Health economic analysis of pharmaceutical inventory levels

Abstract

Purpose

Humanitarian crises increase vulnerability of children to pneumonia, so aid agencies store pharmaceuticals in advance of this demand. Decisions on how much to store are plagued by many diverse challenges as is common in humanitarian contexts, so this study considers storing more medications to improve the relatively poor (∼80) demand coverage at a representative aid agency.

Design/methodology/approach

The paper combines inventory theory with health economics to calculate the impact inventory increases would have on the final cost of pneumonia treatment. It can then assess to what extent inventory can be increased while pneumonia treatment remains cost effective.

Findings

The study finds that more drug investment has only a small effect on the final treatment cost. Substantial drug inventory increases remain well within established guidelines for highly cost-effective treatments, so the agency should consider large increases as an efficient use of funding.

Research limitations/implications

The study focuses on pneumonia treatment only to allow sufficient depth of analysis. Further research could look at many other treatments using the same approach, although some problem scenarios will include complicating parameters like drug perishability.

Practical implications

The level of pharmaceutical inventory at humanitarian warehouses is a high-value decision for the aid sector. The method shows the potential for health economics to provide practical decision support for a wide range of humanitarian and ministry of health warehouse operations. While large increases in inventory investment are within guidelines, there is an asymptotically increasing cost as demand coverage approaches 100%. As a result, decision makers may want to set a target demand coverage (e.g. 99%) and allocate remaining aid funding to other projects.

Originality/value

Many humanitarian supply chain decisions lack analytical support due to issues with complexity, scale or a lack of reliable input data, and this study is the first to provide analytical insights which can greatly improve the current approach to inventory control policies for pneumonia medications and beyond.

Citation

Ellison, P.B. and Cook, R.A. (2020), "Health economic analysis of pharmaceutical inventory levels", Journal of Humanitarian Logistics and Supply Chain Management, Vol. 10 No. 4, pp. 603-628. https://doi.org/10.1108/JHLSCM-01-2020-0001