Allow market to dictate medicine prices

IN 2014, Health Minister Aaron Motsoaledi accused pharmaceutical companies of being "satanic" and "genocidal". In his department’s budget vote speech, he now claims, "cancer drugs are devilishly unaffordable today. If no drastic action is taken today, we are going to be counting body bags like we are at war. Two years ago, I was regarded as exaggerating or outright insane by some, when I spoke openly against Pharmaceutical companies that were planning a price onslaught against us".

Only governments have ever committed genocide. The pharmaceutical companies the health minister is again attacking have developed vaccines, antibiotics and a plethora of other medications that have increased life expectancies throughout the world and helped humanity to enjoy longer, happier and more prosperous lives.

SA’s leading killers — tuberculosis (TB), influenza, pneumonia and intestinal infectious diseases — can be treated with readily available cheap medicines, yet patients continue to die from these diseases because of numerous failures that exist throughout the complex continuum of healthcare. The government is so preoccupied with trying to control the private sector that it is ignoring the colossal problems that exist in the public sector and the ongoing suffering its poor service delivery is causing the patients it affects.

In April 2001, African heads of state met in Abuja, Nigeria, and signed the historic Abuja declaration, in which, among other things, they pledged to devote at least 15% of their total national budgets to improving healthcare. More than 15 years later, SA still has not fulfilled this commitment.

Motsoaledi said he was against the "commodification" of healthcare (the for-profit private sector) and ostensibly sought to control every aspect of the private healthcare sector. Controls that reduce competition, put upward pressure on prices, and deter entry by potential competitors. The minister is so focused on the private sector that he overlooks obvious government-created bottlenecks that widely hamper and deny people access to medicines.

In 2004, the government introduced the single exit price mechanism (SEP), which applies to all medicines supplied to the private healthcare sector. The SEP compels all manufacturers and importers to sell their products at the same price to all of their private-sector customers, regardless of the size of the order, and prohibits them from offering any discounts. No pharmaceutical company may donate medicine to the private sector or sell medicine to a private company at a reduced price. The government, though, has a much greater freedom. State tender prices show that some medicines are available to the state at about one-tenth of the cost to the private sector.

A far more durable strategy to increase access to medicines would be for the government to allow private-sector organisations and charities to negotiate directly with pharmaceutical companies to obtain the required drugs at discounted prices. Such private-sector organisations and charities have a very good idea of what goods and services are required on the ground.

Instead of the government’s undertaking to finance and provide healthcare for all (which is not a particularly good use of scarce taxpayer resources), it should put the task of providing medical care out to tender and let private companies, which are subject to the ruthless efficiencies of the market, compete for government-funded tenders.

It is scandalous that state-owned entities such as South African Airways, Eskom, Denel and others, which compete directly with private enterprises, consume billions of rand in taxpayer resources through bailouts and subsidies — money that could be used for purchasing healthcare services and products from privately competing companies.

Despite these and other failures, the government has the nerve to suggest that pharmaceutical companies charge "devilishly" high prices for certain drugs to cure diseases that affect a small minority of the population, but considers it fitting to impose a value added tax (VAT) of 14% on all pharmaceutical products and devices.

If the objective is to have a healthy and productive population, it makes no sense to levy a highly regressive tax, the purpose of which is purely to raise government revenue, that penalises the sickest and most vulnerable members of society.

If the government is serious about increasing access to medicines, it should eliminate all taxes on pharmaceuticals and other medical devices and remove the regulations that restrict the private sector and prevent its efficient functioning. The surest path to lower prices is through increased competition – not government diktat.

• Urbach is a director of the Free Market Foundation

This article was first published in Business Day on 31 May 2016

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