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The ‘market’ for medicines

February 02, 2012

THE tragedy, still unfolding in Lahore, should be an eye-opener. But the problem is not going to be solved by firing a few people. It needs much deeper understanding and institutional restructuring.

Some years ago, my brother had an eye problem for which his doctor suggested we get an injectable dye that he would then inject in the blood and see the eye under a scope to find out where the problem was. But the doctor said we could get the dye only from one particular pharmacy in Lahore.

The pharmacy had the medicine and when I paid for it they did not give me a receipt. I asked for the receipt as I wanted to make sure I had proof of purchase as this was going to be injected in my brother and I wanted some assurance of the quality of medicine. But the pharmacist refused to give a receipt. He said this was a smuggled medicine and he could not give a receipt, but he said his shop’s reputation was such that I should not worry. I had to take the medicine since there wasn’t much choice.

The medicine was fine but the incident does point to some major issues in the medicine ‘market’.

Imagine you take a very injured person to a hospital emergency. The emergency people, quite typical of our hospitals, ask you to get some life-saving injections from any one of the 50 pharmacies outside the hospital. You go to buy these medicines. The pharmacies know you are a one-time customer (not a repeat customer) who happens to be at their shop for some life-saving medicines. You get the medicines. How sure are you that these medicines are not fake or not as effective as they should be?

When a person is seriously injured there is always the probability that she may not survive despite the best quality medicine, and there is also always a chance that a patient survives despite less effective medicines. So, unlike a lot of goods where we can judge quality by looking at them or using them (televisions, etc.) or by consuming them (tasting, eating, drinking) finding the quality of medicines is not easy. It has to be through testing them. But testing is costly and there are very few facilities in Pakistan for testing, and they have a limited range of tests.

The profits from selling fake medicines are huge. If a proper injection costs a few hundred rupees, an ampule filled with coloured water will cost only a few rupees. And if the shopkeeper knows you are a one-time customer he is not going to worry about reputation effects. We know, from cases that are reported in the papers, that sellers do think this way.

So how do we ensure that the medicine market works properly?

Normally, most people buy medicines from shops in their neighbourhood and they are repeat customers at such shops. This allows for people to develop expectations of future business and so there is incentive for shopkeepers to keep cheating below some acceptable threshold.

There are also some shops, usually large ones and sometimes chains, that have a lot to lose from loss of reputation while the gain from any one cheating is small, comparatively, so it does not make sense for them to cheat customers in too blatant a fashion. But for shops where one-time or emergency buying occurs, the incentive to cheat, from an economic perspective, leaving aside ethics and values, is very large.The only way to deal with this incentive is to balance it with the possibility of punishment. If pharmacists know they could be checked at random, and if caught they will definitely be punished, then as long as the expected value of being caught (the probability of being caught times the cost of punishment) is greater than the benefit from cheating, there will be no cheating. But for this to work, the punishment has to be severe enough and the probability of being caught high enough as the expected profits from cheating are large.

In addition, to punish people we also need to determine, quite unambiguously, who the culprit is. If the shopkeeper says he bought the medicine from the supplier and he was duped too, and the supplier says the same about her purchase from the company, and all of them keep shifting the blame on the other, how do we pin down liability?

It has to be done through documents; documents that establish price at which purchases have been made, and when and from whom, and some details of what has been purchased/sold. And eventually the source has to be traced to authentic pharmaceutical producers. Such documentation is missing in Pakistan. Or the chain is not fully established and corruption is possible in many places in this chain.

Resultantly, even when people have been arrested sometimes prosecuting them has not been easy or straightforward. Delays in prosecution and/or letting go of culprits only increases effective incentives to cheat. The documentation will also take care of issues like smuggling. And there are significant benefits of this documentation for other purposes, such as taxation.

Many people believe that even multinationals producing medicines in Pakistan or for Pakistani clients save on quality. This cannot be checked without a proper testing regimen. This should be the responsibility of the state and the licence-giving authority: they should have a regimen for checking factory-produced medicines randomly.

The market for medicines is important and a very lucrative market too, and since medicines are a good whose quality cannot be checked easily, it needs special regulatory mechanisms to make the ‘market’ function well. If this regulatory mechanism is not there, as in Pakistan, the temptation to sell adulterated drugs would be very large. The regulatory mechanism has to get the entire value chain documented, and it has to institute random checks of medicines, with significant punishments for adulteration: the matter of selling adulterated drugs is not just fraud, it is closer to manslaughter or even murder.

Encouraging larger chains and brand names in retailing is another way of reducing incentives for cheating, from single purchases, but this is not going to work in most less-affluent urban, peri-urban and rural areas. Stand-alone stores will continue to serve the bulk of the market. For these the only option is a regimen of random checks and strict punishments.

Anything short of that will leave us open to abuse, as we currently are.

The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.