IN THE HIGH COURT OF SOUTH AFRICA
(TRANSVAAL PROVINCIAL DIVISION)
Case No: 4183/98
In the matter between:
PHARMACEUTICAL MANUFACTURERS’ ASOCIATION OF SOUTH AFRICA
AND OTHERS
Applicants
and
THE PRESIDENT OF THE REPUBLIC OF
SOUTH AFRICA AND OTHERS
Respondents
and
TREATMENT ACTION CAMPAIGN (TAC)
Amicus Curiae
AFFIDAVIT
I, the undersigned
ALEXANDER MARIUS VAN DEN HEEVER
do hereby make oath and say:
1. I am a director at the Centre for Actuarial Research, a research unit within the
Department of Actuarial Science at the Faculty of Commerce, University of
Cape Town. I am currently on contract co-ordinating the Committee of Inquiry
into a Comprehensive System of Social Security and Special Advisor to the
Chief Executive Officer of the Office of the Council for Medical Schemes.
Over the past five years I have worked on a range of health financing
processes and projects while attached to the Centre for Health Policy,
University of the Witwatersrand. My curriculum vitae is annexed hereto as
annex “AvdH 1”.
2. The facts deposed to in this affidavit are within my personal knowledge
except where I indicate otherwise. To the extent that I rely on the information
received from others, I believe that such information is true and correct. I
respectfully submit that I am by my training and experience duly qualified to
express the views and opinions that I express in this affidavit and to access
the repute, opinions and reliability of other persons to whom I refer.
Overview of Health Markets
3. In order to understand the overall thrust of the health policy of the South
African government, a cursory review of various issues relating to specific
characteristics of health markets is set out below.
4. In dealing with international trends in health care finance and provision, it is
important to note that a high degree of consensus has been achieved
regarding the core problems. Although measures to deal with these problems
vary across countries, what remains constant is the understanding that
government intervention is crucial in achieving key social objectives.
5. Internationally, governments intervene heavily in the financing and provision
of health care. The reason for this is well established: because of asymmetric
information between buyers (patients) and sellers (such as doctors and
hospitals), buyers are vulnerable to over-servicing and over-charging in the
absence of government regulation.
6. The standard and almost universal response to this asymmetry of information
is to accredit schools in health professions and hospitals, to license health
facilities, to introduce codes of ethics, and to place bans on advertising.
Instead of relying on markets, the standard response has been to rely on
professional norms and self-regulation by healthcare professionals and
institutions such as hospitals.
7. Further problems arise as a result of the monopoly power of service
providers, such as the raising of prices and the lowering of output and product
quality. As a result of (a) services being purchased infrequently, (b) much
medical care being of a very technical nature, (c) the emotional state of many
patients, and (d) the urgency often required at point of service, information is
costly to consumers. The lack of information over the form, amount, and cost
of future health care requirements leads to a derived demand for good health,
the demand for insurance. This leads to further problems affecting health care
costs, services and quality of care.
8. The traditional theory of market failure in health is based on the effect of
insurance on incentives.
(K. J. Arrow, "Uncertainty and the welfare
economics of medical care", American Economic Review, December 1963,
pp 941-973).
As the incidence of illness and the cost of treatment are
uncertain, a risk-averse population takes out insurance. However, once
insured people exceed any annual deductible, they face zero costs for any
further health care purchases. Consequently insured people will choose to
buy more care than they would have if they were paying out-of-pocket.
9. Further, physiciansacting as agents for their patientsrecommend and
provide more care. When physicians are reimbursed on a fee-for-service
basis, they are given powerful incentives to provide more services than
necessary. Increases in per capita expenditure are easily explained by the
combination of cost-unconscious demand, more specialists, new technology
and new tests. (A. C. Enthoven, "Why managed care has failed to contain
healthy costs", Health Affairs, Fall 1993 at 1993, pp 21-43 at 28)
10. Incentives in the health care market are so skewed that the ordinary rules of
competition do not work. Prices remain high even when volumes are high.
Technology remains expensive even when it is widely used. Hospitals and
physicians remain in business even when they charge excessive prices for
equal quality or fail to provide high-quality services. Until recently, incentives
existed only for innovations that raised costs or increased quality regardless
of cost. (E. O. Teisberg, M. E. Porter, G. E. Brown, "Making Competition in
Health Care Work", Harvard Business Review, July/August 1994)
11. Publicly financed health care systems remain the backbone of health care
financing in most countries. There are basically two approaches to the public
financing of health care: the public health service approach (including national
health services, which are universal in cover as in the United Kingdom, and
public service health systems, which only cover the poorer populations, as in
South Africa) and the national/social health insurance approach (which are
contributory in nature with the former providing universal cover and the latter
providing cover to only the contributors). In the former, the public sector is
both the financing agent and the provider of health services. In the latter, the
government is the financier but may not be the provider.
12. Indirect financing interventions include two categories of public sector action:
financial interventions that affect the cost and availability of various inputs
(such as medical personnel, drugs and equipment) in the provision of health
care services, and financial interventions that encourage or discourage the
provision of certain health care services.
13. The World Health Organisation’s 2000 report provides an important
consensus overview of directions in health system values and systems. In
particular, the report deals with the benefits that should be targeted by all
health systems, the role of governments, the principles to be followed
regarding access and equity, and public/private options and opportunities.
These issues are reflected in excerpts from the 2000 report, annexed hereto
as annex “AvdH2”.
Role of Government Intervention in Healthcare
Broad Policy Objectives
14. Private markets for health care suffer from inherent destabilising factors which
result in:
14.1.
systematic cost increases;
14.2.
adverse selection (in the case of health insurance);
14.3.
provider induced moral hazard (where providers and suppliers of
service have a profit motive to supply more services than are actually
needed by the patient); and
14.4.
consumer related moral hazard (where insured patients face zero
cost at point of service they have an incentive to consume services in
excess of their actual needs).
15. Many perverse relationships exist within the health care market that result in
the provision of services substantially beyond their value to the individual and
to society. The resulting cost spiral destabilises the viability of private health
care markets.
This excessive shift of financial resources into the private
environment results in an artificial shift of staff from public to the private sector
– and of people in need of health care from the private to the public sector.
16. Private markets for health care traditionally invert normal market behaviour.
Whereas demand leads supply in other sectors, the supply of services within
the health sector creates demand. It is for this reason that most countries
reserve the right to constrain growth in the supply of services in the public
interest. In many countries, for example, controls are placed on the creation
and deployment of new services and equipment. Although this needs to be
done with care, it is by no means unusual within an international context
within market driven economies.
17. Where the demand for pharmaceutical products is induced this represents a
substantial overhead cost for the economy as a whole, as well as affecting
the competitiveness of all companies that provide private health cover for
their employees.
Bringing down medical costs should thus improve the
competitiveness of South African businesses. It will also improve access to
necessary and essential pharmaceutical products as in the case of HIV/AIDS.
18. Many countries seek a degree of discretionary power over drug prices and
the range of products available on the market. Although direct controls are
not always desirable, it should nevertheless remain as one of a range of
important instruments that can be used to ensure that drugs remain
affordable and that market power is not used unfairly.
19. Government intervention in healthcare is never restricted to one or two
instruments, ranging from demand- to supply-side measures in private and
public environments. Health policy is never restricted to interventions
exclusively within the public sector. This is acknowledged by the World Health
organisation's 2000 report (Annexure AvdH 2).
20. Demand-side interventions include the regulation of the funding side of health
systems, either through tax-funded systems or through regulated private
insurance markets. South Africa has adopted a mixed approach to demandside regulation whereby it intervenes in both environments to remove unfair
discrimination, to regulate the perverse incentives of agents (brokers and
related intermediaries) and to generate incentives for cost-containment. This
is a substantive policy intervention that was introduced through the Medical
Schemes Act (No. 131 of 1998), and must be seen together with all other
areas of reform.
21. Supply-side market interventions regulate the supply of new technology,
increases in the number of beds, the registration and distribution of drugs,
increases in the number of new professionals (such as doctors and nurses),
price controls and ceilings, marketing practices, pricing practices, dispensing
and irregular incentives granted to doctors, pharmacists and hospitals. Such
interventions can be used both for specific situations (such as an epidemic)
and for controlling perverse practices and the abuse of monopoly power (such
as the ability to use unfair market power or collusion to drive prices up).
Given that the health market is especially prone to supply-side problems, the
regulatory power of government here is regarded as essential, especially
where large private health sectors are involved. Large private sectors often
lack the balancing (monopsony) effect of a large single purchaser to counter
the monopoly/oligopoly power of pharmaceutical vendors.
22. No single measure or instrument on its own is sufficient to deal with the
multidimensional nature of a health system. The regulation of the health
system involves interventions on publicly and privately provided health
services, on both the demand and supply side. Without this approach, major
distortions will emerge in one sector that will have a negative impact on the
other sector.
The Role of Pharmaceutical Regulation
23. In pharmaceuticals, the instruments used to regulate the private sector (for
example, manufacturers, distributors and pharmacies) include controls on
drug quality (through mandatory inspection programmes), controls on imports
(restricting imports of dangerous products or permitting the import of only
essential drugs), and registration and licensure of pharmacists. Restrictions
on the prices at which pharmaceuticals can be sold have also been widely
imposed.
24. In evaluating the impact of regulation, a number of issues need to be
considered, including the extent of coverage, the capacity of government to
monitor compliance with regulation, the extent of enforcement and
exemptions, and the extent to which the private sector can circumvent or
evade regulation.
25. The Assessment Guide for Pharmaceutical Policy, annexed hereto as annex
“AvdH 3”, indicates that discretion in licensing, marketing and generic
substitution are standard instruments for a domestic pharmaceutical policy.
(Management Sciences for Health, Managing Drug Supply, Second Edition,
Kumarian Press, Boston 1997)
Unfair Market Power
26. As already noted, the health market is prone to a number of market
distortions that can severely hamper the performance of a health system. One
that is fairly typical in the private side of the system is that of unfair market
power.
27. Unfair market power can take the form of a single supplier of a good, as in the
case of a product under patent or a single government monopoly. This .can
be very problematic in the case of essential life-saving/prolonging goods and
services.
28. In these instances suppliers of the good are able to charge prices that are in
excess of what would be charged in a competitive market. This results in the
market distortion termed “super-normal” profits. Such a price is regarded as a
market distortion because it is in excess of the socially optimal price -- society
as a whole is left worse off. In such circumstances, governments usually
regulate prices so that they sit at the socially optimal level.
Consumer Protection
29. Consumers are often placed at a disadvantage in situations where there are
significant information asymmetries, requiring them to rely on the advice and
recommendations of third parties. Consumers cannot inspect every
commodity that comes on the market or personally test every product for
safety. Great reliance is therefore placed on government authorities and paid
intermediaries to assist the ordinary consumer in making certain decisions.
30. Intermediaries, however, are influenced by financial incentives and may be
given specific incentives to advise consumers to use preferred goods and
services. The central concern here is that the consumer is under the mistaken
assumption that they are receiving independent objective advice. The advice
given and resulting consumption patterns are not only market distorting, but
result in a deviation from the preferences individuals would have expressed if
they had full knowledge of all the options.
South African Experience of Cost Increases in the Private Sector
Overview
31. The year-on-year changes in cost, as opposed to price changes and price
levels, is the primary problem facing purchasers of health care. Price is
however very important in all countries where a public sector health priority
may be involved. HIV/AIDS, malaria and tuberculosis all involve public health
servicesin such cases, very high prices could effectively reduce the viability
of critical social interventions.
Pharmaceutical Cost Increases in the Private Sector
32. Systematic cost increases above general inflation and economic growth are a
universal phenomenon in voluntary health insurance environments where
services are reimbursed retrospectively on a fee-for-service approach.
Although some cost containment is possible through bill reviews and the
creation of all-inclusive fees (per diems, global fees or diagnostic related
groupers), these have been shown over time to be of limited value.
33. Tables 1 and 2 (attached hereto as annexures “AvdH 4” & “AvdH 5”) show the
real changes in total spending on drugs, hospital services and other benefits
by South African medical schemes over the period 1974-1999. Overall, drugs
have increased in cost by 273% in real terms, while hospital costs have
increased by 512.5%. In 1974, per capita drug costs for medical scheme
members was R 305. By 1999 this had increased to R 1,137. (Annex “AvdH
5”). The figures for 1997 onward should in fact be higher than they are, but
reduce relative to hospital benefits due to a definitional change in the medical
scheme statutory return from that year. This results in some medicine
expenditure now falling under hospital benefits. There is consequently a
discontinuity from previous years. However, after note is taken of the
adjustment in 1997 the trend continues as before. In future it will prove more
difficult to track pharmaceutical cost increases using medical scheme data
due to reductions in the coverage of certain medicines through the use of
deductibles and co-payments. This trend has been increasingly evident
during the 1990s.
34. Figure 1 (attached hereto as annexure “AvdH 6”) shows real changes in total
expenditure by medical schemes on medicines, hospitals and other benefits
for the period 1974-1999, with figure 2 (attached hereto as “AvdH 7”) showing
real changes in per capita expenditure by medical schemes on medicines and
hospitals for the same period.
South African Pharmaceutical Policy
35. Figure 3 (attached as “AvdH 8”) provides a representation of the importance
to the pharmaceutical industry of uncritical purchasers. The essence of the
problem faced by the country at present is a cost problem related to both high
prices and the volume of drugs prescribed.
36. Pharmaceutical companies influence the principal decision-maker in the
process of selling drugs -- the physician -- through both general and specific
incentives to sell. The former occurs because of the percentage mark-up,
while the latter occurs when bonuses, discounts and other inducements are
used to get doctors to favour particular brand-name products.
37. Virtually all the incentives in the private market induce doctors to prescribe
high cost drugs as often as possible. This behaviour permits the
pharmaceutical industry to charge higher prices than they would when
compared with a normally functioning market.
38. The proposed reforms in the Medicines and Related Substances Control Act
focus on addressing various incentives given to doctors to over-prescribe, or
to prescribe the drugs from which they receive the greatest profit. Generic
substitution, transparent pricing and the outlawing of specific inducements to
doctors, if they work, should increase price sensitivity in the market.
Response to Arguments Made By the First Applicant in the Answering
Affidavit to the Amicus Curiae
39. I have read the Answering Affidavit of the First Applicant. The following are
my responses to specific allegations made in that affidavit.
40. In paragraph 5.3 the Applicant asserts that “no saving whatsoever will be
brought about in the public sector by the process catered for in section 22F
i.e. by generic substitution.” This is mistaken. The situation of the public
sector can be greatly enhanced by general cost reductions in the private
sector. Generic substitution by its nature is targeted at perverse behaviour
and incentives in private fee-for-service markets for healthcare, where doctors
dispense. As such any move to remove these perverse incentives should
improve access to health services generally through preventing any
reductions in medical scheme cover in the private sector.
41. In paragraph 5.4 the Applicants states that there is “no prospect that any
saving in the public sector will be brought about by the provisions of section
22G.” This is incorrect. Any removal of perverse incentives in the private
sector will impact on funds available in the public sector. Lower costs in the
private sector protect medical scheme cover, which indirectly assists the
public sector.
42. In paragraph 5.8 the Applicant states that no cost saving will result from
generic substitution at the levels of the dispensing doctor, private hospital or
clinic. However, it is my belief that the Act would result in a situation where
medical schemes, via the retrospective review of bills, would be in a position
to ensure compliance with generic substitution in hospital settings. They
would also be in a position to set reimbursement rates for drugs consistent
with the now transparently priced lowest cost drug on the market.
43. In my view the relevant sections of the Act greatly empower medical schemes
to negotiate appropriate prices for drugs – which will result in lower costs.
Furthermore, the establishment of the single exit price and the handling fee
would in conjunction with mandatory generic substitution substantially
improve the ability of the final purchaser to obtain fair prices for drugs in the
case of ward stock and hospital dispensaries.
44. In paragraph 5.9 the Applicant asserts that the savings from the measures in
the Act will be “small, if any.” This not accepted. They should, if used
correctly, have a dramatic impact on prices by moving the system closer to a
fair market.
45. In paragraph 6.1 the Applicant asserts that a less restrictive means of
permitting generic substitution would require “no more than a law giving an
option to the patient to direct the pharmacist to dispense a cheaper generic
version of the prescribed medicine; …” . Such a recommendation is
unrealistic. It would rely on the unlikely scenario of the typically
disempowered and uninformed patient to opt for a generic. This would allow
current abuses to continue.
46. In paragraph 6.2 the Applicant again argues that a less restrictive way of
preventing perverse incentives would be to target the specific practice, e.g. by
prohibiting the doctors and pharmacist from not passing on a discount etc to
the patients. However, the suggestion places too much reliance on measures
that can be bypassed by indirect means. As argued earlier in this affidavit, the
instruments available in the Act must be combined to achieve their maximum
effect.
47. At paragraph 9.1.8 the Applicant complains that the single exit price will leave
no room for competitive pricing, for discounts or for prompt payment
incentives. If a discount were permitted, as argued earlier, this would permit
special incentives to be given to doctors or hospitals. The maximum price or
ceiling that is preferred by the Applicant would, if set high, merely reproduce
the current environment whereby a special volume-related discount off a
published price are provided to service providers. For the single exit price to
have any meaning, it would clearly have to be the only price. If the PMA
recommendation were accepted, it would result in a high ceiling price with
discounts. In the case of a single exit price, a lower competitive price would
result as manufacturers would have to avoid being over-priced. The market
dynamics would be very different to that of a ceiling price.
Price factors in the private market
48. The third-party purchaser in the private sector is the medical scheme and is a
crucial element in the overall strategic policy picture. The revisions to the
Medical Schemes Act (No. 131 of 1998) address many of the perverse
elements on the final demand side for pharmaceuticals and other medical
goods and services. This element serves to enhance the supply-side reforms.
49. There are essentially two elements driving up volume in the private market for
drugs.
50. The first relates to a general incentive given to prescribe higher-priced drugs
often, the percentage mark-up. Until now the mark-up has been provided to
doctors, pharmacists and hospitals as a dispensing fee, i.e. to cover the cost
associated with procuring, storing and dispensing a drug. The mark-up has
been reflected as a percentage on a published price (e.g. the “Blue-book”
price, namely the price listed in the Ethical Pricing List, published by
Pharmaceutical Publishers and Printers). The final purchaser, the patient,
pays a price which includes this mark-up. As the medical scheme is
reimbursing or directly paying for the drug in the private sector, the patient is
not very price sensitive. Even if they were concerned about the price, they are
not in a position to question the decision of the doctor. The general mark-up
therefore creates a powerful incentive to increase the volume of drugs
prescribed and to prefer the higher-priced drugs.
51. The second element involves specific incentives targeted at doctors
responsible for both prescribing and dispensing. These specific incentives are
additional to the general incentive and are used to create preferences for
specific companies or brand names. Incentives take the form of:
51.1.
Bonusing: this is essentially a direct financial kick-back in exchange
for proof of volumes prescribed and dispensed – the extent of the bonus
is linked to target volumes;
51.2.
Discounts of the published price (this substantially increases the
impact of any percentage mark-up);
51.3.
Formularies: doctor groupings such as Independent Practitioner
Associations (IPAs) create limited drug lists. Pharmaceutical companies
essentially have to pay a “fee” to get on the formulary. Limited lists used
by the final purchaser are usually quite beneficial for cost management.
However, when used by the agent (i.e. the doctor) they are used to
“pressurise” pharmaceutical companies for additional compensation.
52. When these elements are combined with a price insensitive final purchaser,
the market will be faced with general price and volume increases beyond
what is actually needed and high prices (due to the preference created for
high price drugs).
53. As the mechanisms causing the eventual cost increases (price x volume)
result from a combination of perverse elements, market corrections are
required through a combination of instruments. No single measure is
sufficient on its own.
Policy instruments:
54. The various measures described below, which are in my opinion rational and
reasonable, are part of the overall policy package introduced by the
Medicines and Related Substances Control Amendment Act Although I am
aware that the amicus curiae has sought permission only to defend Sections
15C, 22F and 22G of the Act, it is important to see these measures in their
context.
55. The general mark-up: The appropriate response here is to move to a flat-rate
dispensing fee rather than a percentage mark-up. However, without
addressing the specific incentives given by pharmaceutical companies to
agents, very little will be achieved by this measure on its own.
56. Specific incentives: These are dealt with through:
56.1.
Outlawing of bonusing and discounting: On its own however, these
measures are not sufficient, as there are too many ways that kick-backs
of one form or another can be given, both directly and indirectly.
56.2.
Transparent pricing from manufacturer to final purchaser: This
measure can assist in making all market participants aware of the prices
and mark-ups being paid from the manufacturer to the final purchaser.
However, although this measure is useful, it will achieve little when the
purchasing decisions are controlled by agents receiving kick-backs.
56.3.
Mandatory generic prescribing: This breaks the crucial link between
the act of prescribing and dispensing – greatly disrupting the ability of the
pharmaceutical manufacturer to incentivise a chosen agent. This is one of
the central measures that begin to address the core problem of specific
incentives to agents.
56.4.
Single
exit
price:
This
eliminates
specific
discount-related
incentives being provided to agents. It therefore removes an important
perverse incentive.
56.5.
Elimination of the dispensing doctor: This measure, in conjunction
with mandatory generic prescribing by pharmacists, breaks a number of
critical collusive arrangements, making it far more difficult to co-ordinate
the allocation of specific incentives as easily as before.
57. The measures described above achieve a number of rational objectives in
relation to overall health policy:
57.1.
The general trend in the cost of drugs can be addressed, reducing
the cost of private medical scheme cover and preventing a drop out of
membership on to health services provided by the state.
57.2.
Basic
consumer
protection
is
enhanced
through
removing
incentives to prescribe drugs that are either not needed or may even be
harmful to members of the public.
Mandatory Generic Substitution
58. Mandatory generic substitution is criticised by the first applicant on a range of
grounds. Some responses to questions raised by the PMA and its consultants
are provided below.
59. Why are pharmaceuticals treated differently from other commodities where it
would be regarded as abnormal behaviour for a substitution to occur?
60. The purchase of pharmaceuticals has an agent interposed between the
product and the final purchaser, unlike in the case where clothing or a
television set is purchased. In the former instance the product that is being
purchased is “good health care”, which includes the pharmaceuticals
purchased. Here the patient is concerned about the outcome only and the
brand name of a product attracts no loyalty. A problem exists for the patient,
however, in that the health care is purchased in a time of need and with a
limited opportunity to shop around.
61. In the case of an ordinary commodity, taste and personal preference play an
important role in the choice of whether and what to buy. This ceases to be the
case in all situations where an agent with substantial influence over the final
demand for goods and services is interposed. In ordinary markets the
purchase is not driven by an acute need and an opportunity to shop around
and to review alternative products can occur. If the consumer wishes to trade-
off a higher price against a specific preference for a product with a particular
characteristic, e.g. colour or quality, then this can occur through delaying the
purchase of other products or by dipping into savings, by saving or by taking
a loan.
62. Health care is often purchased through some form of insurance in the private
market. However, health insurance also reduces the incentive of the
consumer to review the purchase. Many health care providers take advantage
of this fact, within a fee-for-service environment, to provide services or
prescribe in excess of the needs of patients for personal gain. Over time this
creates a market driven by what is termed “supplier induced demand”.
Ultimately this results in systematic cost increases which are difficult for
individual purchasers of health care to adequately contain.
63. Within private markets the following considerations over-and-above price
need to be taken into account:
63.1.
The drug bill of any medical scheme is based on both the price and
the volume of drugs dispensed or used. Volumes may accelerate if prices
are contained.
63.2.
Year-on-year changes in price are often more important than the
price level in any one year. The freedom to increase prices substantially
above the general inflation rate is often an indication that the market is
not adequately responding to price signals. The implication is that some
form of collusive arrangement (or other market imperfection) is occurring
such that the consumer is not adequately empowered, through normal
market forces, to force prices down to competitive levels.
63.3.
Year-on-year changes in the overall cost of medicines are a clear
indication that the primary agent determining the drug purchase of the
patient is profiting from additional sales. The doctor is able to control the
volume of sales, as well as the final price of the drug. The doctor profits
from both. Clearly a collusive arrangement between the manufacturer and
the doctor will cause a problem here, and often does.
64. Within properly functioning markets, pharmaceutical manufacturers will have
to price their products more competitively. They will also face a market in
which incentives to induce additional volume may be reduced. Both these
influences will probably force uncompetitive products off the market.
Consequently, manufacturers with limited justification for survival will drop out
of the picture – as is the situation within normal markets.
Parallel Importation
65. It is generally accepted as normal market behaviour to attempt to purchase
the lowest cost equivalent drug on the market. If the public sector remains
restricted to domestic suppliers, this fundamental principle of normal market
behaviour cannot be observed. Aside from the issue of quality control (which
is addressed through other measures), there is no market-related reason to
prevent the introduction of parallel importation. As a measure for eliminating
the effects of market segmentation (price discrimination) in the purchasing of
essential drugs it is clearly an essential measure.
Single-Exit Price
66. Provided here are some responses to comments that have been made by the
PMA and one of their consultants, Prof. Duncan Reekie. The responses to
these arguments are important in illustrating why the reforms are important
instruments of public policy.
67. According to material filed by the Applicant: “Uniform price legislation would
make it illegal to negotiate discounts on prescription medicine (other than for
volume) with retailers who can offer services to manufacturers that justify
discounts. Uniform prices should be opposed as a form of price control. They
are inconsistent with the goal of strengthening competition in the private
health sector and would curtail company pricing flexibility - a flexibility which
has been important in causing reductions in ex-factory price levels in recent
years, and which, in turn, despite many artificial rigidities in the distribution
chain, has resulted in lower prices paid by patients to many previously
unavailable forms of medicine distribution (for example mail order
pharmacies,
dispensing
doctors
and
preferred
provider
pharmacies
nominated by medical schemes). Conventional retail pharmacies, leading
proponents of uniform pricing, consequently now find it essential to offer
discounts to their customers.” (Reekie) (PMA, 1997)
68. Reekie fails to note that the final consumer of medical services has faced no
real reduction in cost. Consequently, the value of price flexibility in reducing
the final cost of drugs must be questioned as ex-manufacturer price flexibility
has existed over all the years in which costs have been rising.
69. Furthermore, discounts within the market for medicines rarely result in lower
costs for the final purchaser. In fact none of the discounts on offer have that
as a final objective. In those instances where a pharmacist offers a discount
to a patient, this is frequently at the expense of a medical scheme. For
instance, the pharmacist offers the patient a discount on a drug which is fully
covered by a medical scheme. However, the patient is allowed to claim from
the medical scheme at the full price, with the assistance of the pharmacist,
and keep the difference. This discount is used by the pharmacist to provide
an incentive for the patient not to use a dispensing doctor, or to create a
preference for a particular pharmacy. The discount is not genuine and is
fraud, i.e. the claim from the medical scheme is more than the actual charge.
Discounts have however primarily been used as incentives for increased
prescribing of particular drugs.
70. “Secret rebates do not remain secret for long and any rebate is soon
matched. This is how competition avoids prices congealing at high levels.
(Reekie) (PMA, 1997)
71. Rebates within the health market are common and very confidential. These
rebates do not result in lower prices for the final purchaser, irrespective of
whether or not they remain secret.
72. “The price difference between the two sectors, in effect, if not in intent, results
in a redistribution of income.” (Joan Robinson, 1933) (Quoted by Reekie)
(PMA, 1997)
73. Price discrimination allows the supplier to capture a greater portion of the
consumer surplus than would be the case with a single price. Rather than
being a “redistribution of income”, the measure if introduced prevents these
socially sub-optimal transfers to producers.
74. The creation of a transparent single exit price reduces the ability of the
supplier to use price as a form of market manipulation.
75. Individual price comparisons between particular medicines today, versus the
same a few years on, will not reflect the above behaviour. This is because the
medicines upon which providers were maximising profits a few years ago,
may not be the same now. These would change depending upon the specific
incentives applied to specific medicines provided at any one point in time.
Some medicine prices may even go down. However, costs will increase as
the focus remains on the highest priced medicines and keeping the number of
items per script high.
76. “... the fact that distribution costs in South Africa are among the world’s
highest. Or to put it another way, South African manufacturers receive among
the world’s lowest percentage of the final selling price of medicine.” (PMA,
1997).
77. Reekie places strong emphasis on the price impact of inefficient distribution
chains within the pharmaceutical market. However, one of the primary
reasons for the high prices of medicines involves the manipulation of the final
purchaser, and the incentives given to do so. The high cost distribution chain
could explain why medicines are generally expensive, but it cannot explain
the annual real cost increases that are evident in the market. Consequently
the distribution chain cannot be seen as the primary cause of high medicine
prices. Savings from improving efficiencies in the distribution chain will only
result in a one-off reduction in the cost to the retailer or dispensing doctor.
This one-off saving need not be passed on to the patient and historical cost
increases could remain unaffected.
Conclusion
78. On the basis of all the above I submit that sections 15c, 22F and 22G are
rational measures, anticipated by national and international health policy, that
have the legitimate and likely objective of reducing the price of essential
medicines in the South African private and public health care sectors.
________________________
DEPONENT
SIGNED AND SWORN TO BEFORE ME AT JOHANNESBURG ON THIS THE
10TH DAY OF APRIL 2001, THE DEPONENT HAVING ACKNOWLEDGED THAT
HE KNOWS AND UNDERSTANDS THE CONTENTS OF THIS AFFIDAVIT, THAT
HE HAS NO OBJECTION TO TAKING THE PRESCRIBED OATH AND THAT HE
CONSIDERS THE SAME AS BINDING ON HIS CONSCIENCE.
________________________
COMMISSIONER OF OATHS