Electronic tendering of pharmaceuticals and medical devices in Chile

Abstract

The present study investigates the effect of electronic tendering on the price paid by the public sector for pharmaceuticals and medical devices in Chile. This study uses two panel regression models to analyze a data set that covers 6888 tenders for these items between 2001 and 2006, which spans 2004, the year when use of the Chilecompra electronic platform becomes obligatory. Model 1 explains the winning bid in each tender relative to the historic price, whereas Model 2 explains the winning bid relative to the concurrent price paid by drugstore chains. The regressors include variables which in the theoretical literature are indirectly associated with purchase prices (tender volume, the number of bidders and the time between tenders) and a Chilecompra dummy variable which captures the direct effect of the platform. The novel hypothesis of this paper is that e-tendering engages the market mechanism more effectively than traditional tendering, because of reduced corruption and less supplier collusion, which results in a direct platform effect. The empirical results support the volume effect. Greater aggregation of purchases leads to 2.8% lower prices. The evidence does not support the other indirect channels. More bidders result in lower prices, but the number of bidders fails to increase after Chilecompra. More frequent tendering leads to lower prices for medical devices, but tender frequency decreases after the implementation of the platform. Finally, the empirical results confirm the direct platform effect. Electronic tendering over Chilecompra leads directly to a greater than 8% reduction in prices. These results contribute to the literature on the returns to IT investments.

Introduction

Electronic procurement by corporations promises to save resources, accelerates cycle times and reduces errors. Aggregation of purchases, both within the organization and with other buyers and new tendering techniques promise to lower prices.

Governments can achieve these advantages more readily as they do not face the “penguin problem” that corporations encounter (Farrell & Saloner, 1987 as discussed in Coles & Edelman, 2011), whereby no penguin wants to be the first to dive from an ice flow for food for fear of predators. As the largest buyer in the economy, the government can force suppliers to join its marketplace, and does not have to coordinate with other buyers to achieve buying power. Academic studies do not agree on the size of price savings. Bandiera, Prat, and Valletti (2009) show massive waste in Italian public procurement which suggests a large need for performance improvement. The least efficient decile of public buyers in Italy pays 55% more than the most efficient decile for the same goods, controlling for product quality and purchase volume. If all public buyers match the performance of the most efficient decile, they can reduce public spending by 21%. Other studies are less encouraging. Pavel and Sičáková-Beblavá (2013) and Singer, Konstantinidis, Roubik, and Beffermann (2009) suggest much more modest price savings of 2.4% and 2.65%. McCue and Roman (2012) echo the more conservative sentiment.

The absence of reliable spending data for the period preceding the deployment of the electronic procurement platform limits the scope of much of this research. If purchase prices for different goods and services were available for a period before the introduction of the platform — the so called “baseline period”, one could calculate saving by comparing those prices to the prices obtained after the implementation of the platform, controlling for other variables that might affect prices.

The authors use a database of public purchases of pharmaceuticals (henceforth drugs) and medical devices in Chile between 2001 and 2006, which spans 2004, the year in which the Ministry of Finance makes use of its procurement platform, Chilecompra, obligatory for public agencies. The authors also have extensive data for other variables that can affect prices. Their model shows that e-Tendering over Chilecompra saves the government 8.3% in drug purchases and 9.1% in medical devices directly. The indirect effect of Chilecompra is to reduce purchase prices by 2.8% through greater aggregation and by 0.4% as a result of better rules.

The authors are also able to confirm two hypotheses of great interest in health economics. First, volume discounts exist for drugs and medical devices. Second, purchase prices are lower when buyers have substitution possibilities; the greater a buyer's substitution possibilities, the lower the purchase price. The next section discusses the particular context of the health care sector, followed by a discussion of the literature. The authors then explain the data, models and results, and finish with some concluding thoughts.