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The Case for a Global Subsidy of Antimalarial Drugs

INTRODUCTION

Subsidies of public money increase access to goods or services that, from a societal perspective, are necessary or highly desirable but would not otherwise reach intended users because of cost. In cases where the item being subsidized also produces “positive externalities” that benefit everyone, the rationale for subsidizing individual access is strengthened. Artemisinin combination therapies (ACTs) have proven effective at the indivdual level in every setting where they have been tried. Used in combination with another effective antimalarial—as opposed to an artemisinin alone—a “global public good” results from the reduced risk of early development of resistance to this class of drug. A global subsidy, therefore, benefits not only those using the drugs directly but the global community.

Without subsidies, a large proportion (in some countries, a majority) of residents of sub-Saharan Africa and the poorer malaria-endemic countries of Asia will not be able to afford appropriate courses of ACTs. Moreover, evolving patterns of use are likely to create a negative externality—an increased chance that artemisinin-resistant strains will develop and spread, to the detriment of all. To round out the arguments for a global subsidy, ACTs are cost effective by global standards, and the full subsidy has a reasonable global price tag when held against the human and economic burden of malaria.

This chapter presents the pros and cons for a global antimalarial drug subsidy, using the specific case of ACTs, the only family of drugs that



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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance 3 The Case for a Global Subsidy of Antimalarial Drugs INTRODUCTION Subsidies of public money increase access to goods or services that, from a societal perspective, are necessary or highly desirable but would not otherwise reach intended users because of cost. In cases where the item being subsidized also produces “positive externalities” that benefit everyone, the rationale for subsidizing individual access is strengthened. Artemisinin combination therapies (ACTs) have proven effective at the indivdual level in every setting where they have been tried. Used in combination with another effective antimalarial—as opposed to an artemisinin alone—a “global public good” results from the reduced risk of early development of resistance to this class of drug. A global subsidy, therefore, benefits not only those using the drugs directly but the global community. Without subsidies, a large proportion (in some countries, a majority) of residents of sub-Saharan Africa and the poorer malaria-endemic countries of Asia will not be able to afford appropriate courses of ACTs. Moreover, evolving patterns of use are likely to create a negative externality—an increased chance that artemisinin-resistant strains will develop and spread, to the detriment of all. To round out the arguments for a global subsidy, ACTs are cost effective by global standards, and the full subsidy has a reasonable global price tag when held against the human and economic burden of malaria. This chapter presents the pros and cons for a global antimalarial drug subsidy, using the specific case of ACTs, the only family of drugs that

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance would currently meet worldwide needs. It ends with a discussion of how such a subsidy might be financed. The Case for an Antimalarial Subsidy of Any Kind The Humanitarian Case: Saving Lives The primary reason for subsidizing antimalarials is to increase access to ACTs (and other drugs in the future) with the aim of reversing the recent upward trend in deaths and illness from drug-resistant falciparum malaria. Despite WHO’s recommendation that ACTs be adopted as the first-line treatment for uncomplicated falciparum malaria where drug resistance has already reached significant levels (defined as greater than 15-25 percent failure to cure in standard clinical tests), few countries of sub-Saharan Africa that meet this definition of drug failure have named ACTs as their first-line malaria treatment. The few that have made the change have done so only after securing means to finance at least the public portion of the cost for a few years (i.e., drugs sold through the private retail sector are not subsidized). Other countries have made other decisions, e.g., switching to sulfadoxine-pyrimethamine (SP), or chloroquine plus SP, as first-line treatments (both regimens are in the same price range as chloroquine), merely postponing the inevitable change to ACTs for the time being. Informally, knowledgeable individuals from endemic countries readily disclose that cost is the main factor preventing governments from switching to ACTs. Even if the prospect of funding exists, e.g., through the Global Fund, governments are wary about changing because of the uncertain sustainability of financing in the longer term. This has led to the continuing spread of chloroquine resistance to current high levels in many countries. The current dilemma clearly supports a subsidy of some type that would make the choice of adopting ACTs as first-line antimalarials a financially feasible option for countries unable to do so under existing circumstances. The fact that no country in Africa has adopted ACTs as first-line treatment without external funding indicates that widespread coverage will not be achieved across the continent without a global plan and a subsidy available to all countries. Currently, not enough money is available through the Global Fund or bilateral agencies to accomplish this. Creating a “Public Good:” Buying Time against Drug Resistance In addition to the humanitarian rationale, there is an economic rationale for international subsidies of ACTs. Treating any contagious disease creates a “positive externality” by reducing the chances that other people

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance nearby will contract the disease. In the case of malaria, this argument for public financing would justify making transfers only to governments. There is, however, an international externality: if a country does not use ACTs—in particular, if it uses artemisinins as monotherapy—the possibility that resistance will develop is much greater. The subsequent spread of artemisinin resistance—first directly to neighboring countries and then to more distant ones via migrants and travelers—is inevitable. It is therefore in the interest of the global community to maintain the efficacy of artemisinins through “universal” adoption of ACTs and to discourage monotherapies that would compromise either the artemisinins directly, or the ability of companion drugs to protect artemisinins in a combination. It is impossible to assign a dollar value to this international public good, but it must include both the ability to treat hundreds of millions of cases of malaria with these drugs (over the number of years of extra effective life produced), and potential moderation of future R&D costs for first-line antimalarials. Stimulating the ACT Market An additional rationale for a substantial international ACT subsidy is to provide the impetus needed for more generic drug manufacturers to enter ACT production, and for those already producing artemisinins to increase output. Companies have not invested in producing ACTs on the scale needed to supply Africa because there has been no assured market. Starting with cultivation of Artemisia annua, it takes about 18 months to produce a finished ACT, which currently has a 2-year shelf life. A visible, global subsidy would provide the security needed for private concerns to ramp up for African demand. Maintaining the Impetus to Develop New Antimalarial Drugs The push to develop new and better antimalarial drugs is not driven by profitability but largely by a sense of public and private sector responsibility to address a major health need that otherwise would likely be neglected. (Chapter 10 describes the recently revitalized R&D pipeline for antimalarials, largely through the Medicines for Malaria Venture [MMV], a public-private partnership.) The need is great, but demand is weak because the potential customers are among the world’s poorest people. The current situation with ACTs is just the consequence that would be expected. Without a system in place to pay for new drugs emerging from MMV (and possibly other sources), it is likely to become increasingly difficult to maintain support for R&D programs.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance Goals of a Subsidy for ACTs The broad goals of a subsidy for ACTs correspond one-to-one with the goals of this study: To ensure access to ACTs for the greatest number of patients, aiming to at least match historic access to chloroquine, which would require access in both the public and private sectors in most, if not all, countries To delay for as long as possible the development and spread of resistance to artemisinins and currently-effective partner drugs by: discouraging the use of artemisinin (and other) monotherapy for uncomplicated malaria, and encouraging use of ACTs in recommended courses. The following discussion proceeds through the arguments that lead to this report’s central recommendation: a supranational, broad subsidy of ACTs (a “global subsidy”) near the top of the distribution chain. The Case for a Global Subsidy of ACTs Under ideal circumstances, the following conditions would be met when ACTs are introduced into Africa and Asia on a widespread basis. Within a relatively short time (i.e., a few years): Full courses (i.e., doses taken once or twice a day for a total of 3 days, depending on formulation) will be taken to ensure that an individual’s current malaria infection is cured, since partial courses typically produce incomplete cure, and also increase the possibility of recurrence with drug-resistant malaria parasites. Monotherapy with either the artemisinin or the companion drug will be avoided (except in special circumstances that demand customized monotherapy treatment). (One practical benefit to individuals taking ACTs as opposed to artemisinin monotherapy is a shorter course: 3 days vs. 7 days, respectively. The main benefit to the global community is a greatly reduced probability of resistance.) ACT coverage of people with clinical malaria will be as high as possible to achieve the greatest benefit in terms of reduced morbidity and mortality. High coverage also could result in reduced transmission, at least in areas of low and moderate transmission. Whether transmission will be affected in areas of intense transmission is not yet known. A high degree of coverage will require that ACTs be made available through both public and private outlets.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance There is one other condition that ideally should be met, but which is less time-sensitive: ACTs will not be used by people whose clinical illness is not due to malaria. Use by nonaffected people has several consequences: 1) for the individual, the true cause of illness goes untreated, with whatever consequences that may entail (including also loss of confidence in ACTs); 2) in people with low level, asymptomatic malaria infections, unwarranted ACT use (particularly in partial doses) may actually enhance the development of drug resistant parasites, although this risk is probably very low;1 3) the ACT (and associated subsidy) is essentially wasted. These are the ideal conditions, but they must be approached with current conditions as a starting point. Given the existing deficiencies of health care systems and the treatment of malaria in particular, the goals are only partially achievable in the short-to-medium term. Nonetheless, the introduction of ACTs will provide immediate, major benefits in all endemic countries. A key question for this study is whether countries acting on their own could create the conditions set out above that would sustain the benefits of ACTs within their national borders. If not country-by-country, would it be possible to maintain drug efficacy regionally? But these turn out to be merely rhetorical questions, because national borders have little effect on the spread of disease or resistant strains, generally. Furthermore, the spread of malaria resistant to chloroquine and other widely used antimalarials has already occurred. Even when disease agents are not spreading, drugs move readily across borders wherever a sufficient disparity exists in availability or price. If subsidies for antimalarials were available in some countries and not others, the result could be inexpensive, nationally subsidized ACTs moving into countries that lack subsidies, or inexpensive monotherapies moving from one country in which they are available to a neighboring one where they are not. Regulatory systems and surveillance may be better in some countries than others, but weak links are bound to exist that will facilitate such transfers. Practical market realities suggest that similar access and similar prices should prevail everywhere if ACTs are to become a reliable medical staple and be reasonably protected from the premature development of artemisinin-resistant malaria. 1   Inappropriate treatment of a person with another cause of fever, who happens to have coincident asymptomatic malaria, does not encourage resistance. Even what are considered inadequate doses may be sufficient to eradicate asymptomatic parasitemias, and will contribute little or nothing to drug pressure. If the person does not have malaria at all, treatment would have no relevance to the development of resistance.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance Avoidance of Macroeconomic Distortions in Endemic Countries An issue that surfaces in discussions of a significant expansion of overseas development assistance flowing into countries is that it can lead to unintended and often detrimental macroeconomic effects. These include unfavorable effects on the currency exchange rate, imbalances among sectors in the wage structure, and the diversion of resources from intended uses to other sectors. The nature and consequences of such effects was reviewed by the Commission on Macroeconomics and Health in relation to their recommendation for a large increase in external funding for core health services (Commission on Macroeconomics and Health Working Group 3, 2002). The design of the subsidy recommended in this report should avoid these effects, to the greatest extent possible. The subsidy arrives in each country in the form of lower prices for antimalarial drugs (prices that should be similar to prices for chloroquine and SP in recent years), not as currency. No other method of subsidization would appear to be as neutral in this respect. Potential Difficulties with a Global Subsidy for Antimalarials A global subsidy for ACTs does pose some difficulties, in terms of both how ACTs are used and the way in which bilateral and multilateral aid programs are structured. Potential Negative Impacts of ACT Use If ACTs become as inexpensive to consumers as chloroquine is now, chances are they will be used as frequently as chloroquine, including overuse for febrile illnesses due to causes other than malaria. All overuse increases the probability that artemisinin-resistant parasites will arise and spread. Experience with other antimalarials suggests that resistance is less likely to develop in high-transmission areas than in low-transmission areas where people develop high parasite loads accompanied by clinical symptoms of malaria (see Chapter 9). This is not guaranteed, however. Low-priced ACTs also could dampen incentives to expand the use of diagnostic tests (traditional microscopy or rapid dipsticks) for malaria. Currently, most antimalarial use in sub-Saharan Africa follows self-diagnosis (or parental diagnosis, in the case of children) and purchase of drugs through the private sector. Even in formal health facilities, diagnosis is often based on clinical symptoms. One confounding issue is that the currently available diagnostic tests have drawbacks. Microscopy is time-consuming, and technically demanding. Present-day dipsticks are relatively

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance expensive and do not discriminate between a true clinical case of malaria and illness of another cause in someone with a chronic but asymptomatic malaria infection, which is common in high-transmission areas. Work is progressing toward appropriate rapid diagnostics for such areas, but validated tests are not yet available. Difficulties Related to International Aid Programs The main purpose of bilateral and multilateral aid is to provide benefits to nations (or groups within them) who have been identified as appropriate beneficiaries of the particular type of assistance given. A global subsidy takes away the opportunity to select beneficiaries. In the case of ACTs, this means that some nations as well as certain individuals within virtually every nation will benefit when they could afford to pay the full price or something between the fully subsidized and nonsubsidized price. Concern over Setting Precedents Concerns may arise that a global subsidy for ACTs sets a precedent for other drugs or health interventions. The main precedent would be to subsidize other antimalarials which international consensus deems should either supplant ACTs or serve as another first-line therapy. If economic conditions in endemic countries are substantially unchanged when that time comes and the new product meets appropriate cost and cost-effectiveness criteria, it would be difficult to exclude it from subsidies. On the other hand, the possibility that a global subsidy for ACTs would lead to pressure to subsidize drugs for treatment of other diseases should be a lesser concern. A few key factors related to malaria and its treatment, taken together, are unique among the major diseases. These factors are: Predominance of self-diagnosis and treatment of a life-threatening disease, with private sector drug purchasing, for an unpredictable need at the level of the individual or family Negligible market for drug in wealthier countries, so minimal opportunity for tiered pricing (particularly because ACTs are not appropriate for prophylaxis for travelers) Lack of a viable replacement for artemisinins as first-line drug Need for drug change because the historically effective drug has failed rather than extending a new medical benefit (as with the provision of long-term treatment for HIV-infected individuals); the major aim of replacing current antimalarials is to prevent further deterioration of clinical management

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance The first two points are particularly important. Taking tuberculosis and HIV as the two most important global comparator diseases, there are significant differences. Neither is commonly self-treated, and for both, the courses of treatment are long-term and predictable. The market for drugs to treat both TB and HIV are global, although the TB market is heavily weighted toward poor countries. Thus, no current disease is analogous, but one could arise in the future that has characteristics akin to malaria and ACT treatment. In such a case, the experience gained with ACTs will undoubtedly provide guidance. How Can a Subsidy Be Structured to Achieve the Goals of ACT Use? Subsidies can be structured in many ways. A major division is between “broad” and “targeted” subsidies. Broad subsidies apply equally to all members of society. In the case of ACTs, a lower (subsidized) price would be available to everyone, regardless of their income. In theory, broad subsidies can reach into the private sector; however, they often are made available only through the public sector, which deters some people from taking advantage of them. Targeted subsidies are designed to benefit particular groups within society. The main reasons for choosing to target a subsidy often relate to equity, efficiency, sustainability, and meeting community needs (Worrall et al., 2003). However, there are no standard formulas and each situation must be assessed based on the specific goals of the subsidy, the feasibility of delivering it in different ways, and the potential for unwanted effects. Whether broad or targeted, levels of subsidy can vary, with effects on consumer price that range from lowering the price by a small decrement to a full subsidy that makes the item free. The overall cost of subsidies is determined both by how broad or targeted they are and the level of the subsidy. The point at which the subsidy is applied also affects how it operates, and its costs. In the case of ACTs, the point of subsidy could be anywhere along the distribution chain, from the top (somewhere close to where the drugs are produced and first sold as finished products) to the bottom, i.e., the consumer. A consumer might receive a drug voucher for redemption at various outlets, or obtain free drugs from a public clinic or other specified outlet, with the cost differential directly channeled to the providing facility. The advantages and disadvantages of broad and targeted subsidies, and considerations specific to ACTs, are summarized in Table 3-1 (Derriennic and Mensah, 2003) and discussed below.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance Broad versus Targeted Subsidy for ACTs Wealthier individuals in every endemic country are able to afford ACTs for malaria treatment at the current retail price, which ranges between US$5 and US$20 in private pharmacies throughout Africa. The price is likely to fall over the next few years (for newer ACTs), which will expand the numbers of people with financial access. Consequently, a broad subsidy that reduces the price of the entire ACT supply will benefit some people who do not need it. This could be the basis for arguing for a targeted subsidy over a broad one on grounds of equity, efficiency, or both. Improving equity is a common objective of targeted subsidies, with the aim of redressing imbalances in access to vital goods or services, particularly for health care and food, but also in areas such as education for women (Worrall et al., 2003). If targeting is feasible, it can reduce the cost of the subsidy while at the same time concentrating it on those who would benefit most. In the case of ACTs, in areas of high transmission, young children and pregnant women are at greatest risk of death or serious consequences of malaria; in low-transmission areas, everyone who contracts malaria is at some risk of serious illness and death, including healthy adults. Considering only short-term gains in morbidity and mortality, the greatest benefits could therefore be achieved by targeting young children and pregnant women in high-transmission areas, and patients of all ages with confirmed falciparum malaria in low-transmission areas. Another important factor in deciding between broad and targeted subsidies is the proportion of the population who would be eligible for a subsidy. In the case of ACTs, we would want to know: 1) the proportion of the population who would be unable to buy the drugs without a subsidy, and 2) something about the price elasticity of demand (i.e., how demand changes with changes in prices), to determine the level of subsidy needed per dose to reach the target population. The larger the proportion of the population who would be eligible, and the larger the subsidy per dose, the closer we come to a broad subsidy covering a substantial proportion of the drug’s purchase price. If there were no administrative costs to delivering subsidies and/or negative effects of targeted subsidies, it would always make sense to target, but this is not the case. Not surprisingly, it is difficult to estimate the proportion of the population in endemic countries that would find ACTs financially inaccessible, either at current prices or at the somewhat lower prices projected over the next few years, because information is limited. However, we have estimated that in many countries in sub-Saharan Africa and some in Asia, where per capita incomes are very low, well over half of the population would be unable to afford ACTs without a subsidy, and the proportion may be substantially higher in some countries.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance TABLE 3-1 Types of Subsidy That Could Be Applied to ACTs Population to Be Reached Channel and Method Advantages BROAD SUBSIDIES Broad subsidies would have the highest total drug costs, but administrative costs are likely to be substantially lower, and coverage substantially higher, than with targeted subsidies. All endemic countries, total population (“global”) Public and private (including NGO) sectors Widest possible access created (depending on level of subsidy)   Global (supranational) level purchase or other high-level subsidy in ACT production chain Maintains existing drug flows with minimal market distortion   Supplies to public and private sectors through existing channels (withacceptance of each government for private sector access) Administrative simplicity within countries Country-specific, but covering total population within subsidized countries (national) Direct subsidy of public sector from central government to reduce drug costs in clinics and other facilities Same as above   Sale of ACTs at highest levels of private sector, including NGOs (by government?)  

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance Disadvantages ACT-Specific Issues Higher drug costs than other subsidies To meet the goal of access equal to historic levels of chloroquine access, end-user price would have to be no more than chloroquine. Requires international financing mechanisms outside the current norm To meet the goal of discouraging the use of monotherapies, the price would have to be no higher than the least expensive of the two components (the artemisinin and the companion drug). Poorest of the poor still would be excluded by cost; additional coverage would require additional targeted programs   Greatest potential for overuse of drug and increased drug selection pressure for resistance   Same as above, and: Same as above Potential for diversion to neighboring countries without subsidized ACTs  

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance total amount of ACTs needed in Asia is much less than is needed in Africa. Many of the Asian malaria-endemic countries (e.g., Vietnam, Laos, Cambodia, India) are low-income countries, but some (Thailand, China) are among the lower middle-income group. To the extent that the subsidy benefits those in the greatest need, it might be appropriate for governments of the better-off recipient nations to contribute enough to the overall subsidy to offset flows into their countries through both public and private sectors. This arrangement would have the following advantages over not offering subsidized antimalarials to these countries: 1) it would maintain low prices in both the public and private sector for end-users, many of whom are extremely poor, even in somewhat richer countries, and would find unsubsidized prices prohibitive; 2) lower-priced ACTs would undercut monotherapies (which would be cheaper if ACTs were not subsidized); and 3) it would reduce the potential for illegal importation of lower-priced ACTs from other countries. This report does not prescribe how much countries would be expected to contribute, or the administrative details of how transfers would occur. The Potential for Greater External Financing to Subsidize ACTs As a general principle, it seems likely that few, if any, African countries will be able to raise a significant share of the incremental resources required, especially during the first few years of ACT introduction and use. The implication is that endemic countries’ development partners are likely to be called upon to play a central role in mobilizing the required resources. These resources represent an important investment in better health in Africa, but also constitute, from the standpoint of those responsible for public budgets, an incremental recurrent expenditure. For this reason alone, a continuing process of national and global costing, and financial planning and monitoring is needed for ACTs, and other new antimalarial therapies. This is not a revelation, but a fact accepted by the major institutions that are already playing a role, and will play an increasing role, in paying for ACTs—namely, the World Bank, the Global Fund, USAID, and other national aid agencies. Identifying where the funds will be found, and how they will be administered pose major challenges, however; these questions have been the subject of some dissensus within the international community. A related question, also controversial, is whether the funds can be time-limited to just a few years, after which countries would be expected to absorb most of the cost. The first question is where additional funds totaling US$300-500 million per year (within 2 to 3 years) can be raised. Where the funds come from also dictates, to varying degrees, how they can be used. Potential sources of additional money for antimalarial drugs are the World Bank, and its asso-

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance BOX 3-2 World Bank Instruments and Their Potential for Use in Financing Antimalarial Drugs Traditionally, the World Bank financed malaria control programs through specific projects, or malaria components of health projects. Today, funds from such projects represent only one-fifth and one-quarter, respectively, of funds estimated currently, and potentially to be available annually from the World Bank for financing of antimalarial drugs. Other World Bank instruments that could be used include: Poverty Reduction Support Loans and Credits (PRSCs). This instrument provides nonearmarked budget support for countries’ poverty reduction strategies. The Uganda PRSC process, to give an example extending over several financial operations, provides a framework for measuring policy and institutional reforms in all service sectors, including health, and a number of cross-cutting areas, such as public procurement. The two PRSCs approved in Uganda each involved commitments of US$150 million (Elmendorf, 2003). A portion of these funds could be available for the purchase of ACTs, which can be promoted by health stakeholders within the domestic PRSC dialogue. Structural Adjustment Loans and Structural Adjustment Credits (SALs and SACs). SALs and SACs provide quick-disbursing assistance to countries to support structural reforms in one sector or the economy as a whole. They were originally intended to support macroeconomic policy reforms, but have evolved to focus more on structural, financial sector, and social policy reforms, such as establishing social protection funds. Funds are disbursed when the borrower complies with specific release conditions (usually that they not spend money on prohibited items, e.g., military and luxury items) (World Bank, 2001). The fourth structural ciated institutions, the Global Fund, and individual governments. An issue that arises with all of these sources is whether funding can be pooled in some way into the “global subsidy” outlined earlier in this chapter given the usual practice of country-specific funding, discussed below. Country-Specific versus Global Funding The World Bank and Affiliated Institutions Aid and lending institutions have a variety of instruments for transferring funds to recipients (Box 3-2). By and large, funding is specific to countries, most often (but not always) flowing through the governments for use in prescribed ways. African countries are increasingly organizing their externally funded health projects on the basis of a “sector-wide approach” (SWAp) (Cassels, 1997; Peters and Chao, 1998) rather than a series of

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance adjustment credit (US$50 million) in Guinea, for example, was used to increase accountability and efficiency in public resource use through administrative improvements (World Bank, 2002b). The Bank introduced Higher Impact Adjustment Lending in Africa in 1995, focusing on countries deemed most likely to use it effectively, and reducing conditions by about one-half (World Bank Operations Evaluation Department, 1999). Adaptable Program Loans and Credits (APLs). APLs provide phased support, over as long as a decade, to development programs at the sectoral level. They involve a series of loans, contingent on continued progress. The Guinea Population and Reproductive Health Program, e.g., has three phases. The first phase is to set frameworks and processes, and carry out activities including advocacy and health promotion campaigns, and quality assurance. If this is done successfully (based on agreed criteria), the second phase will be triggered, with a goal of reducing high-risk pregnancies by 30 percent, and achieving a national contraceptive prevalence rate of 16 percent. Continued success will trigger the third phase (World Bank, 2002b). Emergency Recovery Loans and Credits. These are used to support the restoration and reconstruction of economic, social, and physical systems after an extraordinary event such as war, civil disturbance, or natural disaster. The operations may include fast-disbursing components that finance imports needed for effective recovery. The Emergency Multisector Rehabilitation and Reconstruction Project in Democratic Republic of Congo, e.g., committed more than US$450 million from the Bank against total program costs estimated at US$1.7 billion. Health services accounted for an estimated US$154 million, with IDA financing of US$49 million planned. Contracting from UN agencies and prequalified NGOs has been agreed to for medical equipment and supplies for this LICUS country operation (World Bank, 2002a). specific projects. The SWAp leads countries toward a sector strategy and expenditure program, and away from specific projects for which funds are earmarked. The SWAp is actually a method of organizing relationships between recipients and their donor partners. A memorandum of understanding between the Ministry of Health and its development partners is a common feature, as is a movement toward “basket funding,” placing donor funds into a common account to be used by the government to achieve specific goals.2 2   The Ghana SWAp is one of the most advanced such arrangements. The World Bank has recently committed US$90 million in IDA Credit and grants in its second support for the SWAp process in Ghana. Under the Tanzania SWAp, a target of reducing the malaria inpatient case fatality rate for children under 5 from 12.8 percent (1997) to 8 percent (2011) has been included among indicators to measure progress. The government of Tanzania allocated US$10 million in IDA SWAp funds for malaria in 2003.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance The Global Fund The Global Fund supports projects within countries through grants for specific activities to control AIDS, tuberculosis, and malaria. Grants may include components for one, two, or all three diseases. One of the key principles of Global Fund grant making is that the funds are not fungible—they may not reduce or replace other sources of funding for the stated diseases or for health in general, but must add to the overall amount being spent. In fact, the Global Fund encourages countries to use the grants to leverage still greater funding from other sources. While another principle of Global Fund grants is that the work they support should “evolve from national plans and priorities,” and build upon poverty-reduction strategies and SWAps, Global Fund grants lack the fungibility that is a characteristic of those approaches (Global Fund to Fight AIDS, 2003). The Global Fund has developed a mode of operating that works through “Country Coordinating Mechanisms,” which operate at the country level, interacting with the government and other partners in funded projects. Thus far, no grants have been made (or funds otherwise disbursed) for multicountry or global projects, although this would not necessarily be prohibited. It also is the case that money coming into the Global Fund from donors is not conditioned on donor-specified requirements for spending it, e.g., on particular countries (or excluding particular countries), or in specific ways. The allocation among diseases and countries is a matter for the Global Fund, its board, and its advisors to determine. Support of a global subsidy for antimalarial drugs would be consistent with the goals of the Global Fund, even if the type of funding mechanism required does not exist at present. Bilateral Aid Agencies The U.S. Agency for International Development (USAID) and its counterparts in other countries also are potential contributors to a global antimalarial drug fund. They currently fund projects and development on a country-specific basis, and contribute to many multilateral programs (e.g., WHO, UNICEF, the Global Fund). Potential Sources and Amounts of External Funding for an Antimalarial Drug Subsidy Development cooperation in Africa is characterized by a wide range of financial modalities, terms, and sources (Dollar et al., 2001). Funds can flow from donors through central banks and finance ministries to sectoral departments such as health, which in turn contract with suppliers; or there

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance may be direct financial linkages between donors and suppliers. Large international NGOs often receive funds directly from bilateral donors, especially USAID, and have semiautonomous programs in individual countries, especially those in the LICUS (Low Income Countries Under Stress Initiative) category. Financial terms, too, vary greatly. Bilateral donors and the European Union largely provide grants to African countries. The World Bank and the African Development Bank provide long-term concessional loans through affiliates created for this purpose, the International Development Association (IDA), and the African Development Fund. Over the past several years, IDA has begun to introduce grants in five categories: 1) HIV/AIDS, 2) natural disaster reconstruction, 3) poorest countries, 4) poorest and debt-vulnerable countries, and 5) post-conflict countries. These grants represent about 20 percent of IDA funds, and more than half of the grants are in the social sectors, including 3-4 percent for HIV/ AIDS projects (International Development Association, 2003b). The introduction of a pilot program of US$450 million per year in FY04-FY05 for regional integration projects to be supported by IDA, and a set-aside of up to 10 percent in the African Development Bank, represents a strong recognition of the positive externalities of regional projects (International Development Association, 2003a). In this connection it should be noted that, to assist countries in nonaccrual status (where the Bank does not extend new financing as a matter of policy), IDA management plans to make IDA grant financing available for regional HIV/AIDS projects through a regional organization, or another country participating in the project (International Development Association, 2003b). These arrangements suggest a certain flexibility that might be exploited for antimalarial drugs. Beyond the international financial institutions, bilateral donors—including Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States—could conceivably support a global subsidy for antimalarial drugs. Finally, there are the agencies of the United Nations (such as WHO, UNICEF, and the Office of the UN High Commissioner for Refugees), the Global Fund, and the larger foundations, such as the Gates Foundation. Estimating the amount of funding currently being provided for malaria control (or specifically, antimalarial drugs), much less what might be available for subsidies, poses formidable challenges. Systematic tracking of donor expenditures on malaria programs is incomplete. Where data are available, accounting definitions vary, so comparisons are difficult. One recent effort estimated the international aid for malaria control at US$100 million annually, and argued that the sums dedicated to malaria had remained essentially unchanged since the advent of Roll Back Malaria (Narasimhan and Attaran, 2003). The external evaluation of the Roll Back Malaria

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance partnership completed in 2002 estimated external donor disbursements for malaria at US$125 million in 2002 (Feachem, 2002). A separate estimate prepared for the RBM partnership indicates that approximately US$200 million worldwide was earmarked from international and domestic resources for malaria control in 2002 (WHO/UNICEF, 2003). The IOM Committee commissioned an examination of funds that could potentially be made available for antimalarial drugs from the large international lenders and donors, by Elmendorf and Finn (Elmendorf and Finn, 2003). Where feasible, data collected from external sources were reviewed and corrected with the donor institution. However, it was not possible to obtain information from every donor, particularly European donors. To that extent, the data represent underestimates. Elmendorf and Finn estimated that approximately US$500 million per year are currently available,3 or somewhat more than US$800 million are potentially available4 to support malaria programs in Africa. Approximately US$160 million per year are estimated to be currently available for financing of antimalarial drugs, and about US$300 million to be potentially available. These funds are judged to be available overall to African countries, but are not equally available to all African countries, nor do they flow from a single source. Similarly, neither the funds defined as “available” or “potentially available” are likely to all end up being spent on malaria control, and of the malaria control expenditures, only a portion will go to drugs. The estimates of resource availabilities presented above significantly exceed earlier estimates, and the reasons for this merit exploration. First, in most cases the new data do not represent disbursements or even formal financial commitments for malaria programs. As the term implies, the data only represent funds “available” for malaria control if recipient countries make the effort needed to access and use them. 3   Available is defined as resources that are contractually committed under health sector projects that are expected to be used for malaria programs, plus resources contractually committed for a broader range of purposes that could be applied to malaria programs. This does not mean funds currently disbursed or “used” for malaria and other purposes, nor does this imply in the case of health sector projects that there is a contractual commitment to use the funds for malaria. 4   Potentially available refers to resources that could be committed for malaria under health sector projects, and resources that could be mobilized for malaria from resources currently committed for a broader range of purposes if substantial, additional efforts are made within the recipient country to mobilize and allocate the resources for malaria, and, where necessary, donor institution staff support these efforts. These are resources for which there would be stiff competition among a country’s many spending priorities.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance Second, in the case of the World Bank, the data take into account financial resources available to African countries not only under health sector investment projects (the basis of the previous estimates), but also under programmatic lending, structural adjustment and poverty reduction support credits, and emergency loans. For each of these categories, it has not been assumed, of course, that a full financial commitment might accrue to malaria programs. Estimates of the share that might be available for malaria have been made in consultation with the Bank staff concerned. This results in estimated funds currently and potentially available from the World Bank for purchase of antimalarials of US$40 and US$80 million per annum, respectively (see Box 3-2). Third, the data take into account funds available to African countries for social programs in connection with the Highly Indebted Poor Countries (HIPC) initiative for debt relief. HIPC funds currently estimated to be available for health programs in Africa on an annual basis exceed US$750 million; for malaria, HIPC resources currently and potentially available annually amount to US$190 and US$250, respectively. HIPC resources available on an annual basis for purchase of antimalarial drugs are estimated currently to be US$96 million, and potentially to be US$125 million. This, however, is the most optimistic estimate. Competition for HIPC funds among the many potential poverty-reduction uses in the social and economic sectors is strong. The likelihood of country authorities allocating this money for a high-level subsidy of the type is probably low. Fourth, the funds represent incremental foreign resources to a relatively minor extent. The bulk of the funds reported to be currently or potentially available already are largely under the control of African governments. It is impossible to estimate how much of the “available” or “potentially available” international funding could be used to support an antimalarial subsidy of the type proposed in this report. Further investigation is needed to determine exactly what next steps are necessary for this to take place. The international finance institutions are, however, a likely source of some significant portion of the requisite funding. CONCLUSION Rationale for the Subsidy The need for the widespread introduction of ACTs is immediate, but there also are immediate obstacles that must be addressed for this to happen. Some are technical—for example, the global capacity to produce artemisinin compounds is currently quite limited, and the processes for

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance making the desired ACTs (i.e., coformulations) are only now being finalized. There are no technical barriers to ramping up production of artemisinins using current technologies (and there is a real possibility of improving yields through better technology (Personal communication, W. Haddad, February 2004). There is every reason to trust that production will increase to meet demand, once the manufacturers know that there is an expanded market for their products and they have mastered the necessary coformulation processes. The demand for the raw material at that point will stimulate agricultural production through standard market forces. The main piece still missing is getting ACTs from manufacturers to consumers, most of whom will not be able to afford the free-market price (either current or expected, when prices fall). This chapter has laid out the rationale for a “global” subsidy that would be applied very high up in the distribution chain—supranationally—probably through the procurement organization (see chapter 4), or a financial organization affiliated with it. The choice is between using the current pathways for antimalarial distribution—flawed as they are—and accepting some level of misuse, or controlling the introduction of ACTs so that a large proportion of what is provided is used appropriately but, as a result, reaches a minority of the people who need them. The main reasons for a supranational (as opposed to national) approach are: To ensure that ACTs can flow easily into both the public and private sector supply chains with the least disruption of current distribution patterns To ensure access in every malaria-endemic country—rather than only those able to act quickly to organize sufficient external funding to pay for them—and internal supply systems to deliver them to the widest possible number of consumers To minimize the attractiveness of artemisinin (or other) monotherapies, by having ACTs underprice them This approach involves tradeoffs: targeted subsidies that allow greater control of the final destination of drugs means that those who do receive and use them correctly would get the greatest possible benefit. Global subsidies, on the other hand, mean that drugs will be wasted and misused. However, a drawback that the targeted subsidy would create (particularly if ACTs reach mainly the public and/or NGO sectors) is that monotherapies (including artemisinins) would undoubtedly dominate the private sector where, unsubsidized, they will be cheaper than ACTs and equally effective, at least initially. From past experience with other drugs, it is likely that monotherapies purchased through the private sector will be taken in partial

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance doses by many people, further compromising the effectiveness of artemisinins. With a global subsidy of ACTs, monotherapies could be limited in two ways: first, their unsubsidized price would be higher than that of ACTs, so the market itself would work against them. And second, the world’s manufacturers of ACTs—who also would be the manufacturers of artemisinin monotherapies—would be dissuaded from producing artemisinin monotherapies in order to benefit from the global ACT subsidy. In this way, the subsidy produces a positive externality: the protection of artemisinins (and other currently effective antimalarials) from the early development of drug-resistant malaria by essentially eliminating the use of artemisinin, and at least some other monotherapies. Countries should, of course, also use their legal authority to control the inappropriate use of monotherapies through complete or partial bans of ACT components, but the degree of control is likely to vary considerably. Regulation alone cannot be expected to succeed in this (recall the availability of many unregistered antimalarials in the examples of drug flows presented in Chapter 1). There also is a need to maintain some monotherapy use in first-line treatment and prevention. There is gathering evidence that artesunate suppositories could save children with severe malaria (which should be treated with an ACT once the child is stable), if readily available for use in the home, as well as in clinics. SP still is needed for intermittent preventive therapy by pregnant women (although in some areas, its effectiveness may be so eroded that it is no longer effective). SP is not, however, recommended as a partner drug in ACTs. The locus of concern tends toward the high-transmission areas of Africa, where the human toll is so high, but it should be remembered that widespread availability of ACTs in low-transmission areas (in parts of Asia and Latin America, as well as some parts of Africa), together with effective vector control will reduce, and could eliminate malaria, providing sustained economic and humanitarian benefit. More resources could then be concentrated on the more difficult, higher transmission areas. Changing the status quo toward more rational drug use also is a pressing goal, and one that should be pursued actively through many channels, as recommended in this report. Tying a requirement for dramatic changes in malaria treatment to a subsidy for ACTs does not, however, appear to be a feasible approach in the short term. Level of Funding Required We estimate that an annual subsidy of US$300-500 million will be needed to support affordable prices for all ACT consumers. This report does not attempt to apportion the cost of the subsidy among contributors.

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Saving Lives, Buying Time: Economics of Malaria Drugs in an Age of Resistance It does point out that funds that could be used for ACTs are available from the variety of sources that routinely support health projects. Much of the funding potentially available would be attached to specific countries. Ways to use at least some of that funding as part of a global subsidy would have to be explored. The issue of sustainability of funding for the subsidy also must be addressed. On the positive side, we can expect the global cost of ACTs to decrease, as economies of scale are reached, and expected technical improvements in the manufacturing process are made. And with very wide access to ACTs, the malaria problem may begin to shrink, further reducing the global price of treating malaria. Those economies notwithstanding, it may be unrealistic to assume that the endemic countries and their populations will, within a few years, be able to afford these drugs any more than they can now. This suggests that the global community should anticipate an ongoing, but declining, need for external funds for this purpose. Potential Sources of Funding The prospects are poor for greatly increased funding for antimalarial drugs from existing budgets of endemic countries in sub-Saharan Africa. At the same time, one of the potential objections to a global subsidy is that international development funds will benefit every country with malaria, including some with more robust economies, where the government might be able to afford a larger contribution to a subsidy for its own population. Although there are no high-income countries with substantial malaria problems, some middle-income countries would fall into this group. In general, their burdens (and therefore, demand for antimalarials) are substantially lower than those of sub-Saharan Africa, so their benefit from a subsidy would be proportionately less. Nonetheless, wealthier endemic countries could be approached to contribute directly to the global subsidy fund, amounts bearing some relation to the volume of ACTs likely to be sold in the country at subsidized prices. Data on actual consumption gathered once the subsidy is in place could be used to make adjustments. There are substantial amounts of money in various streams from the international financing institutions that could be diverted to a global subsidy for antimalarial drugs. It would remain the task of the stewards of the subsidy finances (either the procurement organization or a separate financial entity) to negotiate with the funding institutions and with individual countries to determine the mechanisms through which funds could flow to a central point.

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