Much of the special nature of markets for health care stems from the triangular relationship between the consumers, the providers of health care and the agencies that finance it or pay for it (Figure 1). Patients often do not pay directly for health care; instead they pay taxes to the government or premiums to an insurance agency which in turn channels funds to the providers. In most standard markets, prices play a central role, providing signals to both consumers and suppliers. If prices go down, consumers will demand more; if prices go up, then consumers will demand less. As patients in health care markets often do not bear the full cost of care, prices cannot perform the same central role of bringing supply and demand into balance.

Although some systems of “third party payment” exist in virtually all countries, they tend to be much less prevalent in poorer countries where consumers continue to pay for a substantial amount of health care directly out of their own pockets. Consequently the types of problems encountered in countries with substantial insurance schemes are quite different from those where such schemes have limited coverage. Where insurance is common, a key concern is often how to contain costs. In countries with very limited insurance, however, much more attention is paid to the question of affordability.

This triangular relationship exists also in the pharmaceutical market. In many cases, patients receiving drugs will not pay the full price or they will pay but then be reimbursed by an insurance scheme.

Figure 1: Consumers, payers and health care providers (adapted from [81,122])

Many reforms in OECD countries have been based on the separation of the financing and the provision of health care [34,103]. In order to improve efficiency, governments have attempted to stimulate greater competition between providers, both public and private. The state has, however, retained control over finance. Competition, rather than public or private ownership per se, is seen to be important.

A separation between financing and distribution functions is also illuminating in the pharmaceutical sector (Table 1).

Public financing includes government budgets (central, regional and local) and compulsory social health insurance programmes. Private financing includes out-of-pocket payments by individuals and households, private health insurance, community drug schemes, cooperative schemes, employers' schemes, and financing through other nongovernmental entities.

Public distribution includes wholesale distribution and retail dispensing by government-managed drug supply and health services as well as distribution through state-owned enterprises (state corporations). Private distribution includes private for-profit wholesalers and retailers, and not-for-profit essential drugs supply services.

Table 1. Systems for financing and distributing drugs

Adapted from [13]

The four quadrants of Table 1 represent four basic models of pharmaceutical financing and distribution. Each model carries inherent advantages and disadvantages.

Fully public centralized system (model 1)

Drugs are financed, procured and distributed by a centralized government unit. This has been the standard approach in many countries in Africa, Asia, Europe and Latin America.

This approach may offer insufficient incentives for technically efficient behaviour by the distributor, and the total amount spent on drugs is constrained by the government budget. On the other hand, government involvement in both financing and distribution means that fully public systems can potentially be very equitable ones and monopsony (“single buyer”) power in purchasing helps procure drugs at low cost.

Social health insurance reimbursement system (model 2)

Public funding from central budgets and social health insurance premiums is used to reimburse pharmacies or patients themselves for drugs provided through private pharmacies. This approach has been followed in recent years in many western European drug distribution systems and in North America and Australia. Publicly funded drug supply systems which are largely contracted-out to the private sector also fit into this quadrant.

The model may capture some of the benefits of the supposedly superior efficiency in distribution of the private sector, but probably at the cost of higher administrative expenditures. Limited finance may also be a problem.

User fees at government health services (model 3)

Drugs are supplied by government medical stores or state-owned wholesalers and dispensed by government health facilities, but paid for (in whole or in part) by patient fees. This was the case for a time in many former centrally-planned economies. In the 1990s, this approach is being used by China and by government health services in Africa, Asia and Latin America which have implemented user fees for drugs.

Few developing countries manage to raise substantial amounts through such user fee schemes [30], however the amounts raised may have a positive impact that is disproportionate to their size. Such schemes often have adverse implications for equity [45]. In the pharmaceutical sector a special concern is the impact on rational drug use. If providers have a direct financial incentive to prescribe more drugs, or to prescribe more expensive drugs, then this may adversely affect rational drug use.

Fully private (model 4)

Patients pay the entire cost of drugs, purchasing from private retail pharmacies and drug sellers which now exist in nearly every country in the world, accounting in some cases for over 90% of drug distribution. This fully private approach probably accounts for the majority of non-prescription drug sales. Outside market economies that have higher levels of social and private health insurance, this approach probably represents the major source of payment for prescription drugs in most countries.

The fully private system may be technically efficient, but it is therapeutically inefficient. Although the profit incentive may enable private drug suppliers to deliver drugs to the patient at low cost, there are often substantial problems with the provision of low quality drugs, inappropriate drugs and incomplete courses of treatment. These problems mean that the cost may be high for the health benefit gained. A fully private system is also likely to impede access for those with lower incomes who are unable to pay for drugs.

Mixed systems

Most countries have a combination of two or more of these models in operation. Private financing and private provision exist to a greater or lesser extent in nearly every country. With the current pluralistic approach that many countries are taking in the provision and financing of health care, different models may be found for different groups in the population. For example, fully public financing and supply may be used for the poor and for the treatment of communicable diseases, social health insurance for civil servants and those in formal employment, and the fully private model for populations and categories of drugs not covered by the other systems.