Price controls and VAT reduce access to medicines

The beginning of this year marked the introduction of the new amended medicine pricing regulations, which have been a bone of contention for a number of years. The initial regulations were proposed in 2004 and were immediately challenged by the retail pharmacies. The matter was heard in the Cape High Court, Supreme Court of Appeal and finally in the Constitutional Court where it was declared that the regulations were invalid and had to be amended.

The government has committed itself to reducing the cost of medicines and healthcare to patients in an attempt to improve the overall welfare and health of the nation. While the government may have good intentions in wanting to increase access to medicines and good quality healthcare, the imposition of price controls results in many unintended consequences. In the long run these controls will merely compromise SA’s healthcare system and reduce access to medicines.

Price controls are normally promoted and devised under the guise of assisting the poor and alleviating poverty. Yet in almost every case it is the poor that suffer most from price controls. In SA and most other countries, it is the rich that have access to the high volume, low mark-up retailers that can offer cheaper goods in large urban areas. SA’s poor generally shop in low-volume, high mark-up establishments in the townships simply because they are conveniently located. However, price controls tend to penalise the low volume establishments that serve the poor, therefore forcing them to travel to urban centres, incurring costs and inconvenience in order to shop.

The result of the imposition of the price controls is that a number of these low-volume, high mark-up establishments will simply close down. Indeed, the Pharmaceutical Society of South Africa (PSSA) estimates that over 100 small pharmacies have already closed since the introduction of the regulations. Moreover, the society estimates that as many as 75% of pharmacies may be at risk of closing as a result of the regulations. The closure of these pharmacies would severely affect access to medicines and decrease the provision of medical services to isolated communities. The regulations have also discouraged many individuals from entering the field and prompted others to relocate – this in an environment that is already constrained by a lack of qualified medical personnel.

SA 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 will reduce incentives to conduct such trials and invest in scientific infrastructure and knowledge as the ability to make appropriate returns on the investment has been reduced.

Despite the best intentions of the government to make drug prices as transparent as possible, the pricing regulations merely frustrate the efficient functioning of the market. SA is one of the few developing countries that do not levy significant tariffs on pharmaceutical products and devices and it should be commended for this and held up as an example for others to follow. However, the government continues to impose a value added tax (VAT) of 14 per cent on pharmaceutical products and devices. This tax is highly regressive since it disproportionately affects the most vulnerable members of our society.

VAT is counter-intuitive in the sense that it is levied purely to raise government revenue but if one of SA’s objectives is to have a healthy and productive population it makes no sense to levy a tax that penalises the sick. If the government is really concerned about increasing access to medicines it will eliminate all taxes on pharmaceuticals and other medical devices.

The government’s preferred policy of price controls will not result in increased access to medicines. On the contrary, in the long run it will simply serve to reduce access to medicines in SA.

Author: Jasson Urbach is an economist with 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/ 23 January 2007 - FMF Policy Bulletin / 08 December 2009
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