Questions related to health economics have become more and more crucial in the formulation and implementation of national drug policies. Such policies have moved from the purely technical and pharmacological to the economic and social spheres. Each component of a national drug policy -including selection, supply, quality assurance, storage and distribution, and rational use -has economic effects.

Macroeconomic changes, have an important impact in the health field, and particularly on the financing of drugs. Furthermore, the new economic policies in the drug sector may have direct consequences, as yet not clear, on access, quality and rational use of drugs. The economic dimensions of national drug policies are therefore a question of concern, not only for ministries of health, but also for all other government departments.

The relationship between the public and the private sectors is an important consideration. Markets usually allocate resources efficiently, if competitive conditions prevail. But the pharmaceutical market, if left alone, may fail and monopolistic conditions may arise.

Government action is therefore needed:

• to establish a regulatory framework that ensures efficacy, safety and quality of drugs;

• to create the incentives required to guarantee competition for the benefit of consumers and the efficiency of the economy at large;

• to negotiate with suppliers when monopolistic conditions prevail;

• to provide access to essential drugs to the whole population, and particularly to finance the needs of the poor.

Markets do not necessarily achieve equity. The public sector has a responsibility to improve the distribution of health care and drugs among social groups. Taking into account the particular socioeconomic circumstances, every government should allocate a certain amount of resources to satisfy the essential drugs needs of the poor and other target groups.

Economic strategies for drugs should be adapted to the particular needs of each country. Countries are diverse with respect to population, income levels, health expenditure and other relevant factors. National spending may vary from 2 to 400 US$ per person per year.

Countries that are small, do not have the necessary infrastructure, or experience extreme economic hardship may find it difficult to achieve a sufficiently competitive pharmaceutical market. In such instances, public supply through competitive procurement and distribution through public health networks may be necessary. International cooperation, aid and technical assistance may be required.

Organization of markets to foster competition

With adequate institutions, information and incentives, national pharmaceutical markets can be organized to promote price competition.

Rules to organize the pharmaceutical market

First the basic rules have to be established. Some of the basic rules to organize pharmaceutical markets are peculiar to the sector: drug evaluation and licensing, drug selection, quality assurance, public purchasing regulations and laws on patents and trade marks, for example.

The Uruguay Round of trade negotiations under the General Agreement on Tariffs and Trade concluded in 1994 with an important agreement on trade-related intellectual property rights (TRIPS). It establishes the obligation for all signatory countries to recognize patents on pharmaceuticals under stringent conditions, which entails a significant change in the basic rules of the markets of a number of countries. Industries in such countries, which used to produce pharmaceuticals patented in developed countries without the permission of the patent holder, will no longer be allowed to do so once the agreement is implemented. However, the agreement provides for a transitional period of 10 years and some possibilities, such as compulsory licenses, to balance the exclusive rights conferred by patents and consequent higher prices, with public health needs.

Information

More and better information is also needed to foster competition. Private and public institutions should disseminate information on the technical characteristics, prices and cost-effectiveness of medicines to physicians, pharmacists and patients.

Incentives

Incentives are devised to encourage consumers, health workers and the industry to take appropriate actions that are both economically and therapeutically beneficial. Monitoring is essential to ensure that incentives produce the intended effects. The following examples illustrate some possibilities:

Public demand for lower priced drugs can be increased by publishing information on drug prices.

Altering levels of cost-sharing can achieve a number of outcomes depending on the particular context of programmes or subsidy schemes. It may, for example, increase user awareness of cost, reduce wastage and increase the use of essential drugs compared to less useful drugs.

Methods of payment of health care providers can affect the way drugs are prescribed, dispensed, selected and used. Incentives to encourage cost-effective prescribing and a high quality of care by doctors can be designed by altering the method by which they are paid.

Drug financing options

The main principles of the economic strategy for drugs recommended by WHO are:

1. the objective of various drug financing systems must be to improve and facilitate the access of the whole population to essential drugs;

2. the responsibility and will of the State to participate in paying the national drug bill are fundamental;

3. the money saved by the selection of drugs to circulate in the country and their rational use must be one of the main sources of additional income for the purchase of drugs;

4. the allocation of an adequate percentage of the State budget to health, and consequently to drugs, must be a priority; for many countries this will require an increase in public spending for health.

Possible options of drug financing include public financing, health insurance, user charges, non-State collective non-profit-making financing, donors and international loans. In some countries the option is a pluralistic approach in which different financing mechanisms are used to serve different groups of the population.

Nevertheless, it is the responsibility of governments to ensure that drug financing mechanisms are managed in such a way as to achieve universal access to essential drugs. Health financing mechanisms may be evaluated and compared in terms of equity, efficiency, sustainability, and feasibility.

Public financing

Stable government financing through the State budget for essential drugs may be facilitated by convincing decision-makers of the importance of health for national social and economic development. As part of the regular State budget, the following are some of the options for State drug financing:

• Taxes and levies allocated to drugs

Taxes on lotteries, alcohol and tobacco consumption can yield considerable financial resources. The allocation of such income to drugs or health in general makes the idea much more acceptable to the population. To make this allocation obvious and secure, the sums concerned should pass through a fund with separate accounts.

• Local and regional authorities

Local and regional authorities can help to finance people's access to essential drugs. The funds available may be small, but since they are managed in a decentralized way they may be easier to negotiate than those from the central authorities.

• Health insurance

Insurance schemes collect premiums from individuals or their employers to pay for health expenditures incurred by the members. A major advantage of insurance schemes is that health care costs are shared by healthy and ill people alike. The experience of many countries has shown that compulsory social insurance is a necessary step to a more equitable health care system.

User charges

User charges should be seen as a complement to government financing, not a substitute. User charges for drugs at the present moment in several New Independent States, due to the very low income of the majority of the population, could drastically reduce the access to drugs of certain groups, particularly in the rural areas. Privatization of pharmacies, for example, often means that drugs have to be financed by the population, this decision, without prior analysis of the patient's ability to pay, can exclude part to the population from basic health care.

Non-State collective non-profit-making financing

Solidarity within various population groups could play an important role in financing the health services. Financing by cooperatives, State or private companies (such as railways or mines) and the community should be considered as complementary to State financing of the health services. Collective financing does not leave the financial burden on the shoulders of the patient during illness, but distributes it among other economic actors.

Donors

For some countries, economic necessity may require dependency on an external funded drug programme for a relatively long period of time. With donor drug financing, governments need to ensure that realistic transition is made to an ongoing mechanism funded through a line item in the ministry of health budget or appropriate other institutional funding mechanisms. Careful evaluation of external drug financing is needed.

International loans

Loans may contribute to long-term development of human and physical infrastructure for the health sector. However loans should not be used for financing the recurrent cost of drug supplies.