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Pharmacy Procurement Practice Overview. Richard C. Ponder, Jr., CPhT, CPP, CEPP, BBA, BS(Bio) Pharmacy Supply Chain Supervisor East Jefferson General Hospital . Agenda . 1. Introduction. 2. Knowledge, Skills, & Abilities. 3. Laws & Regulations. 4. Order Cycle. 5.

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pharmacy procurement practice overview

Pharmacy Procurement Practice Overview

Richard C. Ponder, Jr., CPhT, CPP, CEPP, BBA, BS(Bio)

Pharmacy Supply Chain Supervisor

East Jefferson General Hospital





Knowledge, Skills, & Abilities


Laws & Regulations


Order Cycle


Cost Management Program


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.

Statements about Pharmacy Procurement

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) purchaseplanning, (2) standards determination, (3) specificationsdevelopment, (4) supplierresearch and selection, (5) value analysis, (6) financing, (7) pricenegotiation, (8) making the purchase, (9) supplycontract administration, (10) inventory control and stores, and (11) disposals and other related functions.Procurement - Defined

Page 4

pharmacy procurement
“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, s20 -s28, 2009.

Pharmacy Procurement

Quote by Eva Ombaka

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.

Procurement – ASHP Policy Position #0524

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

Nine Principles of Pharmacy Procurement

Page 7

pharmacy procurement8
Pharmacy Procurement

Knowledge, Skills, & Abilities


General knowledge of operations, regulations, and terminology


Supply Chain Management


BOK – Accounting, Economics, Business Mathematics, Business Law, Negotiations, Quality Assurance, & Statistics


Interpersonal Skills


Continous Education

Page 8

pharmaceutical supply chain
Pharmaceutical Supply Chain


  • Source of pharmaceuticals: Pfizer, Wyeth, Mylan, Bedford
  • Wholesale Acquisition Cost - WAC
  • Brand, Generic; Dropship; cGMP; Recalls; Failure to Supply

Wholesale Distributors

  • Distributors of pharmaceuticals: Morris and Dickson, Cardinal, Reliance
  • WAC +/- a negotiated %; GPO Contracts
  • Pedigree; VAWD; NCPD; HIDA


  • Dispences pharmaceuticals: Hospitals, Infusion, Retail, Mail-order
  • Average Wholesale Price – AWP
  • Internal Supply Chain Management System


  • End User of pharmaceuticals: Inpatient, Outpatient, Family Members
  • AWP +/- a negotiated %; Pharmacy Benefit Managers – PBM
  • PBMs: Caremark, Medco, Express Scripts

Page 9

laws and regulations
Laws and Regulations



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

Page 10

laws and regulations11
Laws and Regulations



  • 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
  • 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 regulations12
Laws and Regulations



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

Page 12

contract fundamentals
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.
  • Acceptance – The offer was accepted unambiguously. Acceptance may be expressed through words, deeds, or performance.

Page 13

contract fundamentals continued
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
Group Purchasing Organization (GPO)

Examples: Amerinet, Broadlane, Consorta, Med-Assets, Novation, Premier


  • Fees; Allowable distribution methods; Payment terms; Return policies; Supplier performance requirements; Rebates; Market-share agreements; Single-agent contracts; Services; Letters of commitment


  • 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

procurement process
Procurement Process
  • Receiving; Accounts Payable; Inventory Control


Anatomy of the Process

  • Creat a RFP; Issue a PO; Select a Supplier; Recieve a Good; Pay an Invoice


  • Complete Requisition Form; Verify Requirment; Input Data; Create a PO; Sign Documents

Individual Tasks

Page 16

inventory management
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




Stocking & Storage

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

Inventory Management


Initiation, Validation, Transmission

Supplier Processes and Delivery

Goods Received Processing

Invoice Clearance and Payment

The Order Cycle

Validated Computer System; Manage Supplier Base; Stock Profiles up to Date; Monitored Stock and Performance; Audit Trails

Trannsparency; Exception Reporting; Price Validation; Right First Time; Consolidated Deliveries; Invoice with Goods or Electronic

Electronic Process; Complete within 2 days; Electronic Transfer; Prompt Payment

Electronic Process; Minimal Manual Intervention; Electronic Records; Electronic link from Pharmacy Management System to Trransmission; Electronic Audit Trail

Bar Coded Receipt and Expiry Dating; Instant Notification of Discrepancies; Delegation of Authority

Page 18

procurement value added assessment
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
Componets of a Cost Management Program

Pharmacy Directed Activities

Interdisciplinary Activities

Reimbursement Charging

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

Page 20

reporting tools
Reporting Tools



  • Wholesaler/GPO Reports
  • Direct Reports
  • Cost per medical service
  • Cost per adjusted patient day
  • For 80/20 analysis, by therapetutic class, monthly trends, benchmarks
  • Available from accounting/finance
  • 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 variance report
Reporting Tools – Variance Report

2008 Average vs. February 2009 Actual (Therapeutic Classes)

Page 23

pharmaceutical procurement summary
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?




Page 25


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 s20-s28.

CPSP Study Guide, American Association of Pharmaceutical Sales Professionals, Round Rock, TX, 2007.

CPM Study Guide, 7th edition, Institute for Supply Management, Tempe, AZ, 2001

CPP Study Guide, 6th edition, American Purchasing Society, Aurora, IL, 2007.

Deegan, A. & O’Donovan, T. Management by Objectives for Hospitals 2nd edition, Aspen Publication, Rockville, MD, 1982.

McKeller, John. Evaluating the Purchasing Process. NAPM InfoEdge. 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