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Health Reform and Drug Financing. Selected Topics - Health Economics and Drugs Series, No. 006
(1998; 49 pages) [French] [Spanish]
Table of Contents
View the documentAcknowledgements
View the documentExecutive summary
Open this folder and view contents1. Introduction
Open this folder and view contents2. Financing reforms
Open this folder and view contents3. Affordability and efficiency
Open this folder and view contents4. Organizational reforms
View the documentConclusions
View the documentReferences
View the documentBack Cover

Executive summary

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. This paper focuses primarily on certain financial aspects of health reform. Some attention is also given to key organizational reforms. Several related topics are not covered in this paper, but are addressed in other activities of the Action Programme on Essential Drugs. Examples of such topics include public-private roles in the pharmaceutical sector, and the impact of the World Trade Organization and associated trade agreements on access to essential drugs.

Drug financing reforms

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 industrialized 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 of 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 recognized, 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 utilization. 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 recognized that sustainability may require relatively long-term commitments by donors.

To promote beneficial drug donations and to minimize unintended problems with drug donations, interagency guidelines [40] have been published which set out core principles and twelve specific guidelines which should be followed in all drug donations.

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 exist 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.

Affordability and efficiency

The appropriate choice and use of drugs is the key to the achievement of pharmaceutical policy objectives and should lead to a greater economic efficiency in the health sector. A variety of cost-control measures have been applied at various 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.

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 industrialized countries are becoming increasingly concerned with pharmaceutical prices. With or without price controls, price transparency should be a central objective.

Organizational reforms

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

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.

Decentralization and integration in drug supply systems

Control and decision-making in health systems is increasingly being decentralized. For drugs, decentralization may improve quantification of drug requirements, inventory control, prescribing, and dispensing. But some degree of centralization 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 specialized 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.


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