Centralised procurement as a powerful health idea

Pooled procurement by the central government when it comes drug procurement can revolutionise the health-care system in India

Updated - October 22, 2023 01:32 pm IST

Published - October 18, 2023 12:08 am IST

Blue Capsules on Conveyor at Modern Pharmaceutical Factory. Tablet and Capsule Manufacturing Process. Close-up Shot of Medical Drug Production Line.

Blue Capsules on Conveyor at Modern Pharmaceutical Factory. Tablet and Capsule Manufacturing Process. Close-up Shot of Medical Drug Production Line. | Photo Credit: Getty Images/iStockphoto

Imagine that you have decided to go up against McDonald’s in India. The homegrown vada pav will go up against the mighty burger and come out trumps. And so you build a plan to have hundreds, nay, thousands of franchises all over the country. They will sell clean, hygienic and tasty vada pavs in the millions in the years to come.

What a great idea, and let us hope that somebody actually does this. But here is a quick question: should each franchisee purchase their own potatoes, or would you much rather have a centralised procurement team to do the task? You will quickly realise that there are two central problems to solve: price and quality.

Each franchisee conducting negotiations with potato sellers becomes a problem when it comes to price. The amount of potatoes that the entire business needs to purchase will be more than the amount of potatoes that each franchisee will need to buy. So, who do you think will be able to negotiate a better price? The centralised team, or each of the individual franchisees?

Each franchisee conducting negotiations with potato sellers is also problematic when it comes to quality. Each franchisee might have a different idea of what is acceptable quality. And, each franchisee might have a different idea about what makes for a good potato. But that would then lead to each franchisee’s vada pavs having a different taste — and that just will not do in a franchisee model.

This brings up another question. So, why should hospitals be any different when it comes to drug procurement?

In India

Many countries and international organisations (including McDonald’s) have shown that a pooled buyer model for drug procurement addresses many issues that are related to price efficiency, stockouts and quality concerns. But for reasons that have remained mysterious for decades, the Central Government chooses to ignore the merits of pooled procurement when it comes to schemes such as the Central Government Health Scheme (CGHS), the Pradhan Mantri Jan Arogya Yojna (PMJAY) and the Employees’ State Insurance Scheme (ESI).

Corporate hospital chains, on the other hand, are well aware of the benefits of pooled procurement. For years on end, they have conducted direct negotiations with pharmaceutical companies, and availed of significant discounts. Patients at these hospitals end up buying these drugs at maximum retail price of course, but that is another story. We cannot help but wonder why many more hospitals cannot team up to form buyers’ clubs, benefit from better bargaining power, and then, being not-for-profit institutions, pass on these cost savings to patients.

The focus in these papers

A recent paper, “A National Cancer Grid pooled procurement initiative, India”, demonstrates the viability of just such an idea. Group negotiation, uniform contracts, and, finally, purchases by hospitals associated with the National Cancer Grid for 40 drugs resulted in savings of ₹13.2 billion. Without pooled procurement, the cost would have been ₹15.6 billion, with savings ranging from between 23% to 99%. As the authors say with quiet understatement in the last sentence of their abstract, their study reveals the advantages of group negotiation in pooled procurement for high-value medicines. This approach, they conclude, can be applied to other health systems besides cancer.

We are in complete agreement; our paper, “Unifying India’s Healthcare Markets” makes just such an argument. We show that the central government is not consistent in how it covers different categories of beneficiaries under the CGHS, ESI and PMJAY. The same procedure, for example, might be available in one scheme, but not the other. And, centralised procurement, sadly, is not yet a reality.

It is not that the central government is unaware of the benefits of pooled procurement and price discovery.

When the government (through the National Aids Control Organization) procures male contraceptives, it invites tenders from private manufacturers and then offers to buy from all those who are willing to match the lowest price. How does the government ensure that the suppliers are not colluding to keep the price high? HLL Lifecare Ltd., a public sector unit (PSU), with the highest manufacturing capacity in India, provides a benchmark price. All the bidders know that if they are not competitive on price, the government will just procure all its requirements from HLL and they will be left with unused manufacturing capacity — and as a result, face huge fixed costs and overheads.

The government can follow this model for most of the drugs it procures. It has many pharma PSUs that can provide benchmark prices and also ensure that the government has leverage. Such leverage ensures that the government is not forced to buy from private manufacturers, given that there is competition from PSUs which can make supplies at a competitive price.

The issue of better quality

Finally, in addition to cost savings, buyers’ clubs can ensure better quality by having the supplies tested independently rather than having to rely on the drug regulator to ensure quality. This is not a new idea; this is standard operating procedure for buyers in many developed nations.

Centralised procurement, or pooled procurement, is a simple yet powerful idea that has the power and the potential to reduce costs, ensure better deployment of funds in other areas related to health care, and ensure availability of life-saving drugs in this country. It is an idea with both theoretical backing, and now empirical validation. It is an idea that India should implement at scale, and as soon as possible.

Murali Neelakantan is Principal Lawyer, amicus. Ashish Kulkarni is Blogger, econforeverybody.com

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