Behind the pill:Who sets price of your medicine?

A nation’s economic progress is closely tied to the strength of its healthcare system. A robust healthcare system is a key driver of a country’s societal welfare. On this note, drawing excerpts from a panel discussion organised by the Sri Lanka Economic Association, in collaboration with the Economic Students’ Association of the University of Colombo, this article delves into the key perspectives centred around the focal theme of the pricing system in the pharmaceutical industry. 

The enlightening panel consisted of three experts: presenter Prof. Asita De Silva - Senior Professor in Pharmacology at the University of Kelaniya, discussant Dr. Herath Gunathilaka -Senior Advisor at the Centre for Poverty Analysis (CEPA) and moderator Emeritus Professor Sirimal Abeyratne - Executive Director of the CEPA.

Pricing pressure

The pharmaceutical industry has been increasingly challenged in the past as rising medicine prices have been in the spotlight, sparking controversy and debate from the wake of the Covid pandemic.

High prices impede the access of medicine. It has been highly regressive on the vulnerable groups, with the prices exacerbating the income disparities, creating long-term socioeconomic pressure.

The total expenditure on pharmaceuticals in Sri Lanka is approximately Rs.250 billion. From that, Rs.100 billion is procured by the state and Rs.150 billion by the individuals. Sri Lanka is the largest medicine buyer in Asia. The country spends 35 percent of its annual budget on medicine and has a significantly large market share in global pharmaceutical companies.

Systemic issues

In spite of high expenditure on medicines, there are constant struggles of severe limitations. Those who could afford too had to face drug shortages. Scarcity too makes the cost increase and high prices make consumers purchase less medicines than the prescribed dosages. Less utilisation leads to short life expectancy, with a high-risk transformation to diseases.

The drug approval process is lengthy and expensive. The cost stretches over years. In the balance between innovation and affordability, huge R&D costs and the challenging regulatory process make it an oligopolistic market. Investing on a new drug costs many years of research. That is the leverage to inflate the cost. There is an inelastic demand in the pharmaceutical industry. There is no choice, no bargaining power, thus the consumer relies on the pharmacist. Also, the consumer does not possess complete knowledge, due to the vast information gap.

Supply chain vulnerabilities

Eighty-five percent of the medicines in Sri Lanka are imported and the prices are mainly decided by the importers. Since most medicines are manufactured internationally, global disruptions and the local devaluation of the rupee affect the price of the medicines. The prices were heavily constrained by the forex and crippling crisis in the past. When global supply chain falls, the cost of human lives is enormous.

There is an importer monopoly, as the importer decides the cost of insurance and freight, which is free of taxes and duty. It is inflated by the agreement between the importer and the agent at point the of declaration, where there are added markup, leading to unethical practices. Staggering markups can be achieved ranging from 50 percent to 500 percent, depending on the number of brands.

The entire supply chain is leveraged. The out-of-pocket expenditure is more than 50 percent of the total value in contrast to the OECD countries, which is 18 percent. Sri Lanka is the largest medicine buyer in Asia. There is no justification to this process. Patients and healthcare providers are dependent on the pharmaceutical companies.

Regulatory hurdles

Healthcare is delivered by both public and private sectors globally. Price is one of the significant determinants in the regulatory process by the government sector. Rising medicine prices have been a global phenomenon and the prices are regulated by governments all over the world. The Sri Lankan government has imposed price controls on pharmaceuticals from time to time. Pricing formulas are introduced but not strictly implemented.

In general, competition guarantees the best market price in a market but in the pharmaceutical sector, it is different. The characteristics of perfect competition market conditions do not exist, due to controlled prices, high entry barriers, heavy product differentiation, brand positioning and lack of clarity, due to imperfect knowledge of the market. It is either a monopoly or oligopoly, which restricts competition, where a few dominant firms being price setters have significant influence over the market, leading to high concentration ratios. 

Optimisation of industry

The universal health coverage underpins the access to quality-assured medicines, without financial hardships to patients. Access to quality-assured affordable medicine is a necessity but affordability should not compromise the quality. The need of an efficient, transparent, equitable and workable price mechanism accepted by all stakeholders is vital for the health system rooted in the country. With an aging population driving up the healthcare demand and a very high burden of NCD patients, access to essential and lifesaving medicines at affordable prices, without any disruptions or stockouts, is necessary. 

How can the pharmaceutical industry be optimised to cater to the financial system today?

The government should intervene when there are monopolies, externalities, market failures implementing rational restrictions. Mechanism targeting essential and widely used products should be controlled through an MRP model for access to fairly priced medicines, minimising the malpractices of pharmaceutical companies to control output and allocation. Sometimes non-market failures, due to inefficiencies and transparency issues, too can cause instability in the health sector.

When there are market failures, the government should regulate the market, strengthen the competition and enhance capacity build up and capacity assessment to monitor the compliance. Studies on the effects of pricing are important in decision-making techno assessments, international networking with reference countries are needed for a better and healthier nation.

Corruption in the procurement process too has to be streamlined when selling low-quality drugs at high prices. Other avenues also should be considered when targeting price controls as a comprehensive package.

(Dr. Faheema Saheed is a Visiting Lecturer at the University of Colombo and a Council Member of the Sri Lanka Economic Association)

Source: Daily Mirror