Revolving drug funds: Conducting business in the public sector

Pharmaceuticals are essential for preventive and therapeutic health services. Unfortunately, significant demand, limited funds and high prices contribute to frequent shortages of drugs in many public health programs. One method for financing pharmaceutical supplies has been the establishment of revolving drug funds (RDFs) in which, after an initial capital investment, drug supplies are replenished with monies collected from the sale of drugs. All too often however, the funds actually recovered are insufficient to replenish supplies and the fund is soon depleted. In this paper we consider the potential benefits and common pitfalls of revolving drug funds and then focus on the central role of financial planning in establishing drug sales programs. Experiences from a variety of countries suggest several causes for the failure of some RDFs, including: (1) under-estimation of capitalization costs, (2) prices set below true replacement cost, frequent failure to collect payment, (3) delays in cash flow which make funds unavailable for replenishment of drug stocks, (4) rapid program expansion for which additional capital funds are not available, (5) losses due to theft and deterioration of drugs, (6) unanticipated price increases due to inflation or changes in parity rates and (7) foreign exchange purchase restrictions. Common to many of these problems is the lack of a businesslike orientation to RDFs and, in particular, lack of careful financial planning and management. Financial planning for an RDF includes four analytical tasks: 1. (1) assessment of the potential market, 2. (2) estimation of the costs of an RDF, 3. (3) establishment of the cost-recovery objectives, 4. (4) definition of the role of subsidies and surcharges. Revolving drug funds offer great potential for supplying drugs in many parts of the Third World, but they must be carefully planned and the organizers should bear in mind the pitfalls which commonly undermine these programs.