The Drug Revolving Fund: Concept, Advantages and Why It Fails
9 minute read
What you will learn
- Explain the concept of a drug revolving fund
- Describe the cycle by which the fund keeps medicines available
- State the advantages of a drug revolving fund
- List the reasons why drug revolving funds fail
- Suggest how each cause of failure can be prevented
Key points
- A drug revolving fund is a scheme in which the money paid for medicines is kept in a separate fund and used to buy more medicines.
- It starts with seed capital, which pays for the first stock. After that, sales are meant to pay for the next purchase.
- Its aim is to keep common medicines available, not to make a profit.
- Advantages: it is self-accounting in theory, it encourages community self-reliance, it encourages careful use of medicines, it promotes accountability, and it improves availability.
- Funds fail when the money received does not buy back the same amount of stock, so the fund shrinks.
- The main causes are low seed capital, prices below replacement cost, unpaid medicines, delayed cash, fast expansion, theft and expiry, inflation, and poor planning.
- Price medicines at replacement cost, not at the price you originally paid.
What is a drug revolving fund?
A drug revolving fund (DRF), also called a medicines revolving fund, is a scheme that assumes that the cost of common medicines will be recovered from the people who use them, put in a separate fund, and ploughed back to buy more medicines to keep the system going.
The fund is started with seed capital, which is the money used to buy the first stock. The seed capital may come from the government, a donor, or the community. After that, the money paid for medicines is meant to pay for the next purchase, so the fund keeps revolving.
Revolving funds became widespread in Africa after the Bamako Initiative of 1987, which encouraged communities to share in the cost of primary health care. Nigerian states and health programmes have also used them to keep common medicines in primary health care centres.
The aim of a DRF is to keep essential medicines available to the community. It is not to make a profit. A DRF is unnecessary where medicines are already supplied free and reliably.
The cycle
| Step | What happens |
|---|---|
| 1. Seed capital | Money is provided to buy the first stock |
| 2. Buy | The first stock of essential medicines is bought |
| 3. Store | Stock is stored and recorded on stock cards |
| 4. Sell | Medicines are sold to patients at the agreed prices |
| 5. Collect | Cash is received and a receipt is issued for each sale |
| 6. Bank | The takings are paid into the fund's own bank account |
| 7. Re-order | The money is used to buy the next stock, and the cycle repeats |
The cycle only works if, at step 7, the money in the bank can buy as much stock as was sold. Everything about a DRF, including pricing, record keeping and security, protects that one point.
Advantages
| Advantage | Why |
|---|---|
| Theoretically self-accounting | Once started, the fund is meant to pay for itself without new outside money |
| Encourages community participation and self-reliance | People help to pay for, and often help to manage, their own medicines |
| An incentive for rational use of common medicines | When people pay, they tend to use medicines more carefully and do not waste them |
| Promotes accountability in medicines management | Separate records and a separate bank account show where money and stock went |
| Makes common medicines more available | Regular restocking means fewer stock-outs |
Other benefits often given are that the money collected can add to central government funds, that decisions are made locally, and that patients may value medicines they have paid for and so take them properly.
Limits and criticisms
A DRF is not a perfect answer, and you should know the arguments against it:
- Fees can stop poor patients from getting medicines. This is why exemptions are needed.
- Collecting and recording small payments costs money and time.
- Actual collections are often much lower than expected.
- It needs business skills that many health workers have not been trained in.
Why drug revolving funds fail
A fund fails when it loses capital, so that over time it can buy less and less stock until it runs out. These are the causes listed in the curriculum:
| Cause of failure | What happens | How to prevent it |
|---|---|---|
| Seed capital underestimated | There is not enough money to stock all the medicines needed | Work out the cost of a full stock carefully before starting |
| Prices below replacement cost | Sales do not bring back enough money to re-stock | Price at replacement cost, plus an allowance for losses |
| Payment not collected, with no subsidy | Children, the elderly and disabled people are exempt, but nobody pays for them | Decide who is exempt, estimate the cost, and arrange a subsidy to cover it |
| Delays in cash flow | Money from sales is not available when it is time to buy | Bank takings quickly and keep the fund's money where it can be reached |
| Rapid expansion | More medicines or more health units are added without more capital | Expand in step with the money available |
| Theft and loss | Medicines or money are stolen, or medicines expire or spoil | Control stock and cash, use FEFO, and store correctly |
| Inflation outstrips expectations | Medicines cost more each time they are bought | Review prices often and base them on replacement cost |
| Lack of business orientation | Money is tied up in medicines that are rarely used | Stock only what is needed, and review stock regularly |
| Poor financial planning and management | Records are missing and nobody knows the true position | Keep accurate records and report regularly |
Worked examples
How inflation shrinks a fund
A fund sells its whole stock at the price it paid, with no mark-up and no allowance for losses, and receives ₦100 000. The price of the same medicines has risen by 25%.
- Cost to re-buy the same stock = 100 000 × 1.25 = ₦125 000
- Money available = ₦100 000
- Part of the original stock that can be bought = 100 000 ÷ 125 000 = 0.8, or 80%
If prices rise by another 25% before the next cycle, the fund buys 80% × 80% = 64% of the original quantity. The fund shrinks every cycle, even though nobody has stolen anything. This is why prices must be set on replacement cost.
The cost of exemptions
A health centre expects 1 000 patients to pay ₦500 each. 20% are exempt.
- Expected collections = 1 000 × 500 = ₦500 000
- Exempt patients = 1 000 × 20 ÷ 100 = 200
- Paying patients = 1 000 − 200 = 800
- Actual collections = 800 × 500 = ₦400 000
- Shortfall = 500 000 − 400 000 = ₦100 000
The fund can only keep its capital if someone pays this ₦100 000, such as a government grant, a community subsidy, or slightly higher prices for those who can pay.
All prices and amounts in these lessons are made up to practise the arithmetic.
Exam focus
- Define a drug revolving fund in one or two sentences. Include the idea of money being 'ploughed back' to buy more medicines.
- List five advantages and five reasons for failure. The lists in this lesson follow the curriculum.
- Know that prices set below replacement cost cause the fund to shrink.
- Common mistake: describing a revolving fund as a way for the pharmacy to make a profit. Its purpose is to sustain the supply of medicines.
Quick check
Test yourself before you move on. Pick an answer to see the explanation.
1.A drug revolving fund is best described as a scheme in which:
2.Which of these is an advantage of a drug revolving fund?
3.Which of these is a reason why a revolving fund may fail?
4.A fund sells its whole stock at the price it paid, so it receives ₦100 000. The same medicines now cost 25% more. What part of the original quantity can the money buy?
5.1 000 patients are expected to pay ₦500 each. 20% of them are exempt and nobody pays for them. How much does the fund collect?