A Pricing Policy Towards the Sourcing of Cheaper Drugs in Cyprus
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Health Policy 81 (2007) 368–375 A pricing policy towards the sourcing of cheaper drugs in Cyprus Sherry Merkur ∗, Elias Mossialos 1 LSE Health, Department of Social Policy, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, United Kingdom Abstract In contrast to other EU countries, Cyprus lacks comprehensive health care coverage for its population, thus a significant portion of the population lacks insurance for medicines. Due to the small size of the country and small indigenous pharmaceutical industry, pharmaceuticals are mainly imported. Prices in the private sector are determined based on the ex-factory price from the country of origin. Distribution margins are calculated as a percentage of the import price, which creates perverse incentives for wholesalers to import products from high price countries, or import very expensive products, to maximize their income. In this article, we compare pharmaceutical prices in Cyprus to other EU counties with higher or similar GDP per capita and found Cyprus to be a high price country. We then propose a new pricing system to change wholesaler incentives, which would encourage them to shop around for the best buy in Europe. Prices can be set based on average prices from a basket of European countries, and adjusted to reflect the GDP per capita level in Cyprus. This will establish the wholesale price that the government will accept, and wholesalers can procure products from any country at a lower rate. Thus, wholesalers would be encouraged to go for the lowest prices and the authorities would be indifferent to the actual price they obtain, so long as the necessary criteria (good manufacturing practice, safety, effectiveness and efficacy) are met. Our proposal has implications for low and middle income countries where this system of pharmaceutical pricing and wholesaler incentives can be used. © 2006 Elsevier Ireland Ltd. All rights reserved. Keywords: Cyprus; Drug importation; Pharmaceutical pricing; Wholesaler incentives 1. Introduction tical care and pay out of pocket for all medicines [1]. As a result, the pharmaceutical market is divided into In contrast to other EU member states, 43% of the two distinct sectors: public and private, which supply population in Cyprus are not covered for pharmaceu- prescription and over-the-counter (OTC) products, but operate independently at all levels. The public sector is run by the government. Medicines are prescribed ∗ Corresponding author. Tel.: +44 20 7955 6194; by doctors working in government hospitals and out- fax: +44 20 7955 6803. patient clinics and are dispensed by government phar- E-mail addresses: [email protected] (S. Merkur), [email protected] (E. Mossialos). macies. The public sector uses a tendering process to 1 Tel.: +44 20 7955 7564. arrive at the price of pharmaceutical products and some 0168-8510/$ – see front matter © 2006 Elsevier Ireland Ltd. All rights reserved. doi:10.1016/j.healthpol.2006.07.007 S. Merkur, E. Mossialos / Health Policy 81 (2007) 368–375 369 patients are reimbursed for medicines dependent on prices in other countries, which have a higher level of their level of income and disease profile. socio-economic development. Hypothesis 2: if prices In contrast, medicines for the uninsured are pre- are based on products from a basket of high and similar scribed by self-employed office-based doctors and dis- income countries as Cyprus, then prices could be lower pensed by private pharmacies. There is no price regu- than they currently are in the Cyprus private pharma- lation in Cyprus, which is in contrast to most European ceutical market. Prices for the different countries could countries that impose price controls on medicines [2]. also be adjusted to reflect price levels in these countries Maximum prices in the private sector are based on the and Cyprus’ purchasing power in terms of its GDP. ex-factory price from the country from where the prod- Thus, we test the effects of calculating average prices uct is imported. Because prices in the private sector for a basket of countries and compare these to prices in are based on import prices, this creates incentives for Cyprus. importers/wholesalers to import products from coun- The following section details the pharmaceutical tries with high ex-factory prices as well as particularly market in Cyprus. The data sources and methodol- expensive products, in order to maximize their bene- ogy used in this study are then described. Next, the fit. As a consequence, pharmaceutical prices in Cyprus results of the price comparisons are presented along will likely be higher than prices in other EU coun- with the results of the simulation exercises. The arti- tries, which have a similar or higher level of GDP per cle concludes by specifying new options for changing capita. Also, distribution margins are calculated as a the pricing of pharmaceutical products and amending percentage of the import price, which creates perverse wholesale incentives in attempt to avoid the perverse incentives for wholesalers. Due to the lack of universal incentives present in the current system. We also iden- health care coverage, there is uncontrolled exposure of tify specific challenges and how the proposed pricing almost half the population to unregulated private sector options may be relevant to other countries. pharmaceutical prices. There has been anecdotal evidence that pharmaceu- tical prices in Cyprus are very high and unaffordable 2. The pharmaceutical market in Cyprus [3]. However, there has been no empirical evidence to test if this is the case.1 It is estimated that approximately 53% of the popu- The aim of this article is to: lation is eligible for free health services, 4% are eligible for care at reduced fees, and 43% are expected to pay • analyse whether pharmaceuticals in Cyprus are more full prices in public health facilities or utilize the private expensive than in other European countries; sector [1].2 The significant portion of the population • investigate whether pharmaceutical prices may be who are not covered, also lack insurance for medicines. lowered if prices are determined by using average In 2002, total expenditure on health care in Cyprus prices from a basket of European countries and was estimated at 5.8% of GDP. Around 51% of total adjusting for GDP; health expenditure in Cyprus is from private resources, • examine alternative incentives to promote a more efficient importation and distribution market. In this study we explore two hypotheses. Hypoth- 2 Cyprus lacks comprehensive health care coverage for its popu- esis 1: given that mark-ups for wholesalers are based lation. Eligibility for publicly provided free services is defined on on prices in the country of origin, wholesalers possess the basis of income and employment groups. This includes persons with an annual income below D 15,300 per annum and families with an incentive to import products from high price coun- an annual income below D 30,600 per annum (increased by D 1700 tries in order to maximize their benefit. As a result, for each dependent child), civil servants, students, war pensioners, pharmaceutical prices in Cyprus would be higher than welfare recipients, families with 4+ children, citizens with specific diseases (e.g. multiple sclerosis, Alzheimer’s disease), and the treat- ment of a specific medical condition only irrespective of income (e.g. 1 The authors of this paper were invited by the Cyprus Ministry of cancer, diabetes, rheumatoid arthritis). Reduced fee services are pro- Health to examine the pharmaceutical price level compared to other vided for single persons with an annual income between D 15,300 European Union (EU) countries and to consider options to reform and 20,400 and families with incomes between D 30,600 and 34,400 the system. (increased by D 1700 for each dependent child). 370 S. Merkur, E. Mossialos / Health Policy 81 (2007) 368–375 compared to around 25% in former EU-15 countries way that each have three wholesalers for populations [1]. As a percentage of total health expenditure, phar- of 5.4, 5.2 and 4.5 million, respectively [9]. maceutical expenditure was 21% in Cyprus, compared With regards to drug dispensing, medicines in the to 17.8% on average in OECD countries [4]. From 1998 public sector are dispensed by government pharma- to 2002, the private sector pharmaceutical market in cies to eligible patients. In the private sector, medicines Cyprus experienced an annual average growth rate of are dispensed by private pharmacies. There is no reg- 7.7%. In 2002, the value of the private sector in retail ulation of private pharmacies, such that there are no prices was almost twice the value of the public sector geographical limits or caps as there are in other Euro- in public procurement prices [5]. pean countries [10]. The uninsured in Cyprus must pay the full price of medicines in the private sector, which is determined by importers. For imported products, private phar- 3. Data sources and methodology macy prices are established based on the ex-factory price from the country of origin. Importers/wholesalers We first performed direct bilateral price compar- receive up to 6% of the import price for shipping and isons between Cyprus and selected EU countries. This handling and a 25% margin to arrive at the wholesale was carried out in order to gauge the level of phar- price. Subsequently, a 33% pharmacist margin is added maceutical prices in Cyprus in the European context to arrive at the retail price. Therefore, in Cyprus the (Hypothesis 1). Next, we performed simulation exer- wholesale margin is between 15 and 18.5% of the retail cises to test how the average price of a product for price, which is much higher than in other EU countries, basket of selected EU countries compares to prices e.g.