strategies to raise the state buying power research department
TRANSCRIPT
Regulatory framework
Demand aggregation
through framework agreements
Framework agreements
Decentralized tenders
Centrally tendered with decentralized use
One or more agencies
Demand Aggregation: Health care sector singularity
For drugs and medical devices there is one single buying agency (CENABAST) which aggregates demand
and tender for the whole system. Afterwards, distribution is carried out to each Hospital.
How different are drugs prices when procured through this centralized agency or when using framework
agreements?
Demand Aggregation: CENABAST
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
• Generic Drugs: Twice a year CENABAST aggregates Hospital´s demand and call for proposals through www.mercadopublico.cl e-marketplace. Awarded products will have a 6 month fixed price.
• Ministerial Programs: Non generic drugs and vaccines are purchased by Ministerial command through CENABAST. Quantities and delivery structure is defined by the Ministry.
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
Business Model: Recently deployed FA (April 2011).
• Scope: Generic drugs
• Call for proposals: Done by ChileCompra through www.mercadopublico.cl
• Agreement duration: 3 years
• Prices: After the first year, prices may be updated depending on market conditions.
• Delivery mechanism: From vendors to purchasing units along the country.
• Payment system: decentralized
Demand Aggregation: FA
Market structure
CENABAST has a 36,6% market share (data in log scale):
However, nowadays framework agreements are irrelevant in terms of market share
CENABAST and FA: comparative performance
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
The following table shows a comparison between the two
purchasing mechanisms (CENABAST and FA), showing that under
current conditions, they are complementary
Concept # ItemsAverage
Purchase per Drug $MM
Actual Cost $MM
Valor CMM $MM
Value Direct Purchase $MM
Value 100% CENABAST
$MM(Savings) CMM vs Actual $MM
Total Compared 242 36.321 38.736 45.956 N/A 6,6%
Share of CENABAST
50%-100% 114 164 18.735 23.028 27.621 16.504 22,9%
10%-49% 18 475 8.555 7.924 9.250 5.930 -7,4%
1%-9% 110 82 9.031 7.784 9.035 N/A -13,8%
Total 242 150 36.321 38.736 45.906
Study of FA Mechanism
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
Some variables that affect prices in framework agreements:
• Agreements duration.
• Vendors pricing strategies.
• Estimated demand.
• Idiosyncratic industry features.
• Others factors
UNCERTAINTY
Modeling FA as Options a la Black-Scholes Grounded evidence on the necessity of FA theory
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
Left: The portion of Bad assigments (i.e., expost inefficiency) as a function of alpha. Right: The fraction of time the big supplier is preferred out of the inefficient assignments as a function of alpha.
While standard auctions are considered an efficient mechanism in many cases, in the presence of uncertainty about future demand, future spot prices, or the desired properties of the procured product, they become less successful in allocating goods to the most efficient suppliers. The figures bellow, emphasize auction inefficiency in the presence of demand uncertainty, in which even a simple randomizing mechanism (e.g., a coin flipping) may perform better in terms of efficiency than a standard auction. This suggests that procurement mechanisms that operate under this type of uncertainty such as FAs require a special treatment that goes beyond standard auctions.
• The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity from the seller of the option at a certain time for a certain price..
• The seller is obligated to sell the commodity if the buyer use the option.
• The buyer pays a fee (called a premium) for this right.
Dealing with uncertainty: Systematic market riskAssessing a call premium research project
Frameworks agreements may include a premium for allowing the buyer handle the underlying commodity uncertainty.
Long Call
Payo
ff
Prof
it
Pro
fit
Share Price at Maturity
StrikePrice
0
Premium
Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra
Dealing with uncertainty: Auction theory approach to asses demand uncertainty impact
Dealing with uncertainty: Product Uncertainty and Horizontal Differentiation