Mail & Guardian (Johannesburg) - May 10, 2004

From last week pharmacists, distributors, wholesalers and manufacturers will have to change the way they do business, with discounting, rebating and bonusing prohibited by the Medicines and Related Substances Act. However, old stock - whose prices are influenced by these practices - will remain on the shelves and can be sold.

From June 2 manufacturers will be required to determine a single exit price at which each item can be sold. These may find their way onto pharmacy shelves from that date and can be sold, with pharmacists allowed a set dispensing markup on each item, according to the Act.

From August 2, the confusion will end, as all medicines from Schedule 1 upwards - old stock and new - must be sold at the single exit price.

For clever shoppers, it will mean shopping around for the next three months for the best deal.

With the new pricing system, branded medicines will drop by about 15% and generics by between 20% and as much as 50%, said Andy Gray, senior pharmacology lecturer at the University of KwaZulu-Natal.

However, consumers may be surprised to find that there is no immediate change in prices and, in some cases, there will be a hike. This is because pharmacies have until August to get rid of old stock bought at discount prices. Pharmacies are also concerned that once the deadline for charging a single exit price is enforced they will be put out of business. An insider says many have started cashing in now.

On August 2, when all medicine will have a single exit price printed on the label, consumers will be able to see a drop in prices and calculate what the pharmacist charges for dispensing the medicine. Pharmacists will then charge a maximum of 26% as a dispensing fee for drugs costing less than R100 or R26 if the medication costs more than R100.

Consumers who have prescription medication will see an increase in the price because pharmacies will not be able to discount to medical aids, Val Beaumont, Innovative Medicines South Africa, said in a statement.

Experts say that despite the good intention of the regulations to make pricing systems transparent, the Department of Health's implementation has left industry stakeholders and consumers confused.

"Part of the problem is that there has not been enough openness and transparency of the original report of the pricing committee," said Jonathan Berger, an attorney at the Aids Law Project.

He said the methodology behind the regulations was kept hidden, making it hard to understand how the 26% was calculated. "The regulations don't cut to the reason why medicines are priced so high. They're getting rid of the rebates and discounts on the chain until dispensing. But manufacturers have not been asked to justify their costs."

Berger said the regulations do make provision for monitoring and enforcing manufacturing costs in the future.

However, they will standardise the pricing of medicine across the country, he said, and ensure that all people, regardless of the area they live in, will pay the same exit price. The consumer needs to understand that the system of discounts is not a good one because someone pays for those discounts - and it is not the drug company.

Under the old system, manufacturers gave discounts to big pharmacies and recovered it from the smaller peri-urban ones. Smaller pharmacies that could not afford to buy in bulk therefore charged higher prices for drugs. So the consumer in Sandton, Johannesburg, who has been buying at a big pharmacy will feel the pinch - but this means the poorer consumer in Mtubatuba, KwaZulu-Natal, will not be charged excessively.

"People going to pharmacies in the next week will be buying stock that has been bought before the deadline so they should not see a change [in prices]," says Berger.

Currently pharmacists do not know what to charge, but are responding "very cautiously" because they are not sure if the medical aids will reimburse them, said Gray. "In the immediate period after May 2, where factory gate prices have not yet changed, this could lead to a temporary increase in prices for some medicines."

He says pharmacists are also afraid to set prices between them, as this could be seen as collusive. "They're also concerned that the 26% or R26 stipulated on April 30 could lead to half or more of the retail pharmacies going out of business very quickly after August 2, so they're trying to negotiate [with the department] but are keeping open their legal options."

Gray said consumers should look for transparency about how the price has been calculated, and ask why they are being charged for any co-payments (the percentage the medical aid is paying). Different pharmacies may be charging different prices so consumers can shop around for the best price.

Why medical aid members will pay more:

Why are medical aid members experiencing a hike in the price of their medication?

Andy Gray, senior pharmacology lecturer at the University of KwaZulu-Natal, says: "Let's take a hypothetical example. A chronic medicine that is currently sold by wholesalers to the retailers at R100 would normally have been marked up by the pharmacist to R150; then a small dispensing fee added, to come to R151,30. However, the medical aid would not have paid that amount, but would typically, for a chronic claim, have demanded a 30% discount, paying R105,91 plus VAT, a total of R120,73.

"However, the pharmacist didn't actually buy at R100, as the wholesaler offered a range of special deals for bulk purchases, loyalty discounts and rebates. The pharmacist perhaps paid R90, making a R15,91 profit. Now, until the manufacturers drop their prices to the average paid by all purchasers, the wholesale exit price remains R100, but there no discounts are allowed.

"Equally, the law prevents the pharmacy from adding its normal margin, and then discounting the price to the medical aid.

"With the threat of major cuts in profit after August, many pharmacists would like to charge the full 50% mark-up, perhaps foregoing the R1,30 [dispensing fee] - so [the price would be] R150 for this hypothetical medicine.

"Many medical aids could not accommodate that increase in costs, so they're offering something less than 50%."Part of the uncertainty is that the Board of Healthcare Funders cannot provide guidance to the medical aids - 20% and 30% discounts used to apply across all schemes, but this is considered collusive under the Competition Act. So the schemes have been setting their own rules, and must now decide individually what they can afford."

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