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EXPERIENCES IN SOUTH AFRICA WITH THE
INTRODUCTION OF PHARMACEUTICAL
PRICING LEGISLATION
Zokufa HZ, Pillay T
Pharmaceutical Policy and Planning, Department of Health
Republic of South Africa
Abstract
Experiences in South Africa with the Introduction of Pharmaceutical Pricing Legislation
Zokufa HZ, Pillay T. National Department of Health, Republic of South Africa
Problem Statement: Pharmaceutical price surveys in South Africa have identified a number of flaws in the
pharmaceutical market. International comparisons of private sector drug prices suggest that prices in this sector
are excessively high. Perversities exist in all components of the supply chain: manufacturers, distributors,
wholesalers, pharmacists, dispensing doctors, and private hospitals.
Objectives: The objectives were (1) to identify the flaws in the components of the pharmaceutical supply chain; (2) to
review international experiences on pharmaceutical price regulation; and (3) to develop appropriate legislation to
regulate all components of the pharmaceutical supply chain.
Methods: Review the results of pharmaceutical pricing surveys conducted in the South African private sector to identify
the contribution of each sector to the overall price. Analyze the advantages and disadvantages of strategies
employed by countries to regulate pharmaceutical prices.
Results: The manufacturer’s published selling price is significantly higher than the actual selling price. The wholesaler
marks the product up by 21% and then offers a discount (about 10%) to preferred clients. The pharmacist adds a
theoretical markup of 50% and then offers a discount of 20–30% to private medical schemes. Private hospitals and
dispensing doctors often bypass wholesalers/distributors and purchase drugs (in bulk) directly from the
manufacturer. Drugs are then sold at the standard retail price to patients. The key problems are perversities
associated with volume discounts, the influence of the dispensing doctors on drug use, percentage of markup for
wholesalers, pharmaceutical manufacturers who establish exclusive distributors, percentage of markup for retail
pharmacies, and excessive prices charged by manufacturers. Legislative interventions were designed to reduce
the impact of these perversities on the market. The proposed legislation was challenged by stakeholders with
vested interests in the current situation, particularly manufacturers and dispensing doctors.
Conclusions: Regulation of the South African pharmaceutical market requires that interventions be directed at all
major stakeholders in the supply chain. The legislative interventions were an adaptation of previous local
experience and experiences from other countries. The political will to regulate the pharmaceutical market is pivotal
to the entire process.
Identification of problem areas
The research into the private sector pharmaceutical supply chain in South
Africa have identified the following problems areas (illustrated in Figure 1):
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Manufacturer selling price is significantly higher than the state tender price
and the prices in other countries of similar wealth.
The manufacturers’ published price is not the “real price” at which a drug
is sold - i.e. there is uncertainty about ex-manufacturer price.
Wholesalers use a percentage mark-up system which in unrelated to the
value of the service.
Pharmacists use a percentage based mark-up system which creates
incentive to sell expensive products.
Dispensing doctors who purchase drugs receive large volume discounts
and these are not passed onto the patient.
Private hospitals also purchase drugs directly from manufacturers with
large volume discounts and do not pass this onto the patient.
Figure 1: Pricing Survey- (WHO/HAI)
Amoxycillin 250mg 500’s
Ex Manufacturer
Excluding VAT:
R61.19
Wholesaler markup: 34.34%
R93.33 (ex VAT)
Retail Markup: 41.52%
R159.60
Patient Pays R161.08
Wholesaler sometimes offers a
10% discount and the pharmacist
offers a 20 % to 30% discount. So
the lowest the patient can pay is
R83.21.
Interventions to reduce ex-manufacturer price
1.
2.
3.
4.
5.
6.
7.
8.
Reference pricing – drugs in a similar pharmacological class or therapeutic
category are priced the same.
International price comparison with countries of similar wealth. Alternatively
using purchasing power parity to compare prices in developed countries.
Mandatory generic substitution to promote local manufacturing industry.
Request economic analyses for selected drugs that are found to be highly
priced.
Powers to request manufacturing and related costs related to the
manufacture of drugs.
To “level the playing field” manufacturers have to reduce their price by 50%
when the legislation is introduced.
Introduction of a “web-based” transparent pricing system
Introduction of a single exit price i.e. manufacturers have to sell their drugs to
all purchasers at the same price – no price discrimination.
Problems with exchange rate
Exchange rate is the price of one currency in terms of another. Exchange rate
has been established by established by governments so it is subject to
distortions from speculators.
Exchange rate is based on short term factors and does not indicate anything
about degree of affordability. Example: one litre of milk in Australia is
(AUD$1) R5 and the price in South Africa is R5. Does this mean that milk
is equally affordable by both populations?
So how do we compare prices with affordability in mind?
• World bank uses purchasing power parity or PPP
• What is PPP?
It estimates the value of a dollar in each country.
One dollar will buy the same quantity of goods and services in all countries.
Purchasing Power Parity
PPP IS based on the price of a basket of goods and also considers salaries,
average standard of living.
The World Bank has an ongoing project of developing a database of
international price comparisons using PPP.
Can PPP benefit a pricing committee?
• More reliable estimate of comparative prices.
• We can use prices from any country and use the PPP conversion factor
• Methodology has been validated by World Bank
Options for wholesaler fee and dispensing fee
Price regulation
mechanism
Description
Comments
Cost + fixed percentage
Wholesalers and retailers add a fixed
percentage price
May encourage stocking and sale
of more expensive items
Cost + declining percentage
The more costly the drug, the lower
the percentage markup
Provides incentives to sell less
expensive items
Cost + fixed dispensing fee
A fixed fee is paid per prescription
Reduces the incentive to prescribe
or sell higher priced drugs
Cost + differential dispensing
fee
Fee paid per prescription is higher for
generic products
Encourages generic prescribing
Maximum allowable price
Involves price setting of producers’
price and fixed percentage markups
for distribution
Individual drug prices may be
limited but incentives exist for
retailers to sell more expensive
drugs
Wholesalers and distributors in South Africa
Wholesalers
• Trade in medicine i.e. purchase drugs in large volume and then influencing
purchasing by offering volume discounts.
• Mainly supply generic drugs.
• Offer frequent deliveries so pharmacies do not have to hold large stocks.
• Offer purchases on credit which may benefit small rural pharmacies.
Distributors
• Manufacturers have a financial interest in these companies.
• Distribute mainly patented products.
• Do not offer credit or frequent deliveries which may disadvantage small
rural pharmacies.
Intervention for wholesalers and distributors
Fixed and declining percentage used
Wholesaler and distributor
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Drug <R40 then add 15% to item
Drug >R40 then add R6/pack of medicine
If the Wholesaler purchases from the distributor
then:
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Drug <R40 then add 2.5% to item
•
Drug >R40 then add R1/pack of medicine
•
Wholesaler then sells the drug at 12.5% of single exit price if exit price is
R<40 or adds R5 if the price is >R40
Dispensing fee - fixed and declining percentage
Pharmacists
Pharmacists previously used a % mark-up system which encouraged the use
of expensive drugs. The Pharmacy Council published “unit based activity”
for dispensing.
Pharmacists given a maximum dispensing fee of R24 per item. This fee is
higher than the fee for doctors since the “stockholding risk” is higher in a
pharmacy.
Dispensing doctors
Dispensing doctors would have to complete a dispensing course before
receiving a licence to dispense.
Dispensing doctors given a lower fee of R16 since the stockholding risk is
much lower.
Transparent Pricing system
Manufacturers would have to publish their selling prices on a web page.
These prices are the only prices at which a manufacturer may sell a drug.
Drugs prices may decrease at any time – it is anticipated that a transparent
system will result in informed consumers buying the cheapest drug and
this will serve a mechanism to drive down prices.
Patients who are unhappy with the price they are being charged can search
the web.
It is also recommended that manufacturers print the recommended selling
price on the patient ready pack so that patients are aware of the price and
it prevents others in the supply chain from over billing.
Conclusion
Regulation of the South African pharmaceutical market requires
that interventions be directed at all major stakeholders in the
supply chain.
The legislative interventions were an adaptation of previous
local experience and experiences from other countries. The
political will to regulate the pharmaceutical market is pivotal to
the entire process.