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August 31, 2016

The pricing fuss


August 31, 2016

The recent spate of increase in the prices of medicine has, as expected, elicited a commotion both by the media and the public. And then, of course, popped up the million dollar question: why doesn’t the government do something?)

Unfortunately, all this hue and cry reflects a lack of understanding of prices as an incentive for production and quality.

I have touched upon this issue in one of my previous articles, but I feel there is a need to explain this critical public policy matter a bit more. My experiences tell me that the problems related to pharmaceuticals can largely be traced to the government’s wrongheaded policy of price freezes, whose terrible repercussions have to be borne by producers, consumers and society as a whole.

What is a price freeze policy? This policy imposes government-mandated prices on medicines, above which the medicines cannot be sold. It’s been in practice for decades. In early 2000, a onetime increase in drug prices was allowed, a break from the price freezes of the 1990s. But the ensuing uproar by the media and the public ensured that no such step was possible for a long time after.

The problem with this policy is that it is unrealistic. The cost of production kept galloping all these years, especially in the first decade of the new millennium. Yet successive governments failed to take this into account and continued with price caps. The end results are that many producers of quality medicines either left or diversified away from producing medicines, the size of black market activities (as well as smuggling) in medicines increased, counterfeit medicines are now a regular feature of this market (estimates suggest the prevalence rate at a staggering 40 percent of total medicines, at least), and foreign investment in this sector has all but vanished.

If producers have found themselves at the receiving end of the policy, consumers have also suffered. They buy medicine at controlled prices, but there is absolutely no guarantee whether the medicine is fake or genuine. Recall cases like that of multiple deaths in Lahore a few years ago due to the intake of a low-quality cough syrup. Also, consumers end up paying an exorbitant price for genuine and critical medicines that end up in the black market.

This is ironic in the sense that if the medicine prices had been allowed to be guided by market forces, quality medicine would have been easily available at prices lower than the black market prices. And as if the misery of buying counterfeit, low quality medicines and paying black market prices was not enough, the consumer faces the harrowing prospect of serious injury or death (in extreme cases) due to counterfeit medicines. In short, a policy that is defended on the basis of helping consumers ends up hurting them the most.

Calculating welfare cost can be a tricky matter. However, I managed to calculate the probable monetary losses due to government interventions. For example, I calculated that between 2009 and 2013, the prevalence of counterfeit medicines alone inflicted a whopping cost of Rs343 billion on consumers.

Mind you, this does not happen only in Pakistan. For example, Schankerman and Cockburn (2014) analysed the launch of 642 new drugs in the US between 1993 and 2002. They concluded that the threat of prize freezes made the companies deliberately delay the launch of the drugs; a majority of the drugs were considered critical for patients.

Matters in Pakistan are further compounded by the absence of patent protection, the limited number of drug inspectors, non-regulation of black market activities and the absence of competition in terms of producing quality medicine. This leaves the field open for smuggling and manufacturing low quality drugs. Similarly, since there is no patent protection, genuine medicines are easily copied (the formulae for medicines is written on the bottles or on the paper within the pack). These copied, counterfeit medicines are sold at a lower price, outbidding the genuine medicine. Thus, there is little incentive to indulge in R&D and produce quality medicine.

The government’s incompetence is ably supported by the media, which sensationalises any drug price increase. Suppose the price of a drug increases from Rs25 to Rs50. By any standard, Rs25 is not too big an increase. But the media quotes the percentage change, which in this case is 100 percent. This scares people, and so policymakers spring into action to ‘ensure’ the ‘welfare’ of the people through banning any price increase.

Consumers and the media fail to understand that it is not the price of medicine, but the life of a person that matters. Going for a cheaper, unsafe alternative is no good if the same person is to end up in a pitiable condition.

Both China and India have managed to attract billions of dollars in pharmaceutical investments. Their strategy for success: stick to regulating quality and ensuring competition in the pharma sector, which has made large multinationals sell their quality drugs at comparatively lower prices.

Pakistan’s policymakers are getting it all wrong. They must realise that prices form a powerful incentive for production, and profits are an incentive for attracting investment, which in turn induces more competition which then leads to price reduction in the long run.

The writer is a freelance contributor.

Email: [email protected]

Twitter: @ShahidMohmand79

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