Financing: Fuel for Health Commodity Supply Chains
Well-functioning health systems enable citizens to access affordable, quality health services, medicines, and commodities. Health commodity supply chains (HCSCs) are critical to health systems, yet in many low- and middle-income countries (LMIC)s, HCSCs are weak and underfunded. These countries struggle to finance essential medicines and supplies and invest in stronger, more sustainable health systems.
Two key factors that influence government financing of HCSCs are donor support and COVID-19. Donor support has improved access to commodities, particularly for priorities such as HIV/AIDs, malaria, and family planning. But it presents challenges, too. The timing and amount of donor funding can be unpredictable, disrupting performance of HCSCs. Standalone programs can be difficult for countries to absorb and pay for themselves.
Donor funding is stagnant or declining. For example, this year the UK government, the main funder of the United Nations Population Fund (UNFPA), announced an 85% reduction ($180M) in funding for contraceptive commodities. And funding may misalign with a burden of disease increasingly from non-communicable diseases: the World Health Organization cites drug therapies for diabetes and hypertension as one of six “best buy” interventions the world urgently needs at scale to tackle non-communicable diseases.
The other factor, COVID-19, imposes new capital requirements on HCSCs to respond to the pandemic. The need for buffer stock, greater access to vaccines, and personal protective equipment (PPE) is replacing just-in-time inventory management. Changing demand for commodities (e.g., PPE) and HCSC bottlenecks inflate prices and encourage entry of fake or sub-standard products.
These trends underscore the need for countries to think differently about raising and managing resources for health commodities. Gaps in financing, from a lack of resources to inefficient allocation and use, diminish performance of HCSCs, causing shortages and waste. Ultimately, they lower resilience of the health system. Citizens lose confidence in the system, clients pay more, and health outcomes suffer.
The U.S. Agency for International Development (USAID) and other donors are responding to the changing environment. They strengthen financing for HCSCs and access to commodities by helping countries:
- Increase government spending on health, including commodities, by tapping new, sustainable sources of domestic financing
- Pool resources and reduce out-of-pocket spending through publicly-financed service provision, social health insurance, and other financing approaches
- Strengthen financial management of public resources—planning, budgeting, and program execution--used for commodities and decentralizing buying decisions
- Purchase goods and services more efficiently and with better results by, for example, paying for commodities based on outputs (e.g., stock delivered to clients) instead of inputs (e.g., warehoused stock) or using volume guarantees and other mechanisms to reduce prices for medicines
- Facilitate access to capital needed by HCSC actors.
Opportunities exist to improve financing for HCSCs within nascent and more developed health systems. A country will prioritize financing levers based on its political and economic context, HCSC maturity and characteristics, and health objectives.
Donor support is essential in countries with nascent health systems and where constraints such as political instability, limited governance, and low technical capacity prevail. In these settings, it can make sense to strengthen management of donor funds for the HCSC. In Somalia, for example, donors provide more than 90% of funds that support the country’s fragile public health system. Many funders earmark vital resources directly to recipients, bypassing the government. This fragmentation produces inequity and inefficiency due to differences, for example, in rates paid for commodities, health worker salaries, formularies, and reporting. Multiple donor initiatives present a challenge for the government to oversee and harmonize.
To address these issues, the Federal Government of Somalia collaborated with the World Bank to create the Financial Governance Committee in 2014 to improve still-nascent public financial management in the country. The committee provides a forum for the government, donors, and international financial institutions to promote financial governance. Parallel efforts by the health system, such as to bolster the health information system, are helping stakeholders oversee health programs and investments, including for the HCSC.
In countries with more resources and know-how, financing interventions often focus on strengthening the public HCSC and expanding access to commodities in the private sector. For example, in Tanzania, two projects in which Abt Associates is involved help strengthen the public HCSC: USAID’s Guidehouse-led Global Health Supply Chain-Technical Assistance (GHSC-TA) and the Abt-led Public Sector Systems Strengthening Plus (PS3+). These projects support development of interoperable financing and commodity procurement systems, which help public facilities receive direct payments and make local procurement decisions. In parallel, the Abt-led Sustaining Health Outcomes through the Private Sector (SHOPs) Plus project helped establish public-private partnerships through which private providers distribute publicly subsidized commodities for family planning and HIV/AIDs. These partnerships set the stage for larger scale contracting with programs that pay for commodities, such as Tanzania’s National Health Insurance Fund.
Credit provides a source of working capital for HCSC actors to buy and maintain stock. Donor support may target lenders and “last-mile” providers such as private pharmacies and drug shops that are a frequent first point of contact for medicines and commodities in underserved communities, as well as distributors, wholesalers, and others. In one promising approach to expand access to financing along the HCSC, lenders are experimenting with products that consider accounts receivables (of a provider, distributor, a wholesaler, or other borrower) as collateral for a loan.
In Nigeria, for instance, between 2010-2016, USAID’s SHOPS project helped three banks expand access to credit to private pharmacies and drug shops. The lending program aimed to reduce constraints on working capital needed to buy commodities and reduce frequent stockouts. By 2016, lenders disbursed more than 3,100 loans, in total exceeding $16M, with their rate of lending increasing even after the end of a USAID credit guarantee during the first three years of the program.
The experience of one of these banks, Accion Microfinance Bank, demonstrates that donor support of lending programs can catalyze longer-term financing. The number of loans made by the bank increased by 48 percent in 2017 (the first year after project support ended), and by 25 percent in 2018, for a total of $2,578,530. One bank, and later another, partnered with the Association of Community Pharmacists of Nigeria. The association vetted members to apply for loans and supported repayment, reducing risk and transaction costs for the banks.
As countries reach middle-income status and their health systems mature, they assume more financing for commodities. Some are beginning to integrate financing and provision of commodities from standalone, donor-financed programs into growing government-sponsored health insurance schemes. For example, in Vietnam, Abt is implementing USAID/President’s Emergency Plan for AIDS Relief-funded projects to increase financing for HIV testing and antiretroviral (ARV) drugs via its expanding social health insurance scheme. More efficient procurement and financing of ARVs saved $2M in 2018. Through better budget execution and by securing provincial financing commitments, Abt helped mobilize an additional $15.4M.
Similarly, in the Dominican Republic, on behalf of USAID, Abt helped the government procure, pay for, and distribute ARVs to beneficiaries of the country’s social health insurance program (Seguro Nacional de Salud, or SENASA, in Spanish). This included successfully advocating to the government to include ARVs in SENASA’s benefit package and supporting private non-governmental organizations that care for people living with HIV in efforts to contract with SENASA.
The bottom line is that financing fuels the performance of HCSCs and enables a country to advance toward universal health coverage. It is vital that governments collaborate with development partners to augment and sustain financing for health commodities while using precious resources optimally. But all stakeholders need to realize that the capacity and needs of a country’s health system, effects of the COVID-19 pandemic, and shifting donor priorities will influence new thinking about the pathway and pace by which governments assume ownership – and financing – of HCSCs.