What price is right?

WHILE MANY middle- and high-income countries are employing price controls as a measure to contain the prices of drugs and medicines, the World Health Organization (WHO) emphasizes that it is only one of the mechanisms by which a government can pursue reductions in the cost of essential drugs and medicines. Hence, it should be pursued along with other cost-containment programs such as reimbursement systems through the creation of a positive list and reference pricing and generic substitution.

WHO also recommends restrictions on advertising and promotion, enhancing generic competitiveness, and developing incentive systems to increase the use of generic medicines. Alone, price controls, the WHO says, run the risk of being ineffective and unsustainable.

The international health agency says that a price control mechanism is difficult to sustain and hard to implement because developing the system to establish “fair price” can be complicated. This in turn is attributed to the usually non-transparent pharmaceutical market, especially for medicines patented by multinational corporations.

“The determination of the ‘right’ or ‘fair’ or ‘proper’ price,” says WHO, “primarily relies on the transparent disclosure by the players in the pharmaceutical industry — the manufacturers, wholesalers and distributors — of the price components that they incur in the manufacture and distribution of their products.” Such a provision, it adds, is conspicuously lacking in the House bill.

[photo by Alecks Pabico]

According to Drugs and Money: Prices, Affordability and Cost Containment, a book commissioned by WHO’s Europe regional office, the “fair” price of an item is the result of a negotiating process between the supplier and the user. Compared to consumer markets that are usually transparent and where it is possible to obtain information on product characteristics and to compare prices, pharmaceutical markets are “often characterized by monopolies or oligopolies, while the user generally has insufficient insight into products and prices,” says the book. “If it is not possible to compare prices with those of other comparable products, it becomes very difficult indeed to know what a ‘fair’ price is.”

Already, a number of methodologies have been developed to calculate fair prices both at the level of manufacturers and exporters and at the level of the wholesaler and the pharmacy. But what all this entails is a whole gamut of considerations that goes into determining such a fair price, or the Maximum Retail Price (MRP) of certain drug formulations as House Bill 2844 intends to do. As WHO points out, the government must first be able to ascertain the price components of medicines as basis of the MRP.

Generally, these would include the Manufacturer’s Selling Price (MSP), freight costs, import tariffs, taxes, mark-ups, and distribution and dispensing fees. Data from the Pharmaceutical Research Manufacturers of America serve to illustrate the pricing structure of medicines that incorporates research and development expenses (15 percent), tariffs (23 percent for active ingredients and 12 percent for finished products), and add-ons (which can account for 50 to 80 percent of the price).

As a substantial component of the drug’s price, add-on costs can vary from country to country and from one product to another, with the largest slice going to wholesale and retail mark-ups, then to value-added tax (VAT) and other taxes.

Cumulative Markups on Drug Prices (minimum)
Source: Institute for Philippine Culture, Ateneo de Manila University
Table shows the cumulative percent markup on a hypothetical case (imported medicines) using the minimum figures gathered for the IPC’s medicine price components study. Using maximum fiugres, the cumulative markup goes up to 273.24 percent.

Cost, insurance, freight (CIF) price NA 100.00 0.00%
Finance/banking charge 1.00% 101.00 1.00%
Quality control testing fee 0.54% 101.55 1.55%
Import tariff/duty 3.84% 105.44 5.44%
National corporate taxes 3.30% 108.92 8.92%
Transport costs 10.17% 120.00 20.00%
Wholesale markup 17.50% 141.00 41.00%
Retail markup 20.00% 169.20 69.20%
VAT 12.00% 189.51 89.51%

Drug price components do need to be looked into, concedes WHO, but these should be based on valid, reliable, scientific data, as well as carefully thought-out, unbiased methodologies for data gathering, collecting, and analysis. Various aspects of prescribing, dispensing, consumption, and the ultimate consequences in terms of health and finance are also important variables that must be considered. The same is true for facts and figures on pharmaceutical expenditures, utilization, manufacturing costs, and health and economic outcomes.

Also for the government’s consideration are other parts of the drug components that will be subjected to control. “Of primordial significance,” says WHO, “is to decide whether the control must be placed at the level of the manufacturer or importer or at the level of the wholesaler.”

It appears though that the House bill wants the board to regulate all the sectors involved with drug trade — from manufacturers, importers, traders, distributors, down to wholesalers. This brings up the question, says a health economist, of whether it is practicable to do that or to just regulate the end-point of the industry, which are retail outlets, and the issue of pricing. “Furthermore,” he says, “monitoring all the other industry players is pointless because they are not legally allowed to sell to the public or consumers.”