The case for price freedom for nonprescription (OTC) medicines
‘Toolkit’ presentation (for local adaption as necessary)
The overall case for price freedom for nonprescription medicines. Key messages I
More and more consumers are taking responsibility for their own healthcare, particularly for minor illnesses, and are able and prepared to bear the cost of such treatments.
Market forces alone can effectively control nonprescription medicine prices. Worldwide, OTC prices generally increase at or below the level of inflation.
Almost all economists, and economic theory, supports the case for price freedom of goods that have multiple sources of supply (which includes nonprescription medicines)
Where companies can determine the prices of their products, they are more likely to bring new products to the market, increasing the choice of available products for the consumer and creating a positive ‘virtuous spiral’ of increasing supply and downward price pressure.
The overall case for price freedom for nonprescription medicines. Key messages II
Regulation of prices is burdensome for all concerned - and potentially counter-productive.
Where the state or healthcare insurers do not reimburse nonprescription medicines either partially or fully, they are not subject to price controls in many countries - and the trend is away from controls.
In summary, there is no justification for the price of nonprescription medicines to be controlled. Prices should be allowed to find their own level within the competitive marketplace, as is the case for most other consumer products.
This presentation discusses:
Features of the nonprescription (OTC) sector which make it suitable for price freedom to work in creating competition and choice and thereby automatically restraining price increases.
The problems associated with price controls of OTCs – the practical issues of setting prices, and the likely negative impacts on consumer supply.
Country case studies showing that the removal of price controls has not led to excessive price increases.
Features of the nonprescription (OTC) sector
Features of the OTC sector
OTC products typically represent between 10-20% of the total pharmaceutical sales by value in a country.
Market growth of OTCs is lower than with prescription medicines, by volume and value.
Manufacturers’ margins on OTC products are often narrow, and smaller than on other healthcare products (typically 10-15% PBT).
Reason: demand for OTCs is flexible (‘elastic’).
Features of the OTC sector
There is ‘elasticity’ in the OTC self-medication sector because:
The payer is the patient or consumer of the medicine
There is competition and choice in the marketplace with many alternatives to choose from.
Most purchase decisions of OTCs are optional – no purchase at all is often a viable alternative if the price is judged too high by the consumer
Features of the OTC sector:
Consumer perspectives
Cost of treatment of simple ailments with OTCs is commonly small compared to serious conditions.
Cost of medicines is commonly a small part of consumer expenditures:
Rank Item % of total
1. Housing
2. Food & drink
3. Transport
4. Clothing & Footwear
5. Household goods/services
6. Communications
7. Alcohol & tobacco
8. Hospital & outpatient services
9. Pharma products & other medical
(Ref: Euromonitor International. World Consumer Expenditure Patterns 2002 (2003))
Nonprescription prices typically increase
at, or below, other consumer items. USA:
%
428
407
382
348
325
306
291
283
274
263
Hospital services3
%
327
312
299
284
270
259
250
242
235
228
Medical care services2
%
151
153
151
151
150
149
149
146
143
142
Non prescription medicines
%
271
265
260
252
241
235
226
217
212
206
Medical commodities1
%
190
184
181
177
174
168
164
161
159
154
All consumer items
CAGR
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Item
(Ref: US Bureau of Labor Statistics, 2007. 1982-4 = 100%. 1All prescription drugs, nonprescription medicines, medical supplies, medical equipment. 2Includes doctor, dental, eye glasses and eye care. 3Includes inpatient hospital services, outpatient hospital services, nursing homes and adult day-care.)
Why is price freedom good for consumers?
Price freedom works in favour of consumers and patients, in keeping down prices and driving up choice.
(so long as there is sufficient competition between competing products in the market).
How many competitors is sufficient?
Model example is the decline in prices following patent expiry and generic entry:
1 competing product: price falls to 80-90% of original level
2 competing products: price falls to 60-70% of original level
3 competing products: price falls to 30-40% of original level.
4+ competing products: price reduction falls to 20% of original level, depending on cost of goods & sales (COGS).
NB it can take time (1-2 years) for prices to ‘settle down’
Competition can be of different types
For an OTC medicine:
Multiple brand or unbranded copies
Other chemical classes
Alternative technologies
Rx medicines
No treatment
New switches
The problems associated with price controls
Problems with price controls 1
- Distribution mark-ups
Distribution practices are a source of price variation as conditions vary enormously from country to country; the broad ranges are shown here:
Price build-up
Manufacturers’ selling or
ex-factory price (MSP)…… 100%
Wholesaler mark-up….. + to %
Pharmacy mark-up….. +17 to 40%
Tax (VAT)….. +0 to 25%
Result:→ 120%---200% of MSP
Problems with price controls 2
Price comparisons used for price controls are problematic
The reasons are multiple and reflect price and reimbursement systems, macro-economic differences, exchange rate variation, taxes, national political priorities and the specifics of health care practices and markets.
Methods of price comparison vary significantly. Comparisons can be made by looking at:
Prices of single products
Prices of a group of leading branded products
Prices of therapeutic groups including generics, OTCs and prescription medicines
Prices of a sample of leading products in one country versus the same products in other countries
Prices of the full range offered in a country
Problems with price controls 3
Comparisons can be made by looking at:
A single product price
Average prices
Weighted average prices
The current exchange rate
The exchange rate of a chosen period
The exchange rates at the date on which the product was introduced in the different markets
An exchange rate adjusted for economic differences (. adjusted for purchasing power parity – PPP)
The ex-factory price level
The level of the pharmacy selling price to the public
The reimbursed price level
The bulk purchase price
The average unit sales figures (IMS)
Prices with or without taxes (VAT)
The lowest or highest prices found in a country or just one sample.
Problems with price controls 4
Number of products
Canada - Price Reviews Not Completed 1998-2002
Regulatory burden of price reviews
Other negatives of price controls
Price controls distort supply, reduce competition and choice and can even lead to shortages.
Decrease in market efficiency – price controls discourage low introductory prices, special sales offers and promotion campaigns
Can discourage innovation in OTCs, if innovation is not recognised (price controls on molecule)
Prices sometimes above ‘free market’ levels (because regulation tends to generate market distortions)
Overall, price controls will lead to reduced consumer/patient choice
What do economists
think of price controls?
“…despite the superficial logic of their appeal, economists are generally opposed to price controls, except perhaps for very brief periods during emergencies.”
“Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses.”
“The study of price controls teaches important lessons about free competitive markets. By examining cases in which controls have prevented the price mechanism from working, we gain a better appreciation of its usual elegance and efficiency. This does not mean that there are no circumstances in which temporary controls may be effective. But a fair reading of economic history shows just how rare those circumstances are.”
(Ref: Prof. H. Rockoff. “Price Controls” The Concise Encyclopedia of Economics. See:
Country case studies
Many countries have no (or limited) price controls on OTCs
Argentina, Australia, Austria, Brazil, Bulgaria, Canada, Colombia, Croatia, Denmark, Finland, France, Germany, Hungary, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, Norway, the Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, Spain, Sweden, South Africa, Switzerland, Thailand, UK, USA.
Occasional exceptions include:
Price controls if product has patents, is reimbursed, is on special lists, or is prescribed by a doctor
Authorities may request notification of prices or price increases, or retain power to review any supposed cases of ‘price abuse’
(Ref: AESGP: Economic and Legal Framework for Non-Prescription Medicines. 2007. )
Some country examples
– the Netherlands
In the Netherlands in June 1996 the Law on Medicine Prices came into effect, and OTCs (including those reimbursed) were exempted by the Minister of Health ‘in order to give the market an opportunity to prove itself’
Key results of the Netherlands experience:
The OTC market shows all characteristics of a completely free market such as wide distribution and price competition.
Price levels of OTCs in the Netherlands are not higher than reference countries.
Market forces led to price falls in medicines switched from Rx to OTC
(Ref: Neprofarm: Marktwerking bij zelfzorggeneesmiddelen (“Market forces for self-care medicines”))
Norway
Norway abolished price controls for OTCs in 1995.
From April 1999 to January 2003 the manufacturer selling price for OTC medicines increased by % on average against a retail price increase of 27% in the same period.
“This deregulation led to an overall price increase on OTCs the first year, but eventually the price increase on OTCs was even lower than the general inflation rate when calculated at pharmacy purchase price.”
(Ref: Geir Bredesen. Organization of Health Care Systems and Financing of Pharmaceuticals in Norway, including cost containments. Journal of Pharmaceutical Finance, Economics & Policy Vol. 12, 2003, pp. 351-360.)
The European Commission, I
The European Commission has stated on several occasions that the experience with free pricing of OTCs is positive.
“The remaining price controls on pharmaceuticals sold without prescription could be removed… Consideration could also be given to accompanying measures aiming at reinforcing competition in this sector, such as the abolition of resale price maintenance, the relaxation of restrictions on the place of sale of non-prescription medicines and the relaxation of restrictions on the use of brand names for products switched from prescription-only to non-prescription.”
(Ref: Communication from the Commission on the Single Market in Pharmaceuticals. Brussels, 25 November 1998. COM(1998) 588 final.)
The European Commission, II
The G10 Medicines Group (convened under EC chairmanship to look at competitiveness of the pharmaceutical industry and public and social objectives):
“However, there are categories of medicines that are not reimbursed, often non-prescription medicines, and those supplied outside the state sector in private hospitals etc. The Group believes that, as a matter of principle, medicines which are neither purchased nor reimbursed by the State should be open to full competition.”
“Recommendation 6. That the Commission and Member States should secure the principle that a member State’s authority to regulate prices in the EU should extend only to those medicines purchased by, or reimbursed by, the State.”
(Ref: European Commission. High Level Group on innovation and provision of medicines. Recommendations for action. G10 medicines report. 07 May 2002 .)
The European Commission, III
The Pharmaceutical Forum is a European Commission-led group with the objective of improving the access and delivery of healthcare services to patients.
One of the topics under evaluation by the Pharmaceutical Forum was the Pricing and Reimbursement of medicines.
“Price control is not necessary for non-reimbursed medicines. For these products, price competition can steer the price-evolution sufficiently well. Therefore, Member States should abstain from price-control”.
(Ref: Pharmaceutical Forum. Second progress report, 26 June 2007. Annex A. Guiding principles for good practices implementing a pricing and reimbursement policy)
South Africa 2004
January 2004 – Draft regulations introduced by Ministry of Health introduced various measures including price controls for OTC medicines, to be effective from May 2004. Objective: to achieve cost savings for consumers
However, the economic case against price controls showed that the regulations may reduce the supply of affordable OTC medicines due to product withdrawals and reduced competition.
Significant differences were demonstrated between OTC and prescription products.
Persuaded by these arguments, in July 2004 the Medicines Control Council exempted “Schedule 0” (OTC medicines) from the price control and other regulations.
South Africa 2007
In 2004, based on evidence provided by the industry, the South African Minister of Health decided to exempt nonprescription medicines (schedule 0) from the price regulation scheme on the condition that an impact study be submitted to the Department evaluating whether the exemption continues to be warranted.
In 2007, SMASA (Self-Medication Manufacturers’ Association of South Africa) commissioned consulting firm G:ENESIS to conduct the study. It confirms that ‘market forces’ had indeed been effective in 2005 and 2006 in restraining price increases. The ongoing exemption of schedule 0 medicines is therefore justified.
G:ENESIS. Impact study evaluating whether the exemption of schedule 0 medicine from Section 18A and 22G of the Medicines and Related Substances Control Act continues to be warranted in South Africa - July 2007
Colombia I
In Colombia OTC prices are under the “oversight freedom” system in which manufacturers and distributors can set prices.
A 2005 study showed that OTC prices over the period 2000-2004 remained flat whereas the prescription sector tended to rise.
It was concluded that price freedom was appropriate for OTCs where there were sufficient competitors in a given therapeutic class.
Evolution of retail prices in Colombia,
prescription and non prescription sectors, 2002-4.
-
50
100
150
200
250
300
350
400
Ene-00
Mar-00
May-00
Jul-00
Sep-00
Nov-00
Ene-01
Mar-01
May-01
Jul-01
Sep-01
Nov-01
Ene-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Ene-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Ene-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Month
$ per Dose
Prescription
All products
Nonprescription
Colombia II
(Ref: Ramon E M Rivera, Director of Regulation, Ministry of Commerce, Industry and Tourism. Politica de precios de medicamentos de venta libre en Colombia. (“Politics of prices of medicines on free sale in Colombia”) 2005)
Conclusions, I
More and more consumers are taking responsibility for their own healthcare, particularly for minor illnesses, and are able and prepared to bear the cost of such treatments.
Market forces alone can effectively control nonprescription medicine prices. Worldwide, OTC prices generally increase at or below the level of inflation.
Almost all economists, and economic theory, supports the case for price freedom of goods that have multiple sources of supply (which includes nonprescription medicines)
Where companies can determine the prices of their products, they are more likely to bring new products to the market, increasing the choice of available products for the consumer and creating a positive ‘virtuous spiral’ of increasing supply and downward price pressure.
Conclusions, II
Regulation of prices is burdensome for all concerned - and potentially counter-productive.
Where the state or healthcare insurers do not reimburse nonprescription medicines either partially or fully, they are not subject to price controls in many countries - and the trend is away from controls.
In summary, there is no justification for the price of nonprescription medicines to be controlled. Prices should be allowed to find their own level within the competitive marketplace, as is the case for most other consumer products.
Price elastic because Not a ‘forced purchase’
In many countries, ‘out-of-pocket’ expenditure on healthcare in general, and nonprescription medicines in particular, is lower than for other areas of discretionary spend such as entertainment and cigarettes + alcohol.
MEXICO BULGARIA AND ROMANIA HAVE GDPs PER CAPITA SIMILAR TO BRAZIL’s
