Incentives Help Bring Healthcare Products to Underserved Regions


Many existing health care solutions do not reach those most in need. Low- and middle-income countries, many of them in Africa, often cannot afford to pay for such life-saving products as malaria bed nets, viral load tests or contraceptives. 


In an article recently published in Production and Operations Management, Burak Kazaz, Steven R. Becker Professor of Supply Chain Management, and two colleagues—Scott Webster, professor of supply chain management at Arizona State University, and Prashant Yadav, professor of technology and operations management at INSEAD—examined techniques for solving this problem.  


“Our study is intended to develop an alternative financing mechanism to incentivize pharmaceutical companies to build sufficient capacity to manufacture and satisfy the needs of these particular markets,” Kazaz says. They could be used by governments or donor organizations such as the Gates Foundation. 


The authors’ model explored how four different financing schemes would perform under various conditions: An input subsidy (also known as capacity subsidy) pays a pharmaceutical company to build capacity to manufacture the product. An output subsidy (also referred to as sales subsidy), on the other hand, pays the manufacturer an amount for each unit sold. With a concessional loan, donors provide the capital for pharmaceutical companies to invest in manufacturing capability but charge a low, or even no interest rate. Finally, philanthropic organizations and governments of developed nations may use volume guarantees, committing to purchasing a minimum amount of the health product. 


 The researchers found that all four methods could be optimal under different conditions. When a country’s ability to pay is low, a sales subsidy is preferred, while a slightly higher—but still low—ability to pay requires a total-capacity subsidy. Additional results are more nuanced, with volume guarantees doing well when the manufacturer’s variable costs are low and when there is a high budget.  


“These financing schemes are important because if you let the pharmaceutical company determine the amount of capacity they will build, they will look at their profits and costs, and they set a quantity that's typically less than the socially optimal amount of products. These financing incentives encourage pharmaceutical firms to establish a production capacity that is ideal and necessary to protect communities that lack the means to pay for such health products,” Kazaz says. “It makes me extremely happy and fulfilled to work on these kinds of projects that help societies that cannot pay for the care necessary for all human beings.” 


Kazaz, B. (2023), Increasing the Supply of Health Products in Underserved Regions (with Webster, S. and Yadav, P.) Production and Operations Management. 


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