Pharmacy 483 Institutional Pharmacy Practice

Purchasing, Product, and Inventory Management

Donald L. Bomgaars, M.S., M.B.A.bomgaars@u.washington.edu

February 26, 2004

Pharmacy Practice Overview

• Product Supply Chain Management

• Patient Care Issues & Management

• Institutional Level Therapy Management

• Population Level Management

Lecture Overview

• PRODUCT & VENDOR SELECTION PROCESS

• GROUP PURCHASING

• PURCHASING & DISTRIBUTION CHANNELS

• INVENTORY CONTROL SYSTEMS

• PRICING & REGULATORY ISSUES

• RELATIONSHIPS WITH THE PHARMACEUTICAL INDUSTRY

SELECTION PROCESS

• ASSESSMENT OF NEEDS– P&T decisions– Patient populations– Staff preferences– Managed care environment

SELECTION PROCESS

• SUPPLIER APPROVAL– Quality assurance

BIG PHARMA, INC.

• Product Line – Oral solids, controlled substances, SVP, LVP, topicals, peptides, and chemicals

• Supplier Type - ( )Primary/( )Secondary/( )Marketer

• Back Order History – What & when?

• QA/QC Director & Production Director – Appropriate educational backgrounds and experience?

• Recall History – Is there a pattern?

SUPPLIER CERTIFICATION REVIEW

BIG PHARMA, INC. (cont.)

• FDA Documents & Company Responses – What was noted or observed? How did the company respond? Was there a Warning Letter issued by the FDA? Is there a pattern of observations from visit to visit?

• Overall Comments – Company SOPs review, financial news reports, company web site info, recent FDA approvals?

• Recommendation - Approve, qualified approval, disapprove?

SUPPLIER CERTIFICATION REVIEW

SELECTION PROCESS

• SUPPLIER APPROVAL– Quality assurance– Supplier performance history– Terms and conditions

SELECTION PROCESS• PRODUCT SPECIFICATIONS

– Bioequivalence issues http://www.fda.gov/cder– Packaging issues

• CONTRACT BID & AWARDS– Conventional RFQ process– Online reverse auction

SELECTION PROCESS

• PRODUCT SPECIFICATIONS

• CONTRACT BID AND AWARDS

• POST-AWARD MONITORING

GROUP PURCHASING ORGANIZATIONS

• ADVANTAGES– Pooled volumes– Shared resources– Peer networking

• DISADVANTAGES– Loss of control– Variety of constituencies– Member compliance issues

PURCHASING & DISTRIBUTION CHANNELS

• Supply Chain Management

– coordination of processes from the supplier of raw materials to the end user.

PURCHASING & DISTRIBUTION CHANNELS

• Wholesaler versus Direct Purchases

• Selection of a Distribution Vendor– Big Three vs. regional players– Specialty distributors and “grey-market”

sources

PURCHASING & DISTRIBUTION CHANNELS

• Prime Vendor Wholesaler Features We Value– Access to online inventory status and QOH– Accurate representation of TOS and MOS– Bar code receiving– Electronic access to invoices and statements– Clean and standardized product detail info– Data warehouse of purchase history info– Markers in wholesaler database to direct purchases to

desired products– Pick & ship accuracy– Customer service follow-up

PURCHASING & DISTRIBUTION CHANNELS

• Value ManagementOther directions for improvement:

• reverse distribution process

• indigent care program management

• information companies (HBOC, MediQual, CIC)

• pharmacy distribution systems (Pyxis, API, Owens) and pharmacy department management (Swedish)

• manufacturing component (Cardinal Assist, National PharmPak, RP Scherer)

PURCHASING & DISTRIBUTION CHANNELS

• E-CommerceExpanding efficiencies to other members of

supply chain • Decreased transaction expenses, increased info flow

Impact on wholesalers

Pharma to patients direct • Dispensing with the intermediaries?

INVENTORY CONTROL SYSTEMS

• Balancing the costs– Ordering costs– Product cost– Inventory carrying costs– Outage costs

INVENTORY CONTROL SYSTEMS

• Alphabet soup of acronyms– JIT, POS, MRP, ERP– ABC, EOQ, ROP

• Consignment stocking programs

• POU replenishment

• Demand forecasting

EOQ EXAMPLES

• Filgrastim: $1,627/pkg

700 annually

$2.00

$163

4

• Cost =

• Demand=

• Reorder cost=

• Inventory carrying cost=

• EOQ=

• Multivitamin: $6/pkg

700 annually

$2.00

$0.6

68

INVENTORY CONTROL SYSTEMS

• DEMAND FORECASTING– Moves further out the supply chain– Uses software algorithms to predict usage

based on seasonal and customer specific anticipated fill dates.

– Longs’ Drug California DC reduced inventory by 58%, cut replenishment costs by 65%, maintained 99.5% controllable service levels, released enough cash flow ($60M) to purchase 20 stores.

INVENTORY CONTROL SYSTEMS

• Decision Support & Monitoring– Linear programming

• Allows optimization under constrained resources

– Decision trees• Simplifies complex decisions using

outcomes and probability distributions

Decision Trees

$328,000$328,000 (p= 1.0)

$235,000 (p= 0.2)

$340,000 (p= 0.8)

$319,000

STATUS QUO

MAKE

SWITCH

SUCCESSFUL

FAILURE

INVENTORY CONTROL SYSTEMS

• Decision Support & Monitoring– Multi-Attribute Utility Theory (MAUT)

• Method of quantifying assessments of worth of diverse attributes

– Financial concepts• Time value of money (NPV, IRR)• Risk value of money• Standard cost monitoring

PRICING & REGULATORY ISSUES

• For Profit vs. Not For Profit Status– Class of trade and own use provisions

• Governmental/Regulatory impacts– Cost based vs. DRG based reimbursement

– Budget Deficit factor - OBRA 90

– Veterans Health Care Act of 1992

– Medicare APC program

– Medicare Prescription Drug, Improvement, and Modernization Act of 2003

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• The Global Market and Price Controls– Impact on the US market– Cross border internet sales

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• The Changing Face of Industry– Rapid consolidation continues– Driven by failure of the R&D organizations to

meet the earning per share expectations– Increased R&D expenditures may not solve the

problems

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• The Changing Face of R&D– The Human Genome project could provide up

to 25,000 new molecular targets

PHARMACEUTICAL COMPANY RELATIONS

HUMAN GENOME PROJECT TO SPARK EXPONENTIAL GROWTH IN NUMBER OF TARGETS FOR DRUG INNOVATION

Source: Drews, Jurgen, M.D., "Genomic Sciences and the Medicine of Tomorrow: Commentary on Drug Development," Nature Biotechnology, Vol. 14, November 1996

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• The Changing Face of R&D– The Human Genome project could provide up

to 25,000 new molecular targets– Combinatorial chemistry will allow increases

of the number of compounds synthesized and screened by a million-fold

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• The Changing Face of R&D– The Human Genome project could provide up

to 25,000 new molecular targets– Combinatorial chemistry will allow increases of

the number of compounds synthesized and screened by a million-fold

– Increased ways of attacking medical problems could fragment market and allow easier competition

PHARMACEUTICAL COMPANY RELATIONS

Sources: PhRMA, 1997; The Wilkerson Group, 1995.

SHRINKING PERIOD OF MARKET EXCLUSIVITY BETWEEN INTRODUCTION OF BREAKTHROUGH MEDICINE AND COMPETING INNOVATORS

PHARMACEUTICAL INDUSTRY RELATIONSHIPS

• Marketing– Partners versus antagonists– Managed care organizations– Government funding for prescription coverage– DTC and Internet marketing

SUGGESTED READINGS• TEXT: www.ashp.com/bestpractices

– ASHP Technical Assistance Bulletin on Assessing Cost-Containment Strategies for Pharmacies in Organized Health-Care Settings

– ASHP Technical Assistance Bulletin on Hospital Drug Distribution and Control

– ASHP Guidelines for Selecting Pharmaceutical Manufacturers and Suppliers

– ASHP Guidelines on Managing Drug Product Shortages

• Additional reference regarding business methodologies as they are used in the clinical arena:

• Magid, David et al., Doxycycline Compared with Azithromycin for Treating Women with Genital Chlamydia trachomatis Infections: An incremental Cost-Effectiveness Analysis, Ann Intern Med. 1996;124:389-399.

• Pharmacogenomics reference:• Evans WE, McLeod HL. Pharmacogenomics-drug disposition, drug

targets, and side effects. NEJM 2003; 348:538-49.