Regulating Supply Chain Mark-Ups to Control Medicine Prices—A Review of the Literature in Low- and Middle- Income Countries Ball, Douglas Independent consultant, United Kingdom

Regulating Supply Chain Mark-Ups to Control Medicine Prices—A Review of the Literature in Low- and Middle-Income Countries Ball, Douglas Independent consultant, United Kingdom Problem statement: Medicine prices are often an access barrier for the poor, especially in low-income countries. In order to increase financial access, policy makers may regulate the prices of medicines using a variety of means. The regulation of supply chain mark-ups is one strategy, but little is known about how common this intervention is in low- and middle-income countries (LMIC) and whether it is effective. Objectives: To describe the evidence base for the regulation of supply chain mark-ups in low- and middle-income countries and whether it leads to lower medicine prices Design: Literature review Setting: International, public, and private sectors Study population: Low- and middle-income countries Outcome measure(s): Number of countries using pharmaceutical mark-up regulation, types of regulation, factors affecting implementation of the policy and its effectiveness Results: Mark-ups are commonly regulated in high-income countries (HIC). Around 60% of LMIC report regulating wholesale or retail mark- ups. HIC use a variety of regulation methods and may apply different mark-ups to separate groups of pharmaceuticals. LMIC commonly use fixed percentage mark-ups, with few applying regressive mark-ups. Mark-up regulation is seldom used as a means to promote generic medicines. Little information is available about the impact of mark-up regulation on medicines prices or supply chain stakeholder viability. Ineffective enforcement and lack of regulation of manufacturer or retail prices are likely to lead to failure. Mark-up regulation has an impact on wholesaler and retailer viability. Conclusions: Evidence on the implementation, effect, and enforcement of mark-ups in LMIC is sparse. Regulation of mark-ups as part of comprehensive price regulation will probably lead to reduced medicine prices, but there may be unexpected effects on the supply of medicines. Without regulation of either the manufacturer’s selling price or the retail selling price, mark-up regulation is unlikely to be effective. Mark-ups that include a regressive component with or without fixed fees probably lead to better outcomes that fixed percentage mark-ups through their influence on financial incentives. Funding source(s): Health Action International - Global 2

Introduction 1 A mark-up is taken to be the gross profit, the difference between purchase and selling price – Strictly speaking not the same as the “margin” – The mark-up covers costs and adds profit The diagram above depicts a traditional private sector supply chain – Mark-ups can be added on at various points of the supply chain Changes to the traditional distribution model depend on pharmaceutical legal and trade environment and can make tracing and regulation of mark-ups difficult – Vertical integration of wholesale and retail functions – Wholesalers/distributors may be short-line (restricted product range) or long-line (wide product range) – There may be multiple wholesalers/distributors involved – Distributors may be tied to particular manufacturers and only charge a service fee without taking ownership of the products 3

Introduction 2 Public sector supply chains may also be traditional: Manufacturer  CMS  RMS  health facility  patient Or can involve ‘modifications’ and can be integrated to the private sector distribution mechanism to various degrees – Autonomous medical stores – Distribution contracted out – Health facilities buying direct from private outlets Evidence of ‘inappropriate’ mark-ups and unaffordable medicines – WHO/HAI pricing, availability and affordability surveys Mark-ups can contribute more than 40% of the final price the patient pays – Up to 90% in extreme cases – Regulation has been recommended in some quarters 4

Objectives / Study questions Does the regulation of mark-ups lead to lower medicine prices (or at least control them and/or contain costs) in LMICs? – The policy addressed was the regulation of distribution mark-ups in the supply chain of medicines, both wholesale and retail. Discounts and rebates not specifically covered Duties, taxes and other public levies or charges not covered – What is the current practice in LMICs? – What options are available to policy makers to regulate mark-ups? – What evidence is there that this intervention is effective? – What lessons can be learnt from experiences to date? – Should pharmaceutical distribution mark-ups be regulated? A systematic literature review and analysis of policy issues and options was conducted to examine these issues. 5

Methods Literature search performed to determine the evidence base of experience regulating mark-ups on medicines in LMICs. Searches were performed using PubMed, EconLit and Internet (Google) supplemented with additional measures: – PubMed : Four domain search strategy: the policy, the supply chain, pharmaceuticals and developing countries. (564 articles reduced to 37 after review) – EconLit : Three domain search strategy: policy, pharmaceuticals and developing countries, limited by descriptors. (37 hits reduced to 7 after review) – Internet: A multiple search approach was used – Others: To identify grey literature and non-indexed publications Purposive searching of policy papers, publications and reference lists E-Drug/E-Med messages WHO/HAI medicine price database Personal approach to professionals in the field Three country case studies were examined as examples of LMICs have approached the regulation of distribution mark-ups. – Albania, South Africa, Mali 6

How widespread is mark-up regulation? WHO level 1 indicators suggest more than two-thirds of countries regulate wholesale and retail mark-ups (2007 data) – Private sector and retail sector more likely to have mark-ups regulated WHO Africa pharmaceutical profiles 4/14 regulate wholesale and 6/14 regulate retail mark-ups suggesting there are regional variations WHO/HAI surveys show regional variation but are not in concert with WHO level 1 data Distribution mark-ups / margins regulated widely in high-income countries in EU / OECD but not in all e.g. USA, UK, Japan Difficult to draw firm conclusions from LMICs due to weaknesses in data collection e.g. self-reported, non-systematic data collection, incomplete data sets Countries (n=156)Regulate wholesale mark-upRegulate retail mark-up Public sector 65%68% Private sector 75%81% NGO sector 52%54% 7

What is the size of regulated mark-ups? WHO/HAI surveys and literature show wide variation in regulated mark-ups in LMICs across both public and private sectors Variations due to: country factors, public/private sector, targeting specific classes of medicines Wholesale mark-ups range: 10% – 35% Retail mark-ups range: 0% – 76% – WHO/HAI data show total cumulative mark-ups ranging from 17% – 84% in the public sector and 11% – 6,894% in the private sector (Cameron et al. 2009) – Private sector mark-ups show wider variation Wide variation also in HICs (as part of comprehensive pricing strategy) – Wholesale: 2 – 21% – Retail: 4 – 50% Many local factors influence mark-up magnitude – There is no ‘ideal’ or ‘recommended’ mark-up 8

WHO Region (no. of countries with data) Range (n) regulated public wholesale mark-up Range (n) regulated public retail mark-up Range (n) regulated private wholesale mark-up Range (n) regulated private retail mark-up AFRO (n=19)20-50% (2)30 (1)27.5% (1)5-76% (2) EMRO (n=12)10% (2)0-20% (3)2-35% (11)8-42.9% (11) EURO (n=8)15% (1) 25% (1)30-35% (2) PAHO (n=12)-25% (1)4-30% (4)25-30% (3) SEARO (n=5)--8-10% (1)16-20% (1) WPRO (n=5)-30% (1)-- Table 1. Magnitude of regulated mark-ups in the public and private sectors (various sources) Note:  Regional variation in n / % of countries regulating mark-ups  Lower regulation in public sector  Variation in levels of mark-ups within a sector and between countries 9

How are mark-ups regulated? Various mark-up ‘strategies’ were identified (Table) – Fixed percentage mark-ups are most common in LMICs – Regressive mark-ups only used in some higher income economies e.g. Iran, Lebanon, Syria, South Africa, Tunisia – Few LMICs use pharmacist dispensing fees – HICs use a variety of mechanisms, often in combination Mark-up regulation generally not used as a means to promote generic dispensing in LMICs – Tends to include all medicines within the defined public or private sector Mali has a mechanism focusing only on certain essential medicines HICs may focus only on health insurance reimbursed medicines 10

Mark-up (cost price +)Key features Fixed fee Reduced incentive to sell higher value items Adds significantly to the patient price of low-cost medicines Relatively easy to enforce Regressive flat fee/amount Reduces incentive to dispense high cost medicines Adds significantly to the patient price of low-cost medicines Fixed percentage Encourage stocking and sale of more expensive items Relatively simple to implement and enforce Regressive percentage Easy to implement Reduces incentive to dispense high cost medicines Differential percentage or fixed fee Incentives created for particular groups of medicines e.g. EML More complex to implement and enforce Fixed maximum fee / percentage Incentive for competition May lead to reduced service quality to lower costs Combined mark-up divided after negotiation Reduces regulation Capitation fees No link to the sale or cost of the medicines Sophisticated administration systems required Capping of mark-ups Reduces incentive to dispense very high cost items Combinations of above Combinations of above Table 2. Mark-up strategies with key advantages / disadvantages 11

What else do we learn? What is the impact of regulation on medicine prices – In HIC it is assumed to be effective – There is insufficient reliable evidence from LMICs Are mark-up regulations enforced? – A few anecdotal accounts of lax enforcement in LMICs – No sound evidence What special considerations are there? – Viability of wholesalers and retailers Especially smaller operators, those in rural areas, those who use mark-ups on medicines to cross- subsidize other activities – Need high political support, legislative changes, civil society support, consumer education, consultative approach, expertise, business intelligence, etc. Developing, implementing and enforcing mark-up regulation is not simple 12

Implications/conclusions 1 Regulation of mark-ups without regulation of either the manufacturer’s selling price or the retail selling price is unlikely to be effective – need a comprehensive price regulation strategy Regulation of mark-ups will effect the viability of some wholesalers/retailers especially those in more remote areas or offering health services cross- subsidized through higher mark-ups Regulation of distribution mark-ups can have unintended impacts or consequences. Incentives and disincentives need to be mapped and potential unexpected effects considered. A reliable monitoring mechanism for medicine prices and sales is essential to be able to judge the effects of pricing regulations, both intended and unintended. Mark-up regulation can be used to promote the prescription and use of generic medicines through selective application 13

Implications/conclusions 2 Regulating mark-ups is more complex in the private sector than in the public sector Improving efficiency of procurement and distribution in the public sector should be considered as a strategy to lower pharmaceutical costs Adequate enforcement is necessary for regulation to be effective and this is challenging in low-income countries Mark-ups with a regressive component are preferable to fixed percentage mark-ups due to the incentives involved. However, fixed fee mark-ups can dramatically increase the price of otherwise low-cost medicines 14