Monday, February 04, 2013

Senior Citizens Discount 4: Distortion in Consumers' Perception of Drug Prices

(Note: The original title of this paper was "Health Transparency, More on Senior Citizens Drug Price Discount".)

There will be another meeting, the 16th meeting of the DOH Advisory Council on the Implementation of RA 9502 (Cheaper Medicines Law of 2008) next week, February 13 at the DOH. I have told the Secretariat that I will join the meeting.

I think the new Department Order regarding the sharing of burden of the mandatory 20 percent discount for medicines of senior citizens will be shown to us members of the Council. Or has it been officially issued already, I don't know.

In my blog post last December on this subject, there were two comments there, one from Leonie Ocampo, the President of the Philippine Pharmacists Association (PPhA) and from an anonymous individual who owns a small drugstore in the province. See below:

(1) ... Drug price regulation or expanding he MDRP list, as had always been my personal and the PPhA POSITION, THIS WILL NOT HELP. The first list did not give the expected result; no increase in the number of users which means only the regular users of the SKUs in the list benefits from the initiative and those who have NOT used said medicines continue not to avail of them even at 50 or 70% price reduction because in the first place, these people do not have the money to buy the medicines. Other ways to improve medicine access must be explored BUT THIS MUST BE DONE WITHOUT JEOPARDIZING THE MEDICINES QUALITY. We are open to help how this will be done.
-Leonie Ocampo
(2)  As a small independent drugstore in the province, I would like to add that the senior citizens law is being EFFECTIVELY USED by the giant chain drugstores as a LOYALTY and PREDATORY pricing program. Since they have the advantage of the “economies of scale”, they can easily “force and coerce” the drug distributors to subsidize this “expense discount” or else they will not buy. Because of this reason, the giant chain drugstores capture more or less 100% of the sales from senior citizens, without spending a penny! Unfortunately (also) for the small independent botikas… this not only means LOST SALES from the seniors, but they also loss the LOYALTY and PATRONAGE of the very influential sector in the local community! A double whammy!

I developed this new graph below showing what happens when the smaller drugstores in small municipalities in the provinces will stop selling some drugs at a loss, particularly those medicines often demanded by the senior citizens. The mandatory discount under RA 9994 or Expanded Senior Citizens Act is 32 percent (20 percent original discount + 12 percent VAT) and only a small portion will be shouldered by the drug manufacturers, the bulk of the burden will be shouldered by the small drugstores. Government takes little or no burden as such loss is not tax-credited. 

In graph A, before the expanded mandatory price discounts to senior citizens is implemented, there are four sellers of a particular drug often demanded by senior citizens. Mercury Drugstore (they control about 60 percent of the total drug retail business in the country) and three small, town-specific drugstores. They may have slightly different prices for the same drug with the smaller ones selling lower than the dominant player Mercury. These are represented by points A, B, C and M.

After the expanded mandatory price discounts, the three local drugstores are still around but they have stopped selling some medicines often demanded by senior citizens to prevent losses. Only price M by Mercury is left, still at the same level as chain stores keep only one price for each product for all their branches nationwide. But the quantity has expanded from Q1 to Q2. 

What the anonymous commenter above argued is that they may prevent losses by not selling certain medicines often demanded by the senior citizens, but they suffer further lower revenues as the senior citizens who may be buying other medicines, say vitamins for their grandchildren, will purchase these in the same store, ie, Mercury or other big chain drugstores (Watsons, Rose, etc.).

The above graph is hypothetical but it shows another negative effect of government price intervention on small businesses. The other negative effect is the inconvenience to senior citizens themselves. If drugstore A selling at price A is just a few blocks away but it has stopped selling the medicine that they need, then they will have to travel to farther, perhaps in the neighboring town or city where there is a Mercury or other big chain drugstores.

I hope that this law will be amended in the next Congress. The main goal of that law is to help the poorer senior citizens purchase their needed medicines, fine. But the law did not make a distinction between the richer senior citizens with their poorer cohorts. Many senior citizens are rich or have ample savings, have PhilHealth and private health insurance, they do not need that discount much. The ones who need a discount are the poorer ones, those who worked at the informal sector. 

There are actually many government programs towards this end. Like the rising budget of the DOH, additional funding for PhilHealth from the new Sin tax law and higher monthly contributions from those working in the formal sector, and higher budget for local healthcare by the local government units. Forcing the private players (drug manufacturers, drugstores, drug importers, hospital pharmacies, etc.) to give that discount otherwise the government will go after them and cancel their license to operate (LTO) or business permit is wrong.

So a new legislation to correct this mistake is needed. I am not sure though how ready the major players and stakeholders can be in deflecting legislators' grandstanding and political harassment. Finding less costly alternative schemes to protect the poorer senior citizens will make this work more palatable to the legislators.

For the meeting next week, we were asked what topics we wish to be included in the agenda. I suggested that requests for price hike for some drug molecules that were put under the mandatory 50 percent price cut through the "voluntary price reduction" or politically twisted as  GMAP, should be be considered and granted. Why? 

So long as cheaper generic products for the same molecule are available for the consumers and patients, meaning they have the option to buy other drugs, let the innovator drugs be priced high if they want.


GabbyD said...

"Since they have the advantage of the “economies of scale”,"

the irony of this is that if it is really correct they have economies of scale, then it is efficient for them to leave the market.

do u agree?

Bienvenido Oplas Jr said...

Why would a company operating profitably leave the market?

Anonymous said...

“So a new legislation to correct this mistake is needed. I am not sure though how ready the major players and stakeholders can be in deflecting legislators' grandstanding and political harassment”.

No legislator/politician (in his/her right mind) would dare amend the senior citizens law… because during the last presidential election, the seniors are estimated to be more than 14 million (enough to create a president)!

How ready the major players and stakeholders (are) in deflecting legislators' grandstanding and political harassment? First, let us specifically identify who the major players and stakeholders are?

1. Drug manufacturers and drug importers, are not directly affected by this law because they are the “back end” players… meaning the seniors will not “directly” buy from them.

2. Hospital pharmacies are also not seriously affected because they have higher profit margin.

3. Generic pharmacy franchises are also not affected as much because generic drugs have higher profit margin are they are being SUPPORTED by the franchise owners.

4. Giant chain drugstores, are the REAL beneficiaries of the senior citizens law because they capture (more or less) 100% of the purchases of the seniors (plus the other family member’s needs). Fortunately for them also, the mandatory discount under RA 9994 or Expanded Senior Citizens Act (20% original discount + 12% VAT) will be shouldered by the drug manufacturers because the will “force and coerce” them to shoulder it for them. Therefore, the chain drugstores will not lift a finger to “deflect” this law. To them this law is a free and effective tool that can be used to kill smaller competitors.

5. The small independent botikas, therefore, are the ones that are REALLY AFFECTED by this law… because they are the FRONTLINERS who are being “forced and coerced” by the “generous” government to shoulder the bulk of the burden without considering the FACT that they are small-time entrepreneurs who will NOT BE SUPPORTED by Drug Distributors.

How ready are the small independent botikas in deflecting legislators' grandstanding and political harassment? They are not ready…. they are already dying.

Bienvenido Oplas Jr said...

Hi Anonymous,

Thanks for your comments. My quick reply to your points above.

1. Senior citizens' (SCs) possible rejection of an amendment to the law. As I mentioned above, a proposed amendment will not remove the 20% discount for them, but it will apply only to poorer SCs, not to all including richer SCs, so not all SCs will object to such possible amendment. In addition, an amendment will make explicit tax credit for such losses. It is predatory for the government to force and mandate discounts by private players but it will have zero share on such burden.

2.Drug manufacturers and importers will shoulder something like 70% of 20% (or 14% of total discount excl VAT exemptions) so it is also a big loss for them.

3. Hospital pharmacies are also affected as they cannot pass on the cost of drug administration. Unlike drug dispensing for outpatients, in the hospitals, (a) physician prescribes, (b) nurses give drugs to patient, (c) nurses monitor if their is improvement in patient within minutes or few hours, (d) they report to physicians if Yes or No. If No, physician must change the drug, cycle continues until there is improvement in patient condition. Such admin procedures have costs and hospitals pass on that cost to their medicine prices.

3. I don't know how the generic chain stores (The Generics, Generika, etc.) deal with manufacturers in terms of trade discounts.

4. Giant drugstores like Mercury, yes, they are not directly affected and they may even benefit from RA 9994. From what I heard, Mercury gets something like 30% or more automatic discount for ordinary drugs from manufacturers, wholesalers and importers. For drugs used by SCs, they could be getting 50% or more discount.

5. Small independent and non-chain drugstores, yes they are the ones severely affected. One danger here is that some of them may be forced to get drugs from suspicious manufacturers and importers but sell at really low prices. Then they can have a 50% or more gross margin so that after the 32% total SCs discount was given, there is still some profit for them. One possible adverse result here is that they could be selling fake or substandard medicines and the condition of sick SCs will not improve, could even result in lethal outcome.


Anonymous said...

"Small independent and non-chain drugstores, yes they are the ones severely affected. One danger here is that some of them may be forced to get drugs from suspicious manufacturers and importers...."

IHMO, I think it is already happening... in fact, it is maybe the reason why Zuellig Pharma Philippines has launched FIRMUS Distribution Co. (a break pack distribution company) intended to capture opportunities to serve independent drugstore owners. According to this link, ..."The wholesale sector of the Philippine pharmaceutical market was the fastest-growing segment from 2007-10, with a CAGR of 8.5% compared to the market’s 5.7% CAGR."... I presume that since 2007, the small independent and non-chain drugstores are already sourcing their drugs from the "wholesale sector"... suspicious or not.

Bienvenido Oplas Jr said...

Thanks for the link. I do not know the real estimate of fake or substandard drugs in the PH market. Sometimes I read 10%, sometimes 20%, and that was a few years ago. Fake and/or substandard drugs are dangerous, can be lethal sometimes as the patient does not get well while the disease inside his/her body evolves and mutates to something more complicated, more serious.

Government intervention in pricing often results in more adverse results to the public.

Anonymous said...

So, after more than three years, my presumption that no legislator would dare amend the “mistake” they made (the 20% discount plus VAT exemption for our seniors), proved to be correct… in fact this “mistake” is repeated AGAIN with the release of the IRR for PWD VAT exemption plus 20% discount last Thursday, Dec 1, 2016.

How’s my drugstore doing? Well, with the Senior Discount law and the old PWD law my annual growth rate is -24%... yes, the figure is correct… it is really negative!

How’s the country’s retail drugstore industry? Well, as expected, the growth is “exclusive”… and the figure looks like this:

“As of May 17, 2016, Robinsons Retail said it acquired a 51-percent stake in The Generics Pharmacy, expanding its drugstore network to 2,200. The combined network of South Star Drug and The Generics Pharmacy is double its competitor Mercury Drug, which has about 1,100 stores. Robinsons Retail will also compete with the 632-store Generika, which is 50-percent owned by Ayala Corp. (Watsons, 543 as of Nov 6, 2016 according to the website)”


Bienvenido Oplas Jr said...

Dec. 3, 2016

Thank you Anonymous for that comment. With these endless government assaults in pricing behavior of private enterprises, only the big chains with economies of scale will be able to survive and adjust. The small ones, their choices are: (a) be forced to merge and consolidate with each other, (b) mix legitimate drugs with fake/substandard ones with very low prices to survive, or (c) be bought by any of the existing huge drug chains you mentioned -- TGP/South Star, Generika, Watsons, Mercury, others.