GOVERNMENT intervention is needed to address market failures and inequities in the Philippine pharmaceuticals industry.
Inefficiencies are manifested by international and domestic price variations that suggest markups on manufacturing, distribution and retailing costs that are higher than competitive prices.
Such markups may be caused by non-tariff barriers to trade, lack of information and the role of pharmaceutical companies which are dominant at all levels of the industry.
At the manufacturing level, for example, international patent holders enjoy exclusive rights to manufacture and market drugs for a set number of years, including the decision to locally produce or market a “branded” product.
Distribution and retailing markets also feature dominant players, which control over 80 percent of distribution, and another corporation, which controls almost 77 percent of the retail market, according to 2008 data at the Department of Health.
Private hospitals exercise market power when they discourage or prohibit patients from purchasing drugs from outside.
Inefficiencies are also reflected by irrational drug use, or the use of ineffective remedies, non-compliance with prescribed dosages and the persistent use of branded drugs despite the availability of equally effective and cheaper substitutes. Irrational drug use is seen in unaffordable prices as well as by lack of information. Patients, for instance, have little understanding, much less information, on disease processes and how these are treated.
As such, the physician effectively has the power to choose what drug the patient will buy, what brand and even where to buy it. Physicians, however, may tend to over-prescribe because of lack of, or biased, information.
There is growing evidence that demonstrates how corporate sponsorships and gift-giving to health professionals and medical organizations influence physician prescribing behavior and promote irrational drug use.
Intervention
Market failures and inequities provide reasons for government intervention.
In deciding whether to intervene, costs and benefits of government intervention must be weighed against the cost and benefits of “doing nothing.”
For instance, if price controls are contemplated in order to improve access to drugs, setting prices too low may result in retaliatory actions such as withdrawal of supply, or worse, deter the entry of more players, undermining the very objective to promote competition.
Setting prices too high could effectively transfer “informational rents” to drug suppliers. Informational rents are private profits generated because of the possession of relevant information.
Setting prices just right—at the level that brings down the price of branded drugs while maintaining or increasing the volume sold—could also artificially reduce the demand for unbranded generic drugs and inadvertently kill the generics industry in the longer run.
Policy depends on which market failures—supply side or demand side—are to be addressed.
International price variations maybe caused by barriers to trade, in which case, one response by government is the removal of trade barriers. This has been accomplished through the newly enacted Cheaper Medicines Law.
It is assumed that removing trade barriers will allow for equalizing the prices of drugs of the same brand, maker and dosage.
Policies should enable competition at distribution and retail levels so that price gains are not co-opted by dominant players at these levels as well as policies to facilitate the entry of new importers and ensure the quality of new supplies.
Direct price regulation—by imposing price caps or ceilings—may be employed to address monopoly markups. Or indirect price regulation may be opted through government procurement and retailing.
To be effective, the size of government procurement relative to the market shares of identified drugs is crucial. If government procurement of targeted drugs accounts for less than, say, 30 percent of their markets in terms of volume, there is little likelihood that the procurement would have significant impact.
Price control
There are important reasons for a price cap.
The National Demographic and Health Survey 2003 shows that only 30 percent of households have at least one member covered by the Philippine Health Insurance Corp. (PhilHealth).
PhilHealth benefit packages barely cover outpatient conditions and require substantial out-of-pocket payments by patients.
Annual government spending on pharmaceuticals (including imports) accounts for just P10 billion, or 10 percent of the entire pharmaceutical market, and such spending is fragmented.
Second, regular capacity, whether for ensuring the quality of generics or for monitoring and analyzing overall market conditions, is weak.
Thus the need for government price control, regulation or putting up a maximum drug retail price (MDRP).
In a two-tiered pricing system, the Department of Health finalizes a list of patented or off patent branded drugs that it intends for use in the public health system. Meanwhile, other patients are free to purchase more expensive patented or branded drugs.
Another option is to increase government procurement for selected drugs. This requires increasing the 10 percent of total market value currently observed in procurement.
Still another option is the imposition of a selective MDRP. This is warranted when local prices are too expensive compared with international price or when a patented drug so dominates the local market that little or no close substitutes are available.
An MDRP is warranted when drugs can contribute greatly to public health goals, such as reducing the incidence of leading causes of deaths and diseases like hearth diseases and infectious diseases.
A price cap is justified when it reduces the disease burden of the poor as well as mothers, children and infants.
For obvious public health reasons, drugs required for epidemics or national disasters, if they are not readily accessible or available in an equitable manner, may also be considered.
Source: Department of Health
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