The manufacturing industry has since taken a more constructive approach by engaging with government and presenting the necessary data to support their argument through consultative processes facilitated by the Department of Health during the drafting and
finalization of regulations under this Act. This is definitely a more productive engagement that should
characterize policy formulation and implementation in a sector as critical as the pharmaceutical industry.
At least two major drug manufacturer's organizations - Innovative Medicine SA and National Association of Pharmaceutical Manufacturers - were this week reported to have taken a decision to comply with the medicine pricing regulations.
Their commendable stance came in the middle of the debate where those opposed to government efforts to reduce the prices of medicine expressed their determination not to abide by the medicine pricing regulations set by government. They argue that last month's decision by the Supreme Court of Appeal, which set aside the pricing regulations, stands despite the appeal process lodged by the Department of Health at the Constitutional Court.
Ordinarily, when a higher court has decided to consider an application for leave to appeal, the decision of the lower court is suspended until the higher court rules on the matter. This thesis is based on a general judicial rule that that any appeal to a higher court suspends the decision of the lower court.
Unfortunately as a young democracy, we still have a few in our society who are yet to be convinced that the Constitutional Court is the highest court in this country, particularly on this issue which has been argued on Constitutional grounds by both parties since the beginning of the case at the Cape High Court earlier last year.Also during this week, one of the main opponents of the medicine pricing regulations, New Clicks, reported a 25% increase in the company's turnover for the four months ending December last year. The company said one of the main contributors to this improved profit was its wholesale pharmaceutical distributing division, which grew its turnover by 34,5% to R943 million. The pricing regulations proved to be favorable for the division, since pharmacists had moved away from stocking large amounts of medicine, the company Chief Executive Trevor Honeysett was quoted as saying in Business Report.
It appears as though at least two levels of the drug distribution chain -manufacturers and wholesale distributors - are generally adapting to the new dispensation and some are already reaping the benefits of government pricing regulations.
Over the past year or two, there has been stiff resistance to this transformation process at the third level of the drug distribution chain which is responsible for delivering the medicines directly to the consumer -the dispensing doctors and pharmacists.Some dispensing doctors were vehemently opposed to the new policy of licensing dispensing health professionals with the aim of ensuring that health professionals who dispense are competent and adhere to good standards of practice. Two cases were subsequently lodged at the Pretoria High Court against the dispensing regulations. One case was withdrawn and on the other, the court ruled in favor of the Department of Health. The matter is now awaiting the ruling of the Constitutional Court and, in the meantime, these professionals are generally complying with the law. The Department of Health has issued thousands of dispensing licenses.
The opponents of the transformation process within the retail pharmacy industry initially argued that the dispensing fee that can be charged by pharmacists was too low and would therefore undermine the viability of this industry. In subsequent arguments in court on this matter, they questioned not only the dispensing fee set by government but also the whole idea of regulating prices in order to improve accessibility to medicine. Highly priced medicine is preferred because of better returns when using a percentage mark-up system. The lowering of medicine prices to benefit the consumer is therefore bad news for those who have built their business models on this practice.
The Department of Health has no reservation in discussing the appropriateness of the current dispensing fee with the retail pharmacy industry. If information that requires the recalculation of the current dispensing fee becomes available, the Department can engage in that process. We have said that the dispensing fee will be reviewed every year in line with the appropriate economic indicators. This means that the current dispensing fee, which became effective last year will have to be revisited and adjusted accordingly during the course of this year. We have made efforts to reach consensus with the aggrieved pharmacy groups. In addition to consultation with them as one of the stakeholders during the drafting of the regulations, the department facilitated further discussions on the dispensing fee with pharmacists after the regulations came into effect and we set up a task team to consider the concerns of pharmacies. The task team requested concrete evidence from the Pharmaceutical Society of South Africa (PSSA) and New Clicks to substantiate their concerns. Instead of providing this evidence to the department, Netcare group, New Clicks, and PSSA chose a difficult path by taking this matter to the Cape High Court. Unhappy with the proceedings at the Cape court, this group took an unprecedented move of applying for an appeal directly to the Supreme Court of Appeal in Bloemfontein even before the Cape High Court could make its ruling whether to grant leave to appeal or not. Normally, an applicant would wait for the court which has been handling the matter to decide whether a leave to appeal is granted before approaching a higher court.
The issues of transformation of our judiciary that this case has raised have been discussed widely. Of immediate concern to the Department of Health are deliberate efforts made by the three groups to undermine the regulations while the Constitutional Court is still going to consider the matter. It is clear that these groups are keen to fleece medical aids through high dispensing fees without any regard for the poor patient who is going to end up exhausting their medicine benefits before the end of the year.
Managed HealthCare Systems (MHS), a company contracted by pharmacists to come up with an alternative medicine pricing structure to that set by government, have advised the pharmacists to charge a dispensing fee of between 15 and 50% plus a fixed fee of between R5,50 and R40.
In an example given by MHS on how the model works, a manufacturer will sell a packet of 20 Stopayne tablets at about R31.45 to a pharmacist. The pharmacists will add a fixed fee of R5.50, putting the price at R36.95 before charging another 50% of this amount (ie. R18.48). The medicine will end up selling at R55.43 to the consumer. This means that the pharmacist will have a mark up of 76% (R23.98) on a medicine bought from the manufacturer at R31.45. The MHS pricing structure will result in pharmacists earning close to three times more than what they were receiving even before the implementation of government pricing regulations. When applying government pricing regulations on the same medicine quoted above, a pharmacist would simply add 26% on the manufacturer's price of R31.45. This means that a consumer would buy the medicine at R39.63 instead of an unjustifiable R55.43 set by MHS. The Financial Mail best summed up this whole scenario around the new dispensation for the pricing of medicine when we published the draft regulations for public comment at the beginning of last year. In an editorial comment published on 23 January 2004, the Financial Mail said:
The draft medicine price regulations constitute the most fundamental shake-up of the private healthcare sector in decades - and threaten the super-profits traditionally earned by most corporates operating in this sector. Not only should they (the regulations) occasion an immediate reduction in the price of medicine... they should also curb annual increases in medicine prices and thereby help rein in medical inflation, which has raged at double digits throughout most of the 1990s.
(The regulations) are entirely consistent with what exists in most European Union countries and in Australia, fundamentally free-market economies...Though the means to achieve this involve the state fixing the price of medicine and interfering in the free market to regulate profit-taking in the distribution chain, the advantages clearly outweigh the disadvantages. The pros are cheaper medicine and a transparent pricing system where the factory-exit price of a drug is known and the mark-ups added by middlemen are limited to a ceiling set by government. This will prevent undue profit-taking in the distribution chain and because it will no longer be more profitable to sell higher-priced drugs, the market should shift as a whole towards cheaper generic drugs.
The downside is that any discounting of the factory-exit price will not be allowed. This will eliminate volume-based discounting, a function of free markets the world over. Among the hardest hit will be New Clicks, Dis-Chem and other big pharmacy and hospital groups, which will no longer be able to use their size and buying capacity to negotiate better wholesale prices than their smaller competitors. However, the reality is that in the past bulk discounts have seldom been passed on to the consumer, allowing some players to make unreasonable profits on the sale of medicine, reportedly of up to 350% ...the various players in the industry who stand to lose out under the new system - private hospitals, pharmacists, dispensing doctors, wholesalers and drug manufacturers - are unlikely to give up a collective R4bn without a fight. It's the job of civil society, large medical aid administrators, the health department and the pricing committee to ensure that players don't buck the new system.
This editorial comment captures perfectly the situation we were faced with in this industry and why it necessitated the interventions we made. It correctly predicted the level of resistance to change that particular interest groups have responded with. But more importantly it calls on particular sectors to ensure that the system is not undermined. The role of civil society in defending their rights of access to health as entrenched in the constitution and effected through the Medicine Act and other pieces of legislation cannot be over estimated. Government is determined to play its role, but it is the people themselves that have the power to defend their rights. The medicine regulations are effective and they state that only a dispensing fee of 26% for the medicine with a single exit price (manufacturer's price) of R100 and below should be charged. Where the single exit price is higher than R100, a maximum of R26 dispensing fee can be charged. Our people can exercise their right to access affordable medicine. They can do so by refusing to pay unjustifiable fees that some pharmacists are adding onto the price of medicine. They can also opt for pharmacies that are complying with the regulations such as Dis-chem, Pick 'n Pay Hypermarket Pharmacies, Shoprite Medi-rite Pharmacies, Van Heerder Pharmacies Group and other individually owned pharmacies
The Department of Health will continue to provide stewardship in the process of transforming the health sector to ensure access to quality healthcare for all. In this regard, we will not compromise on our mandate to make quality medicine accessible and affordable to our people.
(Source: ANC Today, January 21, 2005)