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There has been uproar in the media on recent increases in medicine prices, some of which are viewed as exorbitant. Many opposition politicians have made public statements condemning the government for this and social media is rife with disapproval. Further, as part of the cabinet reshuffle on 18th April 2019, the Federal Health Minister was removed, with the media claiming that this is because of the increased medicine prices.
Given medicines are a necessity, and in an environment with high inflation, some of the uproar is understandable; but are the claims that there is overpricing correct, or were these price increases legitimate? And what does pricing mean for availability of essential medicines, which are vital for public health? For the past six months I have been engaged in a research project on strategies to address corruption in the pharmaceutical sector, in partnership with the SOAS Anti-Corruption Evidence research consortium. While the project is still ongoing, I will borrow from this work to provide historical context to this round of price increases, point out negative consequences of controlling prices, and make a case for decontrolling prices for non-essential medicines.
Medicine Pricing Over the Years
The pharmaceutical sector is unique in Pakistan in that the universe of products have controlled prices, which are by and large enforced. This control is inconsistent and prone to rent-seeking. There was a virtual freeze of prices from 2001 to 2013, despite rising costs of production. Then in October 2013 the Nawaz Sharif government initially increased, but very quickly revoked this increase. 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 applications of the policy 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 the SC’s orders and with due consultation, another pricing policy was introduced in 2018.
Over the past few years, the costs of production – mainly for raw materials, 95% of which are imported – have increased drastically due to two factors. First, devaluation of the Rupee since 2017 has increased this cost. Second, China’s environmental policy has resulted in an increase of prices of chemicals, and since China is the biggest supplier for Pakistan, this means higher raw material costs.
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 (SROs) , allowed an increase in 600-plus medicines because of ‘hardship cases’ (but also reduced prices for 395 medicines). Then, acting on a SC order, and in lieu of the currency devaluation, DRAP permitted another increase of 9% for essential medicines and 15% for non-essential medicines. While there is no doubt some manufacturers may have increased their prices beyond that permissible, in general the price increase was merited and, in fact, long overdue.
Costs of Over-Regulation
The conventional argument in favour of controlling prices of medicines is a populist one: governments put a ceiling on medicine prices so as to enable the low income population to have access to affordable medicine. This seems to be borne out by the current controversy over increased prices, and the recent announcement by the Pakistan Pharmaceutical Manufacturers Association (PPMA) to reduce prices by 10-15 percent of 464 medicines ‘voluntarily’. There is indeed public pressure to keep prices in check – but does this also have a cost to economic growth and public health?
Our research into this shows that there are significant negative consequences to the strict price controls practiced in Pakistan. These costs pertain to shortages of key medicines, often leading to black marketing and increased imports, higher drug resistance, and withdrawal of multinational firms.
Businesses, by definition, operate for profit, and pharmaceutical manufacturers are no different. With a freeze in prices and no consistent increases, even though initial prices may yield high margins for manufacturers, these margins are inevitably squeezed over time because of inflation. The result is that producing a medicine is not profitable any more, leading to shortages of many essential medicines. For example, in 2015 there were multiple reports of a shortage in medicines for tuberculosis. 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 for a higher cost. The consequence of either an absence of a key medicine or much higher monetary costs is thus borne by the consumer.
The shortage hurts the poorest segments of society, who can only afford to get medicines from public health facilities, the most. One study estimated that, of a basket of essential medicines, only 15% are available in the public sector. This is not only because of public procurement issues because in the private sector, availability, at 31%, was twice as better but still much below what it should be.
When a medicine is not profitable to produce anymore, many manufacturers register a new drug to produce. At registration, manufacturers can get a price with high margins so that even if there is no increase over the short-to-medium term, they can make a profit. 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 ten-times higher than the original first-generation medicine. Again, the burden of this falls on the consumer whose out-of-pocket expenditure rises.
In addition to the 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 trainings. This has a positive spillover in the local industry as pharmacists who are 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, and to which citizens hold governments accountable. Even prices that were raised through the proper mechanism, as defined in the pricing policy, have been criticized. 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 the negative, and hugely important, consequence of unavailability of key medicines and in turn affects public health.
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 70% of their medicines below the notified maximum retail price.
The state can, however, rationally control prices of essential drugs. This will ensure that medicines which are prioritized will not have prices spiraling out of control.
More importantly, I would argue 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 (primary, secondary and tertiary) healthcare system. Provincial governments already do this at scale and this can be improved and expanded.
Finally, in the medium term there also needs to be a concerted effort by the state to incentivize the production of pharmaceutical raw materials 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.
Disclaimer: This blog is an output of a research programme (SOAS-ACE) funded by UK Aid from the UK government. The views presented in this blog are those of the author and do not necessarily represent the views of the UK Government’s official policies.
A version of this blog was originally published by Prism, Dawn.
