06th November, 2016
CCC Voices Concern on Pricing Mechanism for Pharma Products
The CCC expresses concern on the recent implementation of fixed prices on medicinal drugs announced by Government Gazette.
Sri Lanka has a strong and accessible public healthcare system, complemented by a quality private healthcare system that is catering to evolving needs of the Sri Lankan people. While all Sri Lankans, regardless of socio-economic conditions, have access to free public healthcare, patients have the freedom to seek private healthcare as well, particularly medicinal drugs from private providers. In this context, the new pricing rules are hurting the efficient operation of the private healthcare market and are hurting consumer choice.
While Sri Lanka has a small local pharmaceutical manufacturing industry, it accounts for approximately less than 10% of the private sector supply; 90% is supplied by private firms in Sri Lanka who are the designated local agents for pharmaceuticals imported from international principals. It is these private providers who largely import ‘generics’ or ‘branded generics’ and ‘originators’.
Problems with the pricing mechanism
The new pricing system that has been announced is one derived from the Indian model, suitable for a large domestic market with a substantial domestic drug-manufacturing base. It is considered less suitable for Sri Lanka. 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.
This also means that prices of such drugs would be well below regional ceiling prices, which international providers operate on the basis of. The international firms would not want to subject their products to the possibility of unofficial arbitrage trade in the region, originating from Sri Lanka. The CCC is aware of incidents over the past week of authorities having to seize drugs being brought illegally, as baggage goods by travellers, and all of these are items coming under the new price controls. This is a clear indication of how economic actors will attempt to circumvent unviable controls.
With the majority Sri Lanka’s pharmaceutical drugs needs depending on imports, where costs vary with every shipment due to exchange rate variability, fixed prices become highly infeasible. ‘Branded generics’ and ‘originators’ are strongly impacted by the new pricing rules, and can result in shortages as well as restrict patients’ choice. Early reports indicate that several originator drug companies have signaled they would discontinue supplying to the Sri Lankan market. The regulator should consider an ‘automatic pass through’ for exchange rate changes (up or down), where a quarterly revision of prices is linked to Central Bank approved exchange rate. In the absence of such a mechanism, a devaluation for instance would result in each pharma importer requiring NMRA pricing committee approval for price increases on all products stemming from a change over which the importer has no control.
A further impact of the recent gazette is that good quality drugs developed with innovation in the originator countries would no longer supply to Sri Lanka, and only cheaper generics would be available. This affects not only individual choice of consumers, but also affects the country’s ability to continually access the newest medication. Moreover, price controls can lead to the proliferation of lower quality and counterfeit drugs, which is dangerous to public health.
Better Dialogue, Avoiding Unhealthy Regulations
Industry representatives affiliated to the Chamber have pointed out that changes were made in an ad hoc manner and without full consultation with key industry stakeholders. Moreover, the suggestion made by industry bodies of implementing a verifiable CIF (like in Saudi Arabia, Malaysia and Singapore) where it can be ensured that the CIF offered to Sri Lanka is not higher than the region, had not been given full consideration. While the industry had clearly indicated support for a rational pricing mechanism, the process under which the new price controls were implemented is far from desirable. It severely impacts private sector decision making, harms Sri Lanka’s international standing as an open economy, restricts consumers/patients ability to make free choices based on their individual affordability, and creates overall distortionary effects that hamper a smooth functioning of markets. The CCC strongly urges the government to refrain from introducing ad hoc, poorly designed and unviable regulations, that cause undesirable market distortions and undermines the country’s overall socio-economic goals.