Contracting for Pharmaceuticals and Services. (MDS-3: Managing Access to Medicines and Health Technologies, Chapter 39)
(2012; 20 pages)


A contract for goods or services is a legally binding agreement between a purchaser and a provider for a specified period of time. In the public sector, the purchaser is usually the government and the provider may be a private-sector company.

Some health systems contract out (outsource) customs clearance, pharmaceutical storage, procurement, and transport. In some cases, a health system may contract out pharmaceutical services through retail or not-for profit pharmacies. Outsourcing services can, in some cases, reduce costs and improve effectiveness. The decision whether to contract out or to provide services in house must rely on a careful analysis of the effect on the entire supply chain, including costs, performance, the capacity of the private sector to provide the goods and services in question, and the capacity of the health system to monitor the contract. Outsourcing is most likely to succeed when real competition takes place, the health system is equipped to supervise the contract, and sufficient funds are available to pay the contractor.

This chapter considers -

  • Pharmaceutical procurement contracts: Careful preparation of specifications and enforcement of contract terms are a must for efficient procurement.
  • Service contracts: Such arrangements may reduce or eliminate the need to maintain government storage and transport infrastructure. In a supply agency contract, an autonomous private or parastatal agency operates warehousing and transport services on the government’s behalf. In a direct delivery contract, the supplier delivers to regional or district stores and hospitals. Under a primary distributor contract, health facilities order from a contracted distributor and pay the manufacturer’s contract price for the medicines plus a distribution fee. Pharmacy benefit management programs provide prescription services to designated beneficiaries, either in person at contracted pharmacies or through direct delivery (that is, via mail) from a central location.
  • Service contracting process: The process of contracting for services has four stages:
  1. identify a service that could be provided by contract and establish the feasibility of contracting out;
  2. prepare detailed tender specifications and contract terms;
  3. shortlist suitably qualified contractors, invite formal tenders, and appoint a contractor; and
  4. monitor the contractor’s and the health system’s performance.
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