Analyzing and Controlling Pharmaceutical Expenditures. (MDS-3: Managing Access to Medicines and Health Technologies, Chapter 40)
(2012; 33 pages)


This chapter focuses on identifying and controlling excess costs in the selection, procurement, distribution, and use of medicines. Several analytical tools are presented that help managers quantify costs and identify areas where costs can be reduced; the information provided is also essential in designing and monitoring interventions to control costs.

Total cost analysis compiles information on variable costs associated with purchasing and inventory management to help managers consider options for change in terms of their impact on total costs. It is a key tool for pharmaceutical system assessments. The other analytical tools discussed in this chapter may be used as part of a total cost analysis, or they may be used individually for special purposes.

The VEN system categorizes pharmaceuticals by their relative public health value. It is useful in setting purchasing priorities, determining safety stock levels and pharmaceutical sales prices, and directing staff activities. The categories in the original system are vital (V), essential (E), and nonessential (N) (sometimes called VED-vital, essential, and desirable). Some health systems find a two category system more useful than the three-tiered VEN; for example, the categories might be V and N, differentiating between those medicines that must always be in stock and other medicines.

ABC analysis examines the annual consumption of medicines and expenditures for procurement by dividing the medicines consumed into three categories. Class A includes 10 to 20 percent of items, which account for 75 to 80 percent of expenditures. Class B items represent 10 to 20 percent of items and 15 to 20 percent of expenditures. Class C items are 60 to 80 percent of items but only about 5 to 10 percent of expenditures. ABC analysis can be used to -

  • Measure the degree to which actual consumption reflects public health needs and morbidity
  • Reduce inventory levels and costs by arranging for more frequent purchase or delivery of smaller quantities of class A items
  • Seek major cost reductions by finding lower prices on class A items, where savings will be more noticeable
  • Assign import and inventory control staff to ensure that large orders of class A items are handled expeditiously Therapeutic category analysis considers the use and financial impact of various therapeutic categories of medicines and then compares cost and therapeutic benefit to select the most cost-effective medicines in each major therapeutic category. This analysis can be done to select medicines for a formulary or procurement list.

Price comparison analysis compares pharmaceutical prices paid by different supply systems as one measure of procurement efficiency. The analysis can also compare supply system acquisition and selling prices with local private-sector prices to gauge the cost-effectiveness of in house pharmaceutical services and to assess price elasticity for cost recovery.

Lead-time analysis is a systematic approach to tracking procurement lead times, determining the points at which lead time can be reduced, and adjusting safety stock appropriately. Payment time should also be analyzed (when delayed payment to suppliers is feasible).

Expiry-date analysis examines levels of stock on hand and their expiry dates and compares this information with average rates of consumption to assess the likelihood of wastage (and to develop appropriate countermeasures). Hidden-cost analysis examines supplier performance to identify any hidden costs incurred because of problems such as late deliveries and short shipments. Hidden costs may make one supplier considerably more expensive than a competitor that offers a higher unit price but better performance.

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