1. EXPERIENCES IN SOUTH AFRICA WITH THE INTRODUCTION OF PHARMACEUTICAL PRICING LEGISLATION Zokufa HZ, Pillay T Pharmaceutical Policy and Planning, Department of Health Republic of South Africa

2. Abstract Experiences in South Africa with the Introduction of Pharmaceutical Pricing Legislation Zokufa HZ, Pillay T. National Department of Health, Republic of South Africa Problem Statement: Pharmaceutical price surveys in South Africa have identified a number of flaws in the pharmaceutical market. International comparisons of private sector drug prices suggest that prices in this sector are excessively high. Perversities exist in all components of the supply chain: manufacturers, distributors, wholesalers, pharmacists, dispensing doctors, and private hospitals. Objectives: The objectives were (1) to identify the flaws in the components of the pharmaceutical supply chain; (2) to review international experiences on pharmaceutical price regulation; and (3) to develop appropriate legislation to regulate all components of the pharmaceutical supply chain. Methods: Review the results of pharmaceutical pricing surveys conducted in the South African private sector to identify the contribution of each sector to the overall price. Analyze the advantages and disadvantages of strategies employed by countries to regulate pharmaceutical prices. Results: The manufacturer’s published selling price is significantly higher than the actual selling price. The wholesaler marks the product up by 21% and then offers a discount (about 10%) to preferred clients. The pharmacist adds a theoretical markup of 50% and then offers a discount of 20–30% to private medical schemes. Private hospitals and dispensing doctors often bypass wholesalers/distributors and purchase drugs (in bulk) directly from the manufacturer. Drugs are then sold at the standard retail price to patients. The key problems are perversities associated with volume discounts, the influence of the dispensing doctors on drug use, percentage of markup for wholesalers, pharmaceutical manufacturers who establish exclusive distributors, percentage of markup for retail pharmacies, and excessive prices charged by manufacturers. Legislative interventions were designed to reduce the impact of these perversities on the market. The proposed legislation was challenged by stakeholders with vested interests in the current situation, particularly manufacturers and dispensing doctors. Conclusions: Regulation of the South African pharmaceutical market requires that interventions be directed at all major stakeholders in the supply chain. The legislative interventions were an adaptation of previous local experience and experiences from other countries. The political will to regulate the pharmaceutical market is pivotal to the entire process.

3. Identification of problem areas The research into the private sector pharmaceutical supply chain in South Africa have identified the following problems areas (illustrated in Figure 1): Manufacturer selling price is significantly higher than the state tender price and the prices in other countries of similar wealth. The manufacturers’ published price is not the “real price” at which a drug is sold - i.e. there is uncertainty about ex-manufacturer price. Wholesalers use a percentage mark-up system which in unrelated to the value of the service. Pharmacists use a percentage based mark-up system which creates incentive to sell expensive products. Dispensing doctors who purchase drugs receive large volume discounts and these are not passed onto the patient. Private hospitals also purchase drugs directly from manufacturers with large volume discounts and do not pass this onto the patient.

4. Figure 1: Pricing Survey- (WHO/HAI) Figure 1: Pricing Survey- (WHO/HAI) Amoxycillin 250mg 500’s Wholesaler markup: 34.34% R93.33 (ex VAT) Retail Markup: 41.52% R159.60 Patient Pays R161.08 Ex Manufacturer Excluding VAT: R61.19 Wholesaler sometimes offers a 10% discount and the pharmacist offers a 20 % to 30% discount. So the lowest the patient can pay is R83.21.

5. Interventions to reduce ex-manufacturer price 1.Reference pricing – drugs in a similar pharmacological class or therapeutic category are priced the same. 2.International price comparison with countries of similar wealth. Alternatively using purchasing power parity to compare prices in developed countries. 3.Mandatory generic substitution to promote local manufacturing industry. 4.Request economic analyses for selected drugs that are found to be highly priced. 5.Powers to request manufacturing and related costs related to the manufacture of drugs. 6.To “level the playing field” manufacturers have to reduce their price by 50% when the legislation is introduced. 7.Introduction of a “web-based” transparent pricing system 8.Introduction of a single exit price i.e. manufacturers have to sell their drugs to all purchasers at the same price – no price discrimination.

6. Problems with exchange rate Exchange rate is the price of one currency in terms of another. Exchange rate has been established by established by governments so it is subject to distortions from speculators. Exchange rate is based on short term factors and does not indicate anything about degree of affordability. Example: one litre of milk in Australia is (AUD$1) R5 and the price in South Africa is R5. Does this mean that milk is equally affordable by both populations? So how do we compare prices with affordability in mind? World bank uses purchasing power parity or PPP What is PPP? It estimates the value of a dollar in each country. One dollar will buy the same quantity of goods and services in all countries.

7. Purchasing Power Parity PPP IS based on the price of a basket of goods and also considers salaries, average standard of living. The World Bank has an ongoing project of developing a database of international price comparisons using PPP. Can PPP benefit a pricing committee? More reliable estimate of comparative prices. We can use prices from any country and use the PPP conversion factor Methodology has been validated by World Bank

8. Options for wholesaler fee and dispensing fee Price regulation mechanism Description Comments Cost + fixed percentageWholesalers and retailers add a fixed percentage price May encourage stocking and sale of more expensive items Cost + declining percentageThe more costly the drug, the lower the percentage markup Provides incentives to sell less expensive items Cost + fixed dispensing feeA fixed fee is paid per prescriptionReduces the incentive to prescribe or sell higher priced drugs Cost + differential dispensing fee Fee paid per prescription is higher for generic products Encourages generic prescribing Maximum allowable priceInvolves price setting of producers’ price and fixed percentage markups for distribution Individual drug prices may be limited but incentives exist for retailers to sell more expensive drugs

9. Wholesalers and distributors in South Africa Wholesalers Trade in medicine i.e. purchase drugs in large volume and then influencing purchasing by offering volume discounts. Mainly supply generic drugs. Offer frequent deliveries so pharmacies do not have to hold large stocks. Offer purchases on credit which may benefit small rural pharmacies. Distributors Manufacturers have a financial interest in these companies. Distribute mainly patented products. Do not offer credit or frequent deliveries which may disadvantage small rural pharmacies.

10. Intervention for wholesalers and distributors Fixed and declining percentage used Wholesaler and distributor Drug <R40 then add 15% to item Drug >R40 then add R6/pack of medicine If the Wholesaler purchases from the distributor then: Drug <R40 then add 2.5% to item Drug >R40 then add R1/pack of medicine Wholesaler then sells the drug at 12.5% of single exit price if exit price is R R40

11. Dispensing fee - fixed and declining percentage Pharmacists Pharmacists previously used a % mark-up system which encouraged the use of expensive drugs. The Pharmacy Council published “unit based activity” for dispensing. Pharmacists given a maximum dispensing fee of R24 per item. This fee is higher than the fee for doctors since the “stockholding risk” is higher in a pharmacy. Dispensing doctors Dispensing doctors would have to complete a dispensing course before receiving a licence to dispense. Dispensing doctors given a lower fee of R16 since the stockholding risk is much lower.

12. Transparent Pricing system Manufacturers would have to publish their selling prices on a web page. These prices are the only prices at which a manufacturer may sell a drug. Drugs prices may decrease at any time – it is anticipated that a transparent system will result in informed consumers buying the cheapest drug and this will serve a mechanism to drive down prices. Patients who are unhappy with the price they are being charged can search the web. It is also recommended that manufacturers print the recommended selling price on the patient ready pack so that patients are aware of the price and it prevents others in the supply chain from over billing.

13. Conclusion Regulation of the South African pharmaceutical market requires that interventions be directed at all major stakeholders in the supply chain. The legislative interventions were an adaptation of previous local experience and experiences from other countries. The political will to regulate the pharmaceutical market is pivotal to the entire process.