Drug Price Control 39: Presentation at USC, Cebu, March 2014

Two weekends ago, I gave a talk at the University of San Carlos (USC) in Cebu City, some 100 Pharmacy Economics students of a friend, Prof. Frank Largo. Frank is a fellow UP School of Economics (UPSE) alumni, also a fellow International Academy for Leadership (IAF) alumni at Gummersbach, Germany.

Four years ago, I also gave a talk at his Economics graduate class also at USC. I was one of four speakers then. See  Drug Price Control 38: Presentation at USC, Cebu, March 2010.

The other speaker that day was Prof. Eric Salenga, Chairman of the Pharmacy Department, UP Manila, also President of the Young Pharmacists Association of the Philippines (YPAP). He's a very articulate speaker.

My outline was simple. I.  Dreaming a single national price, II. Drug price control of RA 9502,

III. Senior citizens discount of RA 9994, IV. Conclusions.

I. Dreaming a single national price

Many of those who advocate government price control and/or mandatory discounts of certain commodities in society make this faulty assumption. That same product with same dosage or quality made by the same manufacturer in the same country should have only one price nationwide. Thus, medicine price by the same manufacturer should be the same regardless of outlets.

Any difference in pricing is explained by corporate greed; the wider the price difference, the bigger the greed, so government should control or limit that greed in the name of public health and welfare. This can be an emotionally powerful argument.

When this logic is applied internationally, it would imply that same product with same dosage or quality by same manufacturer made in different but similarly developing countries should have little price differentials. But why this did not happen?

This line of thinking is illogical because there can never be a single national price.

To make meaningful price comparison of a commodity country by country, one must show:

a.       same or comparable retail outlet, say only from Watsons (not a hospital pharmacy in country A vs. small drugstore in country B)

b.       same reference period for price, say December 30, 2012 (not end-January in A vs end-December in B of same year)

c.       Same reference period for exchange rate in converting different currencies into a common currency, PhP or US$, say as of end-June 2013

d.       taxes and fees, national and local, applied on each commodity

e.       subsidies or mandatory discount or price control, if any, applied on each commodity;

f.         other factors.

I asked some individuals who were involved in the lobbying and crafting of the Cheaper Medicines bill into a law, RA 9502, the raw data for such price comparison in the above table, they could not present one. Those numbers in the Senate Committee Report therefore, were suspicious, but they have become strong basis for enactment into a law of the bill.

RA 9502's main concerns were as follows:

* Amending the Intellectual Property Code (IPC) to allow TRIPS flexibilities in the intellectual property rights (IPR) like patents of innovator drugs and allow compulsory licensing (CL), special CL, “early working” and parallel importation.

*  Drugs and medicines price regulation through the issuance of maximum retail price (MRP, not MDRP or GMAP).

* Non-discriminatory clause, amending the pharmacy law and generics law and strengthening BFAD, now FDA.

* Only one goal: cheaper and safe medicines be more accessible to the poor.

But even before RA 9502, average medicine prices were already declining. Not because of political coercion and harassment, but because of competition among drug manufacturers themselves.

Senior Citizens Discount 5: Supreme Court Flip-Flopping on the Law

A fried from Mercury Drugstore, Atty. Edsel Manuel, gave a long reply to the complaint of Mr. James Auste, head of the Cancer Warriors Foundation, why his demand to get a 3-months supply of his medicines from Mercury was denied. The email exchange was posted in our DOH Advisory Council for RA 9502 (Cheaper Medicines Law of 2008) email loop. Atty. Manuel's long reply covered several topics, from the law on mandatory discounts to persons with disabilities (PWDs) or RA 9442, to the expanded mandatory discounts to senior citizens or RA 9527 (enacted February 2004) and RA 9994 (enacted January 2010), to pricing by big drugstore chains.

Below, I am posting portions of his reply related only to RA 9994. I will reserve my further comments about this law in my next blog post on the subject. I thank Atty. Manuel for giving me permission to blog his long reply. Photos here, I got from the web.

(S)ince the enactment of senior citizen and PWD discounts, drugstores have been crying afoul and have been literally crying a river in Congress and Senate.  If this 20% discount is viable and reasonable to drugstores why on earth will drugstores complain? And with the burden shared to manufacturers and suppliers, why are they complaining also? This means that there is something wrong with the law.

The first giver of 20% discount is RA 7432 or the original senior citizen law. This law is the most fair that even without the implementing rules being issued, Mercury Drug has initiated the giving of 20% discount believing in the just and fairness of the law as the cost of the discount was treated as tax credit. 

However, the anticipated fairness of the law was saddened by the issuance by the Bureau of Internal Revenue of Revenue Regulation No. 2 series of 1994, by treating the grant of the 20% discount as tax deduction instead of tax credit; and the expected propriety of the elderly was frustrated by the abuses made by unscrupulous persons. We were able to convict in Valenzuela court a person who used fake senior IDs and the discounted medicines he illegally acquired were sold to other establishments.

Appeal to the Executive branch of the government turned to be futile thus, the company sought the intervention of the Judiciary.  

From 1994 until the company won the case with the Supreme Court in 2005, the company had suffered substantial reduction in sales,  profit, and drain in the company’s cash flow, not to mention the litigation costs  incurred . 

It has been decided in numerous decisions of the Supreme Court that tax deduction is not fair- is not a just compensation for the loss revenues brought about by the discount. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation G.R. No. 159647, April 15, 2005, 456 SCRA 414; Bicolandia Drug Corporation  v. Commissioner of Internal Revenue, G.R. No. 142299, June 22, 2006, 492 SCRA 159; Commissioner of Internal Revenue v. Bicolandia Drug Corporation, G.R. No. 148083, July 21, 2006, 496 SCRA 176; Commissioner of Internal Revenue v. Central Luzon Drug Corporation , G.R. No. 159610,(June 12, 2008] 

To quote the Supreme Court, thru Justice Panganiban, 

“Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned.  Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.” (Commissioner of Internal Revenue v. Central Luzon Drug Corporation G.R. No. 159647, April 15, 2005, 456 SCRA 414)

That light we saw from the Supreme Court in redeeming the company from injustice did not continue to flame-up because the Legislature enacted RA 9527 or the Expanded Senior Citizen Act of 2004, which changed the original tax treatment of the discount from tax credit to tax deduction.

With the enactment of the Expanded Senior Citizen Act of 2004, the small drugstores filed a Petition with the Supreme Court questioning the constitutionality of the tax deduction provision of the law.

Surprisingly, the Petition by the small drugstores was dismissed by the Supreme Court, in deviation from their previous ruling by upholding the  tax deduction scheme, but questioning the business decision of drugstores in pegging a small mark-up. 

The Supreme Court enunciated thru Justice Azcuna

“it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this decision. In as much as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers to competition.” (Carlos Super Drug vs. DSWD, G.R. No. 166494, June 29, 2007)

As evident from the above ruling, the Supreme Court teaches drugstores to increase their prices to counter the effect of tax deduction, but this has been rendered inutile by the enactment of RA 9502 or the Cheaper Medicine Law in June 6, 2008, where prices of medicines have been limited to the dictated price of the government. 

Where now will the drugstores put themselves? Again, woe to drugstores! Additional salt to wound is that the drugstores are being punished if they will not give discounts and the aggressive complaints of seniors and pwds as if drugstores are the dictator of prices….

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See also:
Senior Citizens Discount, Part 2, November 03, 2010 
Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011 
Senior Citizens Discount 3: Sharing of Mandatory Discounts on Medicines of Senior Citizens, December 14, 2012 
Senior Citizens Discount 4: Distortion in Consumers' Perception of Drug Prices, February 04, 2013 

Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011 
Welfarism 25: Centenarians and Populist Legislators, May 30, 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!

-Anonymous

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.

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See also:
On Senior Citizens Discount, August 10, 2009 
Senior Citizens Discount, Part 2, November 03, 2010 
Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011 
Senior Citizens Discount 3: Sharing of Mandatory Discounts on Medicines of Senior Citizens, December 14, 2012

Senior Citizens Discount 3: Sharing of Mandatory Discounts on Medicines of Senior Citizens

Republic Act (RA) 9994 or the Expanded Senior Citizens Act of 2010 provides for these new benefits to resident citizens of the Philippines who are 60 years old and above:

"SEC. 4. Privileges for the Senior Citizens. -

The senior citizens shall be entitled to the following:

"(a) the grant of twenty percent (20%) discount and exemption from the value -added tax (VAT), if applicable, on the sale of the following goods and services from all establishments, for the exclusive use and enjoyment or availment of the senior citizen

"(1) on the purchase of medicines, including the purchase of influenza and pnuemococcal vaccines, and such other essential medical supplies, accessories and equipment to be determined by the Department of Health (DOH).

"The DOH shall establish guidelines and mechanism of compulsory rebates in the sharing of burden of discounts among retailers, manufacturers and distributors, taking into consideration their respective margins;

"(2) on the professional fees of attending physician/s in all private hospitals, medical facilities, outpatient clinics and home health care services;

"(3) on the professional fees of licensed professional health providing home health care services as endorsed by private hospitals or employed through home health care employment agencies;

"(4) on medical and dental services, diagnostic and laboratory fees in all private hospitals, medical facilities, outpatient clinics, and home health care services, in accordance with the rules and regulations to be issued by the DOH, in coordination with the Philippine Health Insurance Corporation (PhilHealth);...

While there is not much confusion or conflict in the discounts in professional fees of healthcare professionals, there is confusion and even conflict among the various players in the medicines sub-sector, in particular among drug manufacturers, distributors, importers/exporters, wholesalers, retailers, and hospital pharmacies.

The Department of Health (DOH) has requested members of the Advisory Council (AC) on the Implementation of RA 9502 (Cheaper Medicines Law of 2008) for their comments of the draft DOH Circular that will soon be issued by the DOH Secretary. Below is my letter to them which I sent by email yesterday.
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12 December 2012

Dr. Madeleine de Rosas-Valera

Chair, Advisory Council for RA 9502

Assistant Secretary

Department of Health

Dear Doc Madz,

Here are our comments to the draft Department Circular, “Clarification on Certain Provisions of Administrative Order No. 2010-0032” regarding RA 9994 or the Expanded Senior Citizens Act of 2010.

1. Definitions of Wholesaler, Retailer, Distributor, Manufacturer and so on, we agree with the definitions given.

2. On the sharing of the 20 percent mandatory discount to senior citizens, the 30-70 percent burden sharing to retailers-manufacturer/distributor/wholesaler looks fair.

It is assumed that whatever burden sharing should apply after the new Department Circular has been issued and not apply retroactively.

As an outside observer and not part of the major players – the drug manufacturers, distributors, retailers and so on – it is pathetic to see how these players were forced to debate among themselves who should get the bigger burden while government burden in the form of tax credits or loss carry over is not clear. Each of these players is doing its share in giving patients and consumers have access to quality and affordable medicines. That alone is an important social function or public service already..

An enterprise that is forced and coerced by the government to give discounts to certain group of consumers will attempt to survive and not go bankrupt. There are many ways to do this.

One is to stop selling those medicines and products that are highly demanded by the senior citizens. This is happening already in some small and independent drugstores in rural areas which have little leeway for further price discounts as they do not have the economies of scale. 

Two, raise further the regular price of those medicines demanded by the senior citizens so that after the 20 percent mandatory discount, the price simply goes back to its original level and thus, not suffer a loss.

Three, raise the price of other medicines and products demanded by the non-senior citizens. In effect they subsidize the price discount given to the senior citizens. This situation can be illustrated by this graph.

If there was no price distortion like RA 9994, the “equilibrium price” (P*) of a particular medicine will be at point A, With the law, the new price with mandatory discount (Pmd) will be at point B, lower or cheaper than point A. In order to prevent losses, an enterprise (retailer, wholesaler, manufacturer, etc.) will hike the price (Ph) of  medicines to point C. So a 20 percent discount at point C will only bring back the original price at point A while giving the illusion to patients that they are buying at point B. Or senior citizens pay at point B while non-senior citizens suffer even higher prices at point C.

The only way to correct this injustice is to scrap that law, but since this is impossible at the moment, let this situation serve as additional lesson, that government price regulations and forcible, mandatory price discount, produce more harm than good.

Thank you very much.

Sincerely yours,

Bienvenido “Nonoy” Oplas, Jr.

President

Minimal Government Thinkers, Inc.

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See also:
On Senior Citizens Discount, August 10, 2009 
Senior Citizens Discount, Part 2, November 03, 2010 
Drug price control 5: Mandatory discounts and acronym politics, March 21, 2011

Welfarism 23: Letter to Sens. Cayetano and Pangilinan on Solo Parents Welfare, October 23, 2012

Welfarism 23: Letter to Sens. Cayetano and Pangilinan on Solo Parents Welfare

This is my letter to two Senators which I faxed to their respective offices late afternoon today.
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23 October 2012

Hon. Pia S. Cayetano

Chairperson

Committee on Youth, Women and Family Relations

Hon. Francis N. Pangilinan

Chairperson

Committee on Social Justice, Welfare and Rural Development

Senate of the Philippines

Pasay City

Dear Senators Cayetano and Pangilinan,

While the State has the obligation to protect the citizens’ right to life, private property and liberty, it may have no right to force and coerce private enterprises to give mandatory discounts to their consumers if these companies are already paying the required taxes and complying with various health and regulatory requirements.

The provisions of two Senate Bills amending RA 8972 or the “Solo Parents Welfare Act of 2000” seem to go along this practice. To give additional benefits to solo parents, SB No. 2563 by Sen. Manny Villar provides these mandatory discounts:

(A) TWENTY (20%) PERCENT DISCOUNT ON ALL PURCHASES OF MILK OR FORMULA PRODUCTS AS WELL AS DIAPERS AND OTHER NECESSARY INFANT ITEMS;

(B) TWENTY (20%) PERCENT DISCOUNT ON INFANT MEDICINES AND SUPPLEMENTS. INFANT SHALL REFER TO CHILDREN AGED 0- TO 4 YEARS.

And SB No. 1439 by Sen. Loren Legarda provides the following additional benefits to solo parents:

(1) TEN PERCENT (10%) DISCOUNT FROM ALL PURCHASES OF CLOTHING AND CLOTHING MATERIALS FOR THE CHILD MADE WITHIN A PERIOD OF UP TO TWO (2) YEARS FROM THE CHILD'S BIRTH;

(2) FIFTEEN PERCENT (15%) DISCOUNT FROM ALL PURCHASES OF BABY'S MILK, FOOD AND FOOD SUPPLEMENTS MADE WITHIN A PERIOD OF TWO (2) YEARS FROM THE CHILD'S BIRTH;

(3) FIFTEEN PERCENT (15%) DISCOUNT FROM ALL PURCHASES OF MEDICINES AND OTHER MEDICAL SUPPLEMENTS/SUPPLIES FOR THE CHILD MADE WITHIN A PERIOD OF FIVE (5) YEARS FROM THE CHILD'S BIRTH; AND

There are serious flaws in these two bills forcing companies to give mandatory discounts. Among them:

1. They assume that all solo parents in the country are poor or financially distressed and hence, the need to give them mandatory discounts for their young children’s needs. This is not true.  Some solo parents are rich themselves or have rich family members who can give them various  assistance in cash or in kind.

2. They assume that all shops, manufacturers and traders that produce or sell these goods are rich or financially stable and hence, can afford to give such discounts without adversely affecting their financial conditions. Again this is not true. While some companies are financially stable, others are not or may even be in the brink of bankruptcy due to various financial, economic and social challenges here and abroad.

3. They assume that even financially unstable shops, manufacturers and importers of these products will continue selling these goods. This is wrong. One  result of the implementation of RA 9994 or the “Expanded Senior Citizens Act of 2010” where senior citizens are given mandatory discount of 20 percent plus 12 percent VAT free or 32 percent effective discount on medicines, not tax creditable, is that small drugstores that cannot afford to keep selling medicines at a loss have stopped selling essential medicines to senior citizens. Those living in small and rural municipalities have to travel to bigger cities that are far away so they can buy at Mercury or other large chain pharmacies.

This proves once again that Newton’s third law of motion, “For every action, there is an equal opposite reaction”, can also apply in economics. This can be aptly restated as “For every government intervention to force welfare, there is an equal opposite reaction that results in diswelfare.”