Funding for Russia's Drug-Reimbursement Programme Could Run Out Before Year-End

The depressing new consensus among local pharmaceutical market analysts is that Russia’s DLO reimbursement programme—which provides free-of-charge prescription drugs to low-income Russians—is likely to run out of money completely before the end of the year. According to weekly business magazine Smart Money, the total amount budgeted for the DLO in 2006 is 29 billion roubles (US$1.1 billion), which is down significantly from the 50.8 billion roubles allocated for 2005, the DLO’s first year of operation. This, in combination with a poorly managed structure and a persistent lack of clarity at all levels of the distribution process, have led Director-General Aleksandr Kuzin of the market research agency DSM Group to predict that the DLO’s funding will be exhausted before the end of the summer.

While many column inches have been devoted to the dizzying speed at which the DLO system has grown since its introduction in January 2005 (see Russia: 17 February 2005: Drug Manufacturers Waive Certainty on Reimbursement Levels Under New Russian System); it now seems that this growth has not been matched by a continuously evolving administrative policy. According to Smart Money, the original plan to foster healthy competition by holding regional tenders to determine which drug distributors would supply DLO prescriptions to which regions was soon abandoned in all but name, as the government imposed tight restrictions on which companies were eligible to participate, insisting that participants needed —among other things—to be recommended by the local authorities. This left only a handful of distributors in charge of supplying drugs destined for use by DLO subscribers throughout the country, with Protek walking away with the largest slice of the market (see Russia: 7 December 2005: Protek Emerges Triumphant with 40% of Russian Public Health Insurance Tender). It now seems, however, that in at least some of the regions it acquired, Protek was caught unprepared to handle such a sudden spike in demand.

The company has also highlighted a lack of basic statistics provided to it by DLO authorities, and states that it was impossible to know how many and what sort of medicines were required by patients. As early as February 2005, just one month after the system was first introduced, this lack of basic information was already taking its toll, with local authorities in the Kirovskaya district claiming that only 15% of their drug-reimbursement needs were being met, while Kamchatka and Arkhangelsk fared little better at 36% and 38%, respectively.

Distributors Plagued by Delays

Distributors including Protek, SIA International and Biotek have also been dogged by constant and growing delays, namely, the payments from the Federal Mandatory Health Insurance Fund (FMHIF) owed to the distributors after a patient has obtained a prescription. Normally, a doctor writes a prescription, the patient obtains it from the pharmacist, the FMHIF verifies that the correct medicine has been prescribed, and then reimburses the relevant distributor within 180 days. However, media reports earlier this year discovered that much of the funding for 2006 has not been forthcoming, which has led to certain reimbursable drug supplies drying up in pharmacies across the country (see Russia: 24 April 2006: Drug Shortages Plague Russian Pharmacies). The situation grew so dire that two of Russia’s leading drug wholesalers threatened to sue the FMHIF if their money was not forthcoming (see Russia: 8 May 2006: Distributors Consider Legal Action against Russia’s Drug-Reimbursement Scheme as Funding Withheld).

Rising Costs Prove Hard to Reimburse

The launch of the DLO system caused a rapid influx of nearly 300 drug-makers muscling in on the new market, which caused the value of the DLO to expand by double-digit figures over the past year and a half. The sheer number of companies involved in the scheme would have played an integral part in causing a dizzying rise in spending on reimbursable drugs from the start of 2005 to the end; according to Russian market-research company Pharmexpert, the amount spent by the government in reimbursing DLO prescriptions had quadrupled from January 2005 to December. While pressure from pharma companies to prescribe newer brand-name drugs over generics helped to keep costs high, the authorities were also quick to point out that the rising costs were caused by a high proportion of imported drugs—which tend to cost more than medicines produced in Russia—in the DLO supply chain. In fact, according to DSM, approximately 88% of all drugs in the DLO system are sourced from overseas, compared with 75% in the regular retail supply chain. This has also led to higher prices charged for the same drug in the DLO system than outside of it. While the government has made repeated pledges to permanently ban foreign-produced drugs from the reimbursement system, Russia’s domestic production capabilities are currently nowhere near able to support the entire DLO independently of outside imports.

Outlook and Implications

With the reimbursement scheme in turmoil, it is unsurprising that more than half of the 15.2 million people to which the DLO is meant to extend have voluntarily opted out of the programme altogether, choosing to forego the 350-rouble-per-month medical aid in return for direct monetary compensation. Smart Money reports that in October 2005, only 7.5 million Russians remained subscribed to the scheme, presumably those for whom the free treatments are a vital necessity.

In spite of these extremely adverse circumstances, it seems that many large pharmaceutical companies are choosing to remain part of the DLO system for now, encouraged by the prospect of strong future growth. Nor is there a great deal of concern that the supply of reimbursable drugs will dry up along with the federal money in the next few months. Instead, the length of delays in repayments is simply expected to rise. According to Eva Salai, who works for the Moscow office of Hungarian drug company Richter Gedeon, debts owed to drug-makers via the DLO are currently taking six months to be repaid, rather than the standard 90 days. With Russian doctors now encouraged to prescribe drugs for DLO patients by active ingredient rather than by brand name, and with many leading foreign pharma companies now having reduced their DLO prices to levels lower than in the retail market, there is some hope for the future. Overall spending levels are not expected to decrease, as the system continues to develop and expand. However, if drug companies continue to work with the authorities to bring prices down to a more reasonable level, and a more transparent administrative system is introduced, it will be possible to ensure that future growth proceeds at a more moderate pace.