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Human welfare directly relates to health. There is a positive relationship between a population’s health and economic development of a country. An important component of public health is access to quality medicines, as it accounts for a significant portion of health expenditure. For the same reason, Pakistan is among those countries where drug prices are fixed and regulated by the government. There are other reasons for this exercise also, more important of which is the political mileage that the government wants to take out from this sector. Every time price increase of medicines is publicly talked about, the government is mostly on the side of the public, at least to begin with; later they may change stance.
Having said that, medicines prices fixation in Pakistan is a complex matter, which may be seen in the context of entire regulatory structure and its evolution.
Drug Pricing at Ministry of Health
From licensing to registration to pricing, the pharmaceutical sector is fully regulated by the state. Price ceilings used to be set on an individual basis by the Ministry of Health, without any transparent mechanism, under the Drug Act 1976. The price freeze from 2001 to 2013, despite high levels of inflation and devaluation of Pak rupee was also under this act. The discretionary practices of MoH were the basis of creating disparities between branded and branded generic drugs. Initially, branded generic drugs were awarded high prices, up to 80% of the original research products. Then MoH realized that generic drugs should be priced lower and continued to award lower prices at various times. Numerous examples can be extracted from price archives to show how advantages and disadvantages were created by few people at the helm of affairs in the then Ministry of Health.
Drug Pricing Policy 2015
Drug Pricing Committee was constituted under DRAP in 2013 and comprised representatives of Ministry of Finance, Provincial Health Departments, along with key stakeholders.
The price freeze was lifted in 2013 after DRAP was operationalized, however, it was slapped immediately again after public outcry. The pharmaceutical companies went to court against this action and got a stay against government. The court then ordered DRAP to come up with a pricing policy. The DRAP delayed as much as they could and finally came up with the Drug Pricing Policy 2015. This policy outlined in detail procedure for setting and updating prices. The industry labeled it as irrational and oppressive.
DPP 2015 provided that the prices of new drugs shall be fixed based on average prices in India and Bangladesh, and if new drug is not available in these countries, prices shall be fixed at the lowest level of the developing countries which regulate prices, or wholesale prices in UK, Australia, and New Zealand. Furthermore, a new concept of prices reduction of up to 30% on originator brands was introduced with three staggered annual decrements.
The increase in drug prices was linked to the ‘Consumer Price Index – CPI’ with a maximum cap of 4% for scheduled drugs and 6% for non-scheduled drugs. The Federal government did not issue any approval for the price increase under this policy, which caused further discontentment in the industry.
Drug Pricing Policy 2018
The pharma industry moved from high court to supreme court, and a revised and updated Drug Pricing Policy 2018 was introduced after consultation with relevant stakeholders. Due to court orders, all price setting and price increases must be approved by the Federal Cabinet, while DRAP’s Drug Pricing Committee would only make recommendations.
The 2018 policy divides medicines into two categories: (1) drugs and biologicals on the National Essential Medicines List, and (2) all other drugs. This list is revised every three years or earlier, and is based on the World Health Organization’s (WHO) list of essential medicines.
The pricing policy takes away discretion in establishing prices by using reference pricing. This is done by taking the average of the price of the same drug in Bangladesh and India. If the drug is not available in those two countries, then they use the price in other developing countries or in a developed country such as the United Kingdom. The last two options are to establish the retail price with a 15% markup on the landed cost (the cost of importing) or to accept the price demanded by the producer.
Once a price is established for a particular drug, it can be updated every year by firms themselves. Essential drugs are updated equal to 70% of the consumer price index (CPI) for the year (with a cap of 7%), while prices for all other drugs can be increased up to the CPI for the year (with a cap of 10%).
Even so, manufacturers complained about the price regulation because of rising costs of production as a result of rapid depreciation of the Pakistani Rupee. Given the high dependence on imports for their raw materials, this has hurt manufacturers, who assert that the price increase granted once a year is not enough. In January 2019, on the Supreme Court’s order, the prices of essential medicines were increased by 9% and for all other drugs by 15% on account of this.
Price setting is critical for manufacturers, given the price freeze(s) and the resultant uncertainty in price increases. Manufacturers want the highest possible price ceiling so as to maximise their margins. The manufacturer also has another trick to secure a higher price. In submitting their sources for the raw material, they will quote prices from the most expensive and highest quality source possible (such as from a USFDA-approved plant in China). This inflates their claimed cost. But when manufacturers actually start production, they may procure much cheaper raw materials from sources other than those specified in their original application. Through such means, they manage to secure MRPs that yield high margins. This ensures that manufacturers can continue to produce the drug at a profit for many years even in the face of a price freeze. However, it must be noted that with the pricing policy brought into force since 2018, this activity has largely been eliminated because prices are now set through reference pricing.
Nevertheless, there still remains a large disparity between prices for the same generic molecule across producers because of the way prices were set before 2015, when it was a ‘free for all’. In the price increase in 2013, this disparity was reduced over time through the way that prices were updated. The increase by DRAP in 2013 allowed a price increase of 15% on the originator brand’s price, which usually had the highest value. This meant that local firms with lower prices got a higher increase than those that already had a high price, thereby reducing the gap over time. The price increase granted in January 2019, however, allowed a percentage increase of the brands’ own MRP.
The consequence of a price freeze is that, with rising production costs, the manufacture of drugs becomes unprofitable over time and so firms cease to produce certain drugs. In Pakistan, this has often led to shortages in essential drugs. it was estimated that of a basket of essential medicines, only 15% are available in the public sector and 31% in the private sector.
Concluded.
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