IN THE early 2000s, SA was the epicentre of an important battle over the pricing of antiretroviral drugs. After suffering a major public relations defeat, several drug companies retreated and dropped prices to enable their widespread take- up. However, now that many patients are being switched to second-line drugs, the same issues are recurring, with the new drugs priced at about 10 times more than first-line drugs. Even worse, some companies have decided to avoid investing in drugs used mainly in developing countries, as they do not want to face the Hobson's choice of either selling their products at very low prices or facing criticism by activists.

This is not a problem unique to SA - every country is facing higher drug prices and companies are avoiding investing where the buyers do not offer an attractive market opportunity because of poverty. What is needed is a system in which firms are rewarded for developing valuable, life-enhancing products, while people in poor countries, and the government programmes that often pay for treatment, can afford the right drugs.

There is a way to square this circle, and it involves introducing a market mechanism into the arcane world of drug insurance.

The way the world pays for drug innovation is based on the astronomical prices of new drugs. These elevated prices do not reflect the costs of production, but the way in which the firm is rewarded for the costs of innovation. If we pay for innovation separately, companies will be in a position to sell products without a large mark-up, making drugs more affordable.

But how can we pay for innovation directly? The proposal that offers the most hope is the Health Impact Fund. Financed by many developed and developing countries, the fund would each year disburse a fixed amount, perhaps in the order of 6bn, to reward registered pharmaceutical innovations in proportion to their measured global health effects.

Any product registered with the fund would have to be sold at the cost of production, without a monopoly mark-up, everywhere in the world. Firms would recover the large costs of innovation by sharing for 10 years in the rewards paid out by the fund.

Companies would be free to choose, for each new product, whether to register it with the fund or to charge the usual lofty mark-ups.

The approach makes economic sense because it uses competition to set the reward rate. Firms would register new products with high potential health effects and would market these products so as to realise this potential. The reward rate would be self-correcting - if it fell too low, there would be a drop in product registrations.

The fund could correct the incentives inherent in our current system, since drugs would be rewarded based on measured health outcomes.

The net cost for funders would be much lower than the amount of the rewards paid out, as countries would realise enormous savings thanks to the low prices enabled by the fund.

Essentially, the fund is a restructuring of how we pay for innovative drugs, rather than just an attempt to save money. It establishes the idea that paying for pharmaceutical innovation is a task for the world community, with contributions to be based on national income, but with the benefits available for all. This is not, however, just a redistributive scheme - it recognises that once an innovation has been developed, there is no benefit in restricting its use.

According to the World Health Organisation, SA continues to suffer from colossal HIV/AIDs-related mortality - more than half of all deaths in the country can be attributed to it and there will be a continuing need for drugs to treat it. However, treatment must not be so expensive it bankrupts the country. The approach of the Health Impact Fund offers a way to make drugs affordable, while creating the right incentives for drug companies to invest in developing and distributing medicines that work.

The proposal will feature before the executive board of the World Health Organisation in May and SA has the opportunity to lead this discussion for the benefit of its people.

- Pogge is the Leitner professor of philosophy and international affairs at Yale . Hollis is professor of economics at the University of Calgary.