Strategies to Raise the state Buying Power Research Department.

Strategies to Raise the state Buying PowerResearch Department

Regulatory framework

Demand aggregation

through framework agreements

Framework agreements

Decentralized tenders

Centrally tendered with decentralized use

One or more agencies

Using FA V/S individual purchases

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.

http://www.mercadopublico.cl/


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


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

Aggregating demand with framework agreements: 21% additional

Going beyond drugs: The case of computers: Savings 24,5%

Could framework agreements deliver additional savings?

Study of FA Mechanism


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


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

http://en.wikipedia.org/wiki/Commodity


Dealing with uncertainty: Auction theory approach to asses demand uncertainty impact

Dealing with uncertainty: Product Uncertainty and Horizontal Differentiation

Strategies to Raise the state Buying PowerResearch Department

Strategies to Raise the state Buying Power Research Department.

Documents

fa slide

additional slide

complementary slide

cenabast gobierno

future demand

presence of demand

aggregating demand

estimated demand