Price controls on medicines: The zombie is back!

On Nov. 15, the technical working group organized by the Senate Committee on Trade, Commerce and Entrepreneurship chaired by Senator Pimentel met on the proposed Senate bill that would create the drug price regulatory board or DPRB.
The proposed law would empower the DPRB to cap prices of drugs and medicines, and to sanction non-compliant pharmaceutical companies and medicine retail outlets.
Its purpose is to “effectively reduce the cost of drugs or medicines.” Now who could be against that?
But “tales as old as time” tell us that price capping could not deliver sustained affordability and accessibility of medicines to the poor, or of any basic necessity for that matter subject to price caps.
Price capping may be helpful for a limited duration, as in times following natural calamities when markets are temporarily dysfunctional and lacking adequate competition to bring prices back to their normal levels. Once markets recover, those controls are lifted.
But when price capping is permanent as in having a DPRB to chop off prices of medicines, suppliers would skip the local market.
Price-capped medicines become increasingly scarcer, pushing their prices to increase. Moreover, the medicines purchased could be of questionable quality, as some of them may be obtained in informal markets.
That price controls are incapable of achieving their good objectives in the longer term have been shown in several countries and in several other markets like low-cost housing, food, petroleum, credit, and other essential commodities.
Senator Zubiri authored the DPRB bill, a counterpart bill to the House of Representatives, which Congressman Biron introduced.
Price capping of medicines is not new. Congressman Biron proposed it in 2009, but his bill did not make it, because it was a non-starter for promoting medicines access.
With these bills in both Houses of Congress, their authors are trying to resuscitate a zombie. With their bills, both authors would reduce rather than expand access to medicines in our country in the long run.
The proposed laws are motivated by the claim that local medicine prices are higher than those paid in other countries. That may be so. But we don’t know why they may be so. While the World Health Organization had compiled country and international benchmark prices of medicines in doing the price comparisons, it did not make adjustments for differences in time, exchange rate, policies, and other factors between countries.
Without knowing if we are comparing correctly medicine prices and why external prices are lower, resort to price capping risks is like giving the wrong medicine to the patient.
But suppose the comparisons were correct. Competition, not price capping, turns out to be more effective in reducing medicine prices. In 2009, the DoH price capped five medicines under its Maximum Drug Retail Price (MDRP) program and several other medicines under its Government Mediated Access Prices program.
Competition, not price capping. Figure 1 charts the weighted average price of medicines by type of manufacturer. Even before MDRP in 2009, prices of originator medicines controlled by multinational companies had already been going down. The sharp drop of originator medicines can be attributed to the MDRP. But their weighted average medicines prices of originator medicines continued to slide down because of the shifting market shares in favor of generic medicines (see chart).

Competition would just force those multinational companies to bring down their prices once generic drugs and medicines enter the local market.
Generics firms benefit from the R&D of originator companies. After their medicines go off patent, generic companies produce their own versions of these medicines, which compete with their parent originator medicines. This competition causes medicine prices to go down.
If the DPRB focuses its price axing powers on originator medicines, it risks originator companies deciding against introducing price capped medicines in our country. This would deprive generic firms opportunities for diversifying their medicines portfolio, keep medicines supply high, and offer competition to originator companies to bring medicine prices down.
We all aspire for universal access to medicines. Strengthening competition in the local medicines market rather than controlling the prices of drugs and medicines is the way forward. We had seen it work and it could be made to work more effectively.
Expanded pooled procurement. Making the local medicine market larger is crucial to make the competition more effective in lowering prices. Not only should the government pool procurement of medicines by several public sector entities in our country, it should also allocate more budget for medicines. The deeper and expanded public sector would attract more suppliers in the market and give it leverage in negotiating medicine prices to go down further.
The expanded competition as more suppliers are attracted to bid in expanded public sector markets makes medicines more affordable to the general population. More importantly, the public sector is now in a better position to give drugs and medicines to the poor at no cost to them.
It is noted that despite the drop in the prices of medicines in 2009 because of MDRP, the “poor still find it difficult to buy the number and quality of drugs they need to cure or control their illnesses,” according to one study.
But we have two problems: the DoH has still to learn to fully absorb its budget, and secondly its procurement planning and distribution capacity is weak. Even at current levels of budget for medicines and drugs, we already hear procured drugs that remain unused in public health centers. So if Congress gives more taxpayer money to the DoH for this, this waste can only grow larger.
Hybrid PPP. Thus pooled procurement needs to be complemented with a hybrid PPP. The DoH outsources procurement planning and distribution of medicines. There could be two PPPs: one for planning and another for distribution. The private sector has relatively the experience in undertaking these functions more efficiently.
 
Ramon L. Clarete is a professor at the University of the Philippines School of Economics.