Cost as a Barrier to Access: Identifying the Component Costs of Essential Medicines Levison L,Laing RL

Abstract Problem Statement: The cost of getting an essential medicine to a patient includes the manufacturer's price and a set of add-on costs including: costs for transportation, import duties and taxes, port clearing, storage, wholesale and retail markups, stock losses and procurement practices. Great emphasis has been placed on reducing manufacturers’ costs but very little attention has been paid to these other costs. A careful analysis of the component costs incurred in getting essential medicines into the distribution system is the first step in decreasing pharmaceutical procurement costs and removing financial barriers to access. The results of this analysis can be used by governments to set national pricing policies and by the health sector to improve procurement practices and strengthen health systems to improve access. Objectives: To identify types of add-on costs and their influence on final procurement costs, and to use this information to advise governments and health programs on policy decisions to reduce procurement costs. Design: Comparative cross-sectional study. Setting and Population: Study subjects included ten procurement offices in the public, private and non-governmental sectors in Sri Lanka, Kenya, Tanzania, South Africa, Brazil, Armenia, Kosovo, Nepal, and Mauritius. Data was collected through literature review and personal contacts. Outcome Measures: List of add-on costs; percentage contribution of each add-on cost; cumulative effect of add-on costs; average percentage increase in expense. Results: Analysis of nine countries showed that the add-on costs in the countries surveyed increased the total cost by 68.6% on average over the manufacturer's price. Import tariffs, taxes and wholesale and retail markups are the major contributors. We believe this to be only a partial picture of what happens at the central level and does not accurately depict the cost paid by the patient. The analysis resulted in policy options available to governments and programming practices available to health systems that should lead to lower costs and improved use. Conclusions: Our present understanding of the component costs of providing essential medicines is incomplete and further study in other sectors, in other countries and of other costs is required. Such an analysis is the first step in decreasing essential medicine procurement costs and removing barriers to access.

Price components Retail price = manufacturer’s selling price + insurance & freight + import tariffs + taxes (national, state, local) + import markups + port, customs, inspection + quality control testing + wholesale markups + retail markups + local storage and distribution + VAT/GST + dispensing fees

Study questions Can we identify the component costs of procurement? Can we find data on the component costs? How much do component costs limit access to medicines? Are there component costs that can be reduced? Are there policy and programming changes that can reduce costs and increase access?

Methods Collected component costs –Literature reviews –Personal communication Categorized component costs Cross-sectional comparison of data from 9 countries: –Sri Lanka, Kenya, Tanzania, South Africa, Brazil, Kosovo, Armenia, Nepal and Mauritius

Cost breakdown At least three categories of component costs: –Government regulations (taxes & tariffs, port charges, markups, Pharmacy board fee) –Programmatic (procurement method used, warehousing, distribution, stock expiry) –General (inflation, losses)

Sri Lanka KenyaTZ Import tariff0010 Port charges481 Clearance, freight 12 Pre-shipment inspection Pharm. board fee2 Importer’s markup 25 VAT State tax Wholesale markup 8.515? Retail markup Total64%54%74% All values presented as percentages.

SABrazArm.Kos.NepalMaur %82%87%74%48%59% TZ: Tanzania SA: South Africa; Braz: Brazil; Arm: Armenia; Kos: Kosovo; Maur: Mauritius

Results Component costs increased retail price by average of 68.6% across countries These costs limited to government policies Many other component costs Several reported mark-ups did not match established government policy Focus attention on largest component cost values to reduce total cost

Programmatic and other costs More component costs still missing: differences in base price from choice of tendering method, cost of quality control testing, etc. Rate Inflation/replacement9-14% Stock loss, expiry0-35% Financial0-10% Carrying costs10-35% Domestic handling % Total28.5 – 99.5%

Policy & programming options Remove taxes and tariffs on essential medicines (“Don’t tax the sick”) Enforce mark-ups Select items from a restricted list of generics Procure by restricted tender of pre-qualified suppliers Contain operating costs

Summary Reducing component costs could decrease costs and increase access Role for: –Government in setting policy –Procurement office to improve practices & reduce costs Further research and analysis required Study known methods for reducing component costs

Future work With WHO/HAI Medicine Prices project: Collect data in country –On individual products –In multiple sectors For more information, see: