Price controls reduce access to medicines

Jasson Urbach | 07 Dec 2010
Free Market Foundation
Dispensing fees, which stipulate the maximum price that pharmacists are allowed to charge for medicines, have been a bone of contention since the regulations were first proposed in January 2004, when the maximum price was set at an arbitrarily defined level of R24. Pharmacists, arguing that these prices were unreasonable, challenged the proposal and took the matter to the Cape High Court, Supreme Court of Appeal and finally the Constitutional Court where it was declared that the regulations were invalid and had to be amended.

The Department of Health revised the regulations and recently published the revised schedule of dispensing fees. There is now a provision for four price bands, each with its own maximum dispensing fee. On medicines which sell at less than R75, pharmacists are allowed to charge a maximum fee of R6 plus 46 per cent of the medicine exit price. Medicines that cost more than R75 but less than R200 may not have a mark-up in excess of R15.75 plus 33 per cent. For those that cost between R200 and R700, the fee may not exceed R51 plus 15 per cent. And for the most expensive medicines, that cost R700 or more, the maximum mark-up allowed is R121 plus 5 per cent of the exit price.

The purpose of the pricing regulations is to increase the transparency of medicine prices, and to limit what pharmacies can charge customers for medicines. The aim is to make medicines affordable for everyone in South Africa, in an attempt to improve the overall health of the nation. While government's intentions may be good, to impose any kind of price control is likely to bring about many unintended consequences that will make government's intention unachievable.

In SA, like in most other countries, it is the people who live in large urban areas who have access to the high-volume-low-mark-up retailers able to offer cheaper goods. SA's poor generally are restricted to having to shop in low-volume-high-mark-up establishments in the townships and rural areas. Price controls invariably penalise low volume establishments and, potentially, are the cause for many of them to close down.

Price controls, usually promoted and devised under the guise of assisting the poor and alleviating poverty, in almost every case, cause more hardship. If pharmacies in rural areas and townships are forced to close, it will severely affect access to medicines and decrease the provision of medical services in isolated communities.

Patients will have no alternative but to travel to urban centres at great cost and inconvenience.

Another major unwelcome consequence of price controls is that they act as a barrier to entry. Large established businesses will often tolerate or even welcome regulated price controls because they keeps competition out of the industry. When prices are regulated so that they are kept low and very little profit is allowed to be made, low-volume-high-mark-up shops, or entrepreneurs trying to enter the market, cannot afford to buy stock from which they will not make a return sufficient to support the normal day-to-day running of their business. High-volume-low-mark-up retailers in large urban areas will be able to do this.

When shopkeepers are prevented from operating stores in convenient locations that make them and their goods accessible to those who live in isolated areas, the intervention severely restricts consumer choice and detrimentally affects well-being and welfare.

The intention behind government's action of trying to make drug prices as transparent as possible is good. Pricing regulations though, merely frustrate the efficient functioning of the market and distort prices.

SA must be commended on being one of the few developing countries that does not levy tariffs on pharmaceutical products and should be held up as an example for others to follow. However, value added tax (VAT) of 14 per cent imposed on pharmaceutical products and devices, is counter-intuitive because it is levied purely to raise revenue for government. And, if it is one of government's declared objectives to have a healthy and productive population, it makes no sense to impose a tax on the sick.

If government is truly concerned about increasing access to medicines, it should eliminate all taxes on pharmaceuticals and other medical devices. It should not institute penalties on businesses struggling to provide essential services in low-volume areas.

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