Price controls reduce the availability of medicines

The controversy surrounding the efforts of the Department of Health to control drug prices is now expanding beyond arguments about healthcare and prices, and to the constitution and the state of South Africa’s judiciary. While pharmacists and the government argue about an appropriate dispensing fee, perhaps it is right and proper that this matter goes to the constitutional court. From the beginning pharmacists, drug manufacturers and perhaps more importantly consumer groups, should have been arguing against the principle of government interference in the medicines market.

During the many years of apartheid, the government of the time felt that apart from stripping ordinary people of their basic human rights and interfering in their lives, it had the right to set the prices of goods and services. The prices of thousands of goods were fixed, as the government saw fit to manage the economy. The result was that competition and innovation were stifled, prices in many cases ended up being higher than they otherwise would have been and of course consumers, all 40 million of us, suffered.

While most people now accept the sheer folly of trying to fix the price of soft drinks, which the National Party luminaries sought to do, many consider that medicines are somehow different from other goods and therefore the government has every right to intervene. This is not a uniquely South African idea; almost every country, with the notable exception of the United States, has some form of medicines price control. Yet just because other countries have foolish and damaging laws, doesn’t mean that we have to import them here. Medicines are not different and are not somehow immune to the basic laws of economics to which all other human activities are subject. Fixing the prices of medicines will result in the same consequences, which while unintended are no less damaging than fixing the prices of any other good.

Essentially, price controls frustrate competition and stop the dynamic and constantly evolving market system from operating properly. The controls distort the messages that thousands of transactions send to the producers and retailers of goods every minute of every day. If a price is set too low, as is normally the case, the producer has little incentive to produce the good and so shortages are the inevitable result. When shortages occur, it is normally the wealthy or those with some political connections that have the special privileged of getting access to the goods. Is this really the sort of situation we want with medicines?

The pharmacists and drug manufacturers have stated again and again that they agree with the intention of the government’s drug price regulations, but they have a problem with the details and the specific mark-up that the government is trying to force on them. Their initial argument in the courts was to have the mark-up raised to a higher level.

As it stands the 26% mark-up, capped at R26 has led to the closure of 103 chemists around the country. Most worryingly, Clive Stanton, the president of Community Pharmacies says that these closures are “in areas that can least afford them.” The 26% is clearly not high enough to keep pharmacies in business. Government has responded by encouraging pharmacists to sell all manner of other goods, such as flowers and chewing gum in order to remain in business. Encouraging trained professionals to open corner cafés seems like an odd way to increase access to essential medicines and medical care.

In addition to simply driving pharmacies out of business, the fixed mark-up reduces the incentive to stock or even sell more expensive medicines. Before a recent trip to Kenya, I bought some of GlaxoSmithKline’s excellent, yet expensive new malaria prophylactic Malanil. Absurdly the credit card charge that the travel clinic had to pay was greater than any profit they were allowed to make. When it costs a business more to sell a product than they can make, you can be sure that someone somewhere has got his or her sums wrong.

Arguing for a higher mark-up may suit some pharmacies right now, but will prejudice low volume, high margin pharmacies such as those in townships and rural areas. Furthermore, the whole idea of fixing the mark-up now penalises those who, in the future, may choose to open pharmacies in areas that serve the more marginalised in society – a group that the government specifically seeks to help.

Furthermore, fixing the mark-up fails to take account of the fact that all industries are dynamic and change all the time. New products appear, new ways of selling are constantly being developed; yet fixing the mark-up, at whatever level, undermines the way in which an industry can change and develop and ultimately that harms the consumer.

It is a good thing that this argument is going to the constitutional court. The pharmacies and the pharmaceutical industry should be arguing against the very concept and basis of these regulations, not the specific levels at which the Ministry of Health uses its already considerable discretionary powers to interfere in their business.

Price controls should have died with apartheid. They undermine free markets and thereby undermine the rights of consumers and the health of the nation. Competition is what brings down prices and a good dose of it will serve the buyers of medicines better than government attempts to manage the prices.

Author: Richard Tren is a director of the South Africa based health advocacy group, Africa Fighting Malaria. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\25 January 2005