Chapter 10 Finance and procurement

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Unit 21: The financing of healthcare systems


When you have completed this unit you should be able to:

21-1 What are the different sources of funding for healthcare?

The provision of health services, both preventative and curative, is an important responsibility of government. Healthcare is expensive and most countries spend 5 to 15% of their gross domestic products (GDP) on healthcare. In South Africa, healthcare spending was 9% of GDP in 2014.

Funds for healthcare can come from:

National governments vary in how they choose to fund healthcare. This depends partly on the total funds available, but also on national values that determine how the available funds are distributed, such as the commitment to universal health coverage.

21-2 What are the sources of funds for private expenditure?

Private expenditure can be paid from:

Private funding comes from pooled funds or “out of pocket” payments.

21-3 What is the difference between a medical aid scheme and an insurance scheme in South Africa?

In South Africa, a medical aid scheme is a not-for-profit company that is regulated by the Council for Medical Schemes. They are required by law to cover “prescribed minimum benefits” so that treatment for a range of conditions is covered. A medical aid scheme may not increase a member’s premiums or discontinue cover based on their claims history. Although medical aid schemes may not make a profit, they pay administration fees to a separate administration company, which may make a profit.

The Council for Medical Schemes does not regulate companies offering health insurance. In South Africa, a health insurance scheme may discontinue cover or raise premiums based on claims history. Usually, an insurance scheme does not pay medical bills, but pays out a lump sum in the event of illness or injury.

This distinction does not usually apply in other countries. Not-for-profit community insurance schemes are common in other low- and middle-income countries and some health insurance schemes do pay providers and facilities directly.

21-4 What are the sources of international funds for healthcare?

Funds also enter health systems from international sources:

These international funds tend to be directed to specific projects or programmes such as AIDS prevention or TB treatment.

21-5 What is the breakdown of healthcare funding in South Africa?

In South Africa, roughly half of healthcare spending comes from government expenditure and half from private expenditure, of which 80% to 85% is from pooled funds (medical aid or insurance) and around 15% is out of pocket. Two percent of expenditure comes from international sources in 2013.

In South Africa about half of healthcare spending is from government and half from the private sector.

21-6 What is a public private partnership?

A public-private partnership (PPP) is a contract between a government institution and a private institution to share resources. There are 3 main types of private partnerships:

21-7 What is a private financing initiative?

Private financing is sometimes used for major infrastructure projects, such as the building of hospitals by private companies that are then leased back to the government. In the past, these were very popular for building hospitals in the United Kingdom, because it was assumed that the private sector would be more efficient in building and running a facility. The government’s “balance sheet” would also look better because it did not have to borrow a large initial sum of money for a large capital project. In practice, the money that the government had to spend for the use of these hospitals in the long-term meant that they were eventually very expensive. The evidence suggests that the private sector had by far the better deal in this type of public-private partnership, probably because they had more experience in that type of negotiation.

Private finance initiatives can be very costly in the long run if governments do not have the skills to negotiate with the private sector.

21-8 How does the co-use of state assets work?

Another type of public-private partnership is the co-use of state assets where the private sector pays to use state assets. Examples include the use of public operating theatres by the private sector, or the location of a private ward within a state hospital. Non-health examples include the use of National Parks by private tour operators. These types of projects are much more likely to benefit both parties because the state keeps control of its assets and does not make a long-term financial commitment to transfer large sums of public money to the private sector. This type of public-private partnership can be very successful.

Partnerships where the state keeps control of its assets and leases them to the private sector can be beneficial to both parties.

21-9 What does “contracting out” of services mean?

Sometimes the private sector is able to provide particular services at a lower cost and of better quality than can be provided from the government sector. “Contracting out” means that a government department has decided to purchase those services from the private sector. This can work well for services that are technically quite complex, such as the servicing of scanners or the distribution of drugs and supplies. As with private finance initiatives, it is important that the government sector has the skills to write, negotiate and monitor contracts for these services.

21-10 What are user fees?

The payment of a fee to use a public sector health service by the public is called a “user fee”. For example members of the public (the user) may have to pay a fee to get spectacles at a state hospital.

21-11 What are the advantages and disadvantages of user fees?

User fees are controversial:

21-12 What is the situation with user fees in South Africa?

South Africa abolished user fees for:

For the rest of the public sector, charges are made according to the Uniform Patient Fee Schedule (UPFS). The most recent charges can be found in the finance office at your facility.

21-13 How does the Uniform Patient Fee Schedule classify patients for charges?

There are 3 main categories in the schedule:

This patient classification was set in 2002 and has not been updated. Inflation means that many people on low incomes now fall into the full fee category. There is a strong argument for revising it.

Refugees, asylum seekers and people from the Southern African Development Community have the same benefits as South Africans when using health services.

Other foreigners, such as tourists, must pay full fees. The position of undocumented migrants is not clear. Although they are protected under the Constitution and have the right to access care, they are not specifically included in the list of those eligible for subsidy.

Although many foreign nationals qualify for the same benefits as South Africans, access to healthcare varies considerably between facilities and they are frequently subjected to discriminatory practices.

21-14 What is South Africa’s National Health Insurance scheme?

The National Health Insurance (NHI) scheme proposes a central insurance scheme to replace the current funding system. It was submitted to parliament as a white paper in 2017. Contribution would be based on income. Everybody would have access to the same, good quality, package of services that would be delivered by both public and private facilities. Anybody wishing to have medical insurance for services not covered would have to purchase this in addition.

As well as changing the funding mechanism for healthcare, the National Health Insurance plan involves major improvements to primary healthcare, health facilities and a health information system. The plan would be implemented over a number of years.

There are some concerns around whether the plan is affordable, which services will be included in the package, and how well existing public health facilities will be able to come up to standard. It is also uncertain what role the private sector will play.

You can follow the latest updates on the scheme by visiting the Department of Health’s website.

Case study 1

In 1996, the life expectancy at birth in Rwanda was 35 years and in 2013 it had increased to as 64 years. In 1996, the life expectancy at birth in South Africa was 61 years but in 2013 it had dropped to 57 years. In 2014 the total health expenditure per person in Rwanda was US$125 and in South Africa was US$1148.

1. Now that you know what the health spending is in the 2 countries, why do you think Rwanda had a better life expectancy than South Africa in 2013?

The low life expectancy in South Africa is often blamed on the burden of disease, in particular HIV. However, Rwanda has faced a similar disease burden and has achieved good health outcomes at lower cost. Health funds in Rwanda have likely been spent in a way that is more effective.

Case study 2

You see a 4-year-old child with club foot in your clinic. The mother is from Lesotho and is a migrant worker. You want the child to go to the orthopaedic clinic at your referral hospital, but the mother is worried that she will not be able to pay.

1. How do you advise her?

People from neighbouring states may use the health service under the same terms as South Africans. Children under the age of 6 have free treatment. She will not have to pay fees.

Unit 22: The supply chain and stock outs


When you have completed this unit you should be able to:

22-1 What is a supply chain?

A supply chain describes the process by which materials are processed and delivered to the end consumer. There are several links in the supply chain, and good supply chain management involves making sure that each link is as effective and efficient as possible. As well as goods and supplies flowing “down the chain” towards the consumer, information must flow “up the chain” to those responsible for managing the supply chain. There are currently efforts to improve supply chain management in the South African public sector.

A supply chain is the series of links needed to move a product from the supplier to the consumer.

The links (steps) in the supply chain in a health system are:

The links in a supply chain are demand management, procurement, logistics and disposal.

22-3 What does a good supply chain look like in a health system?

If a supply chain works well:

The ingredients to provide a good supply chain include:

The most important parts of the supply chain for clinicians to understand are procurement and inventory control.

22-4 Why do clinicians need to know about procurement?

It is useful for clinicians to know about procurement so that:

22-5 What is a “tender”?

When the government wishes to purchase something on behalf of its citizens, it may invite private businesses to put in a bid for the required goods and services. A bid is an offer to provide goods or services, and it is usually accompanied by a quote, which is the cost of providing that item or service. The process of inviting a bid is called a “tender”. In South Africa, for contracts less than about R500 000, the government department may approach 3 suppliers to ask each for a quote. For larger contracts, the tender must be advertised and bids examined by a tender board.

The main purpose of a tender is to secure goods and services at the best cost, but other factors such as the quality of the goods or service may influence the selection process. In South Africa, the process is weighted to support South African products and also companies with good BEE (Black Economic Empowerment) practices.

A tender is the process of inviting a bid to provide goods or services.

22-6 What is stock and what is inventory?

Stock is the type and amount of supplies that are kept in facilities and in stores. Inventory is the list of the items in stock.

22-7 What is inventory management and why do clinicians need to know about it?

Inventory management is the use of forms and records to track the flow of drugs and supplies through the distribution system. It is sometimes also called “stock control”. Good inventory management is critical to prevent stock outs, wastage through expiry of medications, and theft. Drugs and disposable items usually expire after a certain time and can no longer be used. Therefore inventory management also tracks the expiry dates of the stock.

Good inventory management is required at the large depots, but also at facility level. In many smaller facilities where there is no pharmacist or pharmacy assistant, the professional nurse may be required to manage the inventory. Adequate systems and training for this are necessary. Even when clinicians are not responsible for managing the inventory, they play an important role in tracking the use of items and contributing information about this.

Unfortunately inventory management is often poor in South Africa.

Inventory management is the use of forms and records to track the flow of items through the distribution system to prevent stock outs and wastage.

22-8 What is the procurement and distribution process for drugs and other consumables such as gloves, needles and swabs in the South African public sector?

In South Africa:

The procurement process may take some time and there may be delays before the supplies arrive or services are provided. This is why it is important for facilities to place orders for new stock in good time.

Items purchased by the central tender process are called “on transversal contract”. If there is no transversal contract for an item, it can still be purchased by a facility using an electronic system.

22-9 What is the procurement process for equipment?

The procurement process is:

22-10 How can additional items be purchased?

Occasionally, a clinician will wish to use an item that was not previously used in that hospital, for example a particular type of catheter. Purchasing the item is far easier if the item is on a government tender (this is also called “on code”). The National Department of Health maintains a database of items on tender. It is important to search this first and locate the item’s code before requesting an order from the hospital store manager.

When an item is not on one of these lists, accurate specifications must be documented, the item is then put out on the national procurement system which is called the Integrated Procurement System (IPS) in order to obtain the quotes and then score them according to specific criteria.

22-11 What are the causes of stock outs?

Stock outs can occur as a result of failures anywhere along the supply chain:

Stock outs often happen because drugs and supplies have not been ordered in time. Therefore good management of the inventory is an important way for facilities to avoid stock outs.

Sometimes a drug will be out of stock because it is no longer recommended by clinical guidelines and therefore has not been procured. This most often happens with antibiotics because recommendations change when antibiotics become less effective. This means that it is important to use the latest version of the Standard Treatment Guidelines in South Africa.

Prescribing should follow guidelines so that prescriptions are in line with procurement by the national Department of Health.

22-12 What are the costs of stock outs?

Stock outs can be costly in the long-term, although the costs are often hidden. This is because:

22-13 What are overstocks and why are they costly?

Overstocks happen when more stock than necessary is ordered. Overstocks are important, because overstocked drugs and supplies expire and have to be discarded as they can no longer be used. Therefore overstocks lead to wastage. Even when overstocks do not expire, money can be unnecessarily tied up in a large inventory when it could be better spent elsewhere.

22-14 Who is responsible for decisions about the quantity of drugs and consumables to order in South African hospitals?

The supply chain department of a facility is responsible for ordering appropriate quantities of drugs and consumables. Supply chain managers are expected to stay within a detailed budget that is allocated to the hospital and its clinics from province. The budget is usually based on the previous year’s consumption.

22-15 Who is responsible for storage of drugs and consumables in South African hospitals?

Most hospitals have a central store, and the store manager is responsible for keeping consumable items safe, dry and at the correct temperature. The store manager is usually responsible to the hospital’s finance director.

Drugs are usually kept in the pharmacy, not the central store. The pharmacist is responsible for the safe storage of drugs.

22-16 How do organisations make decisions about the quantities of supplies to order from stores or depots?

Businesses and industries use calculations to guide decisions about the quantities of supplies to order. The calculations depend on:

In health facilities, supply chain managers or clerks should be able to make these calculations, but in practice, order quantities are often estimated on a “best guess” basis.

To minimise overstock and stock outs, there are some useful concepts for all members of the health team to understand. These are maximum and minimum stock levels and safety stock.

22-17 What are maximum, minimum and safety stock levels?

A maximum stock level is the most stock that should be on a shelf. It is set to avoid overstocks, where too much of an item has been ordered and it takes up space and eventually expires.

The minimum stock level is the level of stock that should trigger a re-order. The minimum stock level must be set so that the facility does not run out of the item while waiting for the new order to arrive.

Both maximum and minimum stock levels can be calculated by knowing how fast the stock will be used up, the ordering intervals and the lead time between ordering new stock and its arrival.

One problem is that the number and types of patients arriving at a clinic or hospital are unpredictable, so the number of a stock item used varies from day-to-day or month-to-month. This uncertainty is handled using the idea of “safety stock”.

A maximum stock level is used to avoid overstocks while a minimum stock level is used to trigger a re-order and make sure that supplies do not run out while waiting for the new order to arrive.

22-18 What is safety stock?

Safety stock is the stock level that will cover the busiest times.

The relationship between maximum, minimum and safety stock levels is shown in Figure 22-1. A facility may dip into the safety stock at busy times, but should rarely run out. Safety stock should cover normal workloads but is not expected to be sufficient for major incidents and disasters, there is usually a separate mechanism for this covered in the facility’s major incident plan.

As with order quantities, it is possible to calculate the minimum and maximum stock levels and the safety stock, but in practice these are often estimated (“best guess”) rather than calculated.

Safety stock is used to make sure that there is sufficient stock for unexpected busy times.

22-19 Why are order quantities and stock levels in health facilities often estimated rather than calculated?

In health facilities, stock levels and order quantities usually have to be estimated rather than calculated because:

“Guessing” rather than calculating order quantities and stock levels does not really matter as long as stock levels are monitored, and the chosen maximum and minimum stock levels are regularly adjusted as required. Just sticking to the order quantities, maximum and minimum levels that have been used in the past will lead to problems.

Calculating maximum and minimum stock levels is difficult when information about the use of supplies is poor. In this situation, it is acceptable to make a best guess at maximum and minimum levels, and adjust as required.

Figure 22-1: The relationship between maximum, minimum and safety stock levels over time.

Figure 22-1: The relationship between maximum, minimum and safety stock levels over time.

22-20 What is stock rotation?

As medicines that expire cannot be used and are wasted, it is important to use the oldest medicines first. Choosing a simple rule about what to take off the shelf first can do this. The oldest medicines can either be placed at the front of the shelf and new stock be placed at the back, or it can be decided to take from the right of the shelf and replace on the left.

Avoiding overstocks and using oldest stock first can reduce wastage.

22-21 What is “ward stock”, and how are types and quantities of ward stock decided?

In most hospital wards, medication is kept in a locked trolley, which is refilled according to patient prescriptions by the pharmacy. In some clinical units, for example operating theatres and emergency centres, a supply of medication is kept and dispensed by ward staff, without review of individual patient prescriptions by the pharmacist. This is more convenient for medications that need to be quickly at hand, and is necessary in smaller clinics where there is no pharmacist. However this can cause problems because medications are not under the direct control of the pharmacist, and clinical staff may be expected to manage the inventory even if they have not been trained to do this.

22-22 How can the amount of ward stock be best controlled?

Ward stock needs to be re-ordered before drugs and supplies run out, but also avoiding overstocks and expiry where possible. Appropriate minimum and maximum levels for ward stock can be estimated with the help of a pharmacist and adjusted as required.

A useful method of avoiding stock outs of ward stock is to place a card in the drawer, compartment or shelf that states the drug’s name and indicates the maximum and minimum stock levels. New orders should not be placed if the stock is at its maximum level. It is also easy to trigger a re-order when stock reaches its minimum level because staff can hand the card in to the ward or unit manager when they see the stock has reached the minimum level.

22-23 What can be done about stock outs that are out of the hands of local pharmacy staff and clinicians?

Some stock outs happen because inventory control at the provincial supply depot is poor. Stock outs related to poor management at the depot or problems with the delivery system should be taken up with managers. Clinics and district hospitals fall under the District Health System, and stock outs should be discussed with the primary care manager or the medical manager at the district office. For regional and tertiary hospitals, the problems should be discussed with the superintendent or chief executive officer. However, when management is unwilling or unable to help it may be necessary to ask for help from a civil society advocacy organisation. The Stop Stock Outs Campaign monitors stock outs of essential medicines and works together with the National Department of Health to identify underperforming districts and advocate for change. Clinicians and members of the public can report stock outs to

Case study 1

Mahloko Clinic has a reputation for regular stock outs. The community is angry and the primary care nurse has resigned and left nursing. Sr Dlamini has been asked to take over the clinic. Her first day at work is not very busy because people have stopped coming to the clinic, but she needs to find some antibiotics that are not in her drug trolley. She goes to the store cupboard and finds the store packed from floor to ceiling with drugs and disposable items in no particular order. She cannot find what she is looking for and her patient has to leave without his antibiotics.

1. Which member of the healthcare team will she need to call on for assistance?

The pharmacist or the pharmacy assistant is the team member who works with stock control and will be able to help her.

2. In smaller clinics like Mahloko, there is often no pharmacist or pharmacy assistant. Which part of the health system manages clinics in South Africa, and how can Sr Dlamini ask for help?

Clinics are a part of the district health system, and are managed from the sub-district (or sometimes district) office. Sr Dlamini will need to ask the Primary Care Manager in the sub-district office for help.

Case study 1 continued

Sr Dlamini phones her Primary Care Manager and asks for the help of a pharmacist. She is told that a pharmacist cannot be spared because they are short staffed and busy at other facilities. She then asks for a pharmacy assistant to help. Her manager agrees and the following week David a pharmacy assistant, arrives.

1. What do you think Sr Dlamini and David should do as a first step?

The first thing they should do is to make an inventory. This means finding and listing what is in the store cupboard, together with expiry dates.

Case study 1 continued

The primary care manager gives Sr Dlamini permission to close the clinic for 2 days so they can do a “stock take” and make an inventory. After much hard work, Sr Dlamini and David finish the stock take in one day. They have a large pile of medicines and disposables that have expired, and a pile of medicines and disposables that Sr Dlamini knows that she will not use. These need to be returned to the sub-district and there is quite a lot of paperwork that needs to be completed. Fortunately David is familiar with the process and offers to do it. Sr Dlamini is left with the medicines and disposables that she knows she will need, but wonders how much she should keep and how much she should send back.

1. What are the 3 factors that should be taken into account when deciding how much to keep in stock?

The 3 important factors are:

Case study 1 continued

David says that it is too early to know what the consumption will be, because he thinks that more patients will arrive when they know medicines are now available. He suggests starting with quite a large amount of the medicines Sr Dlamini will be using, and monitoring how quickly they are used. They clean and tidy the store cupboard and place the medicines on shelves with clearly marked labels, and place a new inventory list in the store room. David gains permission from the primary care manager to visit once a week to look at consumption, to decide what the maximum and minimum stock levels should be, and to help Sr Dlamini with her ordering.

1. There has been a great deal of wastage in this clinic. Do you have any tips to help Sr Dlamini reduce wastage going forward?

Not overstocking is important. Sr Dlamini can also reduce wastage by making sure that the oldest stock is used first. She can do this by making a simple rule about which part of the shelf she will take drugs from, and on which part of the shelf she will put new stock.

Case study 2

Dr Prudence is a community service doctor working in the outpatients department of St Jude’s Hospital. For the third time that afternoon, a patient brings back their folder and her prescription has “out of stock” written on it. This time, the prescription is for Rifafour, an important drug for TB treatment.

1. What should she check before going to see the pharmacist?

She should make sure that the medicines she is prescribing are still in the recommended treatment guidelines.

Case study 2 continued

Dr Prudence goes to see the pharmacist and he says that the drugs are “on order”. Dr Prudence explains that a stock out of Rifafour is very serious. She asks him to borrow from another facility so that TB patients can continue to receive their treatment. She would like to know where the problem in the supply chain is.

1. What are the possible reasons why the medication is out of stock?

There are several possibilities:

2. How could Dr Prudence find out whether this is a local problem that can be sorted out?

It is useful to ask when the order was placed. If the order was only placed within the previous week, it is likely that the pharmacist did not place the order in time. If the order was placed several weeks ago and has still not arrived, it is likely that there is a problem with the provincial depot or its delivery system. There may also be a supply problem at the national level, but the pharmacist should be aware of this and be able to communicate it to Dr Prudence together with a plan for substitute drugs.

3. The pharmacist may be able to borrow the drugs from another facility in the short term, but is there anything that Prudence can do to try to stop this happening regularly?

District hospitals fall under the district health system, and the problem can be taken up with the medical manager at the sub-district office. Dr Prudence can do this herself if there is no family physician or medical superintendent to represent her. If the management at the sub-district office is unwilling or unable to help, and if the stock out is an important one, then Dr Prudence can also report the problem to the Stop Stock Outs campaign.

4. What is governance and what is Dr Prudence’s role in health system governance here?

Governance is the setting of expected standards and outcomes, together with a system of accountability. Dr Prudence has contributed to accountability in this situation because she has identified a failure in expected standards, asked questions and can report the failure onwards.

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