Pricing of Medicines in a Drug Revolving Fund

Why pricing decides whether the fund survives

A revolving fund lives or dies on its prices. The money from sales must be enough to buy the same stock again, plus cover whatever else the community has decided the fund must pay for. If prices are too low, the fund shrinks. If they are too high, patients cannot afford medicines.

Replacement cost and historical cost

Worked example

A pack was bought at ₦40. The supplier now charges ₦50.

• Priced at historical cost, the fund sells at ₦40 (or a little more), then has to find ₦50 for the next pack. It is ₦10 short each time.
• Priced at replacement cost, it sells at ₦50 or more, and the next pack can be bought.

Always check current supplier prices before pricing, and review prices regularly, especially when inflation is high or the exchange rate moves.

What a price must cover

Markup and margin

Both describe profit, but on different bases:

profit = selling price − cost
markup (%) = profit ÷ cost × 100
margin (%) = profit ÷ selling price × 100

Worked example

An item costs ₦80 and sells for ₦100.

• Profit = 100 − 80 = ₦20
• Markup = 20 ÷ 80 × 100 = 25%
• Margin = 20 ÷ 100 × 100 = 20%

The same profit gives two different percentages. Always check which one a question or a price list means.

Finding the selling price from a markup

An item costs ₦200 and the markup is 25%.

• Profit = 200 × 25 ÷ 100 = ₦50
• Selling price = 200 + 50 = ₦250

Equivalent shortcut: selling price = cost × 1.25 = ₦250.

Allowing for losses

Not everything the fund buys will be sold. Some stock expires, breaks or goes missing. The sales of the remaining stock must pay for all of it.

price = replacement cost ÷ (1 − loss fraction)

Worked example

The replacement cost is ₦50 per item, and 20% of stock is expected to be lost.

• Loss fraction = 20 ÷ 100 = 0.2
• Price = 50 ÷ (1 − 0.2) = 50 ÷ 0.8 = ₦62.50

Check. Buy 100 items at ₦50 = ₦5 000. If 20% are lost, only 80 are sold. 80 × ₦62.50 = ₦5 000. The fund recovers exactly what it spent.

Notice that adding 20% to the cost (₦60) would not be enough: 80 × ₦60 = ₦4 800, which is ₦200 short. The loss is 20% of the stock sold, not of the cost, so we divide, not multiply.

The better way to deal with losses is to prevent them, using FEFO, stock cards, correct storage and sensible ordering. Allowances should be small and honest, not a way to hide poor management.

Steps in pricing a medicine

1. Find the current replacement cost from the supplier.
2. Add the allowance for losses, using the division method above.
3. Add the share of running costs, if the fund aims for full plus other costs recovery.
4. Add any subsidy needed for exempt patients.
5. Round to a convenient amount.
6. Compare with what patients can pay, and agree the prices with the committee.
7. Review the prices regularly.

Worked example

Replacement cost ₦50. Loss allowance 20%. Running costs add ₦5 per item.

1. Price covering losses = 50 ÷ 0.8 = ₦62.50
2. Add running costs = 62.50 + 5 = ₦67.50
3. Round up to the next ₦5 = ₦70

The running cost per item is found by dividing the monthly running costs by the number of items expected to be sold. For example, ₦20 000 of running costs and 4 000 items sold gives ₦5 per item.

Ways of charging patients

Many schemes mix these, for example a registration fee plus a charge per item.

Exemptions

Some people, such as young children, the elderly and the very poor, may not be able to pay. A fund must decide:

• who is exempt, and how the exemption is checked;
• how much it is expected to cost;
• who will cover the cost: a government grant, a community fund or higher prices for those who can pay.

Worked example

A fund expects to supply medicines worth ₦500 000 at full price. 20% of patients are exempt.

• Value given to exempt patients = 500 000 × 20 ÷ 100 = ₦100 000
• Without a subsidy, the fund collects only 500 000 − 100 000 = ₦400 000, and loses ₦100 000 of its capital.

If the other patients must cover this, prices for them must rise by 100 000 ÷ 400 000 × 100 = 25%.

This is why exemptions should be planned and paid for. If they are not, they are a major reason why funds fail.

All prices and amounts in these lessons are made up to practise the arithmetic.