Essential Drugs Monitor No. 025-026 (1998)
(1998; 36 pages) [French] [Russian] [Spanish] View the PDF document
Table of Contents
Close this folderEditorial. Managing Drug Supply
View the documentHealth reform and drug financing
View the documentHow “topping-up” improved drug management at a small clinic in Ghana
View the documentGood drugs at low cost: Thailand’s provincial collective bargaining system for drug procurement
View the documentDrug supply choices: what works best?
View the document“Contracting-out” drug procurement and distribution: experience with a primary distributor system in South Africa
View the documentImproving the supply, quality control and access to essential drugs in Guatemala
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Open this folder and view contentsRational Use

Health reform and drug financing

HEALTH sector reform is a process aimed at improving equity, quality and efficiency in the health sector through changes in the organization and financing of health services. In this context, the role of WHO today is to explore and promote ways of organizing health services which respond better to the objectives of equity, quality and efficiency.

Nearly every aspect of national drug policy and pharmaceutical sector development is directly or indirectly affected by health reform initiatives. An addition to DAP’s Health Economics and Drugs Series1, which is summarised here, focuses primarily on certain financial aspects of health reform.

1 WHO/DAP. Health reform and drug financing: selected topics. Health Economics and Drugs Series No.6. Geneva: World Health Organization; 1998. WHO/DAP/98.3.


Governments have the responsibility to ensure that drug financing mechanisms are managed in such a way as to achieve equity of access to essential drugs. Financing mechanisms include public financing, health insurance, user fees, donor financing and development loans.

Public financing

Some public spending will always be needed to ensure access to drugs by the poorest in society; to ensure provision of drugs for tuberculosis, sexually transmitted diseases and other communicable diseases; and to ensure care for target groups, such as mothers and children. As a share of national economic output (GNP), public spending on health in developing countries is one-quarter to one-half that of industrialised countries. Health financing reform should improve the use of public resources, but it should not be aimed to further reduce public spending on health.

The level of public commitment for financing health care and drugs should be a matter of explicit public policy, based on an analysis of health care needs and financing options. Policy makers, managers responsible for health care financing, and essential drugs managers should be familiar with the methods for analysing public financing for drugs and for planning public expenditures for drugs.

Health insurance

Formal health insurance and various informal community insurance programmes represent a growing source of health and drug financing in transitional and developing countries. The experience of many countries has shown that compulsory social insurance can be the critical step to a more equitable health care system. It must be recognised, however, that some developing countries will have difficulties in implementing widespread insurance coverage in the short-term for a number of reasons, including limited formal employment and weak state mechanisms.

There are benefits in providing pharmaceutical coverage together with health coverage although challenges, such as difficulties in tracking prescriptions, exist. Policy makers and managers need to be fully informed about the value of insurance coverage, alternative mechanisms for providing pharmaceutical benefits, and methods to ensure quality of care, while controlling costs.

User charges

User charges are increasingly being implemented by governments and local communities in countries at all levels of development, both to supplement general government revenues or insurance premiums, and to help control use (see Box 1). Often, however, such programmes have not learned from past experiences, are not well managed, and, as a result, access shows no improvement, revenue replaces rather than supplements government funding, and drugs are overprescribed.

User fees can complement government allocations for pharmaceuticals, but should not replace them. Future efforts need to ensure that the lessons from existing research and actual experience are applied to the design, implementation and monitoring of user fee programmes to ensure that access to drugs does improve, and that rational use does not suffer. When fee mechanisms are instituted at a national level, a top-down approach, starting with major national and local hospitals, may have advantages in terms of equity, reinforcement of the referral system, revenue potential, administrative capacity and impact evaluation.

Donor financing and drug donations

Donor financing includes bilateral and multilateral grants. For some countries, internal financing mechanisms for drugs may prove insufficient, even after reforms, and therefore external funding can prove invaluable to relieving immediate human suffering and can allow countries to develop long-term solutions.

The challenge with all external financing, but particularly when it involves the financing of recurrent costs, is to not allow this to substitute for efforts by countries to develop sustainable financing mechanisms. Transitions from external mechanisms to internal mechanisms need to be incorporated in assistance plans from their conception. But it should be recognised that sustainability may require relatively long-term commitments by donors.

To promote beneficial drug donations and to minimise unintended problems with drug donations, interagency guidelines2 have been published which set out core principles and 12 specific guidelines which should be followed in all drug donations.

2 WHO/DAP. Guidelines for drug donations. Geneva: World Health Organization; 1996. WHO/DAP/96.2.

Development loans

Development loans through the World Bank and regional development banks may contribute to long-term development of the human and physical infrastructure for the health sector. However, loans generally should not be used for financing of the cost of drug supplies, as these represent recurrent expenses. There can be certain exceptions to this which may justify the use of loans for procurement (e.g. seeding of revolving drug funds). As with donor financing, conditions associated with development loans should not distort national drug policies defined by governments.


The appropriate choice and use of drugs is the key to the achievement of pharmaceutical policy objectives and should lead to greater economic efficiency in the health sector. A variety of cost-control measures have been applied at different levels within public and private drug supply systems. The appropriateness of different measures varies with the particular health system.

Affordability of drugs for consumers is a public health concern. Private expenditures for pharmaceuticals in developing countries typically account for 50 to 90% of all spending on drugs. Even for rural populations and the urban poor, the most common source of drugs is direct out-of-pocket purchase from the private market.

Use of generic drugs and price controls are the two most commonly pursued mechanisms to promote affordability. Generic competition with price information is effective in this regard. But generic drug markets have grown very slowly in most countries. The strength of public policy commitment to generic drugs is a major determinant of the growth of generic markets. Four essential factors for success appear to be supportive legislation and regulation, reliable quality assurance, professional and public acceptance, and economic incentives (see Box 2).

Various mechanisms exist to control producer prices and distribution margins. Wholesale and dispensing margins based on cost plus a fixed professional fee provide a better incentive for rational dispensing than margins based only on a percentage. The effects of pharmaceutical price controls have been mixed. Paradoxically, a number of developing countries are relaxing price controls on drugs, while governments in industrialised countries are becoming increasingly concerned with pharmaceutical prices. With or without price controls, price transparancy should be a central objective.


Reforms to financing systems cannot be made without organizational reforms that should match the structure of the public and private sectors to their responsabilities in fulfilling policy objectives. Changes may include incorporation of competitive mechanisms within the public sector, decentralisation of health service provision, and a greater role for NGOs and other non commercial “third sector” entities.

Box 1

Observations from user fee experiences in Africa

Revenue generation

In 34 countries with user charges (out of 39 surveyed), the revenue generated by these fees was generally a very small share of public recurrent health expenditures (almost always less than 10%). However, for some of the systems which have remained in place over several years, modest improvements in this percentage have been observed.

Recovery of funds

Of the community drug funds operating in 17 Sub-Saharan African countries (Benin, Chad, Niger, Sierra Leone, and Zaire are some examples), the success rate for the recovery of funds was about 50% with positive margins ranging from 49 - 83% (depending on the margin type).

Experiences of the Central African Republic indicate that public health centres which were self-managed, controlled their own drug sales, and had fees for all services, had higher cost-recovery rates than centres which did not exert as much control over drug sales and offered a range of free services.

Utilisation of facilities and quality of care

Demand for community health services which have user fees does seem to increase if quality, as measured by the availability of drugs, also increases. This is particularly true if accessing the next best care alternative involves significant time and travel costs.

However, because user fees do not always succeed in making drugs more available, and other factors are also involved in utilisation, decreases in use of health facilities are also frequently observed. Utilisation of community health centres, after the adoption of revolving drug funds, was noted to have increased in seven countries, and to have decreased in four.

Equity and affordability

Studies of health care use following the charging of fees show that the poor are more likely than other segments of the population to treat price increases as deterrents to accessing services.

Of 25 Sub-Saharan countries with cost recovery programmes, it appears that only one (Zimbabwe) had an official policy specifying national income ceiling criteria which would allow exemptions for the poor. Fourteen other countries indicated that exemptions for the indigent are permitted but did not provide criteria. The remaining 10 countries relied primarily on local and ad hoc measures for providing exemptions.

Exemptions based on income are difficult to formulate and implement where formal employment is limited. In some countries, the fairness of certain exemption policies remains questionable. Therefore, equity remains a critical issue. Easy-to-use, reliable methods for determining exemptions in mechanisms charging user-fees are not readily available.

Sources: Shaw PR, Ainsworth M. Financing health services through user fees and insurance. World Bank discussion paper No. 294, 1996.

WHO/SHS. Experience with organizational and financing reform in the health sector. Geneva: World Health Organization; 1995. WHO/SHS/CC/94.3.

Competitive mechanisms in public drug supply

Alternative drug supply strategies for public drug supply include the traditional central medical stores system, autonomous supply agencies, the direct delivery system, the prime vendor system and fully private supply. Several of these systems involve different public-private roles and rely on greater competition to improve efficiency.

The practical results of different mechanisms for public drug supply have yet to be clearly documented. Governments seeking to improve efficiency in public drug supply should do so with the knowledge that a number of options exist and that success depends not only on choosing an appropriate option, but also on the way in which the option is implemented.

Decentralisation and integration in drug supply systems

Control and decision making in health systems is increasingly being decentralised. For drugs, decentralisation may improve quantification of drug requirements, inventory control, prescribing and dispensing. But some degree of centralisation may still be required for functions such as drug registration, development of essential drugs lists and standard treatments, quality assurance and bulk tendering.

Efforts are also being made in some countries to integrate supply systems for family planning, tuberculosis control, and other “vertical” programmes into essential drugs programmes. Resource-intensive functions such as procurement, quality assurance, storage and physical distribution may be integrated under the essential drugs programme, while financing, quantification of needs and monitoring may remain under the management of the national control programme.

Role of the “third sector”

Discussions of public and private roles in the pharmaceutical sector should not ignore the vital role of the “third sector”. This includes NGOs’ health services, not-for-profit essential drugs supply agencies, professional associations, consumer groups, and specialised NGOs such as some national pharmacopoeial organizations.

Recently some governments have explored ways of carrying out “public” functions such as standard-setting or quality control testing through innovative arrangements with third sector institutions. The various roles played by the third sector should be clearly acknowledged by policy makers, and ways to best support and involve the sector should be explored.

Health Reform and Drug Financing: Selected Topics is available, free of charge, from: Action Programme on Essential Drugs, World Health Organization, 1211 Geneva 27, Switzerland.

Table 1

Public health and drug expenditures for selected countries

Total public health expenditures

Total public drug expenditures

as % GNP

per capita

as % health budget

per capita





















India (Andhra Pradesh)















Sri Lanka










Viet Nam










Source: WHO/DAP. Public - private roles in the pharmaceutical sector. Geneva: World Health Organization; 1997. Data are from the most recent year available, generally in the early 1990s. Figures from Chad, Colombia, Sri Lanka and Viet Nam are still considered preliminary.

Box 2

Mechanisms for promoting generic drug use

Supportive legislation and regulation

• abbreviated registration procedures (focus on drug quality)
• product development and authorisation during patent process
• provisions which permit, encourage, or require generic prescription and substitution
• requirement that labels and drug information contain generic names

Reliable quality assurance capacity

• development of substitution, non substitution lists
• procedures to demonstrate bioequivalence
• national quality assurance capability
• national drug manufacturer and drug outlet inspection capability

Professional and public acceptance

• involvement of professional associations in policy development
• phased implementation, beginning with permission to substitute
• required use of generic names in all education and training of health professionals
• brand-generic and generic-brand name indexes available to health professionals
• required use of generic names in clinical manuals, drug bulletins, and other publications
• widespread promotional campaigns targeting consumers and professionals

Economic incentives

• public and professional price information
• reference pricing for reimbursement programmes
• retail price controls that favour generic dispensing
• support by social and private health insurance organizations
• incentives for generic drug industry
• trade-offs with industry (reduced price regulation, increased patent protection)

Source: WHO/DAP. Public-private roles in the pharmaceutical sector. Geneva: World Health Organization; 1997. WHO/DAP97.12.

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