Okay, the President has to issue EO 104 because of RA 9502.
But can Health Secretary Duque focus right away on implementing Section 4 of the EO?
We have apparently been so absorbed by COVID-19 and community quarantines over the past four months that the price controls on medicines and drugs that loomed in the last days of January slipped by unnoticed.
When I learned about the plan in late January, I wrote about market friendly ways of reducing medicine prices in my BW Introspective opinion of Jan. 27. At that time, President Rodrigo Duterte was still weighing Health Secretary Francisco Duque’s recommendation to impose price caps on pharmaceutical products.
President Duterte did approve Secretary Duque’s draft, now known as EO 104, on Feb. 17. Its impact was sidelined not by COVID-19, but by a 90-day grace period that allowed existing suppliers to dispose of their inventory at prevailing prices. That window closed last week.
What’s in the order? It imposed price caps on 133 medicines and drugs: 22 anti-hypertensives, 28 anti-diabetic drugs; 18 neoplastic and anti-cancer medicines; 16 immunosuppressant formulations; 11 analgesics; eightanti-asthmatic and chronic obstructive pulmonary (COPD) disease preparations; seven anticoagulants; three antianginal medicines; three agents affecting bone metabolism; three antiemetics; two psoriasis, seborrhea, and ichthyosis preparations; three antidepressants; and nine other medicines and drugs.
These pharmaceutical products meet any of the four following criteria set by the Department of Health (DoH): 1.) they address the health priorities of the general public especially those that account for the leading causes of morbidity and mortality; 2.) they have high price differentials/arbitrage compared to international prices; 3.) they have limited competition in terms of lack of generic counterparts or lack of market access to these products; and, 4.) they are innovator products which are most expensive yet most prescribed.
EO 104 imposes caps on both wholesale and retail prices.
All of us would like to see lower medicine prices in our country. In our healthcare system that is predominantly private sector-oriented, out of pocket costs particularly on medicines are about 50% of total. It is very likely that the majority of us could not afford the medicines our doctors prescribe.
Price controls would, however, bring more problems than benefits to patients. Like price controls imposed on other consumer items, which politicians are prone to price cap such as housing and food items, in the long run E.O. 104 would dry up the supply of medicines and drugs, reduce our country’s access to innovative pharmaceutical products, and would ultimately undermine the overall quality and integrity of the local pharmaceutical market.
If the purpose of the EO is to reduce out-of-pocket costs of medicines and make it more accessible to all of us, this short-term benefit would not be sustained. In the longer term, suppliers would be disincentivized by price controls, reducing the quantity supplied of these price-capped pharmaceutical products.
When supply gets scarce, black markets of medicines start to co-exist with formal markets. Patients start to search for suppliers of the medicines they need. The added search costs effectively raise access costs of patients to medicines and drugs.
Even the rich among us, who could import medicines abroad in desperation would likewise have added access costs. No formal private businesses, Filipino or multi-national, would import drugs and medicines because of price controls. If they cannot pass on to the market the real costs of these products, they would not be supplying these items.
Accordingly, importation would continue but inefficiently and at a higher cost. In the long run, the lower prices that EO 104 orders would not be sustained. It may not be farfetched to expect hearing in the not so distant future these same words, which we had heard from say a seller of rice, meats or fish in wet markets at prices set by the trade and industry or agricultural departments, “go and buy these medicines from the DoH at government prices.”
Secondly, price caps would undermine: the quality of the medicines and drugs sold locally. When the local market of price-capped pharmaceutical products gets to co-exist with black markets of badly needed drugs and medicines, the Food and Drug Administration would be unable to guarantee pharmaceutical quality.
This could be similar to the early years of the generics law, when patients were not enthusiastic over buying generic drugs and medicines because of their uncertain quality. When this problem occurs thanks to the EO 104, medicines cost would even shoot up because patients would have to pay additional cost in black markets to ensure quality.
Thirdly, all of the innovative medicines are manufactured abroad. Innovators price their medicines and drugs higher because they are recouping their investments in developing these innovative medicines and drugs. International and our national intellectual property laws do allow them to have a monopoly of selling the innovative drugs for about 21 years, for them to recover their R&D costs.
One of the DoH’s four criteria in selecting the drugs and medicines to be included in the EO is that the product is innovative, most prescribed, and priced highly. If price controls would not let these innovators recover their costs in our local market, our country may no longer be their priority market for the release of these innovative medicines and drugs. Just consider the implication of that when we need vaccines for COVID-19 in a year or two, and none are coming here because of price controls.
Fourthly, EO 104 may have disastrous effects on the supply chain of drugs and medicines. In the supply chain are giant retailers (or perhaps just one with more than half of the local retail market) of pharmaceutical products. Suppliers know that, and take care they would not incur the ire of these large retailers. With retail prices capped, it is expected that big retailers would just pass on to suppliers the burden of price controls by telling suppliers to price their products at wholesale prices set by the large retailers.
The incidence of the burden of price controls are likely to fall on suppliers, aggravating the disincentive effect of price controls on the supply of medicines and drugs, hastening the drying up of the local pharmaceutical market.
But let’s look at the smaller retailers in the provinces. They do not have the same market power as the large retailers and their locations require higher distribution costs. Suppliers in this case may be able to pass on the burden of price controls to smaller retailers. The incidence of price controls would then be shared by suppliers and the smaller retailers in the regions. But the former could weather the problem better than the latter, who would get squeezed between the price cap on retail prices of medicines and drugs, and the pass on costs of price controls to them by suppliers.
This could destroy the supply chain in the regions, reducing access to medicines and drugs of our people in those areas.
Is this then the reason why wholesale prices are likewise capped? To protect the smaller retailers in the region? Likely. But if suppliers are not getting a good net return from a regional market, they may just skip those markets. This may hasten the demise of small retailers.
According to some suppliers and a distributor, some small retailers did close shop in 2009, when price controls on medicines were first imposed.
Fifth, delivery delays of medicines would also occur. There are two major supply chain distributors linking the suppliers to the hospitals and other health care institutions, and pharmaceutical retailers. Both are experienced in the distribution of medicines and drugs. Because of them, the private sector led-supply chain is relatively efficient.
Their revenues are proportionate to the wholesale prices of suppliers. With lower wholesale prices, distributors’ revenues fall and with distribution costs remaining the same, their net incomes get squeezed. I talked to the CEO of one of these distributors. In the price cap in 2009, his company lost about P10 billion. The price cap then was less than 10% of the scale of EO 104.
With expected larger losses, these distribution companies would have to re-think their business model. One possibility is they may carve off their businesses to focus on outlets where they can make money — another reason why access to medicines may shrink because of price controls.
There is, however, one redeeming section of the EO, Section 4. It says “The DoH, in consultation with relevant government agencies, including the DTI (Department of Trade and Industry) and the Philippine Competition Commission, is hereby directed to study and propose measures, including, but not limited to pooled procurement, price negotiation, and other mechanisms, which will influence the supply, demand and expenditure on drugs and medicines, in accordance with RA No. 9502, and other relevant laws and regulations.”
Secretary Duque, let’s attend to this now, before these long-term negative effects (effects one through three) and the contemporaneous destructive effects on the supply chain of medicines and drugs in the country (effects four and five) of EO 104 become irreversible.
Ramon L. Clarete is a professor at the University of the Philippines School of Economics.