Yoga Prakasa, Analyst , The Jakarta Post
In its efforts to provide the people with easy access to medicines, the government has attempted to make common medicines affordable to people at large by controlling their prices.
The government, through the Health Ministry, issued a series of regulations starting in November 2004 when it reduced the prices of 29 branded generic drugs. The ministry then issued three regulations in 2006, with the latest one in April 2007. As such, prices of more than 400 items have been reduced by 70 percent.
However, the prices of raw materials for medicines have gone up -- more than double for certain items. And since the domestic pharmaceutical industry lacks the capability to develop raw materials, more than 90 percent of them have to be imported, mainly from China and India.
Thus, with the strengthening yuan and rupee relative to the U.S. dollar, coupled with a declining supply of raw materials due to the closing down of several environmentally substandard Chinese and Indian pharmaceutical companies, domestic prices of medicines are vulnerable to the vagaries of rising raw material prices.
As a result, domestic pharmaceutical firms have experienced shrinking margins from their branded generic products. State-owned pharmaceutical firms were hit the most since generic drugs have become the backbone of their business, even accounting for as much as 70 percent of their revenues.
In response to the regulations, pharmaceutical companies have reduced or even stopped the production of such money-losing products, effectively making them scarcer or even unavailable on the market.
Consequently, the regulations actually make it difficult for people to attain access to affordable medicines, the very thing the regulations were intended to resolve.
So what has happened? Well, the situation can best be explained by simple market economics: regardless of drug cartel involvement or not, the dead weight loss experienced from tampering with the market equilibrium price brings everyone involved to a loss.
Up to now, frictions between the Health Ministry and the pharmaceutical industry still exist.
The latest move by the ministry to ensure industry compliance is by proposing its authority to import medicines to alleviate shortages of certain drugs included on the National Essential Medicines List.
If the ministry goes ahead with such plans, the negative impact may be felt across the pharmaceutical industry.
This does not have to be the case. Such a well-intended policy of affordable medicines could potentially bring a win-win solution to all parties if implemented in an appropriate manner.
Up to now, the government still taxes raw material imports with import tariffs of as much as 6.5 to 12.5 percent, while telling the industry to significantly cut prices. This doesn't seem reasonable.
Thus, to entice the industry to be more cooperative, the import tariffs should be done away with. This would be the easiest thing to do in the near term. Subsequently, the government can work with the pharmaceutical industry to formulate a more efficient and longer-term partnership of mutual benefits.
The ministry uses quoted prices published by the non-profit organization Management Sciences for Health and the WHO as the basis for its price cap. The Health Ministry claims to set prices at a level to allow manufacturers and distributors to make acceptable profit margins.
However, the formula is not disclosed. The fact is that the landed cost of imported raw materials is much higher compared to other nations. Thus the total cost of production of the branded generic drugs may be higher than the price cap set by the ministry.
The government, through the ministry, can help reduce cost pressures by cutting out unnecessary middlemen as the next step through direct procurement of the raw materials. The Health Ministry may even collaborate with its regional peers in ASEAN or even the WHO to leverage its bargaining power.
One idea that has been proposed is for the government to be the single buyer of the branded generic drugs' raw materials and to be the single dispenser of the drugs itself through government hospitals, retail pharmacies including people's pharmacies (apotek rakyat), and other health facilities such as Puskesmas.
The Health Ministry could then outsource the production and distribution of the drugs to pharmaceutical state-owned enterprises and private companies, paying them for the cost of service and allowing an acceptably high margin to make it a viable business.
For the government to be the single buyer, the Health Ministry will need sustainable financing to procure the necessary materials and fund the entire initiative. While funds from the state budget would be needed initially, the ministry could make better use of a publicly funded insurance system such as Askes for long-term sustainable funding.
Through Askes, the government can provide health coverage to low-income people while, at the same time, forcing prescriptions of branded generic medicines and allocating those drugs to its targeted people.
In addition, the funding can be in the form of cross tax subsidies, patient co-payments or user fees, professionally managed health funds or any combination of these.
All in all, it can be concluded that the affordable medicines initiative should be part of a comprehensive national health policy program. And with genuine willingness on the part of all parties involved, it can be realized, ultimately, for the good of the people.
The writer is an analyst at PT Danareksa Sekuritas