordability and efficiency
Close this folder4. Organizational reforms
View the document4.1 Competitive mechanisms in public drug supply
View the document4.2 Decentralization in drug supply systems
View the document4.3 Role of the “third sector”
View the documentConclusions
View the documentReferences
View the documentBack Cover

4.1 Competitive mechanisms in public drug supply

Ideally, drug supply systems should be able to provide drugs, in the most cost-efficient manner, to all areas of a country, with minimal stockouts and shortages. There exist five different options for the distribution of pharmaceuticals to government hospitals, health centres, and clinics. These are listed in Table 11.

Table 11. Comparison of systems for public drug supply




Contracting suppliers

Storage & delivery

Monitoring & drug quality

(current and past)

Central medical stores (CMS)
• Drugs procured and distributed by centralized government unit




Numerous countries in Africa, Asia, and elsewhere

Autonomous supply agency
• Bulk procurement and distribution managed by autonomous or semi-autonomous agency

Autonomous agency

Autonomous agency

DPO, Autonomous agency, DRA

Benin, Haiti, India (Tamil Nadu), Sudan, Uganda, Zambia

Direct delivery system
• Decentralized approach
• Tenders establish the supplier and price for each item
• Drugs delivered by supplier to districts, major facilities




Chile, Indonesia, Peru, Thailand

Prime vendor system
• DPO establishes contracts with drug suppliers and separate contract with a single prime vendor.
• Prime vendor warehouses and distributes drugs to districts, major facilities


Prime vendor

DPO, Prime vendor, DRA

South Africa (Northern Transvaal), United States of America (many state and local health services)

Fully private supply
• Private wholesalers and pharmacies manage all aspects of drug supply with government facilities

Procurement and distribution by private enterprise



CMS = central medical stores;
DRA = national drug regulatory authority
DPO = drug procurement office (MOH or other government office);

Source: based on Refs. [23, 43].

With central medical stores, the state both owns and manages the entire drug supply system. Many countries have adopted this approach but have found the management of such a system difficult. One option to which they have turned is the establishment of autonomous or semi-autonomous supply agencies which, in theory, can manage distribution with more efficiency and focus on public health objectives.

Where centralized distribution proves to be difficult or undesirable, direct delivery systems may be able to better deliver pharmaceuticals to health facilities. However, the management demands for this may also be great. Alternatively, the management can be contracted out to another party, a prime vendor, who is responsible for receiving drugs from suppliers and for stocking health facilities. These last two mechanisms are usually only feasible where a well-developed private sector exists.

Box 5. Some experiences with competitive mechanisms for public drug supply

Autonomous supply agency in Tamil Nadu, India

• The Tamil Nadu Medical Services Corporation (TNMSC) was created in 1995 to contain drug costs and reduce shortages by purchasing and supplying drugs to government health care facilities. TNMSC is set up as a government company, with a Board chaired by the Secretary of Health, which is accountable to the Minister of Health. The TNMSC created a list of 267 essential drugs from the previous state drug list of 900 items.

• Drugs are procured through tender and delivered directly to district level stores. Quality assurance procedures are in place, including sampling of products from manufacturers and district stores. Testing is contracted to reputable private laboratories through tenders. TNMSC adds a 5% charge to fund its own operations. Each facility is given a budget target and issued a “pass book” in which to record the value of drugs it has received. Through prompt payment and other administrative efficiencies, TNMSC has considerably reduced drug costs, while maintaining reliable supply [6].

Direct delivery in Chile

• In 1965 the legal basis was created for a National Drug Formulary. The Formulary was launched in 1969 and CENABAST (“Central de Abastecimiento - the central supply agency) became the principal pharmaceutical distributor for the National Health Service. Movement toward free competition in consumer goods (taken to include drugs), led in 1975 to the cancellation of the exclusive supply agreement between CENABAST and the National Health Service. By the mid-1990s, CENABAST accounted for about 35% of public sector procurement.

• Until the 1990s, CENABAST operated a standard centralized warehouse and distribution system. Difficulties in managing this system have led CENABAST, with World Bank financing, to shift to a direct delivery system. CENABAST tenders and contracts with suppliers now include transport costs for direct delivery to major health facilities. Health facilities pay CENABAST a fee for its procurement services and they pay suppliers for drugs upon delivery. The warehouse is being sold to the private sector, with the provision that warehouse employees be retained by the new owner [3,30].

Prime vendor system in Northern Transvaal Province, South Africa

• In South Africa, the Secretariat of the Coordinating Committee for Medical Supplies (COMED) was established in 1985 to manage procurement, storage, and distribution of drugs and medical supplies for the public sector. Soon responsibility for storage and distribution was decentralized, but supplier contracts were still awarded nationally by COMED.

• In Northern Transvaal Province, problems with unreliable public sector distribution and frequent drug shortages led several regions to experiment with contracting different aspects of drug management out to private companies, eventually resulting in a prime vendor system for the entire province. COMED continues to conduct competitive tenders which establish the price and supplier for each product. But the Province Department of Pharmaceutical Services conducts its own competitive tender and awards a management contract for drug distribution. The contract combines four related services: ordering, storage, delivery to health units, and operating the management information system. Early experience indicates that this approach has resulted in more reliable, less costly distribution and many fewer shortages at health facilities [22, 23, 36].

Combined supply strategies in Zimbabwe

• The Zimbabwe Essential Drugs Action Programme (ZEDAP) uses different systems for different categories of drugs. High-usage drugs on the essential drugs list are procured, stocked, and distributed in bulk through the central medical stores. For high-cost, slow-moving specialist items, direct delivery contracts are used. For most specialist items an annual tender is conducted to fix the price for the year. Drugs are then ordered as needed by the roughly two dozen national hospitals and NGO hospitals which require them. Orders are delivered directly to the hospitals. Finally, for cancer agents and some other highly specialized drugs, no contract exists. Instead, drugs are purchased by the Ministry’s pharmaceutical division by individual order, with permission from the Secretary of Health [37].


Measures which can be used effectively in each of the drug supply systems to control costs and make supply more efficient are:

• proper drug selection, which will not only strengthen therapeutic efficiency but will also minimize purchase and storage costs;

• use of quality generic products, which are generally less expensive than brand name products;

• purchasing in bulk to achieve greater negotiating leverage for price reductions;

• promotion of rational use.

The shift away from CMS models towards those incorporating the private sector has been undertaken with the assumption that competition among suppliers and vendors for government contracts will result in improved efficiency. Questions which should be considered prior to reforming a drug supply model include [20, 45]:

• Will real competition take place?

• Will efficiency actually improve or will contractors cut corners to reduce costs?

• How can appropriate drug inspection and quality be maintained?

• Can government effectively supervise the new system?

• Will there be sufficient financing?

Reports from Africa and Asia indicate that a number of countries are establishing autonomous supply agencies, but without fully considering other alternatives (direct delivery and prime vendor systems, for example) and without appreciating the features of an autonomous agency necessary for success. A number of these agencies appear to have run into difficulties. Available experience, though limited, suggests that features which should be sought in establishing autonomous supply agencies include supervision by an independent management board; professional pharmaceutical supply managers; good personnel management; adequate financing; public accountability and sound financial management; continued focus on essential drugs (rather than “profitable” alternatives); and a focus on quality assurance (both in terms of products and of services provided) [45].

WHO, UNICEF, the World Bank, and some bilateral agencies have been involved in promoting competitive mechanisms for public drug supply in several country programmes, and a number of unpublished studies exist on the mechanisms outlined in Table 11. What is required, however, is a systematic analysis of experiences with these programmes.

In the meantime, governments seeking to improve efficiency in public drug supply should do so with the knowledge that a number of options exist and that success depends not only on choosing an appropriate option, but also on the way in which the option is implemented.

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