The hike in drug prices may be painful, but it’s necessary

Price controls are misplaced because they miss out on the more important goal of access to medicines.
Updated 02 May, 2019 09:22am

There is uproar in the media after the recent increases in medicine prices. Many opposition politicians have made public statements condemning the government for this move and social media is rife with disapproval.

Further, as part of the cabinet reshuffle on April 18, 2019, the federal health minister was removed, with the media claiming that this was due to the price hikes.

Given that medicines are a necessity and inflation overall is high, some of the anger is understandable. But were the price increases legitimate?

For the past six months, I have been engaged in a research project on strategies to address corruption in Pakistan's pharmaceutical sector, in partnership with the SOAS Anti-Corruption Evidence research consortium.

While our work is ongoing, I will borrow from it to provide historical context to this round of price increases, point out the negative consequences of controlling prices and make a case for decontrolling prices for non-essential medicines.

Medicine pricing over the years

Pakistan's pharmaceutical sector is unique in that the universe of products is subject to price controls, which are by and large enforced. But this control is inconsistent and prone to rent seeking.

There was a virtual price freeze from 2001 to 2013, despite rising production costs. Then in October 2013, the Nawaz Sharif government increased the prices, but very quickly reversed its decision. The manufacturers went to court and managed to get a stay on the original increase. Following that, a pricing policy was introduced for the first time in 2015.

Due to inconsistent policy application and pricing disparities from the past, litigation on medicine prices in various courts piled up, including on the 2015 policy. Eventually, the Supreme Court took all the cases together through a suo motu notice. On its orders and with due consultation, another pricing policy was introduced in 2018.

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Over the past few years, production costs — mainly for raw materials, 95 per cent of which are imported — have increased drastically due to two factors. First, the devaluation of the rupee since 2017. Second, China, Pakistan's biggest supplier, has changed its environmental policy, resulting in an increase of chemical prices.

It is in this context that medicine prices were increased recently. In December 2018, the Drug Regulatory Authority of Pakistan (DRAP), through three Statutory Regulatory Orders, allowed a price increase in 600-plus medicines because of ‘hardship cases’ (but also reduced prices for 395 other medicines).

Then, acting on a Supreme Court order, and in lieu of the currency devaluation, DRAP permitted another increase of 9pc for essential medicines and 15pc for non-essential medicines.

While there is no doubt that some manufacturers may have increased their prices beyond that, in general the price hike was merited and, in fact, long overdue.

Costs of over-regulation

The conventional argument in favour of controlling prices is a populist one: governments put a ceiling on prices so as to enable low-income populations to have access to affordable medicines.

The Pakistan Pharmaceutical Manufacturers Association also justified their recent announcement to reduce prices by 10-15pc of 464 essential and non-essential medicines ‘voluntarily’ along similar lines.

There is indeed public pressure to keep prices in check. But does this also have an affect on economic growth and public health? Our research shows that there are significant negative consequences to the strict price controls practiced in Pakistan.

Businesses, by definition, operate for profit, and pharmaceutical manufacturers are no different. With a freeze in prices and no consistent increases, profit margins inevitably squeeze over time because of inflation. The result is that producing a medicine is no longer profitable, leading to shortages of many essential drugs.

For example, in 2015 there were multiple reports of shortages of tuberculosis medicines. When there are shortages, some people hoard supplies and sell on the black market for up to 50 times the original price, or the same drug is imported at a higher cost.

The consequence of either an absence of a key medicine or much higher monetary costs is thus borne by the consumer. This hurts the poorest the most, who can only afford to get medicines from public health facilities.

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One study estimated that, of a basket of essential medicines, only 15pc are available in the public sector. This is not only due to public procurement issues, since in the private sector, availability, at 31pc, was twice as better even though much below what it should be.

When a medicine is no longer profitable to produce, many manufacturers register a new drug. At registration, they can get a price with high margins so that even if there is no increase over the short-to-medium term, they can still make money.

Thus, many first-generation drugs have stopped being made and instead manufacturers have gone on to produce second- and third-generation medicines, which are more expensive. These new drugs can have prices that are 10 times higher than the original first-generation ones. Again, the burden falls on the consumer.

In addition to costs to the general population, there is also a negative consequence to the economy and to public health because many multinational companies (MNCs) have exited the Pakistani market.

Since there is no research and development of drugs in Pakistan, all new products are brought into the health system through MNCs who develop new medicines elsewhere. MNCs also have higher standards than local firms and invest heavily in developing human capital through training.

This has a positive spillover in the local industry, as pharmacists trained in these firms then go on to improve the quality of medicines being produced locally. Thus, the exit of MNCs, in addition to the economic costs of disinvestment, also leads to negative consequences on public health through other means.

Policy implications

There appears to be a surprisingly effective political consensus on keeping medicine prices suppressed.

Even prices that were raised through proper mechanism, as defined in the pricing policy, have been criticised. However, given the issues I have described above, this consensus is misplaced because it misses out on the more important goal of access to medicines. Focusing only on affordability has a negative consequence: unavailability of key medicines.

There is an urgent need to decontrol prices for non-essential medicines. With more than 750 manufacturers, there is sufficient competition in the industry to ensure that no one increases prices astronomically. In fact, one manufacturer told me that before the devaluation hit them, they used to sell 70pc of their medicines below the notified maximum retail price.

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The state can, however, rationally control prices of essential drugs. This will ensure that medicines which are prioritised will not have prices spiraling out of control.

More importantly, I would argue that there needs to be a shift in the current political consensus. Instead of keeping prices in check, access to affordable medicines should be made through the existing government healthcare system. Provincial governments already do this at scale and this can be improved and expanded.

Finally, in the medium term there needs to be a concerted state effort to incentivise pharmaceutical raw material production within Pakistan. Not only will this help reduce the trade deficit, it will also reduce the exposure of prices to fluctuations in the currency market, create jobs and spur economic growth.

This article is an output of a research programme (SOAS-ACE) funded by UK Aid from the UK government. The views presented here are those of the author and do not necessarily represent the views of the UK Government’s official policies.

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Kabeer Dawani is a researcher at the Collective for Social Science Research in Karachi. He tweets @dkab91

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (17) Closed

May 01, 2019 08:17pm
Pakistan medicine industry must visit India, and see how India is dealing this with generic medicine. It will help both the countries.
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Obaid Ali
May 01, 2019 09:15pm
How would you justify, unbelievable price's difference of one product manufactured by different members of. Manufacturer associations. e. g. CEFTRIAXONE I GM Inj. From Rs. 150 to 700 prices. Why should patient compelled to buy product of 700 while it is available at 150 too. Please remmeber, manufacturers are supplying this product to marketers at less than Rs 50. It is just an example, a lot of cases that has significant shares of this bussiness exsist.
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May 01, 2019 09:33pm
well elaborated the situation. Have you also analyze the products with decontrolled prices like natural supplements, alternatives medicines, herbals, Nutraceuticals and even medical devices.... how these products are being sold on exorbitant prices .....
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ABD, San Francisco, USA
May 01, 2019 10:17pm
Firstly the author doesn’t talk about prescribing generic drugs instead of brand medicine to make drug easily affordable to the general public. Drug companies are extremely greedy and immoral even in the USA, and the price varies across different pharmacy and there are websites to compare drug prices. Even in China people were unable to afford essential medicine and a Chinese movie that showed how a Chinese travels to India to purchase generic medicine became box office hit. The movie made Chinese government take notice and simplify importing medicine from India and also crack down on MNC pharmaceutical companies on price gouging.
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May 01, 2019 10:42pm
Pharmaceutical industry is a major job provider for our educated middle class, and people perception is that the medicine are produced without cost , while our neighbor India has more than 100 plants US FDA approved and leading in exports while we are leading in over regulation of our industry which no body in the world is doing.
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M A Khan
May 01, 2019 11:44pm
The price controls may be largely relaxed . However, at the same time, the poorest should be protected by sizeable health insurance.
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Hassan Ghayasuddin Ansari
May 02, 2019 07:18am
It might be better to remove tax on medicines instead?
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Fekrat Khan
May 02, 2019 01:29pm
No it’s not.
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May 02, 2019 03:29pm
@Farooq, Even Bangladesh is developing in this sector, by commissioning more manufacturing plants in entire country, Pakistan can also learn it. India has so much surplus Anti Tubercular drugs same can be obtained. US is major destination of India made economical generics medicines, Pakistan should take benefit of the same.
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May 02, 2019 03:37pm
@Asad, well, market dynamics force manufacturers or importers to make conscious decision whether or not to increase the price of their product. As soon as the $ rate goes up, importers cost of product goes up. they have two choices then, either to pass on the price increase 100% to the consumer, thereby increasing the price of product and hence taking a chance of resultant business volume slide. Coz as soon as the price goes up, few of the customers may switch to competitor brand. Or to absorb the price increase thereby reducing the profit earned but protecting the business volume.
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May 02, 2019 04:31pm
The fact also is that when prices of medicines increase beyond a point it is profitable to make fake and sell. Fake drugs and spurious drugs being sold is a direct effect of high drug pricing.
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May 02, 2019 04:40pm
Stop the leakages and prices will come down like extra comission by chemists beyond 15% and doctors demanding comission for prescribing certain brand. Also commissions paid to govt body like drug inspectors, registrations of drug, etc...
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tushar chakravarty
May 02, 2019 05:50pm
Unfortunately Pakistan pharmaceutical industry only does formulation with hardly any basic drugs being manufactured. Pakistan government needs to invest in education, especially in science and encourage research. Look at India. Today it's generic drug industry supplies drugs to all multinational organisations including drugs for HIV, Cancer, etc. Drugs in India are far cheaper than anywhere in the world all because of continuous investment in research and development by the public and private players.
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Abdul Mannan
May 02, 2019 11:20pm
I guess the author missed the point how medicine companies offer lucrative incentives to doctors to prescribe their medicines. They definitely use unethical ways to make profits. There should be check and regulation. By the way, who bothers giving taxes and sharing honest profit statement. Pakistani is theoretically much poorer than actually it is only because nobody declared what they are earning.
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May 03, 2019 01:08am
Government should also think about the poor people because this is not luxury.
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Doctor H
May 03, 2019 02:08am
One of the reasons why medicine prices pinch in Pakistan is the way medical practitioners prescribe medicines. I recently bought a year's worth of supply for an uncle (anti cholesterol, hypertensive, and aspirin) and it cost me just 8000 rupees. Now I have seen similar patients who are paying a lot more for similar drugs because their doctors go for unnecessary drugs and more expensive brands. Doctors in Pakistan tend to overprescribe and prescribe a multitude of drugs without required diagnostic tests or on hunch. All this adds to the bill for the patients when they do no have to pay for half of these drugs.
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May 03, 2019 12:53pm
It's necessary because you were paid for advocating it. I wish you visit a govt hospital and take perspective of poor people flocking such places as they can't afford respectable treatment at private hospitals. But since this would not give you any monetary benefit, you will never advocate for the over 50% poor class of this country.
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