Pharmacy Procurement Practice Overview Dr J Domenech 13

Pharmacy Procurement Practice Overview Dr. J. Domenech 13 th PPNC

Agenda 1 Introduction 2 Knowledge, Skills, & Abilities 3 Laws & Regulations 4 Order Cycle 5 6 Cost Management Program 7 Questions 8 Referances Metrics & Tools Page 2

Statements about Pharmacy Procurement • Drug-cost containment initiatives must never compromise patient safety or quality of care. • Four primary factors drive growth in overall drug expenditures: price, utilization, mix, and innovation. • Medication cost continue to increase faster than other healthcare expenditure. • Four strategic objectives: procure the most cost-effective drugs in the right quantities, select reliable suppliers of high-quality products, ensure timely delivery, and achieve the lowest possible total cost. • Information is the lifeblood of procurement and is needed at every stage if the procurement process is to be optimal. • Even if appropriate policies and procedures are in place, lack of properly trained staff in key positions can doom any procurement system to failure. Page 3

Procurement - Defined Complete process of obtaining goods and services from preparation and processing of a requisition through to receipt and approval of the invoice for payment. Also called sourcing, it commonly involves (1) purchase planning, (2) standards determination, (3) specifications development, (4) supplier research and selection, (5) value analysis, (6) financing, (7) price negotiation, (8) making the purchase, (9) supply contract administration, (10) inventory control and stores, and (11) disposals and other related functions. Page 4

Pharmacy Procurement Quote by Eva Ombaka “Procurement is not simply the acy of buying, but encompasses a complex range of operational, business, information technology, safety and risk amagement, and legal systems, all designed to address an institution’s needs. ” Americal Journal of Health-System Pharmacy, Vol. 66, Issue 5 Supplement 3, s 20 -s 28, 2009. Page 5

Procurement – ASHP Policy Position #0524 • To support existing laws and legitimate practice that ensure product integrity and allow organized health care settings to purchase drug products and related supplies at prices that minimize health care costs; further, • To support the principle of purchase of pharmaceutical products and related supplies by public and private entities using appropriate professional practice to achieve that end; further, • To encourage government acknowledgement of existing local professional activities already in organized health care settings that are methods of promoting quality and cost-effective pharmacist patient-care services. Page 6

Nine Principles of Pharmacy Procurement • 1 – Transparency • 2 – Cost Containment • 3 – Technical Capability • 4 – Operational Principles of Good Pharmaceutical Procurement • 5 – Purchasing for Safety • 6 – Ensuring Appropriate Selection • 7 – Timely, Accurate and Assessable Information • 8 – Ensuring Quality Products • 9 – Proper Budgeting and Financing Page 7

Pharmacy Procurement Knowledge, Skills, & Abilities 1 General knowledge of operations, regulations, and terminology 2 Supply Chain Management 3 BOK – Accounting, Economics, Business Mathematics, Business Law, Negotiations, Quality Assurance, & Statistics 4 Interpersonal Skills 5 Continous Education Page 8

Pharmaceutical Supply Chain Manufacturing Source of pharmaceuticals: Pfizer, Wyeth, Mylan, Bedford Wholesale Acquisition Cost - WAC Brand, Generic; Dropship; c. GMP; Recalls; Failure to Supply Wholesale Distributors of pharmaceuticals: Morris and Dickson, Cardinal, Reliance WAC +/- a negotiated %; GPO Contracts Pedigree; VAWD; NCPD; HIDA Pharmacies Dispences pharmaceuticals: Hospitals, Infusion, Retail, Mail-order Average Wholesale Price – AWP Internal Supply Chain Management System Patient End User of pharmaceuticals: Inpatient, Outpatient, Family Members AWP +/- a negotiated %; Pharmacy Benefit Managers – PBMs: Caremark, Medco, Express Scripts Page 9

Laws and Regulations Procurement Pharmacy Uniform Commercial Code Pure Food and Drug Act Sherman Act Harrison Narcotics Tax Act Clayton Act Food, Drug, and Cosmetic Act Robinson-Patman Act Durham-Humphrey Adment Sarbanes-Oxley Act Kefauver-Harris Amendment Federal Trade Commission Act Comprehensive Drug Abuse prevention and Control Act Uniform Computer Information Technology Act Local Laws Poison Prevention Packaging Act Drug Listing Act Drug Regulation Reform Act Page 10

Laws and Regulations Pharmacy Orphan Drug Act Drug Price Competition and Patent Term Restoration Act Prescription Drug Marketing Act Omnibus Budget Reconcillation Act FDA Safe Medical Devices Act Anabolic Steroids Control Act Dietary Supplement Health and Education Act Pharmacy Health Insurance Portability and Accountability Act FDA Modernization Act Medicare Prescription Drug, Improvement, and Modernization Act Isotretinoin Safety and Risk Management Act Combat Methamphetamine Epidemic Act Page 11

Laws and Regulations Agencies Bureau of Alcohol, Tobacco, and Firearms (ATF) Environmental Protection Agency (EPA) State Boards of Pharmacy (BOP) Food and Drug Administration (FDA) Centers for Medicare and Medicaid Services (CMS) Joint Commission on Accreditation of Health-care Organization (JCAHO) Drug Enforcement Agency (DEA) National Association of the Boards of Pharmacy (NAMP) Department of Transportation (DOT) Institutional Review Boards (IRB) Page 12

Contract Fundamentals Four Elemets: Offer, Consideration, Acceptance, & Mutuality Offer – one of the parties made a promise to do or refrain from doing some specified action in the future. Consideration – Something of value was promised in exchange for the specified action or nonaction. This can take the form of a significant expenditure of money or effort, a promise to or not to perform some service, & reliance on the promise. Page 13 Acceptance – The offer was accepted unambiguously. Acceptance may be expressed through words, deeds, or performance.

Contract Fundamentals – Continued Mutuality – The contracting parties had “a meeting of the minds” regarding the agreement. This means the parties understood and agreed to the basic substance and terms of the contract. Additional Terminology: Market Basket; Force Majeure; Intellectual Property; Disclaimer Warranty; Indemnification, Errors and Omissions Insurance, Parol Evidence; Jurisdiction, Termination Page 14

Group Purchasing Organization (GPO) Examples: Amerinet, Broadlane, Consorta, Med-Assets, Novation, Premier Considerations Fees; Allowable distribution methods; Payment terms; Return policies; Supplier performance requirements; Rebates; Market-share agreements; Single-agent contracts; Services; Letters of commitment Advantages Standardization of products; Reduction of contract labor cost; Enhancement of member institution’s purchasing program, information sharing, & purchasing expertise; Protected periods of price protection Additioanl Note Some GPOs return a portion or all of the contract administrative fee (CAF) to its members. Page 15

s Procurement Processes Creat a RFP; Issue a PO; Select a Supplier; Recieve a Good; Pay an Invoice An ato my of the P roc es Receiving; Accounts Payable; Inventory Control Subprocesses Complete Requisition Form; Verify Requirment; Input Data; Create a PO; Sign Documents Individual Tasks Page 16

Inventory Management The search for one solution is a waste of resources. Wholesaler; Formulary; Government; Manufactures; Pharmacy, Point of Sale; Reorder Points; Automated Counting/Filling Device; Dispensing Machines; System Care and Maintenance; Order Entry Devices; System Backup Automated; Manual; Electronic; Shipping; Material Safety Data Sheets; Pedigrees; Credits/Returns; Receiving; Controls - 222 Unit-Dose; Barcoded; Physical Organization; Refrigeration; Point of Use Stations; Spoilage; Shrinkage; Turnover; Reorder Point - EOQ Page 17

The Order Cycle Validated Computer System; Manage Supplier Base; Stock Profiles up to Date; Monitored Stock and Performance; Audit Trails Inventory Management Trannsparency; Exception Reporting; Price Validation; Right First Time; Consolidated Deliveries; Invoice with Goods or Electronic Order Initiation, Validation, Transmission Electronic Process; Minimal Manual Intervention; Electronic Records; Electronic link from Pharmacy Management System to Trransmission; Electronic Audit Trail Supplier Processes and Delivery Electronic Process; Complete within 2 days; Electronic Transfer; Prompt Payment Goods Received Processing Bar Coded Receipt and Expiry Dating; Instant Notification of Discrepancies; Delegation of Authority Page 18 Invoice Clearance and Payment

Procurement Value –Added Assessment Traditional (Transaction) Procurement Purchase on price alone, Order processing, Target pricing, Multiple sources, Many suppliers, Contract preparation, Order follow-up, Invoice reconciliation Tactical (Best Price) Procurement Leverage volume for multiple to single source, Goals for price, quality, and delivery, Supplier reduction programs, Supplier meetings, Technical planning for negotiations, Conducting negotiations, Functional skill development Strategic (Integrated) Procurement Total cost, Total value, Strategic suppliers, Optimizing supply base, Aligning with business strategies, Developing organizational strategies to meet future needs, Supply performance and relationship management Page 19

Componets of a Cost Management Program Pharmacy Directed Activities Interdisciplinary Activities Reimbursement Charging Purchasing Medication Utilization Program Reimbursement GPO Contracts Facility Contracts Wholesaler Contracts Inventory Management Wholesaler Ordering Programs Clinical Pharmacy Services Assessment of Drug Cost Formulary Management Storage Therapeutic Interchange Waste Reduction Interventions I. V. Waste Returns Protocol Development Page 20 340 B Programs CMS Commercial Insurance Outpatient Infusion Center Charging Coding and Processing Indigent Care Programs

Reporting Tools Report Wholesaler/GPO Reports Consideration Direct Reports For 80/20 analysis, by therapetutic class, monthly trends, benchmarks Cost per medical service Available from accounting/finance Cost per adjusted patient day Drug-utilization data Adjusted patient days are calculated with standard formula that modifies patient days with a ratio of outpatient to inpatient revenue to correct for volume changes and severity of illness. Page 21

Reporting Tools – Inventory Management at a Glance 2005 2006 2007 2008 Total Purchases $16, 078, 980 $19, 704, 733 $21, 703, 184 $20, 859, 723 Year End Inventory $1, 826, 846 $2, 877, 065 $1, 667, 966 $1, 680, 824 Turns 8. 80 6. 85 13. 01 12. 41 % Change in Purchases Base Year 22. 55% 10. 14% -3. 89% % Change in Inventory Base Year 57. 49% -42. 03% 0. 77% % Change in Turns Base Year -22. 18% 89. 98% -4. 62% Page 22

Reporting Tools – Variance Report 2008 Average vs. February 2009 Actual (Therapeutic Classes) Description 2008 Avg Qty/ Month 2008 Avg Spend/ Month 2008 $APD (109. 85) Feb 09 Qty Feb 09 Spend Feb 09 APD (111. 00) %$ Change % APD Change Antineoplastic Agents 509 $307, 607. 06 $2, 800. 25 463 $316, 009. 91 $2, 846. 94 2. 73% 1. 67% Hematopotic Agents 183 $212, 645. 92 $1, 935. 78 141 $173, 850. 31 $1, 566. 22 -18. 24% -19. 09% Antibacterials, Misc. 535 $100, 788. 21 $917. 51 481 $113, 425. 62 $1, 021. 85 12. 53% 11. 37% Anticoagulations 474 $105, 059. 17 $956. 39 418 $105, 066. 31 $946. 54 0. 01% -1. 03% Enezymes 33 $47, 859. 00 $435. 68 51 $77, 935. 96 $702. 13 62. 84% 61. 16% Penicillins 445 $59, 818. 23 $544. 54 420 $62, 870. 95 $566. 40 5. 10% 4. 01% Page 23

Pharmaceutical Procurement Summary • Patient Safety > Cost Savings • 9 Principle of Pharmaceutical Procurement • Must have trained procurement professionals dedicated to the procurement process • Metrics are a useful tool; however, you must understand how the metric is created • Continuous Education Page 24

Do You Have Any Questions? Email: drdomenech 3@gmail. com Page 25

References • American Society of Health-System Pharmacist. ASHP guidelines on medication cost management strategies for hospitals and health systems. Am J Health-Syst Pharm. 2008; 65: 1368 -84. • American Society of Health-System Pharmacist. Current status of medicines procurement. Am J Health-Syst Pharm. 2009; 66: 5: Supplement 3 s 20 -s 28. • CPSP Study Guide, American Association of Pharmaceutical Sales Professionals, Round Rock, TX, 2007. • CPM Study Guide, 7 th edition, Institute for Supply Management, Tempe, AZ, 2001 • CPP Study Guide, 6 th edition, American Purchasing Society, Aurora, IL, 2007. • Deegan, A. & O’Donovan, T. Management by Objectives for Hospitals 2 nd edition, Aspen Publication, Rockville, MD, 1982. • Mc. Keller, John. Evaluating the Purchasing Process. NAPM Info. Edge. 1996; Vol. 1 No. 9. • Moini, Jahangir. Law & Ethics for Pharmacy Technicians. Delmar, Clifton Park, NY, 2009. • Puckett, William. Recruiting a manager for financial activities in pharmacy. Am J Health-Syst Pharm. 2008; 65: 2014 -15. • Raedels, Alan. The Supply Chain Process, Institute for Supply Management, Tempe, AZ, 2000. • Sanderson, Edwards. Hospital Purchasing and Inventory Management. Aspen Publication, Rockville, MD, 1982. • Wilson, Andrew. Financial Management for Health-System Pharmacists. ASHP, Bethesda, MD, 2009. Page 26