Estimating Cost

Pharmaceutical
Management and
Quantification for Antimalaria
Medicines
Discussion Forum
August 12—September 9, 2008
Session 5.
Estimating Costs of
Procurement

Objectives
• Identify sources of price information
• Project costs for quantities of medicines
obtained during a quantification process
• Apply the concepts of ABC and VEN analysis
for reducing cost
• Adjust quantities of medicines according to
budget
• Understand price comparison analysis

Session Outline
• Sources of prices for antimalarial medicines
• Projected costs
• Adjusting for quantities
• ABC analysis
• VEN analysis
• Price comparisons

Sources of Price Information
• Roll Back Malaria Sources and Prices of
Selected Products for the Prevention,
Diagnosis and Treatment of Malaria
• MSH International Drug Price Indicator
Guide
• UNICEF
• Central Medical Stores
• Internet
• Others

Projecting Costs (1)
• List all items to be purchased and
enter the unit cost
• Enter consumption/estimated
quantities
• Calculate the value of each item

Projecting Costs (2)
Medicine
Unit
Dosage
Cost per
Unit
(USD)
Number
of Units
per
Month
Total
Cost
(USD)
Artesunate
Tab
50 mg
0.07
16,800
1,176
Sulfadoxinepyrimethamine
(SP)
Tab
500/25 mg
0.07
2,100
147
Quinine
Tab
300 mg
0.10
2,100
210
Total
1,533

Approaches to Adjusting Quantities
to Procure
• Equal misery approach
• Estimate percentage shortfall and reduce all
quantities by that percent
• Preferential weighting approach
• Use method(s) for giving weights to individual
items and reduce quantities accordingly

Equal Misery Approach (1)
• Total budget available: USD 14,500
• Cost of total requirements: USD 18,396
• Percentage shortfall: 21.18%
• Reduce quantities of all items by 21.18%

Equal Misery Approach (2)
Medicine
Number
of Units
Annually
Quantity to
Reduce by
(21.18%)
Reduced
Total
Quantity
Cost
per Unit
(USD)
New Cost
(USD)
Artesunate
201,600
42,696
158,904
0.07
11,123
SP
25,200
5,337
19,863
0.07
1,390
Quinine
25,200
5,337
19,863
0.10
1,986
Total
14,500

Preferential Weighting Approach
• Make intelligent decisions about
• Which medicines to procure
• Quantities of various medicines to
procure
• Use tools such as
• ABC analysis
• VEN analysis

ABC Analysis (1)
• Method of classifying medicines by rate of use
and cost within a health facility or system
• Assembles data from recent or projected
procurements to determine where money is
actually being spent
• Allows managers to focus first on high-cost
items when considering ways to reduce
procurement costs

ABC Analysis (2)
A
B
C
High percentage of funds spent on largevolume
or high-unit-cost items; great
potential for savings (75%)
Fewer funds spent on larger numbers of
these items; savings are possible (15%)
Few funds are spent on the majority of
inventory; savings are possible, but at high
cost (10%)

Performing an ABC Analysis
1. List all items to be purchased/consumed and enter
the unit cost per item
2. Enter consumption/estimated quantities
3. Calculate the value of each item
4. Calculate the percentage of total value represented
by each item
5. Sort the list in descending order by total value
6. Calculate the cumulative percentage of total value for
each item
7. Choose cut-off points for A, B, and C classes

Adjustments Based on ABC
Classification
• Set procurement period based on ABC
classification of item
• Example
• Class A:
• Class B:
• Class C:
6 months
9 months
12 months

Example
Medicine
Number
of Units
Annually
Cost per
Unit
(USD)
Value
(USD)
New
Procurement
Period
Reduced
Total
Quantity
New
Cost
(USD)
Artesunate
201,600
0.07
14,112
6
100,800
7,056
SP
25,200
0.07
1,764
9
18,900
1,323
Quinine
25,200
0.10
2,520
12
25,200
2,520
Total
18,396
10,899
Budget available: USD 14,500

VEN Classification
V Vital: potentially lifesaving: significant
withdrawal side effects; crucial to providing
basic health services
E Essential: effective against less-severe but
significant illnesses, but not vital
N Nonessential: for minor or self-limited
illnesses; of questionable efficacy; or high
cost for marginal therapeutic advantage

Adjustments Based on VEN
Classification
• Adjust safety stock period based on VEN
classification
• Example
• Class V: 3 months
• Class E: 1 month
• Class N: 0 months
• Apply varying adjustment percentage based on
VEN classification
• Example
• Class V: 100%
• Class E: 50%
• Class N: 0%
• Identify and limit therapeutic duplications

Price Comparisons
• Prices must refer to same year
• Use same generic products in the same or
comparable dosage forms, strength, and
units
• Adjust for different INCOTERMS
• FOB (Free on Board)
• CIF (Cost, Insurance, and Freight ): Landed
cost
• Clearing, handling, and storage charges

Compare Public and Private Sector
Prices
• Public sector prices may be compared against
purchase and selling prices of the private sector
• Wholesale and/or retail prices may be compared
• Survey required to obtain price information

Summary
• Project your costs
• Adjust cost for quantities
• Set expense priorities based on ABC and
VEN analysis
• Price compare