Medicine price controls and the Constitutional Court decision

There are sure to be nuances in the 445-page Constitutional Court judgement on the price controls on medicine dispensing that will be brought to light by detailed study of the judgement.

One of the most important issues to be studied will be the manner in which the court has dealt with the issue of separation of powers between the legislature and the executive. Did the court, for instance, decide that the Medicines Act had properly delegated the power needed by the Minister to allow her to constitutionally introduce price controls on medicines? Whatever the answer to this constitutional question, and whatever the final outcome of the pricing committee hearings, amended price control regulations will be published within 60 days to the longer term detriment of South Africa’s consumers.

Economic policy is in the hands of the government and not the Constitutional Court. The task of the court is to decide whether the government and Parliament have acted constitutionally in adopting specific legislation or regulations, not whether these instruments of law are likely to have beneficial consequences for the country’s citizens. So the full responsibility for the consequences of the institution of price controls on medicines, such as putting pharmacists out of business and depriving poor and rural communities of access to medicines, rests with government. In the current case the Constitutional Court’s concern would have been to ensure that proper procedures had been followed, finding in its judgement that they had not.

After the dust of the court action and required new price committee hearings has settled, we will probably find that pharmacists will be allowed to charge more realistic and differentiated dispensing fees, depending on the nature of their businesses. However, medicines will be subjected to price controls with predictable deleterious consequences.

The evidence suggests that drug price regulations, even in wealthy economies such as Japan, increase the delay in registering new drugs. Manufacturers have greater incentives to register their medicines and comply with the increasingly onerous regulatory requirements in countries where they have greater freedom to price their products without bureaucratic intervention. The registration process in South Africa already delays the registration of drugs, imposing considerable costs on drug companies. The drug price regulations are likely to increase the delays of drug registration and/or stop manufacturers from registering the drugs at all. The healthcare outcomes are likely to be severe, reducing patient welfare as well as the ability of physicians to care for their patients.

Apart from the delays in registering drugs and the reduced overall availability of innovative new medicines, the drug price regulations will still force many pharmacies out of business unless their dispensing incomes are re-instated at the pre-price-control levels. If profit margins for pharmacies, wholesalers and distributors are unduly reduced it will be impossible for them to carry a wide range of medicines.

In rural areas or townships that are not well served with large high volume retailers and pharmacies, poor consumers and patients choose to purchase medicines (and indeed all manner of other goods) from small-scale retailers that may have high margins due to their low volume of trade. Yet consumers are acting rationally when they purchase goods from these retailers, choosing to pay a higher price for convenience. Their alternative would be to travel long distances (thereby incurring travel costs) to access medicines from the high volume, low mark-up retailers in urban centres. The regulations are likely to do considerable harm to these poor consumers by undermining their choices, as they will drive the convenient (but low volume, high mark-up) retailers out of the over-the-counter medicine business

South Africa has traditionally been a favoured destination for drug companies to conduct research and development because of the sound scientific base, good infrastructure and range of different population groups with widely different social statuses in which to run trials. The drug price regulations are likely to reduce any incentive to conduct trials and invest in scientific infrastructure and knowledge as the ability to make appropriate returns on investment is reduced. Pharmaceutical companies, both local and foreign, invest over R500m in R&D currently and this is likely to gradually fall away.

There has been an increasing trend among the research based drug companies to concentrate manufacturing in various centres of excellence around the world. Because of this and to some extent as a result of mergers, since 1994, 33 drug companies have ceased to produce their products in South Africa. This has not only cost the country jobs, but has reduced the scientific skills and knowledge base in the country and has hampered attempts to increase technology transfer.

There is consequently much to lose from instituting price controls on medicines and benefits are dubious. It is not necessarily true that countries without drug price regulations have higher prices. While drug prices in the US are higher for some drugs, they are lower for others and the fact that there are few price regulations means that there is very active competition among generic drug producers. The fact remains that competition is a far more effective way of protecting consumers than price controls.

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 03 October 2005

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