Managing Drug Supply Training Series, Second Edition

Participants Guide

Financing Drug Supply

Selection

Use

Management
Support

Distribution

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Procurement

Copyright 2000 by Management Sciences for Health, Inc.

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LIMITED PERMISSION TO COPY: This publication is for use as a trainers tool, and a reasonable
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This publication was made possible through support provided by the US Agency for International
Development, under the terms of cooperative agreement number HRN-A-00-92-00059-13. The opinions
expressed herein are those of the author(s) and do not necessarily reflect the views of the US Agency for
International Development.

This session is derived from Chapter 40, Drug Financing Strategies, Chapter 42, Financial
Planning and Management, and Chapter 44, Revolving Drug Funds, in Managing Drug Supply:
The Selection, Procurement and Use of Pharmaceuticals, 2d ed., revised and expanded, by Management Sciences for Health with the World Health Organization (West Hartford, CT: Kumarian Press,
Inc., 1997). Used with permission. ISBN 1-56549-047-9
To order Managing Drug Supply, contact:
Kumarian Press, Inc.
14 Oakwood Avenue
West Hartford, CT 06119-2127
US

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Telephone: (860) 233-5895

Fax: (860) 233-6072
E-mail: kpbooks@aol.com

This training module is based on materials from Managing Drug Supply, second edition. The
chapters pertaining to this module are highlighted below.
Part I
Part II
Introduction Policy and
Legal
Framework

Part III
Drug
Management
Cycle

Part IV
Management Support
Systems
Section A
Organization and
Management
Section B
Financing and
Sustainability
Section C
Information
Management
Section D
Human Resources
Management

Chapter 40: Drug

Financing Strategies
Chapter 41: Analyzing
and Controlling Drug
Expenditures
Chapter 42: Financial
Planning and
Management
Chapter 43: Donor
Financing
Chapter 44: Revolving
Drug Funds

Purpose and Content

Every country should have a strategy to make its drug supply financially sustainable. Financial
sustainability is necessary to ensure access to essential drugs and for the operation of any drug
supply system. Financial sustainability is compromised if available funds are insufficient or used
inefficiently, or if demand for drugs is excessive in comparison with supply or available
resources.
This session is oriented toward helping decision makers assess different options for health and
drug financing. In this session, you will review the factors that determine the financial
sustainability equation, analyze current funding mechanisms for essential drugs, and explore
alternative funding strategies for drugs and medical supplies, as well as the advantages and
disadvantages of each.

Objectives
After completing this session, you will be able to:

Analyze the components of the financial sustainability equation and develop a

suitable financial strategy.

Identify current options for financing essential drugs supply and evaluate the
appropriateness of each option.

Review financing mechanisms used in other countries and assess the financing
options for your own country and health system.

Preparation
Read:

Managing Drug Supply, Chapter 40, Drug Financing Strategies

Further Reading

Managing Drug Supply, Chapter 42, Financial Planning and Management

Managing Drug Supply, Chapter 44, Revolving Drug Funds

Financing Drug Supply

Topics

Introduction

The Financial Sustainability Equation

Improving Drug Supply System Efficiencies

Activity One: Sources of Drug Funding

Activity Two: Current Health and Drug Expenditures

Activity Three: Financing Options for Essential Drugs

Summary of Session

Managing Drug Supply Training Series: Participants Guide

Activity One
Sources of Drug Funding
Rationale
There are various sources for funding drug supply. You will be asked to identify the sources you
rely on in your program. This will help you better understand the kinds of programs represented
in the course and identify those with similar strengths and weaknesses in funding.
Instructions
1.

Fill in the headings of Worksheet 1: Sources of Drug Funding with the breakdown of
funding sources for your program. If you do not know the exact breakdown, you may
estimate.

2.

As other participants present their situations, make notes on your worksheet. Be prepared to
discuss your observations.

3.

Can you identify some of the implications of your funding sources?

Financing Drug Supply

Participants
Countries

Worksheet 1
Sources of Drug Funding

Total

100%

100%

100%

100%

100%

100%

100%

100%

Managing Drug Supply Training Series: Participants Guide

Sources of Drug Funding (%)

Put an approximate percentage in each box so that each row sums to 100 percent.

Activity Two
Current Health and Drug Expenditures
Rationale
This activity aims to stimulate your thinking about the current health and drug financing situation
in your program.
Instructions
1.

Divide into groups based on regions.

2.

For each statement on Worksheet 2: Current Health and Drug Expenditures, reach a
consensus on whether the statement is true or false in the context of your countries. If a
statement is false, reword it to make it true.

Financing Drug Supply

Worksheet 2
Current Health and Drug Expenditures
Reach consensus on whether these statements are true or false in the context of your countries. If
a statement is false, reword it to make it true.
True

False Dont
Know

1. Total per capita health expenditure varies hugely in the countries in

my region.

2. Total health expenditure is not related to national economic output in

my country.

3. As a share of the total, public health expenditure has increased as

national income has increased in my country in the last few years.

4. Total government spending on health as a share of gross domestic

product (GDP) was lower last year than it was the year before.

5. Total government spending on drugs as a share of GDP was lower last

year than it was the year before.

6. Insurance coverage is limited in my country but is increasing as

income increases.

7. Foreign aid is a major contributor to health expenditures.

8. Foreign aid is a major contributor to drug expenditures.

9. NGOs play a bigger role than the government in the financing and
provision of health services.

10. Per capita drug consumption varies greatly within the region.

11. Spending on drugs is approximately 1 percent of the GDP in the

countries of the region.

12. Patients pay approximately two-thirds of the drug costs in countries in

the region.

13. Expenditures for inefficient and ineffective drugs (such as

antidiarrheals) are high in countries in the region.

Managing Drug Supply Training Series: Participants Guide

Activity Three
Financing Options for Essential Drugs
Rationale
This activity should help you develop a financial strategy for making the best use of each funding
source. A drug financing strategy must consider all the efforts a country is making to improve the
use of available funds and the selection, procurement, distribution, and use of drugs. The strategy
should also advocate increased funding (from government, user fees, health insurance, and donor
assistance). It will also allow you to think about quality of care in concrete terms by identifying
important evaluation criteria.
Instructions
1.

Review and define the criteria presented in Worksheet 3: Illustrative Comparison of

Funding Mechanisms.

2.

Be prepared to comment on your observations.

Financing Drug Supply

Worksheet 3
Illustrative Comparison of Funding Mechanisms

89 f

Availability of
Essential Drugs
(Access)
8a

9m

89 g

89 g

8b

8h

:c

89 s

8j

8i

89 d

8t

8q

8n

89 e

Sustainability

89

8 needed r

:sector

8k

Administrative
Requirements

Evaluation Criteria

8l

89 p

89

Funding Mechanism

Community drug
schemes
Direct private drug
purchases
Health Insurance

8o

89

needed

Donor Financing

Equity

Social

8o

Efficiency

Private

8o

89

Appropriate Drug
Use

Managed care

89

89

Public Financing
through Government
Budgets
User Fees

Community Financing

89

Government revolving
drug funds (RDF)

Bilateral

Managing Drug Supply Training Series: Participants Guide

Development loans

Key to Worksheet 3
Illustrative Comparison of Funding Mechanisms
Key:
8
9
89
:

increases
decreases
may increase or decrease
uncertain
no change

Notes:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.

If funds are adequate

If selection and use managed properly
No special incentives to improve
Depends on taxation system
Dependent on economic growth and government revenues
Generally increases, but decreases for the poor unless waiver system in place
Fees may discourage overuse or lead to underuse; may promote overprescribing if tied to
revenue for staff
Requires supply management improvements
Higher-income people contribute more; the poor benefit if the supply is improved
Promotes local control, and targeting needy groups supports equity
Improvements require significant local management capacity
Primarily benefits urban and higher-income people
Prices create affordability problems, which often lead to inadequate doses
For population that can afford drugs
If drug benefits are included in the benefits package
Appropriate if cost controls are in place to curb inappropriate use by patients exerting
pressure on providers for drugs
Requires good management and adequate premiums
Requires fraud and abuse controls
Increased equity dependent on membership
Requires good management and sufficient members to maintain sustainability

Financing Drug Supply

10

Managing Drug Supply Training Series: Participants Guide

Slide 1

________________________________
________________________________
Managing Drug Supply
Financing Drug Supply

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_____________________

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Slide 2
Unit Objectives

________________________________

Analyze the components of the financial

sustainability equation (FSE) and the development
of a suitable financial strategy

________________________________

Identify and evaluate current options for financing

the costs of essential drugs supply

________________________________

Review alternative financing mechanisms

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________________________________

FIN 1

________________________________
_____________________

Slide 3

________________________________
Unit Outline
A.

Introduction

B.

The Financial Sustainability Equation

C.

Improving Drug Supply System Efficiencies

D.

Activity One: Sources of Drug Funding

E.

Activity Two: Current Health and Drug Expenditures

F.

Activity Three: Financing Options for Essential

Drugs

G.
FIN 2

Summary of Session

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________________________________
________________________________
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_____________________

Financing Drug Supply

11

Slide 4

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The Financial Sustainability Equation

________________________________

The financial sustainability equation (FSE) requires a

balance among:
the demand for drugs
the cost of meeting this demand
available resources

________________________________
________________________________
________________________________
________________________________

FIN 3A

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_____________________

Slide 5

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Financial Sustainability Equation

________________________________
________________________________
________________________________

If the sustainability equation is not balanced,

then shortages of essential drugs occur and
quality of care declines.
FIN 3B

________________________________
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________________________________
_____________________

________________________________

Slide 6
Components of the FSE
Demand:
availability
affordability
perceived quality
alternative choices
administrative controls

FIN 4A

________________________________
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________________________________
________________________________
________________________________
________________________________
_____________________

12

Managing Drug Supply Training Series: Participants Guide

Slide 7

________________________________
Components of the FSE, cont.
Financial Resources:

________________________________
________________________________

government financing
user fees

________________________________

social insurance
community financing

________________________________

donor financing

________________________________

FIN 4B

________________________________
_____________________

________________________________

Slide 8
Components of the FSE, cont.

Costs:
administration
purchases
personnel
operating costs

Quality of Care:
availability of drugs
selection of drugs
quality of drugs

capital

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 4C

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_____________________

Slide 9

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Options for Decision Makers
Improve efficiency
Increase financial resources

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________________________________

Reduce demand

________________________________

Accept a decline in quality of care

________________________________

FIN 5

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_____________________

Financing Drug Supply

13

Slide 10

________________________________
Examples of Supply System Efficiencies

________________________________

Selection:
fewer drugs
cost-effective choices of drugs

________________________________
________________________________

Procurement:
accurate quantification
wise buying
good prices
reduction in losses from unreliable suppliers

________________________________
________________________________

FIN 6A

________________________________
_____________________

Slide 11

Examples of Supply System Efficiencies,

cont.
Distribution:
reduce port losses
improve storage
control inventory
control theft

________________________________
________________________________
________________________________
________________________________
________________________________

Use:
standard treatments
prescription controls

________________________________

FIN 6B

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_____________________

________________________________

Slide 12
Funding Options for Essential Drugs
Public financing
(government budgets):
national government
local government

FIN 7A

________________________________

User fees:
public-sector revolving
drug funds
community drug
schemes
direct private drug
purchases (out-ofpocket purchases)

________________________________
________________________________
________________________________
________________________________
________________________________
_____________________

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Managing Drug Supply Training Series: Participants Guide

Slide 13

________________________________
Funding Options for Essential Drugs, cont.
Health insurance (prepaid health schemes):
social insurance
private insurance
managed care
community health insurance

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 7B

________________________________
_____________________

________________________________

Slide 14
Funding Options for Essential Drugs, cont.
Voluntary and other local financing:
private voluntary (PVOs)
voluntary community mechanisms
cooperatives
employer-provided health care

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 7C

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_____________________

Slide 15

________________________________
Funding Options for Essential Drugs, cont.
Donor financing:
bilateral grants
multilateral grants
Development loans:
World Bank
regional development banks

FIN 7D

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________________________________
________________________________
________________________________
________________________________
________________________________
_____________________

Financing Drug Supply

15

Slide 16

________________________________
Determinants of Public Drug Expenditures

________________________________

National economic output (GDP)

________________________________

The share of GDP collected in taxes as revenue for

government expenditures (10 to 30% in most
developing countries)

________________________________
________________________________
________________________________

FIN 8A

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_____________________

Slide 17

Determinants of Public Drug Expenditures,

cont.
Share of government spending devoted to health (3
to 10% in most developing countries)

________________________________
________________________________
________________________________
________________________________

Relative share of government health spending

devoted to recurrent operating expenses versus
long-term development

________________________________
________________________________

FIN 8B

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_____________________

Slide 18

Determinants of Public Drug Expenditures,

cont.

________________________________
________________________________

Relative share of recurrent health expenditures for

salaries, drugs, utilities, supplies, other expenses
Variations in exchange rates
Unexpected fluctuations in the national economy due
to devaluations, global changes in commodity prices,
political factors, or other events

FIN 8C

________________________________

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________________________________
________________________________
________________________________
_____________________

16

Managing Drug Supply Training Series: Participants Guide

Slide 19

________________________________
Criteria for Evaluation of Funding
Alternatives
Access: Extent to which drugs are available and
affordable
Equity: Effect on fairness or justness of distribution of
goods and services

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 9A

________________________________
_____________________

Slide 20

Criteria for Evaluation of

Funding Alternatives, cont.
Efficiency:

Relationship between quantity of resources

generated and magnitude of health impact

Sustainability: Predictability of revenue over time

Rational Use: Extent to which the system creates
incentives for the appropriate use of drugs

________________________________
________________________________
________________________________
________________________________
________________________________
________________________________

FIN 9B

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_____________________

Slide 21

Criteria for Evaluation of

Funding Alternatives, cont.
Feasibility:

Revenue source economically,

politically, administratively possible

Other Criteria: Acceptability

Community involvement
Flexibility
Stability
Health impact

FIN 9C

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Financing Drug Supply

17

Slide 22

________________________________
Illustrative Comparison of
Funding Mechanisms
FUNDING
MECHANISM

Availability of
Essential
Drugs
(Access)

Public
Financing
Through
Government
Budgets
User Charges
i Government
revolving
drug funds
(RDF)

Appropriate
Drug Use

Efficiency

Sustainability

Administrative
Requirements

________________________________
________________________________

________________________________

i Community
drug
schemes

Equity

________________________________

________________________________

FIN 10A

________________________________
_____________________

Slide 23

________________________________

Illustrative Comparison of
Funding Mechanisms, cont.
Funding
Mechanism

i Direct
private
drug
purchases
Health
Insurance
i Social
i Private

Availability of
Essential
Drugs
(Access)

Appropriate
Drug Use

Efficiency

Equity

Sustainability

Administrative
Requirements

________________________________

n
sector

r
p

________________________________

________________________________

needed

________________________________

i Managed
care

________________________________

FIN 10B

________________________________
_____________________

Slide 24

________________________________

Illustrative Comparison of
Funding Mechanisms, cont.
Funding
Mechanism

Availability of
Essential
Drugs
(Access)

Appropriate
Drug Use

Efficiency

Equity

Sustainability

Administrative
Requirements

________________________________

Community
Financing
Donor
Financing

________________________________

Bilateral
Development
loans

________________________________

yes

________________________________
________________________________

FIN 10C

________________________________
_____________________

18

Managing Drug Supply Training Series: Participants Guide

Slide 25

________________________________
Summary of Session
Complementary approaches are necessary
If essential drug supply is inadequate, the FSE is
unbalanced. Decision makers have four options:
1. improve efficiency
2. control demand
3. increase funds
4. accept a decline in quality

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 11A

________________________________
_____________________

________________________________

Slide 26
Summary of Session, cont.
Efficiency should be improved in the public and private
health sectors
When improved efficiency and demand do not balance
the FSE, there are four options for increased funding:
1. Greater government funding
2. Introducing or strengthening user fees
3. Introducing or expanding health insurance
4. Obtaining donor assistance

________________________________
________________________________
________________________________
________________________________
________________________________

FIN 11B

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_____________________

Slide 27

________________________________
Summary of Session, cont.
There are no magical solutions to the problems of
health and drug financing
The challenge is to make optimal use of each
available source of financing

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________________________________
________________________________
________________________________

FIN 11C

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________________________________
_____________________

Financing Drug Supply

19

Slide 28

________________________________
Summary of Session, cont.

________________________________

Success depends on:

political commitment
adaptation of financing mechanisms to local
circumstances
good leadership and management
modification of financing systems based on
experience

________________________________
________________________________

Equity of access, quality of drugs, and rational use are the

key objectives for any financing strategy
FIN 11D

________________________________
________________________________
________________________________
_____________________

20

Managing Drug Supply Training Series: Participants Guide