Diagnosis open: how open contracting is bringing down the cost of medicines in Chile

Chile’s largest buyer of medicines, CENABAST, bought 60% of medicines at a lower cost in 2020, saving the government an estimated $9 million. This results from a new law that allows CENABAST to deal with private pharmacies to increase purchases and set maximum retail prices to benefit citizens. The reforms were driven by a community of civil society organizations, journalists, and activists using open procurement data to identify lack of competition and conflicts of interest amplified by country-wide protests in 2019. The public pressure supported by open contracting reforms led to government officials’ resignations and improved purchasing practices and competition.

For years, families in Chile planned trips to buy cheaper medicines from other countries. Healthcare at home was too expensive: taking more than 30% of the average household’s income. The country’s dual public and private healthcare system seems to have combined many of the worst features of both, with high prices and a lack of choice. Online campaigns to raise funds to buy medicines and help finance treatments are a fact of life for citizens. 

This is the story of how reformers outside and inside the government are trying to break the cycle of high prices and boost affordable access to healthcare in Chile. They’ve done so by focusing on public procurement, how the government buys its goods and services from the marketplace. Powered by recent open contracting reforms that have increased transparency and quality of public procurement data, a community of civil society organizations have turned the spotlight on government spending, highlighting the high cost of medicines and lack of competition. They also found conflicts of interest and dubious deals in the health sector. 

As wider country-wide social protests in 2019 triggered the need for reform and slashing health-related costs, those activists found a new audience in the government. Civil society now has a seat at the table of the reforms and helps to steer them. People responsible for conflicts of interest have been held accountable. Key reforms to procurement have empowered CENABAST, the country’s central purchasing agency for medicines, to use its buyer power and market intelligence to reduce prices for citizens. 

Our analysis of the data suggests that – although it is early days – the plan is starting to work. Costs for medicines are generally coming down. The cost of Paracetamol, for example, has halved. 

The road to reform

Chile was an early leader in the world of e-procurement, starting to digitize parts of its procurement process as early as 2003. The country now has a fully digital transactional system managed by ChileCompra through its Mercado Público platform where buyers meet suppliers. 

The high-level Engel Commission, which was established in 2015 in response to a series of scandals including illegal campaign financing and procurement corruption, recommended that the system significantly increased transparency, standardization, and the quality of the information across the platform. Those recommendations formed part of the country’s open government National Action Plan that was co-created in 2016. 

While there was always a lot of information in the ChileCompra system, “the problem is that the information was intended only for the supplier and the internal user,” says Guillermo Burr from Chile Compra. A key deliverable on that plan was to publish accessible and standardized open data across the entire flow of Chile’s procurement planning and delivery through the Open Contracting Data Standard. As Burr explains: this “made the complete procurement process visible, as compared to all other available methods of accessing open data, such as APIs or Excel downloads from the open data website.” It gave ChileCompra users the freedom to analyze and explore the data. Chile began publishing OCDS data in 2018 and has been gradually expanding its coverage to the full process from planning to spending. 

Understanding the need to increase the use of the data and scrutiny of the enormous public marketplace, ChileCompra created a civil society council to work with several civil society organizations, including a working group focused on discussing open data. According to figures from ChileCompra, their efforts have been successful, increasing access to procurement data in CSV, API, and OCDS formats from 26,000 downloads in 2018 to 120,000 in 2019.

As ChileCompra’s Director Tania Perich told us, it was arduous work but now “more than 5.9 million procurement processes available in a standardized format, which helps increase the level of transparency, social control, and access.”

The new information allows for tracking the use of direct awards given without competition. Preventing these has been a key focus for organizations such as the savvy, Santiago-based Fundación Observatorio Fiscal. With the support of OCP and others, it has published a series of reports and tools to track and monitor Chilean public procurement. 

According to Jeannette von Wolffersdorff, Co-Founder of Fundación Observatorio Fiscal, the way civil society oversees government procurement processes has changed the attitude of public officials. “Public officials used to get angry and tried to make Mercado Público seem perfect. We have overcome this period, and we see that our analysis is calling the attention of other actors in the public sector.” 

Conflicts of interest and direct awards in the medical sector

Observatorio Fiscal went deep into the medicines procurement in 2019, publishing an x-ray of health spending. Their diagnosis was clear: many direct awards and a lack of competition were driving high prices. The analysis reveals that more than half of the purchases in 2018 were made via direct awards and that the number of suppliers has gone down between 2017 and 2018. A study on the medicine market by the National Economic Prosecutor’s Office (FNE by its initials in Spanish) reiterated the lack of competition, especially for generic medicines, and found that public health care reforms could save the Chilean government between US$ 290 and 855 million per year.

Direct awards had been on the rise until 2018 at CENABAST, shows an analysis by Observatorio Fiscal.

Matías Jara, a journalist who works for investigative news website CIPER, explains that there was “a lack of information and planning in the procurement processes, [so] purchases were usually made without considering the provider’s record and the information available.” 

Among the country’s top purchasers of medicines is the Central Nacional de Abastecimiento (CENABAST), the hospitals, and the country’s National Health Fund in Chile (FONASA). ‘Abastecimiento’ means ‘supply’ in English: as a decentralized institution in the Ministry of Health, CENABAST is tasked with working with government agencies and other actors in the healthcare system such as hospitals to buy better and more efficiently. 

Observatorio Fiscal’s analysis also exposed links between the key executive responsible for procurement at CENABAST and his former employer, a drug company. The company increased the value of medicines sold to CENABAST by nearly three-fold during his first year at the agency, mainly through controversial direct awards. 

Ongoing media coverage of the investigations into the alleged favoritism and overpricing contributed to his resignation. Together with the country-wide protests in the fall, it pushed the government to act. Congress passed the Ley CENABAST at the beginning of 2020, coming into effect on 6 April. The law allows private independent pharmacies to purchase medicines through CENABAST, expanding the agency’s intermediary role beyond public sector institutions such as hospitals. While CENABAST can use its market power to purchase at a lower price, local pharmacies – often in rural areas – can now take advantage of the lower costs by buying medicines directly from CENABAST. To ensure that cost savings are passed on to the people, CENABAST now fixes maximum retail prices.

CENABAST is also taking a data-driven approach to identify savings. Elías Enrique Garcés, their head analyst, explains that: “We look for maximum prices that are sufficiently attractive so that pharmacies may want to negotiate with us, and sufficiently cheap to reduce the retail price paid by citizens.”   

The institution has also set up a new feedback channel to receive requests from citizens for the inclusion of certain drugs in the institution’s purchasing “basket” and publishes an interactive list on its website that allows citizens to download detailed information about the drugs included in the law, and their maximum retail prices.

A group of researchers from Universidad de Chile has proposed strategies to further optimize CENABAST’s medicine purchases. Their report, published in December 2020, recommends using framework agreements to prequalify suppliers and run short competitions off that pool of prospective suppliers to achieve lower prices, reduce administrative costs, and provide greater flexibility managing supply chains. CENABAST is exploring managing its supply risks by buying some medicines from more than one supplier.

Early evidence of impact 

So are the changes working? Open Contracting Partnership analyzed CENABAST’s drug and pharmaceutical product contracts between January 2018 and September 2020, comparing those awarded before the reforms (in 2018-19) to those afterward (from January 2020). Our analysis focused on 387 procedures procuring 168 unique medicines bought in both periods.

Most medicines were bought only once in each period as contracts are normally for a 12-18 months supply. More medicines – just under 60% – decreased in real price (corrected for inflation) than increased or stayed the same. 

Some 31% of the medicines increased the number of tenderers, with over 56% of the medicines having at least two suppliers. 12% of medicines had 3 or 4 suppliers, meaning they changed suppliers during the period as the contracts are between 12 and 18 months long. Of the medicines with a single supplier, 43% increased in price whereas only  23% decreased in price. 

Our analysis shows that an increase of 1 tenderer reduces the price by approximately 5% on average per medicine and that medicines purchased in 2020 show a reduction of 7% on their price on average, compared to the previous period. Total savings (even accounting for the increases from some drugs) were 6.6 billion Chilean Pesos, approximately US$ 9 million. That’s about 3% of the total amount spent (210 billion Chilean Pesos), which is promising given the pandemic was raging at the same time. Further efforts to increase competition should improve these figures. 

The changes seem to indicate an increase in competition: almost two out of three CENABAST procedures are now open (62% in 2020) than 46% in 2018. Of the 60 suppliers awarded contracts in 2020, 17 hadn’t been awarded contracts in the previous period, suggesting new participants are entering the market. The majority suppliers changed too. 

Among the drugs bought at a lower price was Fingolimod, a drug for treating multiple sclerosis. The price per unit dropped almost 80% between one period and the other. Similarly with Bortezomib, a drug used to treat bone marrow cancer, CENABAST paid almost 79% less for this drug after the Act came into effect. Paracetamol was purchased at 50% of the cost. 

A detailed analysis submitted by CENABAST points to economies of scale, greater competition among suppliers, and an increase in the volume of purchases. Other factors at work can affect competition too. The patents expired on some important HIV drugs that CENABAST bought in 2019, leading to lower prices thanks to new generic suppliers entering the market.  

Some drug prices went up. Acyclovir, used for the treatment of herpes, cost the government 22% more in 2020 than in the previous year. Supply problems in the region resulted in a 5% hike in valproic acid, used to treat epilepsy, bipolar disorder, and migraines. Patents and the purchase of generica also play an important role in the availability and cost.

Tracking emergency procurement: How the COVID-19 pandemic affected public procurement

The COVID-19 pandemic has strained the health system and had a huge impact on public spending.

As a response, ChileCompra passed a directive encouraging purchasing agencies to run processes fully digitally, receiving all documents electronically and holding bid evaluation sessions remotely and supporting providers by extending deadlines. 

The Ministry of Finance and ChileCompra moved quickly to create a portal to publish and track all purchases relating to the pandemic as open data. In the words of the Deputy Secretary of the Ministry of Finance, this was to “promote a detailed knowledge of government actions, fostering greater transparency concerning resources that belong to all Chileans.” 

Journalists and civil society have been using the procurement data to keep a close watch on the government’s pandemic response. They have alerted overpriced masks, contracts for newly created companies with family links, and the challenges plaguing protective equipment procurement, including logistical issues, failed procurement processes, uncertified products, and unreliable brokers. Direct awards have been on the rise again as well. While there was a decrease in single bid tenders in 2019, from 31% in 2018 to 21% in 2019, in 2020, the proportion increased to 48%. 

As Observatorio Fiscal looks ahead, new Executive Director Paula Díaz says she will be keeping her focus on efficiency and effectiveness of public health spending. Its latest effort, developed together with another prominent NGO Espacio Público, provides a framework to regularly analyze red flags for transparency and competition by institution and by procurement process. “The platform will be a valuable tool for greater and better accountability driven by citizens, and provide an opportunity for public institutions to learn, by encouraging them to focus their attention on existing risks to introduce improvements to procurement processes and the availability of data.”

And the next sector is already in sight: as part of its plans to build back, Chile will be investing $8 billion into public infrastructure. The Ministry of Public Works has teamed up with the Chilean Chamber of Construction and Observatorio Fiscal to increase accountability in the recovery spending. “We will make relevant information on procurement processes available in sectors such as infrastructure, too, with a platform that will be launched during the first semester of this year,” says Diaz.

Citizens’ demands for better and more affordable services and works will remain in the headlines. General elections are on for November, and the country is undergoing a constitutional process. A new public procurement law promises to deepen reforms around open data providing citizens with the vital statistics to monitor changes.

We’ll continue to update around transparency and oversight to diagnose progress.