Centralized Procurement As A Powerful Health Idea

Relevance: GS2 - Issues relating to development and management of Social Sector/Services relating to Health, Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

(Source: The Hindu, 10/18/2023)

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Why in the news?

• This article discusses the need for centralized procurement in the healthcare sector in India and its potential to revolutionize the sector.
• It will improve drug availability, reduce costs, and help improve the healthcare sector in the country.

What is centralized procurement?

• In healthcare, centralized or pooled procurement is defined as an approach in which different groups or organizations work together to buy healthcare products, like medicines, as a single team instead of separately.
• It can be implemented in four different ways:
  • Informed Buying: Groups share information about prices and suppliers to make smarter individual purchasing decisions.
  • Coordinated Informed Buying: Groups do joint research to make better-purchasing choices together.
  • Group Contracting: They negotiate as a team with suppliers to get better deals.
  • Central Contracting and Procurement: They appoint a single organization to handle all the purchasing for everyone, which can lead to even bigger savings.

What are the advantages of centralized procurement?

• Reduced prices: Small market size, limited technical capacity, and human resources limit the ability of buyers to purchase at low prices.
  • Pooled procurement enables demand aggregation under which products can be purchased at lower prices and with greater efficiency.
• Increased availability: The adoption of pooled procurement approaches helps increase the availability of life-saving drugs and vaccines.
• Efficient procurement processes: Pooled procurement helps improve the procurement of drugs and equipment in a more efficient and inclusive manner.
  • Example: The Covax initiative in which countries pooled together to procure vaccines and personal protective equipment during the Covid-19 pandemic.

Case study: McDonald's vs Vada Pav

• Consider a hypothetical scenario where a vada pav business aims to compete with McDonald's in India by establishing franchisee stores across the country.
• Price concerns: If each franchisee conducts negotiations with potato sellers it will result in franchisees having to pay a higher amount as compared to the price paid if there is a centralized team to purchase potatoes for all the franchisees.
  • The centralized team is able to negotiate a better price because of the larger volume of its orders.
• Quality concerns: The quality of the potatoes procured will vary if potatoes are sourced by each franchise individually.
  • This would result in each franchisee’s vada pav having a different taste and affecting the reputation of the brand.

Are pooled procurement models used in India?

• The use of centralized procurement by other countries and large companies like McDonald’s has shown that it can be useful in controlling prices and improving availability, and quality.
• Government: However, India has not implemented such a model in its drug-related schemes such as the Central Government Health Scheme (CGHS), the Pradhan Mantri Jan Arogya Yojna (PMJAY), and the Employees’ State Insurance Scheme (ESI).
  • There is a lack of uniformity in how different categories of beneficiaries are covered under these schemes.
• Corporate sector: Corporate hospitals have been implementing pooled procurement by conducting direct negotiations with pharmaceutical companies.
  • As a result, they have been able to procure drugs at much cheaper costs.
  • However, one concern is that patients at these hospitals are charged the maximum retail price.

How is it beneficial?

• Group negotiation, uniform contracts, and 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%.

Way forward

• Buyer’s clubs: More hospitals should collaborate to form buyers’ clubs which will strengthen their bargaining power in price negotiations with pharmaceutical companies.
  • These savings must then be passed on to patients as well.
• Benchmark prices: The Government invites tenders from private manufacturers while procuring male contraceptives through the National Aids Control Organization.
  • In order to ensure that manufacturers do not collaborate to raise prices, PSU HLL Lifecare Ltd. provides a benchmark price.
  • If the price quoted by private manufacturers is not competitive with HLL, the government will procure from HLL leading to huge losses for the private concerns.
  • The government can adopt a similar model for its drug purchases with PSU pharmaceutical companies providing the government with a benchmark price to ensure the availability of drugs at competitive rates.
• Regular testing: In developed nations, it is standard operating procedure for buyers’ clubs to conduct independent trials of drugs without having to rely on the drug regulator to ensure quality.

Conclusion

• Centralized procurement, or pooled procurement, is a simple approach that could potentially lower costs, enhance the availability of life-saving medication in the country, and enable the deployment of funds to other critical areas in health care.
• Therefore, India should implement this approach at scale at the earliest.

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FAQs

MCQs

Question: Consider the following statements with respect to Ayushman Bharat Pradhan Mantri Jan Arogya Yojna (AB-PMJAY)”

1. It has been launched with the aim of achieving Universal Health Coverage.
2. It is the world’s largest health assurance scheme fully financed by the government.
3. It is only applicable to people aged 60 and above.

Which of the above statements is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3