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.
Published May 1, 2019

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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