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Nasty side effects of drugs regulation
Adele Shevel
2004-06-18

The Competition Commission says the proposed pricing regulations on drugs would remove the benefit of competition in the distribution chain and so may actually keep prices high rather than low for consumers.

The Competition Commission says the proposed pricing regulations on drugs would remove the benefit of competition in the distribution chain and so may actually keep prices high rather than low for consumers. The commission put forward this view in its submission to the Department of Health's pricing committee this week.

The submission is based on the draft regulations. In addition, labour movement Cosatu says it has grave concerns about the proposed regulations. It says they could have a negative effect on the availability of medicines the public health system the medical administrative system employment and production capacity.

Cosatu says the proposals could have serious unintended consequences, possibly leading to shortages, higher prices for the public-health sector, and the loss of employment and capacity in the pharmaceutical industry.

In the long run, these costs far outweigh the benefits of lower prices for the private sector, says the union. Mondo Ntlha, head of the legal department at the Competition Commission, says it is doubtful that the price control contemplated in the regulations is the best way to deal with the problem of high drug prices.

Instead, it may distort the operation of markets and deny consumers the benefit of competiotion. The commission says the single-exit price is effectively price control. It says that if there were a need to intervene in prices, subsidies would be preferable to maximum or minimum prices.

Since maximum prices are set below equilibrium price, not only would they distort the market by creating excess demand but also have the potential of affecting competition, and the viability of participants, in the market.

It says the restrictions on margins that may be earned beyond the factory gate may have a negative effect on the viability of distributors, wholesalers and retailers alike. If a profit margin were set too high, a firm may have little incentive to control costs. If margins were set too low, firms may have little incentive to innovate, as the returns on their investments may not have met their expectations.

The commission says that because firms are prohibited from offering discounts even for bulk purchases, price competition is eliminated in contravention of the principles outlined in the Competition Act.

The commission further says government is able to negotiate attractive deals, putting it at a competitive advantage vis-a-vis the private sector. The single-exit price for drugs applies only to the private sector, not government.

The controversial drug pricing regulations are set to change the way the pharmaceutical industry operates. The Cape High Court earlier this month instructed the Department of Health to release sub-missions made to the pricing committee.

This court order followed two separate applications launched last month against the department in a bid to have the regulations set aside on the basis that they were unlawful. (Source: The Sunday Times, 13 June 2004).

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