Further health price regulation: A logistical nightmare

In September, the Department of Health published proposed regulations relating to the maximum fee that logistics companies can charge for handling pharmaceutical products. This is the latest push by government to control prices in the healthcare sector. But a logistics fee cap, as with any form of price control, involves a number of unintended consequences that are ultimately borne by the consumer. Governments have, for many years, attempted to control prices and in every case the regulations have interfered with the normal market process, reduced competition and ultimately have harmed consumers.

Government’s stated objective is to increase access to essential medicines to low-income individuals and since these individuals generally live long distances from the major urban centres, it will discourage distributors and wholesalers from servicing outlying areas if a cap on the logistics fee is introduced. The logistics fee is one of three components that form the single exit price, which also includes the manufacturer’s price and VAT. But surely if government truly wanted to increase access to medicines, it would start by waiving VAT on all pharmaceutical products and devices, as opposed to trying to regulate prices in the private sector, which is neither necessary nor appropriate.

Imposing VAT on medicines and pharmaceutical products is counterintuitive because if government wants a healthy and productive workforce, surely it would not tax the sickest and most vulnerable members of society? Many pharmaceutical manufacturers have handed over distribution logistics to specialist distribution firms. The distributors store stock, issue invoices and deliver products on behalf of manufacturers and importers in return for a logistics fee. Wholesalers of pharmaceuticals tend to add additional services, such as granting credit, providing more frequent deliveries and carrying a wider range of products with which to service their suppliers such as wheelchairs and other devices required by the infirm.

The draft maximum logistics fee, as contemplated by government, has established four price bands, each with a different maximum logistics fee. The four price bands are on a sliding scale based on the value of the product. However, these price bands are simply arbitrary estimates. The bands do not consider the dynamism of the market, particularly preferences of time and place. For medicines where the ex-manufacturer price is less than R100 (excluding VAT), the fee can be no more than 8% plus R3. For medicines priced between R100 and R500, the fee is capped at 6% plus R4. Those priced above R500 but less than R1000 can charge up to 4% plus R5, while medicines priced at R1000 or higher will have logistics fees capped at R54. But what if there is an emergency and a product is needed urgently? And what if the delivery needs to take place in an outlying rural area?

In the setting of a maximum logistics fee, it is the patient at the end of the wholesaler supply chain that is most at risk of losing ready access to medicines, medical devices and other healthcare services. Price controls, usually promoted and devised under the guise of assisting the poor and alleviating poverty, in almost every case, cause more hardship. If pharmacies in rural areas and townships are forced to close because logistics companies can no longer service them, it will severely affect access to medicines and decrease the provision of medical services in isolated communities. Patients will have no alternative but to travel to urban centres at great cost and inconvenience to obtain their medicine.

Another major unwelcome consequence of price controls is that they act as a barrier to entry. Large, established businesses will often tolerate or even welcome regulated price controls because they keep competition out of the industry. When prices are regulated so that they are kept low and very little profit is allowed to be made, low-volume, high-mark-up logistics companies that are willing to go the extra mile and service rural areas will not be in a position to compete. However, high-volume, low-mark-up companies with established contracts in large urban areas will welcome these artificial barriers.

Whenever government attempts to achieve some particular end and intervenes in the marketplace by altering relative prices, the result is a perverse redirection of resources. A logistics fee cap will ensure that the medicine distribution process will impact on the general, consequent adverse effects of government meddling. The easily foreseeable, unintended consequence of this proposal by government is that, as far as the marketing of medicines is concerned, outlying areas will be neglected. Considering that typically poor and marginalised individuals live in these areas, the induced failure to service outlying areas will result in reduced access for these people. Thus, contrary to government intentions, the new regulations will disproportionately affect the poorest of the poor.

This article was first published in the November edition of Medical Chronicle

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