Time to reconsider the ‘command and control’ strategy?

Can a price regulator react timeously to changes in the market and deliver true benefit to the people? In January this year, the Department of Health issued its annual notice on single exit price (SEP) adjustments for 2013, in which pharmaceutical manufacturers are allowed a maximum increase of 5.8% on what they charge for medicines and related substances sold in the private sector. The market is dynamic, constantly balancing the supply of and the demand for products through a spontaneous price mechanism. When a regulator, in this case government, is put in control, prices are set only after a protracted research and consideration period, and, once set, a fixed price cannot quickly or spontaneously adjust for changing market circumstances. Price controls therefore distort the pricing mechanism and interrupt the dynamic demand and supply process.

Local pharmaceutical manufacturers have voiced their disappointment at the latest increase. Stavrous Nicolaou, head of Aspen Pharmacare said, “It [the increase] is lower than we had expected. We had been hoping for an increase closer to 7%”. The predictable result of these latest price distortions is that it will no longer be financially viable for medicines that are expensive to produce to be manufactured here in SA. Given our government’s drive toward local content as well, this puts SA in a curious situation.

Price controls are supposed to make medicine prices more transparent and to increase access. But, instead of being protected by this policy, people who rely on the medicines that unquestionably will be affected by the statutory price fixing – if they do not have the financial means to travel or obtain the medicines from elsewhere – will be hurt, most severely. If not by the non-supply of the required drug, equally possibly by buying unregulated substitutes that could potentially develop through a parallel or black market as a result of the lack of availability caused by the price controls.

I have argued before in this column, that if government truly wanted to increase access to medicines, it would start by waiving VAT on all pharmaceutical products and devices instead of trying to regulate prices in the private sector. Charging VAT on medicines and pharmaceutical products is counter-intuitive. If government wants a healthy and productive workforce, why does it inflict this tax on the sickest and most vulnerable members of society?

History has demonstrated that without market prices, information on relative scarcities cannot circulate and provide the right incentives. Traditionally, SA has been a favoured destination for drug companies to conduct research and development because of our sound scientific base, good infrastructure, and the range of population groups and widely differing social statuses in which to run trials. The drug price regulations reduce incentives to invest in scientific infrastructure and knowledge, or to conduct such trials, as they reduce the ability to make appropriate returns on investments.

According to the Bio-pharma-ceutical Competitiveness and Investment Survey (BCI), a new tool developed for evaluating the biomedical sector, SA ranks poorly compared to other countries when it comes to biomedical investment attractiveness. Based on the BCI results, SA scores 64.92 out of 100, which falls under the category of ‘Limited ability to compete’The findings show that SA is performing particularly badly in the areas of ‘Healthcare Financing’ and ‘Scientific Capabilities and Infrastructure’.

In the area of Healthcare Financing, respondents of the survey cited several difficulties related to cost-containment policies, including restrictive price controls, a prioritisation towards generic medicines on the part of the public healthcare system, and the use of cost effectiveness parameters that do not necessarily take innovation into account. Price controls such as the SEP imposed on pharmaceutical products increase uncertainty for pharmaceutical manufacturers – both originator and generic – and discourage investment.

As with any form of price control, the SEP incurs a number of unintended consequences that, ultimately, are borne by the consumer. For all the years that governments have attempted to control prices, their regulations have interfered with the normal market process, reduced competition and, ultimately, harmed the intended beneficiaries, the consumers. Price controls, usually promoted and devised under the guise of assisting the poor and alleviating poverty, invariably cause them more hardship.

It may be argued that medical care and medicines are different to other goods and services and, in their case, price controls should be justified. But the market for medicines and medical care are subject to the same laws of economics as any other good or service. When it comes to price controls, food is more important for human survival and welfare than medicines, yet government removed price controls on agricultural products precisely because of their damaging effect on the economy and the harm caused to consumers. Given the importance of good medical care, the same reasoning should apply and price controls should not be imposed on pharmaceutical products.

Given the unintended, but unavoidable, consequences associated with the SEP, is it not time to reconsider this intervention? Why, instead of placing an inordinate amount of pressure on overstretched public sector officials to try and predict which way the exchange rate will move or where inflation is headed, do we not introduce policies that increase competition in the pharmaceutical sector? Why don’t we introduce policies that will have a natural tendency to reduce prices and thus achieve government’s declared intentions and improve consumer welfare?

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

Source: This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the authors’ and are not necessarily shared by the members of the Foundation.

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