E-DRUG: Do price controls work? (2)
-----------------------------------
Hi all
Bonnie Fundafunda asked " do price controls work?", and suggested we pose this question to " colleagues in countries such as UK and other EU countries where for many years there was a solid retail price mechanism / control for pharmaceutical products". We should, however, be cautious about how those lessons are drawn - the setting is crucial to the applicability of many price controls, not least direct control at the producer level.
In 2000, Thulani Matsebula and I did a review of the drug pricing policy options open to a the South African government (see http://www.hst.org.za/uploads/files/chapter9_00.pdf). Here are some of the points we made (the references have been removed, but can be accessed at http://www.hst.org.za/uploads/files/refs_00.pdf):
"The options open to governments that do choose to intervene can be characterised in a number of ways. They can be either direct (primarily legal measures that have an immediate effect on suppliers or consumers) or indirect (usually market-related measures, which entail financial implications for the various actors). They may either target prices themselves (supply side measures such as price controls, positive or negative lists,c promotion of generics) or consumption (demand side measures such as exclusion from positive lists, reclassification to OTC status, introduction of patient co-payments, caps on pharmaceutical budgets). Policy options have been described as resulting in either a total control situation (as in Ecuador and Honduras), a mixed system (as in Canada), a situation of monitored freedom (as in Brazil) or total freedom (as in the US)."
"Policy instruments available to any government can be described as either:
* Producer price control measures (direct price controls, reference pricing systems, equity pricing, generic policies)
* Distribution chain cost controls (mark-ups and fixed professional fees, value-added tax)
* Bulk purchase measures (tender and negotiation strategies, regional initiatives)
* International trade agreement relief measures (compulsory licensing, parallel importing)
* Demand side measures (rational drug use, co-payments)."
In relation to direct price controls:
"The imposition of direct price control would seem to be in conflict with South Africa’s national trade and industrial practices, which are influenced to a large extent by global trends. The balance of evidence from other countries would seem to indicate that such practices, while commonly used, are complicated and cumbersome. They are easily circumvented by transfer pricing (inflation of the prices of imported raw materials), are open to political interference, and rely to a great extent on difficult to obtain industry transparency. For example, the Ecuadorian policy involved a production cost plus 20% margin for locally-produced goods, and a landed cost (CIF or ‘cost, insurance and freight’) plus operating costs plus 20% margin for imported goods. Production costs are not often easily determined, while the use of a ‘landed costs plus’ system is open to manipulation by transfer pricing."
The South African government has decided to use international reference pricing instead, but has yet to implement that. In 2004, all private sector factory-gate prices (other than to the State tender) were set at the weighted average of all 2003 private sector prices, taking into account all discounts and rebates offered. A maximal 5.2% increase was allowed in January 2007, and widely applied. However, newly launched medicines would have escaped that intervention, and launch prices would have been based on assessments of the ability to pay and the pricing of competitors. The SA Government has also instituted distribution chain cost controls, but their application has also not been simple - the plan was to replace the retail pharmacy mark-up with a professional fee, but finding the right balance has been difficult. VAT remains at 14% for all medicines. The ban on discounting or any form of incentive schemes has also proven difficult to police. The SA public sector already uses local competitive bidding (tender) as the major mechanism to ensure maximal price leverage. Although allowed by law, international tendering has not been used. The impact of tendering on the prices of single-source medicines has been mixed, with no advantage at all in the case of ARVs for which no voluntary licenses have been issued. Regional bulk purchasing arrangements, particularly with other member states of the Southern African Development Community (SADC), have often been touted, but not put into effect. Although parallel importation is also legally enabled, that has not occurred, nor have any government use or compulsory licenses been issued. Mandatory offer of generic substitution has resulted in just less than 50% of private sector prescription sales, by volume, being for interchangeable multi-source medicines. Although the public sector Standard Treatment Guidelines and EDL are not applicable in the private sector, a complementary mechanism has been created, in that the Council for Medical Schemes has provided treatment algorithms for the 26 chronic conditions which all insurers have to cover from the general risk pool. This has, to some extent, protected these third party payers from the potential impact of newly introduced and expensive medicines (such as the biological agents used in rheumatic conditions).
Regards
Andy
Andy Gray MSc(Pharm) FPS
* Senior Lecturer
Dept of Therapeutics and Medicines Management
* Consultant Pharmacist
Centre for the AIDS Programme of Research in South Africa (CAPRISA)
Nelson R Mandela School of Medicine
University of KwaZulu-Natal
PBag 7 Congella 4013
South Africa
Tel: +27-31-2604334/4298 Fax: +27-31-2604338
graya1@ukzn.ac.za or andy@gray.za.net