Global Insight Perspective | |
Significance | Important announcements include a single exit price annual increase cap of 5.2% for 2006-07. Innovator prices are to be subject to international price-referencing against four countries. |
Implications | While these changes will bring cheer to the pharmaceutical industry pressured under the three-year price-freeze mechanism, retailers will be reassessing the effects of the tiered policy now in force. |
Outlook | Despite slight revisions to the multi-tiered model, pharmacists will be pressured to offer greater discounts to consumers. |
Health Ministry Enforces New Law
After months of wrangling, court decrees and trade-data submissions by the industry, South Africa's Health Ministry announced new medicine-dispensing regulations with add-ons of international reference-pricing methodologies and annual price-increase caps. Dispensing-fee laws were enacted based on recommendations made by the government-appointed pricing committee. The new regulations have not strayed far from the previously announced multi-tier policy, but critical changes to the single-exit price (SEP) within the respective price bands have been effected. Marked changes include:
- The first price band of up to 75 rand will now carry a dispensing fee of 4 rand plus 33% of SEP.
- The earlier second and third price bands (75–250 rand) will now attract a fee of 25 rand plus 6% of SEP.
- Drugs priced at 250 rand and above will have a dispensing fee of 30 rand plus 3% of SEP.
- A new price band of 1000 rand and above has been introduced, with a fee of 50 rand plus 1.5% of SEP.
This model does not include VAT and delivery charges, but assumes the return on investment for a "small pharmacy" start-up, the government website clarified. Although effective immediately, the new rules will have a two-month transformation period for pharmacists compliance.
Annual Price Increase and International Benchmarking
The government also made provisions to effect an annual price increase for the SEP. For 2006-07, the annual SEP increase will be a maximum of 5.2% of the ex-manufacturer price. The committee has arrived at the percentage figure hoping to emulate the combined SEP increase of 2.56% in 2005-06 and 2006-07, as a gesture to calm industry anger over the three-year-price freeze in place since 2003.
The government also introduced an international benchmarking system based on two separate methodologies for innovator price and generics. The benchmark prices for patent-protected drugs are to be based on the rand equivalent of ex-manufacturer prices and the rand equivalent of ex-manufacturer prices Australia, Canada, New Zealand and Spain. For generics, the committee has recommended price which are at least 40% lower than the internationally benchmarked price of the patented drug. The international benchmarking and annual price-increase system are interlinked. The SEP increase will affect products that are priced below the international benchmark but cannot exceed the international price after the SEP increase.
Outlook and Implications
At first glance, the legislation seems complex and the impact on prices will be clearly evident after blanket implementation, which will not start until January 2007. However, medical insurance firms and drug manufacturers will be fairly satisfied with these new rules. The same cannot be said for independent retail pharmacies who have fought in the past to change earlier legislation on dispensing fees. It is important to note here that the SEP is the supplier's rate to pharmacies, while the dispensing fee is meant to cover the retailer's costs. According to the government, the recommendations for price bands were based on a key element that 95% of drug volumes in the market hovered around the SEP of 250 rand. Significantly, the collective aim seems to be to increase the average dispensing fee per item through an increase in SEPs. The annual price increase was to take into consideration two important factors that have affected prices—rand currency devaluation and the three-year price freeze.
Overall, this is a conscious legislative effort to address medicine accessibility while encouraging different industry stakeholders. The increased disease burden in South Africa, especially of HIV/AIDS, makes medicine prices a key issue for the government. The new rules are an effort to streamline prices and to end the price-freeze era that has affected the industry significantly. The government's aim of bringing down prices by 40-70%, announced during the previous draft legislation, may not be attained completely by the new laws. However, the revision does afford some price decline, excluding VAT.
Related Articles:
- South Africa: 6 July 2006: Pharmacists Up in Arms over Government's Drug Price Cap Rules in South Africa
- South Africa: 4 July 2006: Private Sector Seeks Greater Volumes as Prices Freeze
- South Africa: 10 March 2006: Multi-Tier System Adopted by South African Government in New Drug-Dispensing Fee Law
- South Africa: 6 February 2006: Health Ministry Considers Drug Reference Pricing Model in South Africa