Regulating Supply Chain Mark-Ups to Control Medicine Prices—A Review of the Literature in Low- and Middle-Income
Countries
Ball, Douglas Independent consultant, United Kingdom (douglasball@yahoo.co.uk)
Problem statement: Medicine prices are often an access barrier for the poor, especially in low-income countries. In order to increase financial access, policy makers may regulate the prices of medicines using a variety of means. The regulation of supply chain mark-ups is one strategy, but little is known about how common this intervention is in low- and middle-income countries (LMIC) and whether it is effective.
Objectives: To describe the evidence base for the regulation of supply chain mark-ups in low- and middle-income countries and whether it leads to lower medicine prices
Design: Literature review
Setting: International, public, and private sectors
Study population: Low- and middle-income countries
Outcome measure(s): Number of countries using pharmaceutical mark-up regulation, types of regulation, factors affecting implementation of the policy and its effectiveness
Results: Mark-ups are commonly regulated in high-income countries (HIC). Around 60% of LMIC report regulating wholesale or retail markups. HIC use a variety of regulation methods and may apply different mark-ups to separate groups of pharmaceuticals. LMIC commonly use fixed percentage mark-ups, with few applying regressive mark-ups. Mark-up regulation is seldom used as a means to promote generic medicines. Little information is available about the impact of mark-up regulation on medicines prices or supply chain stakeholder viability. Ineffective enforcement and lack of regulation of manufacturer or retail prices are likely to lead to failure. Mark-up regulation has an impact on wholesaler and retailer viability.
Conclusions: Evidence on the implementation, effect, and enforcement of mark-ups in LMIC is sparse. Regulation of mark-ups as part of comprehensive price regulation will probably lead to reduced medicine prices, but there may be unexpected effects on the supply of medicines. Without regulation of either the manufacturer’s selling price or the retail selling price, mark-up regulation is unlikely to be effective. Mark-ups that include a regressive component with or without fixed fees probably lead to better outcomes that fixed percentage mark-ups through their influence on financial incentives.
Funding source(s): Health Action International - Global
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• A mark-up is taken to be the gross profit, the difference between purchase and selling price
– Strictly speaking not the same as the “margin”
– The mark-up covers costs and adds profit
• The diagram above depicts a traditional private sector supply chain
– Mark-ups can be added on at various points of the supply chain
• Changes to the traditional distribution model depend on pharmaceutical legal and trade environment and can make tracing and regulation of mark-ups difficult
– Vertical integration of wholesale and retail functions
– Wholesalers/distributors may be short-line (restricted product range) or long-line
(wide product range)
– There may be multiple wholesalers/distributors involved
– Distributors may be tied to particular manufacturers and only charge a service fee without taking ownership of the products
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• Public sector supply chains may also be traditional:
Manufacturer  CMS  RMS  health facility  patient
• Or can involve ‘modifications’ and can be integrated to the private sector distribution mechanism to various degrees
– Autonomous medical stores
– Distribution contracted out
– Health facilities buying direct from private outlets
• Evidence of ‘inappropriate’ mark-ups and unaffordable medicines
– WHO/HAI pricing, availability and affordability surveys
• Mark-ups can contribute more than 40% of the final price the patient pays
– Up to 90% in extreme cases
– Regulation has been recommended in some quarters
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• Does the regulation of mark-ups lead to lower medicine prices (or at least control them and/or contain costs) in LMICs?
– The policy addressed was the regulation of distribution mark-ups in the supply chain of medicines, both wholesale and retail.
• Discounts and rebates not specifically covered
• Duties, taxes and other public levies or charges not covered
– What is the current practice in LMICs?
– What options are available to policy makers to regulate mark-ups?
– What evidence is there that this intervention is effective?
– What lessons can be learnt from experiences to date?
– Should pharmaceutical distribution mark-ups be regulated?
• A systematic literature review and analysis of policy issues and options was conducted to examine these issues.
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• Literature search performed to determine the evidence base of experience regulating mark-ups on medicines in LMICs.
• Searches were performed using PubMed, EconLit and Internet (Google) supplemented with additional measures:
– PubMed : Four domain search strategy: the policy, the supply chain, pharmaceuticals and developing countries. (564 articles reduced to 37 after review)
– EconLit : Three domain search strategy: policy, pharmaceuticals and developing countries, limited by descriptors. (37 hits reduced to 7 after review)
– Internet: A multiple search approach was used
– Others: To identify grey literature and non-indexed publications
• Purposive searching of policy papers, publications and reference lists
• E-Drug/E-Med messages
• WHO/HAI medicine price database
• Personal approach to professionals in the field
• Three country case studies were examined as examples of LMICs have approached the regulation of distribution mark-ups.
– Albania, South Africa, Mali
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• WHO level 1 indicators suggest more than two-thirds of countries regulate wholesale and retail mark-ups (2007 data)
– Private sector and retail sector more likely to have mark-ups regulated
Countries (n=156)
Public sector
Private sector
NGO sector
Regulate wholesale mark-up
65%
75%
52%
Regulate retail mark-up
68%
81%
54%
• WHO Africa pharmaceutical profiles 4/14 regulate wholesale and 6/14 regulate retail mark-ups suggesting there are regional variations
• WHO/HAI surveys show regional variation but are not in concert with WHO level 1 data
• Distribution mark-ups / margins regulated widely in high-income countries in EU / OECD but not in all e.g. USA, UK, Japan
• Difficult to draw firm conclusions from LMICs due to weaknesses in data collection e.g. self-reported, non-systematic data collection, incomplete data sets
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• WHO/HAI surveys and literature show wide variation in regulated mark-ups in
LMICs across both public and private sectors
• Variations due to: country factors, public/private sector, targeting specific classes of medicines
• Wholesale mark-ups range: 10% – 35%
• Retail mark-ups range: 0% – 76%
– WHO/HAI data show total cumulative mark-ups ranging from 17% – 84% in the public sector and 11% – 6,894% in the private sector (Cameron et al. 2009)
– Private sector mark-ups show wider variation
• Wide variation also in HICs (as part of comprehensive pricing strategy)
– Wholesale: 2 – 21%
– Retail: 4 – 50%
• Many local factors influence mark-up magnitude
– There is no ‘ideal’ or ‘recommended’ mark-up
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Table 1. Magnitude of regulated mark-ups in the public and private sectors (various sources)
WHO Region
(no. of countries with data)
Range (n) regulated public wholesale mark-up
AFRO (n=19) 20-50% (2)
EMRO (n=12)
EURO (n=8)
10% (2)
15% (1)
PAHO (n=12)
SEARO (n=5)
WPRO (n=5)
-
-
-
Range (n) regulated public retail mark-up
30 (1)
Range (n) regulated private wholesale mark-up
Range (n) regulated private retail mark-up
27.5% (1) 5-76% (2)
0-20% (3)
15% (1)
2-35% (11)
25% (1)
8-42.9% (11)
30-35% (2)
25% (1)
-
30% (1)
4-30% (4)
8-10% (1)
-
25-30% (3)
16-20% (1)
-
Note:
 Regional variation in n / % of countries regulating mark-ups
 Lower regulation in public sector
 Variation in levels of mark-ups within a sector and between countries
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– Fixed percentage mark-ups are most common in LMICs
– Regressive mark-ups only used in some higher income economies e.g.
Iran, Lebanon, Syria, South Africa, Tunisia
– Few LMICs use pharmacist dispensing fees
– HICs use a variety of mechanisms, often in combination
– Tends to include all medicines within the defined public or private sector
• Mali has a mechanism focusing only on certain essential medicines
• HICs may focus only on health insurance reimbursed medicines
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Table 2. Mark-up strategies with key advantages / disadvantages
Mark-up (cost price +) Key features
Fixed fee  Reduced incentive to sell higher value items
 Adds significantly to the patient price of low-cost medicines
 Relatively easy to enforce
Regressive flat fee/amount  Reduces incentive to dispense high cost medicines
 Adds significantly to the patient price of low-cost medicines
Fixed percentage
Regressive percentage
Differential percentage or fixed fee
Fixed maximum fee / percentage
 Encourage stocking and sale of more expensive items
 Relatively simple to implement and enforce
 Easy to implement
 Reduces incentive to dispense high cost medicines




Incentives created for particular groups of medicines e.g. EML
More complex to implement and enforce
Incentive for competition
May lead to reduced service quality to lower costs
Combined mark-up divided after negotiation
Capitation fees
 Reduces regulation
 No link to the sale or cost of the medicines
 Sophisticated administration systems required
Capping of mark-ups
Combinations of above
 Reduces incentive to dispense very high cost items
 Combinations of above
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• What is the impact of regulation on medicine prices
– In HIC it is assumed to be effective
– There is insufficient reliable evidence from LMICs
• Are mark-up regulations enforced?
– A few anecdotal accounts of lax enforcement in LMICs
– No sound evidence
• What special considerations are there?
– Viability of wholesalers and retailers
• Especially smaller operators, those in rural areas, those who use mark-ups on medicines to crosssubsidize other activities
– Need high political support, legislative changes, civil society support, consumer education, consultative approach, expertise, business intelligence, etc.
• Developing, implementing and enforcing mark-up regulation is not simple
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• Regulation of mark-ups without regulation of either the manufacturer’s selling price or the retail selling price is unlikely to be effective – need a comprehensive price regulation strategy
• Regulation of mark-ups will effect the viability of some wholesalers/retailers especially those in more remote areas or offering health services crosssubsidized through higher mark-ups
• Regulation of distribution mark-ups can have unintended impacts or
consequences. Incentives and disincentives need to be mapped and potential unexpected effects considered.
• A reliable monitoring mechanism for medicine prices and sales is essential to be able to judge the effects of pricing regulations, both intended and unintended.
• Mark-up regulation can be used to promote the prescription and use of generic
medicines through selective application
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• Regulating mark-ups is more complex in the private sector than in the public sector
• Improving efficiency of procurement and distribution in the public
sector should be considered as a strategy to lower pharmaceutical costs
• Adequate enforcement is necessary for regulation to be effective and this is challenging in low-income countries
• Mark-ups with a regressive component are preferable to fixed percentage mark-ups due to the incentives involved. However, fixed fee mark-ups can dramatically increase the price of otherwise low-cost medicines
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