The South African government has submitted plans for international reference pricing for consultation. The proposals would have drug prices in South Africa set against a basket of prices in Australia, Canada, New Zealand, Spain, and South Africa.
IHS Life Sciences perspective | |
Significance | The South African Department of Health has set forth a proposal for international reference pricing, inviting consultation on the plans. Consultation will remain open for three months from the date that the plans were published. |
Implications | If implemented, the price would be pegged against a basket of five countries (Australia, Canada, New Zealand, Spain, and South Africa). The first phase of the project would involve drug prices being calculated based on the average of the countries in the basket. The second stage of the project, to be implemented afterwards, would bring drug prices in line with the lowest price in the basket, or a weighted average (in the case of drugs used in the public and private sector). |
Outlook | Although unlikely to be welcomed by international pharmaceutical companies, the fact that the measures could be implemented in stages with the chance of exemption may be taken favourably. |
The South African Department of Health has published draft legislation governing novel drug pricing in South Africa, according to BDLive. The guidelines set forth a potential model for international reference pricing (IRP). The legislative plans are still at an early stage and key stakeholders are currently being invited to submit comments and suggestions regarding the proposed legislation within a three-month period. A timeline for a potential advancement of the legislation beyond preliminary consultation stages appears unclear at present.
If implemented, the pricing mechanism would focus solely on originator products for which there are fewer than two generic alternatives, and generic products would be brought under a new mechanism following the successful implementation of the innovative mechanism.
For originator products, the mechanism would be phased in through two stages over a period of two years. This first stage would examine prices of drugs in Australia, Canada, New Zealand, Spain, and South Africa. The average price across the countries within the basket would then be taken as the price for the drug. The second phase of the mechanism would be launched at a later and as yet undetermined stage. This second stage would see drugs take the lowest price from those in the basket. Drugs that are used within the private and public sectors would use a slightly different mechanism from the second phase, with these drugs taking the weighted average of the drug prices in the basket. Following the issuance of drug prices, companies would be given the option of applying for an exemption on certain drugs.
Outlook and implications
The introduction of the pricing mechanism may be viewed as a toughening of the South African government's stance regarding pharmaceutical pricing. Indeed, the pharmaceutical industry may voice concern at comments made by Anban Pillay, the South African Department of Health's deputy director general for health regulation and compliance, who commented: "I think we have now reached the end of trying to accommodate their [Industry] concerns." A more conciliatory reaction was reportedly put forward in comments by Health Minister Aaron Motsoaledi, who suggested that costs of research and development had to be correctly calculated to ensure pharmaceutical companies were rewarded for innovation while also ensuring access to medicines.
Beyond the rhetoric, the pricing changes may be driven by the fact that current pricing models in South Africa could be viewed as complex and ineffective. Within the public sector, prices are controlled through tendering. While this process may serve current public-sector needs to provide mainly essential medicines, as the government rolls out its national health insurance scheme, public healthcare delivery will evolve, necessitating cost containment. In the private sector, private payors are also likely to face costing pressures from the rollout of national health insurance. There has also been growing discontent of the single exit price (SEP) mechanism used in the private sector, with pharmaceutical companies suggesting that annual drug ceiling price increases may fall below recommendations. Also potentially failing are reimbursement systems used by private payors, which in theory could help restrain prices. At present, each private payor should examine pharmacoeconomic dossiers of new drugs before approving reimbursement of new drugs. However, in reality, smaller private payors with less manpower and scientific knowledge than larger companies may face difficulty in adequately challenging data laid out in dossiers. A standard price may therefore be aimed at helping private payors to more easily interpret pharmacoeconomic dossiers.
Although pricing controls are rarely welcomed by the pharmaceutical industry, the provisions in South Africa include a number of measures that could make the mechanism more palatable. First, the fact that pricing is to be phased in over two years provides companies with time to adjust for the mechanism, as opposed to some countries where new pricing mechanisms have been rapidly applied, creating de facto price cuts. The ability to get some drugs exempted from the mechanism may also serve to benefit some companies. The government may argue that it is not a surprise that IRP is being looked at, given that it has examined the policy previously and considering the wider context of its attempts to constrain costs, as exemplified by the recently formed private-sector healthcare cost enquiry.
IHS Life Sciences does not believe South African prices are referenced by any major market. Therefore, we do not foresee the introduction of the model in South Africa will result in a significant decrease in prices elsewhere.
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