The malady of misaligned medical pricing

February, 8, 2019

~ A thought-leadership By the Sri Lanka Chamber of Pharmaceutical Industry -

The rapid growth of the world’s population, coupled with constant advancement in biotechnological and biomedical research, has given rise to more people needing access to frequently evolving treatment. With wealth disparity continually widening, this seemingly simplistic equation has shouldered a raft of economic, social and political implications when pharmaceutical stakeholders attempt to identify an ideal price.

Sri Lanka has grappled with the issue of identifying the right pricing structure for pharmaceuticals for multiple decades. Lending further nuance to the situation is the country’s historic stance on healthcare access, which transforms the issue of medical pricing into a political subject.

Sri Lanka, with a population of 20 million, has an approximate market size of $ 600 million (roughly Rs. 108 billion) according to IMS Health and is growing at mid-single digits, representing a small and slow-growth market for pharmaceuticals.

With limited resources, a lack of support and infrastructure for domestic production as well as a relatively small population, Sri Lanka is primarily an import market for pharmaceuticals. Shifting this balance and becoming competitive relative to major pharmaceutical manufacturing economies requires significant capital investment, including the expansion of the country’s manufacturing base, technical know-how and access to competitively-priced raw materials.

Given the size of Sri Lanka’s market, pharmaceutical manufacturers investing in multi-billion-rupee facilities, technical expertise and technology will also seek an upside via export opportunity, as the domestic market alone may not provide sufficient return on investment.

The role of the pharmaceutical importer in Sri Lanka

Until such time as Sri Lanka can become more self-sufficient, the market is served by a network of importers, foreign and domestic manufacturers, central procurement agencies, hospitals and retail pharmacies who supply medicines and therapies where they are needed most.

These medicines come at multiple price points. For example, ‘branded’ pharmaceuticals are priced higher than unbranded or ‘generic’ pharmaceutical products. Patients need to be encouraged to question their physicians and pharmacists and learn about medicines before they take them.

The role of the importer and distributor is one of intelligently satisfying demand for medicines around the country. Importers represent pharmaceutical manufacturing firms but their ultimate stakeholders are the patients, to whom they have a responsibility to provide quality medicines.

In terms of ensuring accessibility and affordability, importers and distributors also ensure that the medicine is available at the right price where it is most required in the country. This requires careful demand and sales planning. Just like the mechanisms applied to decide which therapies should be made available for retail, if many medicine brands are available at multiple price points, the right brand will be made available in geographies that take into account that population’s ability to afford these therapies. These are intensive activities led by a market mechanism and supported by research and understanding of local market conditions that distributors carry out daily.

The right price  

A common Sri Lankan perception held since the establishment of a 1970 commission of inquiry into pharmaceutical pricing is that intervening to fix pricing governing pharmaceuticals makes medicines more affordable and accessible.

With the introduction of centralised procurement in an attempt to regulate pharmaceutical pricing as a policy in Sri Lanka, any attempt at market determination of supply and demand was removed.

The introduction of price regulation in pharmaceutical markets is motivated by the notion that neither doctors nor patients make choices on pharmaceuticals based on the cost involved. Furthermore, it pivots on the idea that patients rely on the informed decisions of their doctors to choose medication.

Much back and forth on pricing formulas has ensued, which has resulted in failed policies and an absence of due consideration paid to reference pricing and the development of domestic manufacturing capability.

Currently, Sri Lanka’s price controls are modelled on the mechanism instituted by India. However, Indian rules cannot be applied without adequate consideration to Sri Lanka’s market context. This is also particularly important because in India the ostensible reason for price regulation is to increase affordability and accessibility in a country that is considered a privatised health economy (Duggal 2007) with around 80% of healthcare expenses being privately borne, with the majority consisting of out-of-pocket expenses.

In Sri Lanka’s case, the evidence suggests a dynamic markedly different from the intent of price controls, which has led to extreme market distortion, shortages and supply chain disruption.

Price ceilings derived from or based on the Indian model are unsuitable for Sri Lanka as India is a large domestic market with a substantial domestic drug-manufacturing base and largely privatised healthcare. Meanwhile, Sri Lanka is not self-sufficient in most pharmaco-therapies and has a system of subsidised and free healthcare.

This pricing mechanism uses the median price of any drug that commands a 2% or more market share (by volume). In most instances, the median price is a branded Indian generic due to the large volumes of such drugs sold in the Sri Lankan market. As a result, most ‘originator’ brands are faced with an unviable ceiling price, that is neither reflective of cost nor of quality.

Furthermore, good quality drugs developed with innovation in the originator countries would no longer supply Sri Lanka as they would be unviable, resulting in only cheaper and older generics being available. This affects not only the individual choice of consumers but also the country’s ability to continually access the newest medication.

There is also the significant impact of exchange rate fluctuation. When the costs of imports vary with every shipment due to exchange rate variability, fixed prices become highly infeasible. In October 2016, the USD/LKR spot exchange rate was Rs. 144 and the situation continues to remain tenuous.

In an import market, under significant rupee depreciation, the impact of price fixing results in significant shortage and distortion, with quality being compromised as innovative pharmaceuticals are substituted with less reliable, low-cost medicines to meet the stipulated prices; reliable and regularly prescribed pharmaceutical brands being withdrawn from the market; new-generation medicines and therapies not being registered; healthcare professionals facing drug shortages; and independent retailers and auxiliary services (distributors, logistics service companies) who are SMEs and comprise 97% of retail supply being forced to shut down operations. 

Four other factors which emphasise the unsuitability of rigid price controls in the local market are:

  • Sri Lanka already has universal healthcare and centralised procurement
  • Pharmaceuticals are a significant contributory factor towards the rising costs of living
  • Pharmaceutical industry growth is driven almost entirely by volumes and not price
  • Sri Lankan pharmaceutical prices are amongst the lowest in the region

There is also an abundance of international evidence underscoring the negative impact of price controls on pharmaceuticals.

In a January 2016 research paper titled ‘Does pharmaceutical price regulation result in greater access to essential medicines?’ published by the Indian Institute of Management in Ahmedabad, India, the country’s experience with pharmaceutical price control were found to reflect a negative effect on pharmaco-availability. The study also highlighted several drawbacks including that price controls are likely to have a negative impact on social welfare by limiting sales volumes of price-controlled medicines and restrict investment in research and development.

All these facts serve to substantiate the argument that blindly implementing strict price controls only serves to make the already onerous task of effective drug distribution even more difficult.

Video Story

Stock Market

Exchange Rates