The health department's draft regulations intended to make medicine more affordable - and so extend medical aid to more blue-collar workers - constitute the biggest shake-up of the private health-care sector in decades.
The department claims it will cut medicine prices by 40%-70%, but the response from the private health-care sector is that the proposed cuts are so severe they will wipe out 80%-90% of retail pharmacies and wholesalers, and severely compromise the sustainability of the pharmaceutical industry.
All industry players are unanimous in their support of efforts to reduce drug prices by introducing transparency in the distribution chain, but they are almost equally unanimous in condemning the regulations as unworkable.
Though all key players have been afforded ample opportunity to make representations to the department, and much constructive engagement has ensued, the mood of the industry is grim. In some quarters, relations with the department have reached rock bottom and some players feel they may have to approach the courts.
The regulations propose replacing the present medicine pricing system with a transparent one in which the factory-exit price of a drug is revealed for the first time, and marked on its box.
The mark-ups added by middlemen are limited by a ceiling set by government. Under the present system, the wholesaler typically adds 21% to the ex-factory, or Blue Book, price, on to which the pharmacist adds another 50%.
The drug manufacturer, not government, will continue to set the factory-exit price for new drugs, but existing drugs are confined to a price of 50% below the present Blue Book price. This is the most contentious part of the regulations because it assumes that on average manufacturers inflate their ex-factory prices by 50% to offer discounts of this size to bulk buyers.
This special report covers the debate as reflected in a panel discussion convened by managed care company Mx Health in Johannesburg last month. Each grouping within the private health-care sector was represented. The picture they draw is grim.
The Pharmaceutical Manufacturers' Association (PMA) chief operating officer Vicki Ehrich says multinational drug companies were caught completely unawares by the imposition of the blanket 50% price reduction.
The PMA's research, undertaken subsequent to the publication of the regulations, found that multinationals selling branded products do not discount heavily - the average for more than 25 drug companies is only about 15%, with some as low as 1%, and most between 10% and 20%. Generic companies, on the other hand, discount by 40% on average.
"This means these regulations will not penalise the generics companies as much as the multinationals," she explains. "The imposition of a 50% price reduction on branded products will affect the multinational companies and jeopardise the future of the industry."
The PMA is proposing that lower drug prices be decided on through an audited company-by-company and product-by-product process to ensure the reduction that is put into effect accurately reflects the actual discounting previously offered in each case.
Ehrich concedes this may sound like a complex and unwieldy process, but in fact PricewaterhouseCoopers has already done such a collation exercise across research-based companies. The PMA has developed a detailed proposal on how this could be done on a product-by-product basis across the entire industry.
"This approach would offer fewer savings than a 50% price cut, but it would ensure the long-term sustainability of the industry in SA, and that is critical to the provision of health care in this country," says Ehrich. "Contrary to perceptions, we are not an industry with one foot on the shore, poised to go if things become unpleasant or uncomfortable for us."
The multinationals contribute about R12bn/year to the economy and employ about 9 000 people.
The PMA is also concerned about how the annual increase in single-exit prices will be determined and the health director-general's (DG) untrammelled right to information from drug companies relating to their pricing structure.
"The information the DG may request goes beyond that requested within other countries' [pricing control structures], and some information will be commercially sensitive or unavailable," says Ehrich.
The multinationals are awaiting the finalisation of the regulations but are likely to review the extent to which they operate in SA if the regulations are implemented as is.
Though conceding that the private health-care sector requires radical change, Netcare CEO Jackie Shevel agrees with the other panellists that the proposals need "considerably more homework". He says the department must be made to realise that its intentions of improving accessibility, affordability and accountability need to be balanced with workable solutions. But instead of open engagement, the department displays "arrogance and a dismissive attitude to the private sector", he says.
"Though legislation may look as though it will deliver cheaper health care, the long-term consequences could be disastrous. It would make little sense to destroy a viable and innovative industry that is responsible for the creation of hundreds of thousands of jobs," he says.
"If a reduction in the cost of medicines of 50% or more is imposed, we should not be surprised to see multinationals leaving SA."
And what will that mean for South Africans, asks Shevel. "We should not fool ourselves that we will be able to get the drugs these companies produce as easily when they are gone; their exit will open the door to drug fraud, which we certainly do not want.
"We will lose not only employment opportunities, but the ability to do research & development, and access to world-class information about drugs and diseases."
Shevel says the regulations could prove damaging to Netcare as well.
The Hospital Association of SA (Hasa) has made several written and verbal submissions relating to the regulations, but feels its concerns have not been addressed. If the regulations are implemented as is, the hospital industry may have no option but to take government to the constitutional court, says Hasa legal adviser Kurt Worrall-Clare.
He questions the basis for the regulations, arguing that by allowing the health minister to set manufacturing prices, they exceed the ambit of the enabling legislation. The Medicines & Related Substances Control Amendment Act says only that the minister may promulgate regulations for the creation of a transparent pricing system and the provision of a professional fee for pharmacists.
Worrall-Clare believes the 50% proposed price reduction could be held to be in contravention of the act and thrown out. "After all, why should prices be set in terms of the Blue Book?" he asks.
There are also constitutional problems relating to the fact that the state appears exempt from the regulations. This means the purchaser of drugs in the private sector is being treated differently from the state, when the state is a purchaser. Moreover, since state hospitals now have private wards, with private paying patients, which drug prices will they pay?
"I can foresee some interesting class actions in the future against both the state and the suppliers of products, challenging the potential price discrimination inherent in this set-up," he says.
" No-one opposes the creation of a transparent pricing system, but consider how strongly the competition commission has come down on those elements of the health-care industry that are seen to be setting prices," he says. "The commission fined the industry for setting prices in this instance simply because there were recommended tariffs in operation. Why then is it considered a good idea for the department to create a new price-setting mechanism?"
Worrall-Clare also points out that the regulations will remove private hospitals' ability to use their bulk purchasing power to achieve volume discounts. Not only is this recognised as a legitimate business practice virtually everywhere in the world, it also acts as a brake on prices.
"The pricing regulations have been announced with much fanfare - claiming we're going to have drug prices reduced by as much as 70% - but I don't believe they have been properly thought through," he says. "If their long-term impact is to reduce an economically stable pharmaceutical industry to a point of no return, then we may end up asking if a 70% reduction was worth it."
Alpha Pharm CEO Tony Lloyd says the proposed 50% price reduction will destroy the wholesale pharmaceutical industry. He believes a 20% cut would be a good starting point and implementation should take place over a manageable period, five years, for instance.
He says the 45-day grace period the industry has been granted to get existing products through the pipeline is impracticable. Many manufacturers have a product run of up to six months while wholesalers carry at least 17 000 product lines.
The minimum feasible period in which to phase in the new system is at least 135 days, he says, otherwise wholesalers may have to write off up to 50% of the stock they have on hand on May 2, when the regulations are due to be enacted.
Another serious concern for wholesalers is that the regulations do not specify who is liable for paying the wholesale fee. The National Association of Pharmaceutical Wholesalers (NAPW) believes manufacturers should be required to pay it and that it should be embedded in the single-exit price. The manufacturer should also not be permitted to reduce the embedded wholesale fee because the manufacturer, and not the end-user, would profit from the reduction. However, NAPW believes its members should be allowed to discount the fee upstream.
Moreover, the design of the proposed wholesale fees will result in the distribution costs of higher-priced drugs being subsidised by the lower-priced drugs, when it should be the other way around. To get around this, NAPW proposes a tiered level of percentage-based fees.
National Association of Pharmaceutical Distributors (NAPD) chairman Trevor Phillips agrees that if the regulations are promulgated as is, the industry will implode.
This is because the 50% cut, which will result in a corresponding reduction in wholesalers' and distributors' turnover, doesn't automatically result in a 50% reduction in their overhead costs, most of which are fixed and cannot simply be halved in the 45-day grace period provided.
"As distributors, our gross margin is about 12,5%, and our net profit about 2,5%, which is low. If our income is reduced by 50%, the distribution infrastructure will collapse, retail pharmacies will collapse and the patients will not get the medicines they need," he says
The wholesale process requires meticulous management because it often involves extremely costly medicines, many of which need to be transported and stored at specific temperatures.
NAPD members have 18 warehouses situated around the country, each stocking about 17 000 product lines, of which about 6 000 are prescription drugs.
Members deliver four to five times a day to the retail market. If the industry had to reduce costs and deliver less frequently, it would have a significant effect on the pharmacist, who would have to increase his or her stockholding.
"I'm hoping the regulations are a way of saying: This is what we'd like to achieve, now you tell us how far off the mark we are'," he says.
A study by consultants Managed Healthcare Systems commissioned by the Pharmaceutical Society of SA shows that the proposed reforms will beggar retail pharmacies. It was conducted on a database of 55m prescription transactions to which virtually all SA' s 2 400 pharmacies contributed.
It found the regulations would take R2bn/year out of the hands of pharmacies, reducing their annual gross profit after Vat from a collective R2,6bn to about R660m.
For the ordinary pharmacy, it calculated that given an average prescription price of R150/item and an average prescription discount of 19%, it could expect a 70%-88% reduction in gross profit per item sold under the new system.
SA Medical Association (Sama) chairman Dr Kgosi Letlape says the 50% discount on manufacturing prices is a recipe for disaster and is likely to result in disinvestment and a reduction in research funding, the sustainability of medical educational institutions, the availability of new drugs and ultimately in the quality of care.
For instance, he says, the price of antiretrovirals has now reached rock bottom. If manufacturers are expected to halve these prices, it will no longer be viable for them to produce them for the SA market, which could compromise the supply of these drugs to government's treatment plan.
He supports the notion that dispensing doctors should not profit from the sale of medicine, but argues against curbing the profits doctors make on the sale of medicine overnight without correcting the "appalling level" of their professional fees. To do so would lead to the closure of practices.
"The utmost care is needed to preserve the cost-effective package deals - medicine plus a consultation for about R100 - offered by some GPs, typically in disadvantaged areas," he says.
Commenting on some players' intentions to challenge the regulations in court, Letlape says this will only prolong the inevitable. Ultimately, government's imperative to provide affordable health care for all will override all other considerations.
Mx Health business development GM Susan Mynhardt is not convinced the effect of the regulations will be as bad as the other panellists believe.
She says the private health-care sector has known for years that the industry needs a serious overhaul and that these regulations were coming, but there has been no industry-wide initiative to contain costs. This is not to say that Mynhardt likes the regulations, but she says it is better to do something, than nothing at all.
"There was never going to be an ideal time to do something like this. If we waited until we were 100% ready, it would never happen," she says.
Accessibility and affordability are key issues for Faranani Health Solutions, a national GP network working in the emerging market.
Its CEO Dr Kabs Makaba says health-care costs are totally out of control, particularly within the arena of pharmaceuticals, and decisive action needs to be taken.
However, he fears that the regulations will only compound GPs' problems by placing strain on the distribution and accessibility of drugs.
Summing up, MX Health CEO Neels Barendrecht says the private sector is generally ill-prepared for the huge changes coming its way. It has failed to deliver affordable care or find ways of extending medical aid beyond the present 7m members and is reluctant to admit the free market system has not worked as well as it would like it to.
No-one in the industry believes the pricing committee wants to cause the pharmaceutical supply chain to collapse. Most believe the indefensible 50% price cut was thrown at the industry to force it to supply the committee with hard data that illuminates its cost structures and profit margins. In that respect, it has certainly succeeded. It remains to be seen, however, to what extent the committee and, more importantly, its political masters in the health ministry, can be swayed by reason.
