Medicine Prices and Pricing Policies in Vietnam

MEDICINE PRICES AND PRICING POLICIES

IN VIETNAM

Tuan Anh Nguyen

A thesis submitted in fulfillment of the requirements for the degree of

Doctor of Philosophy

School of Public Health & Community Medicine

Faculty of Medicine, University of New South Wales, Australia

April 2011

THE UNIVERSITY OF NEW SOUTH WALES Thesis/Dissertation Sheet Surname or Family name: Nguyen First name: Tuan Anh Other name/s: Abbreviation for degree as given in the University calendar: PhD School: Public Health and Community Medicine Faculty: Medicine Title: Medicine prices and pricing policies in Vietnam Abstract 350 words maximum: Availability of affordable medicines is one precondition to realizing the fundamental human right of access to essential healthcare. Although Vietnam is progressing well with several health-related targets of the Millennium Development Goals being achieved ahead of time, attaining equitable access to affordable medicines remains problematic. In this thesis, a mixed-method approach was adopted in the analysis of medicine prices and polices. The literature was reviewed, followed by an analysis of Vietnam’s pharmaceutical market and legislation. A quantitative study of medicine prices, and a qualitative study on how and why high, unaffordable prices occurred, were conducted. The findings were synthesized to form policy recommendations. The studies demonstrated that medicine prices in Vietnam were unreasonably high. Adjusted for Purchasing Power Parity in 2005, prices in the public sector were 46.58 times the international reference price for innovator-brand medicines and 11.41 times for the lowest-priced generic equivalents. Monopoly of supply was an important cause of high innovator-brand prices. More complex, intrinsic features of Vietnam’s healthcare system were also reported by key stakeholders as driving up prices. Economic survival pressures, in an imperfectly competitive market, were said to force both pharmaceutical companies and prescribers to be inextricably linked financially. Ethics and personal values however did influence prescribers’ behaviour and their response to corrupt procedures. Overall, intractable, systemic features contributing to high prices included unrealistic low salaries for prescribers, poor economies of scale in domestic production, inefficiencies in the local distribution network, malfunctioning pricing policies and a general lack of transparency and accountability in administrative procedures. A range of policy measures and changes are required to improve access to medicines in Vietnam. Short- term recommendations include amendments to pharmaceutical policies, with better enforcement of current regulations. Medium-term measures include the public health insurance system taking an active role in price setting, pooling procurement through a national tendering procurement system and reform of the domestic market through rationalization with appropriate capital and technological investment to achieve improved efficiencies and economies of scale. Longer-term goals include health system improvements to address poor governance, low remuneration of prescribers, with additional measures to limit the scope for corrupt practices. Declaration relating to disposition of project thesis/dissertation I hereby grant to the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or in part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all property rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350-word abstract of my thesis in Dissertation Abstracts International (this is applicable to doctoral theses only).

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THIS SHEET IS TO BE GLUED TO THE INSIDE FRONT COVER OF THE THESIS

ORIGINALITY STATEMENT

‘I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged.’

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‘I hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation.

I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstract International (this is applicable to doctoral theses only).

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DEDICATION

This thesis is dedicated to my parents, Dinh Thiem Nguyen and Thi Lien Doan, for nurturing me and teaching me to care about others.

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ACKNOWLEDGEMENTS

I would like to thank the Ministry of Education and Training of Vietnam, Vietnam government for awarding me a PhD scholarship to study in Australia. I would also like to acknowledge the Vietnam team who conducted the survey of medicine prices and availability, and the Ministry of Health of Vietnam for giving me permission to use the survey data in this thesis. I am grateful to all members of the Drug Price Management Division, Drug Administration of Vietnam for sharing their views as well as their cooperation and support when I conducted fieldwork in Vietnam. My project also rests on the cooperation, generosity and courage of the sixty study participants who gave their time and shared their valuable opinions and sensitive information in the interviews.

I owe a debt of gratitude to my supervisor, Associate Professor Rosemary Knight. Without her mentorship, support, and depth of knowledge, this thesis would not have been completed. Her calm, insights, compassion and elegant language were central to the conceptualisation, design, analysis and reporting of this thesis, as was her vision and ability to approach problems from a global perspective.

My co-supervisors, Associate Professor Andrea Mant and Dr. Quang Minh Cao were patient, thoughtful and encouraging. Their critical comments and feedback were invaluable along every step of this project. Their practical and consistent support has kept me going to the end of my PhD journey.

Dr. Husna Razee was my qualitative co-supervisor, whose experience and knowledge in qualitative research greatly contributed to the qualitative study for this thesis.

My special thanks go to Dr. Geoffrey Brooks for sharing his excellent knowledge of economics and Australian pharmaceutical policy and practice, and for taking me under his wing as my second father. His critical feedback greatly improved the quality of this thesis.

Support was also received from Dr. Pat Bazeley who assisted me in developing the qualitative coding schemes, steered me through the perils of NVIVO and mixed methods research and fed me from her research farm. v

I am grateful to Mr. Martin Auton (Global project officer - Pricing, Health Action International Global) and Ms. Alexandra Cameron (Coordinator medicine pricing project, WHO) for their cross-analysis of the survey data and for giving me valuable comments on the quantitative study for this thesis. Great thanks are also due to Mr. Wayne Critchley (Former Executive Director, Patented Medicine Prices Review Board Government of Canada) for providing critical feedback on the policy analysis components of the thesis.

My colleagues in the School of Public Health and Community Medicine at UNSW also provided great ideas and valuable comments, including Mr. Kevin Forde, Dr. Niahm Stephenson, Dr. Ilse Blignault, Dr. Brahmaputra Marjadi, and Dr. Joanne Spangaro. I would like to thank my former supervisor, Associate Professor Tessa Ho, for her warm encouragement and caring, even when she was not able to supervise me due to her move to another university. Sincere thanks to my fellow PhD students who shared with me both my frustration and happiness, especially Dr. Keith Masnick.

My wife Thu Ha Dang, my daughter Thanh Mai Nguyen and my son Dang Nhat Minh Nguyen are my life. Without their love, encouragement and support, I would not have had the strength and determination to pursue my dream.

TABLE OF CONTENTS

DEDICATION ...... III ACKNOWLEDGEMENTS ...... V LIST OF PUBLICATIONS ARISING FROM THIS RESEARCH ...... XIV LIST OF TABLES ...... XV LIST OF FIGURES ...... XVII GLOSSARY/ACRONYMS ...... XVIII ABSTRACT ...... XX CHAPTER 1. INTRODUCTION ...... 1 1.1 BACKGROUND ...... 1 1.2 AIM AND OBJECTIVES ...... 3 1.3 RESEARCH DESIGN AND METHODOLOGICAL CONSIDERATIONS ...... 5 1.3.1 Overall research design ...... 5 1.3.2 The rationale for a mixed methods approach ...... 6 1.3.3 Researcher background and orientation to the study ...... 6 1.3.4 Currency used in this thesis ...... 7 1.4 FLOW OF RESEARCH AND INTERCONNECTION OF CHAPTERS ...... 8 CHAPTER 2. MEDICINE PRICES, PRICING POLICIES AND PATIENT ACCESS: A REVIEW OF THE INTERNATIONAL LITERATURE ...... 11 2.1 INTRODUCTION ...... 11 2.2 NATIONAL MEDICINES POLICIES AND ACCESS TO MEDICINES ...... 12 2.2.1 Rational selection and use of essential medicines...... 14 2.2.2 Sustainable financing ...... 15 2.2.3 Reliable health and supply systems...... 16 2.2.4 Affordable prices ...... 17 2.3 MEDICINE PRICES AND THEIR DETERMINANTS ...... 18 2.3.1 The pharmaceutical market ...... 18 2.3.1.1 A market with unique features ...... 18 2.3.1.2 A market with conflicting objectives ...... 19 2.3.1.3 A heterogeneous market ...... 20 2.3.2 Pharmaceutical expenditure ...... 22 vii

2.3.3 The determinants of medicine consumption ...... 22 2.3.3.1 Physicians’ prescribing behaviour ...... 23 2.3.3.2 Patient demand ...... 24 2.3.4 The determinants of medicine prices ...... 25 2.3.4.1 The costs of research and development, manufacturing and marketing ...... 26 2.3.4.2 Degree of market competition...... 28 2.3.4.3 Pharmaceutical market intelligence ...... 30 2.3.4.4 Market size and economies of scale ...... 30 2.4. POLICY OPTIONS FOR COST CONTAINMENT OF MEDICINES ...... 30 2.4.1 Overview of price controls ...... 30 2.4.1.1 External price benchmarking ...... 33 2.4.1.2 Internal reference pricing ...... 35 2.4.1.3 Cost plus pricing ...... 36 2.4.1.4 Pharmaco-economic evaluation ...... 37 2.4.1.5 Price negotiations ...... 39 2.4.1.6 Profit ceilings ...... 39 2.4.2 Price controls along the supply chain ...... 40 2.4.2.1 Price controls at ex manufacturer/ex importer level ...... 40 2.4.2.2 Price controls at wholesale and pharmacy retail level ...... 41 2.4.3 Reimbursement measures ...... 42 2.4.3.1 Positive list or formulary systems ...... 43 2.4.3.2 Reference price systems ...... 44 2.4.3.3 Index pricing systems...... 46 2.4.3.4 Co-payments ...... 46 2.4.3.5 Generic substitution ...... 49 2.4.3.6 Other measures influencing demand ...... 50 2.4.4 Evaluation of pricing and reimbursement policies ...... 51 2.5 STUDIES ON MEDICINE PRICES IN DEVELOPING COUNTRIES ...... 53 2.5.1 International studies ...... 53 2.5.2 Vietnam studies ...... 56 2.5.3 Conclusions ...... 60 CHAPTER 3. VIETNAM’S HEALTH CARE AND PHARMACEUTICAL SYSTEM, AND ITS IMPACT ON MEDICINE PRICES ...... 63 viii

3.1 INTRODUCTION ...... 63 3.2 VIETNAM’S TRANSITIONAL HEALTH CARE SYSTEM ...... 63 3.2.1 Vietnam’s health performance ...... 63 3.2.2 Historical background ...... 64 3.2.3 The “Doi Moi” economic reforms ...... 64 3.2.4 Health insurance and subsidization for the poor ...... 65 3.2.5 National Medicines Policy ...... 66 3.2.6 Administrative health care structures ...... 67 3.2.7 An emerging private health sector ...... 69 3.3 DEMAND FOR MEDICINES ...... 70 3.3.1 Epidemiological patterns and lifestyle changes ...... 70 3.3.2 Health care financing ...... 71 3.3.3 Use of medicines ...... 73 3.4 SUPPLY OF MEDICINES ...... 74 3.4.1 Importation of medicines ...... 75 3.4.2 Domestic medicine production ...... 76 3.4.3 Medicine distribution ...... 79 3.4.3.1 Vietnam’s pharmaceutical importers ...... 81 3.4.3.2 International pharmaceutical distributors and their foreign direct investment logistics companies ...... 82 3.4.3.3 Private pharmaceutical wholesalers and distributors ...... 82 3.4.3.4 Retail medicine outlets and hospital pharmacies ...... 83 3.4.3.5 Hospital tender procedures and practices ...... 85 3.4.3.6 Supply of medicines by medical practitioners ...... 86 3.5 IMPLICATIONS FOR MEDICINE PRICES ...... 86 3.5.1 Ineffective governance ...... 87 3.5.2 A poorly organized and internationally dependent market ...... 87 3.5.3 Market imperfections ...... 88 3.5.4 The role of public health insurance in containing medicine prices ...... 89 3.6 CONCLUSIONS ...... 90 CHAPTER 4. AVAILABILITY AND AFFORDABILITY OF MEDICINES IN VIETNAM ...... 93 4.1 INTRODUCTION ...... 93

4. 2 METHODS ...... 93 4.2.1 Sampling ...... 93 4.2.2 Medicines surveyed...... 94 4.2.3 Data collection and entry ...... 96 4.2.4 Data analysis ...... 96 4.3 RESULTS ...... 98 4.3.1 Medicine availability...... 99 4.3.2 Medicine prices ...... 99 4.3.3 Affordability...... 101 4.3.4 Variation across regions ...... 102 4.3.5 International comparison ...... 103 4.3.5.1. Medicine availability ...... 103 4.3.5.2. Medicine prices ...... 104 4.3.5.3 Affordability...... 107 4.4 DISCUSSION ...... 107 4.5 CONCLUSIONS ...... 111 CHAPTER 5. MEDICINE PRICING POLICIES IN VIETNAM ...... 113 5.1 INTRODUCTION ...... 113 5.2 METHODS ...... 113 5.3 RESULTS ...... 114 5.3.1 Context of medicine pricing regulations in Vietnam ...... 116 5.3.2 The price declaration and publication of medicine pricing policies ...... 118 5.3.2.1. The reasonableness of declared prices and published prices ...... 118 5.3.2.2 Other declaration and publication provisions ...... 121 5.3.3 Other pricing provisions...... 122 5.4 DISCUSSION ...... 123 5.4.1 The reasonableness of declared prices and published prices ...... 123 5.4.2 Declaration and publication provisions...... 125 5.5 RECOMMENDATIONS ...... 127 5.6 CONCLUSIONS ...... 128 CHAPTER 6. ROOT CAUSES OF HIGH MEDICINE PRICES IN VIETNAM 129 6.1 INTRODUCTION ...... 129 6.2 METHODS ...... 129 x

6.2.1 Method selection ...... 129 6.2.2 Participant recruitment ...... 130 6.2.3 Interview instruments ...... 131 6.2.4 Ethical issues ...... 134 6.2.5 Data collection and analysis ...... 135 6.2.5.1 Data collection ...... 135 6.2.5.2 Data analysis ...... 136 6.2.6 Data presentation ...... 137 6.3 RESULTS ...... 138 6.3.1 Participant characteristics...... 138 6.3.2 Factors influencing medicine prices...... 139 6.3.2.1 Patent and monopoly ...... 139 6.3.2.2 Market intelligence ...... 140 6.3.2.3 Market size and economies of scale ...... 140 6.3.2.4 Source and quality of medicines ...... 141 6.3.2.5 Informal payments ...... 142 6.3.2.6 Other components of the final price of medicines ...... 144 6.3.2.7 Ineffective control by government ...... 146 6.4 DISCUSSION ...... 147 CHAPTER 7. WHY AND HOW INFORMAL PAYMENTS OCCUR ...... 151 7.1 INTRODUCTION ...... 151 7.2 OPPORTUNITY FOR CORRUPTION ...... 151 7.2.1 Discretion ...... 152 7.2.2 Transparency ...... 153 7.2.3 Accountability ...... 155 7.2.4 Enforcement ...... 157 7.3 PRESSURES FOR CORRUPTION ...... 160 7.3.1 Pharmaceutical market related factors ...... 160 7.3.1.1 Product related factors...... 160 7.3.1.2 Sales representatives related factors...... 162 7.3.1.3 Regulation related factors ...... 162 7.3.1.4 Survival in the market ...... 163 7.3.2 Healthcare processes and structures ...... 166 xi

7.3.2.1 The tender system ...... 166 7.3.2.2 The information system ...... 168 7.3.2.3 The taxation system ...... 168 7.3.2.4 The role of the private and public sectors ...... 170 7.3.2.5 Remuneration systems and financial pressure ...... 170 7.3.2.6 Workplace pressures ...... 172 7.4 RATIONALIZATION OF CORRUPTION ...... 174 7.4.1 The normalization of corruption ...... 174 7.4.1.1 The prevalence of corrupt practices ...... 174 7.4.1.2 Other social norms ...... 175 7.4.2 Self-interest maximization ...... 176 7.4.2.1 Professional ethics...... 176 7.4.2.2 Personal values ...... 177 7.4.2.3 Knowledge and skills ...... 178 7.4.2.4 Advancement opportunity ...... 178 7.4.2.5 Reputation ...... 179 7.4.2.6 Employment ...... 180 7.5 DISCUSSION ...... 180 CHAPTER 8. DISCUSSION AND POLICY RECOMMENDATIONS...... 185 8.1 INTRODUCTION ...... 185 8.2 REVIEW OF THE RESEARCH OBJECTIVES ...... 185 8.3 SYNTHESIZED RESULTS OF THE RESEARCH ...... 187 8.3.1 Vietnam’s medicine prices and availability problems ...... 187 8.3.2 Reasons for unaffordable medicine prices in Vietnam ...... 188 8.3.2.1 Selection of medicines ...... 188 8.3.2.2 Use of medicines ...... 188 8.3.2.3 Pharmaceutical pricing regime ...... 189 8.3.2.4 Pharmaceutical procurement system ...... 191 8.3.2.5 Patent and monopoly issues ...... 192 8.3.2.6 Government taxes and duties ...... 193 8.3.2.7 Financing ...... 194 8.3.2.8 Pharmaceutical distribution network ...... 194 8.3.2.9 Corrupt Practices ...... 198 xii

8.4 POLICY RECOMMENDATIONS ...... 200 8.4.1 Rational selection and use of essential medicines...... 200 8.4.1.1 Rational selection ...... 200 8.4.1.2 Rational use ...... 201 8.4.2 Affordable prices and sustainable financing system ...... 201 8.4.2.1 Strengthening the current pricing regime ...... 201 8.4.2.2 Adoption of a national generic medicines policy ...... 205 8.4.2.3 Improvement of public sector procurement of medicines...... 206 8.4.2.4 Reduction or elimination of duties and taxes ...... 207 8.4.2.5 Use of WTO/TRIPS flexibility ...... 207 8.4.3 Supply and distribution system ...... 208 8.4.4 Systems improvement to minimize the opportunity for corruption ...... 208 8.5 CONTRIBUTION OF THE THESIS ...... 210 8.6 CONCLUSION ...... 211 REFERENCES ...... 215 APPENDIX 1: MEDIAN PRICE RATIO OF INDIVIDUAL INNOVATOR BRAND MEDICINES IN THE PUBLIC PROCUREMENT SECTOR, PUBLIC SECTOR, PRIVATE SECTOR, AND OTHER SECTOR (NOT-FOR-PROFIT PUBLIC SECTOR) IN VIETNAM IN 2005 ...... 239 APPENDIX 2: MEDIAN PRICE RATIO OF INDIVIDUAL LOWEST-PRICED GENERIC MEDICINES IN THE PUBLIC PROCUREMENT SECTOR, PUBLIC SECTOR, PRIVATE SECTOR, AND OTHER SECTOR (NOT-FOR-PROFIT PUBLIC SECTOR) IN VIETNAM IN 2005 ...... 241 APPENDIX 3: MEDICINE PRICING POLICY IN VIETNAM: DOCUMENTARY ANALYSIS FRAMEWORK ...... 243 APPENDIX 4: SAFETY AND RISK MANAGEMENT STRATEGY ...... 246 APPENDIX 5: INFORMED CONSENT...... 247

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LIST OF PUBLICATIONS ARISING FROM THIS RESEARCH

Nguyen AT, Knight R, Mant A, Cao QM, Auton M (2009). Medicine prices, availability, and affordability in Vietnam. Southern Med Review, 2 (2): 2-9

(Chapter 4)

Nguyen AT, Knight R, Mant A, Cao QM, Brooks G (2010). Medicine pricing policies: Lessons from Vietnam. Southern Med Review, 3 (2): 12-19

(Chapter 5)

Nguyen AT, Knight R, Razee H, Mant A, Cao QM (2010). Root causes of high medicine prices in Vietnam – A qualitative study. Pharmacy Practice (Internet), 8 (Suppl.1): 50-51

(Chapter 6 and Chapter 7)

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LIST OF TABLES

Table 2.1 Factors influencing prescribing behaviour by level of analysis...... 24 Table 2.2 Prices of 100 tablets of Zantac 150mg in 1998 (in US dollars)...... 57 Table 4.1 Basket of 42 medicines surveyed in Vietnam in 2005...... 94 Table 4.2 Mean availability and ranges for IBs and LPGs by sectors for 42 medicines surveyed in 2005 in Vietnam...... 99 Table 4.3 Median price ratio of IBs, LPGs in public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005...... 100 Table 4.4 Median price ratio of IBs, LPGs on the current Essential Medicine List in the public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005…...101 Table 4.5 Mean percentage availability of individual lowest-priced generic medicines in Vietnam, in comparison with the average of country-level mean percentage availability of individual lowest-priced generic medicines in the WHO Western Pacific Region……………………...104 Table 4.6 Median price ratios of the public procurement prices, public patient prices, private patient prices for LPG medicines, and private patient prices for IBs in Vietnam in comparison with those in the Western Pacific Region in 2004...... 106 Table 4.7 Number of days’ wages of the lowest-paid unskilled government worker needed to purchase a course of treatment in Vietnam in comparison with those in the Western Pacific Region in 2004...... 107 Table 5.1 Legislative and sub-legislative documents from January 1989 to March 2008 influencing medicine prices in Vietnam...... 115 Table 5.2 Price declaration provided to the Drug Administration of Vietnam by the registrant Company A for medicine X...... 121 Table 5.3 Summary of preconditions of declaration and publication mechanism used in Vietnam pricing regulations...... 122

Table 6.1 Characteristics of participants...... 138 Table 7.1 Matrix of intervening factors for corrupt practices in the model...... 183

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LIST OF FIGURES

Figure 1.1 Overall research design...... 5 Figure 2.1 WHO’s access framework...... 14 Figure 2.2 Marketing costs in comparison with other costs in the OECD pharmaceutical industry, 1973-89...... 27 Figure 3.1 Structure of the health care system of Vietnam...... 68 Figure 3.2 The pharmaceutical supply chain in Vietnam...... 74 Figure 4.1 Differences in affordability of a treatment for an acute respiratory infection and a one-month treatment for a chronic peptic ulcer between therapeutic classes, types of medicines and sectors in Vietnam...... 102 Figure 4.2 Mean percentage availability of lowest-priced generic medicines in Vietnam, in comparison with the average of country-level mean percentage availability of lowest-priced generic medicines in the World Bank low-income group and the WHO Western Pacific Region (WPR)………………………………………………………...103 Figure 4.3 Median price ratio in public procurement for LPG medicines in Vietnam in comparison with those in the World Bank low-income group and the WHO Western Pacific Region...... 105 Figure 6.1 The staged approach to price components...... 133 Figure 6.2 The pharmaceutical management cycle...... 134 Figure 6.3 Example of the component price structure of an imported medicine sold in the hospital market...... 144 Figure 6.4 Model of interaction of factors causing high medicine prices in Vietnam...... 149 Figure 7.1 A new theoretical framework of corruption in Vietnam’s health sector...... 181 Figure 7.2 The Trade-off model of corrupt behaviours in the collusion between prescribers and pharmaceutical companies in Vietnam...... 182

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GLOSSARY/ACRONYMS

API Active Pharmaceutical Ingredient ARV Antiretroviral ATC Anatomical Therapeutic Chemical classification system ASEAN The Association of Southeast Asian Nations BE Bioequivalent CI Consumers International CIF Cost Insurance and Freight CPI Consumer Price Index CHS Commune Health Station DTC Drug and Therapeutic Committees EML Essential Medicines List EU European Union FDI Foreign Direct Investment DAV Drug Administration of Vietnam GDP Gross Domestic Product GMP Good Manufacturing Practice GP General Practitioner GPP Good Pharmacy Practice GSP Good Storage Practice HAI Health Action International IB Innovator Brand INN International Non-proprietary Name IP Intellectual Property LPG Lowest-Priced Generic IRP International Reference Price MOF Ministry of Finance MOH Ministry of Health MOIT Ministry of Industry and Trade xviii

MPR Median Price Ratio MSH Management Sciences for Health NDP National Drug Policy NMP National Medicines Policy NPB National Pricing Bureau NSAID Non-steroidal anti-inflammatory drug OECD Organization for Economic Co-operation and Development OTC Over – The – Counter PBS Pharmaceutical Benefit Scheme PPP Purchasing Power Parity PPRI Pharmaceutical Pricing and Reimbursement Information PPRS Pharmaceutical Price Regulation Scheme QALY Quality Adjusted Life Years R&D Research and Development TRIPS Trade Related Intellectual Property Rights UK United Kingdom UN United Nations US United States of America USD United States Dollar - Currency VAT Value Added Tax VCAD Vietnam Competition Administration Department VND Vietnam Dong – Currency VHW Village Health Worker VSS Vietnam Social Security WHO World Health Organization WPR Western Pacific Region WTO World Trade Organization

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ABSTRACT

Availability of affordable medicines is one precondition to realizing the fundamental human right of access to essential healthcare. Although Vietnam is progressing well with several health-related targets of the Millennium Development Goals being achieved ahead of time, attaining equitable access to affordable medicines remains problematic.

In this thesis, a mixed-method approach was adopted in the analysis of medicine prices and policies. The literature was reviewed, followed by an analysis of Vietnam’s pharmaceutical market and legislation. A quantitative study of medicine prices, and a qualitative study on how and why high, unaffordable prices occurred, were conducted. The findings were synthesized to form policy recommendations.

The studies demonstrated that medicine prices in Vietnam were unreasonably high. Adjusted for Purchasing Power Parity in 2005, prices in the public sector were 46.58 times the international reference price for innovator-brand medicines and 11.41 times for the lowest-priced generic equivalents. Monopoly of supply was an important cause of high innovator-brand prices. More complex, intrinsic features of Vietnam’s healthcare system were also reported by key stakeholders as driving up prices. Economic survival pressures, in an imperfectly competitive market, were said to force both pharmaceutical companies and prescribers to be inextricably linked financially. Ethics and personal values however did influence prescribers’ behaviour and their response to corrupt procedures. Overall, intractable, systemic features contributing to high prices included unrealistic low salaries for prescribers, poor economies of scale in domestic production, inefficiencies in the local distribution network, malfunctioning pricing policies and a general lack of transparency and accountability in administrative procedures.

A range of policy measures and changes are required to improve access to medicines in Vietnam. Short-term recommendations include amendments to pharmaceutical policies, with better enforcement of current regulations. Medium-term measures include the public health insurance system taking an active role in price setting, pooling procurement through a national tendering procurement system and reform of the xx domestic market through rationalization with appropriate capital and technological investment to achieve improved efficiencies and economies of scale. Longer-term goals include health system improvements to address poor governance, low remuneration of prescribers, with additional measures to limit the scope for corrupt practices.

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Chapter 1. Introduction

Health is recognized as a fundamental human right by international treaties and governments all over the world (WHO, 2001). In health care systems, medicines always play a crucial role. Ensuring the availability of affordable medicines, therefore, is one of the preconditions for realizing this human right. Providing access to affordable essential medicines in developing countries has become one of the Millennium Development Goals (i.e. MDG 8E) (United Nations, 2008). However, it is estimated that one third of the world’s population lack reliable access to essential medicines because they are too expensive (WHO, 2000a). The figure increases to 50 per cent in the poorest countries of Africa and Asia (WHO/WTO 2001).

Vietnam, as a developing country in the Western Pacific and South East Asia (World Bank, 2010), is no exception, with access to affordable medicines reportedly being problematic. The aim of this thesis is to research medicine prices and pricing policies in Vietnam. The thesis studies include a review of the relevant international literature, followed by an analysis of Vietnam’s health care and pharmaceutical system and its impact on medicine prices. A quantitative study of medicine prices examines the empirical evidence and is followed by an analysis of the legislative and regulatory framework that underpins medicine pricing policies. An innovative qualitative study is conducted on how and why high, unaffordable prices occur in Vietnam. The findings from the component parts of the thesis are synthesized to form policy recommendations, designed to ensure affordable medicines for Vietnam’s population.

1.1 Background

Vietnam’s progress in health care is greater than would be expected from its development level. Several health-related targets set under the Millennium Development Goals have been attained well ahead of time (World Bank, 2006). Yet Vietnam’s total spending on health was between five and six per cent of gross domestic product (GDP) from 2000 to 2005 (WHO, 2008). Government health spending accounts for only a quarter of total expenditure, and the remaining three-quarters is drawn from 1 direct patient out-of-pocket payments (Lieberman & Wagstaff, 2009; Lindholm & Thanh, 2003; WHO, 2008). Some studies have reported that to meet health care costs, many poor households in Vietnam have to reduce essential consumption, sell assets and incur debt, threatening their future livelihood (Ladinsky et al., 2000; Segall et al., 2002).

Medicine expenditure accounts for a large component of total health care costs. In 2005, Vietnam spent USD 3.18 billion on health (USD 1 = VND1 15,907.00), of which 53.3 per cent was for medicines, an almost threefold increase in absolute terms from 2000 (WHO, 2008). Rising prices for medicines have been reported to account for most of this increase (World Bank, 2007). From 2003 to 2004, prices of some medicines soared fourfold (Bộ Tài chính, 2004), and the medicine and health component of the consumer price index (CPI) increased by 13.8 per cent, almost double the CPI (GSO, 2009a). Maintaining medicine prices at affordable levels, therefore, would appear to be of critical importance to improving access to essential medicines in Vietnam.

Prior to 1989, the Vietnam government heavily subsidized the health care system. All health care services and medicines were supplied free of charge (Witter, 1996). A strict medicine price control strategy was in place (Simonet, 2001). Medicines, from central and local sources, were sold only via the public sector with one uniform price set by government throughout the country (MOH of Vietnam, 1987; The Council of Ministers, 1987). On 5 November 1987, joint Circular 28-TT/LB of the State Price Committee and the Ministry of Health was issued. This provided a measure of flexibility in medicine pricing by permitting local sources to have a different designated price level within a price bracket set by the Ministry of Health.

In 1989, the Vietnam government made important heath sector reforms. The provision of free medicines dispensed through the public health care system was replaced by a system of direct payment by patients (Larsson, 2003). Former restraints on the production and sale of pharmaceuticals were liberalized and private medical and pharmacy practices were legalized (Chalker, 1995). With the shift to free market pricing for medicines without government control, medicine prices were set as high as the market would bear, leading to higher medicine prices in Vietnam than in some other

1 Vietnam Dong: Vietnamese currency 2 countries, including developed nations such as Australia and New Zealand (Bala et al., 1998; Kuanpoth, 2007).

To remedy this problem, the Vietnam government introduced legislation to stabilize medicine prices. Vietnam’s Ministry of Health commenced drafting the first Pharmaceutical Law in 1997. This was finally enacted on 14 June 2005, after almost a decade of consultation, discussion, drafting and development. The new law provided a comprehensive legislative framework for all aspects of the pharmaceutical sector, including specific medicine-pricing provisions. A public health insurance system was also introduced. Under these arrangements, health insurance coverage increased rapidly. The level of reimbursement received for medicines under this program was a major factor easing the burden of increasing prices for medicines.

Notwithstanding the significance of legislative measures, medicine prices in Vietnam have kept growing (Inspectorate of the MOH of Vietnam, 2007). Prices to patients for some medicines were up to ten times their imported prices (Trương Ngọc, 2007). Low compliance with medicine pricing regulations was also reported, with some medicines being sold at prices of up to 300 per cent more than the original declared price at the Vietnam Drug Administration (Inspectorate of the MOH of Vietnam, 2007).

Nevertheless, too little is known about the actual prices people pay for medicines in Vietnam and how these prices are set and their impact. Patients, and even government authorities dealing with medicines, often do not know what the lowest prices are and how they vary (Creese, 2003). In this context, the present research was conducted to provide comparable, evidence-based information on medicine prices and their impact, to better inform policy makers how to ensure affordable access to medicines for all of Vietnam’s population.

1.2 Aim and objectives

The overall aim of this research is to explore the factors influencing the price of medicines in Vietnam, and to develop feasible policy recommendations to achieve more affordable medicines in Vietnam. Specifically, the thesis has the following objectives:

3 i) To analyze how demand and supply of pharmaceuticals in Vietnam impact on medicine prices; ii) To assess the price, availability and affordability of a sample of medicines in Vietnam; iii) To assess the effectiveness of medicine pricing policies that the Vietnam government has put in place to date; and iv) To identify underlying factors causing high medicine prices in Vietnam.

1.3 Research design and methodological considerations

1.3.1 Overall research design (Figure 1.1)

Medicine prices and pricing policies in Vietnam

To recommend feasible solutions for affordable medicine prices in Vietnam Aim

To analyse the impact of To assess the price, To assess the To identify underlying pharmaceutical demand and availability, and effectiveness of the factors causing high supply in Vietnam on affordability of government’s medicine medicine prices in Vietnam medicine prices medicines in Vietnam pricing policies

Objectives

Study 1 Study 2 Study 3 Study 4 1. Briefly consider the Analyze the prices, Analyze the 1. Explore the different main features of Vietnam’s availability and strengths and price components when a health care system affordability of a weaknesses of the medicine moves along the sample of legislation which supply chain 2. Review the process, medicines in determines medicine characteristics and 2. Identify the dominant Vietnam pricing policies in problems of the current components of medicine Strategies Vietnam, and its pharmaceutical supply prices and the underlying impact on prices chain in Vietnam causes

Review of literature and Medicine prices Documentary Qualitative in-depth publicly available data survey analysis interviews from the Vietnam methodology Government developed by the WHO/HAI Instruments Instruments

1. Academic journals The Vietnam 1. Vietnam’s Informants from medicine prices and medicine pricing Vietnam’s pharmaceutical 2. Annual reports of the availability survey regulations and laws industry, government Drug Administration of 2005 medicine pricing Vietnam 2003-2008 2. Consultations with authorities and other Vietnam medicine 3. Government’s electronic stakeholders involved in

Data sources pricing authorities databases and web pages the medicine supply chain

Synthesis of the findings from the four studies to develop policy recommendations Integration Figure 1.1 Mixed-methods research design

1.3.2 The rationale for a mixed methods approach

A mixed-methods design was adopted in this study for three reasons. The first was the nature of questions the study sought to answer, which is the most important basis for determining the approach to a project (Creswell, 2003). This study sought to analyse medicine prices in Vietnam, and to explain those prices, thus lending itself to the use of both quantitative methods for measurement and qualitative methods for explanation.

The second reason was the complexity of the issues under investigation. Medicine prices are complex and influenced by a diversity of factors (WHO & HAI, 2008). Medicine pricing policies range from direct price controls (maximum fixed prices, negotiated prices, international price comparisons and price cuts or freezes) to indirect approaches (profit regulation or reference or index pricing) (Mrazek & Mossialos, 2004). They may impact on medicine expenditure directly (e.g. through price changes) or indirectly (e.g. through medicine use changes) (Aaserud et al., 2006). Meanwhile, many researchers contend that complex phenomena “cannot be fully understood using either purely qualitative or purely quantitative techniques” (Teddlie & Tashakkori, 2003, p. 17). Therefore, a mixed-methods approach was chosen as appropriate to obtain a comprehensive and complete understanding of the complex problems being studied.

Using the definition and classification of mixed methods designs provided by Creswell (2003), a sequential explanatory model was employed in this study. It comprised an initial quantitative phase conducted to obtain empirical data on medicine prices and availability, followed by a second phase of gathering qualitative data to better understand the quantitative results. This approach is the final reason for a mixed methods design of this study.

1.3.3 Researcher background and orientation to the study

In qualitative research, the researcher is a special instrument for data collection, analysis and interpretation (Patton, 1990). A rigorous qualitative study therefore requires reflexivity and honest reporting of the role of the researcher (Liamputtong & Ezzy, 2005). Accordingly, a brief account is given here of the author’s background, including my relationships with key stakeholders, and the lens through which I designed the study, analysed and interpreted the qualitative data. 6

I am a pharmacist with a Master of Pharmacy degree from Vietnam, specializing in pharmaco-economics and pharmaceutical management. After five years working for multinational pharmaceutical companies in Vietnam, I became a researcher and university lecturer with a special focus on pharmaceutical marketing, pharmaceutical policy and medicine prices. I had ten years working in the pharmaceutical sector (both industry and university) and this makes me known to a number of stakeholders in Vietnam’s pharmaceutical market, many of whom are my friends or my former students. When they became participants in this study, they treated me as a peer and confidant, rather than an outsider.

Subsequently, I was invited by the Drug Administration of Vietnam to work as a drug appraisal specialist on the legislative sub-committee. The sub-committee advises the Minister of Health on the granting of marketing licenses for medicines in Vietnam. From this work, I gained insights into the pharmaceutical sector from the perspective of government and a pharmaceutical regulation authority. This professional experience, together with my postgraduate studies led me to question whether medicine prices in Vietnam were influenced by the macro-environment (e.g. broad government policies) or the micro-environment (e.g. the company, suppliers, consumers, competitors, etc.) or both, and to what extent each element interacted with the other. These questions in turn led to my research on medicine prices and pricing policies in Vietnam, of which the qualitative study forms one important component. It is acknowledged that the researcher’s professional background and experience in this field could potentially lead to an element of investigator bias. However, it could equally be argued that the insider knowledge gained by the researcher facilitated access to sensitive information and an understanding of what was required to be credible with all stakeholders, especially government.

1.3.4 Currency used in this thesis

To facilitate better understanding, all money values in Vietnam Dong in this study were converted to the equivalent value in US dollars using the appropriate exchange rate. As a guide to relativities, the exchange rate (at February 2011) of USD 1 as equivalent to VND 20,000 is used, unless specifically indicated such as the purchasing power parity (PPP) adjustments for VND used in Chapter 4. 7

1.4 Flow of research and interconnection of chapters

The thesis is organized into the following eight chapters:

Chapter 1, Introduction, provides the overall rationale for the thesis, introduces the research topic and objectives, and positions the overall design of the research and methodological approaches. This includes an outline of the researcher’s background and perspective that informed the research. Finally, the chapter outlines the thesis structure.

Chapter 2, Medicines prices, pricing policies and patient access: a review of the international literature, provides an overview of the international, academic peer- reviewed literature and the ‘grey’ policy literature, along with coverage of the work of major international organizations such as WHO and OECD on medicine prices, policies and their impact. Specific research relating to Vietnam is also briefly reviewed in this chapter.

Chapter 3, Vietnam’s health care and pharmaceutical system, and its impact on medicine prices, describes the Vietnamese health care and pharmaceutical system. An analysis is given of the process, characteristics and intrinsic features of both the demand and supply sides of the pharmaceutical market and implications for medicine prices.

Chapter 4, Availability and affordability of medicines in Vietnam, assesses the prices, availability and affordability of a sample of medicines in Vietnam, using established WHO/Health Action International methods and compares the results with those of other similar countries

Chapter 5, Medicine pricing policies in Vietnam, analyses the features, strengths and weaknesses of the legislation and regulations determining medicine pricing policies in Vietnam, and their impact on prices.

Chapter 6, Root causes of high medicine prices in Vietnam, explores the contributing price components arising as a medicine moves along the supply chain, identifying the dominant components and the underlying root causes of high medicine prices as reported by study participants.

Chapter 7, Why and how informal payments occur, explores the reasons for corrupt practices in Vietnam’s health care and pharmaceutical sector, with particular reference to the impact on affordable medicine prices. A new theoretical explanatory model is proposed to account for the findings of the qualitative study, in relation to corruption.

Chapter 8, Discussion and policy recommendations, sets out the main findings from each chapter and then draws together the final conclusions and policy recommendations.

Chapter 2. Medicine prices, pricing policies and patient access: a review of the international literature

2.1 Introduction

In this chapter, the international literature on affordable medicine prices and corresponding pricing policies is reviewed. A broad range of sources is used: the academic peer-reviewed literature that is both relevant and available; the ‘grey’ policy literature on medicine prices and policies, including government directives and legislation; as well as research studies and seminal documents from influential international organizations, such as the World Health Organization (WHO) and the Organization for Economic Co-operation and Development (OECD). The scope of the literature review is intentionally wide and ostensibly all inclusive, to reflect the multidimensional nature of the problem of patient access to affordable medicines. This approach also provides a broad platform of ideas and research upon which appropriate policy recommendations can be formulated to improve health outcomes in Vietnam. The chapter is organized into six sections with this introduction section being the first.

The second section provides an overview of national medicines policies which have three main objectives: improvement of access to essential medicines; assurance of medicine quality; and promotion of rational use of medicines. A description of the WHO access framework follows. This framework represents a useful international approach, providing an overview of some strategies to improve access to essential medicines in the Western Pacific Region, the region in which Vietnam is placed by the WHO.

The third section focuses on medicine prices as an important determinant of affordable access to medicines. It begins with an overview of the pharmaceutical market’s characteristics. A discussion follows on pharmaceutical expenditure as a function of medicine prices and the quantity of medicines consumed. Finally, the section ends with a review of the determinants of medicine consumption and prices.

The fourth section is devoted to pharmaceutical pricing and reimbursement policies. It provides a classification of policy options for cost containment and a review of the impact of pharmaceutical pricing and reimbursement policies on meeting health policy goals.

The fifth section reviews studies of medicine prices and policies, with a focus on developing countries and with particular reference to Vietnam. The chapter ends with the final section of conclusions.

2.2 National medicines policies and access to medicines

Many countries have encountered significant problems in seeking to improve patient access to quality medicines. These problems have included lack of access due to high prices and low affordability, poor quality, and irrational use. The basic national medicines policy focused on improved access, quality and rational use of medicines, but individual countries were encouraged to develop their own locally appropriate national medicines policy. In 1975, the WHO began to develop practical guides for member states in formulating national medicines policies. The first guidelines were published in 1988 (WHO, 1988). They were updated in a second edition, issued in 2001. This edition focused on national medicines policy processes, strategies and options. The aim was to ensure that safe and effective medicines of good quality are available and affordable to the population at large and that their use is rational and clinically appropriate.

‘A national drug2 policy is a commitment to a goal and a guide for action. It expresses and prioritizes the medium - to long - term goals set by the government for the pharmaceutical sector, and identifies the main strategies for attaining them. It provides a framework within which the activities of the pharmaceutical sector can be coordinated. It covers both the public and the private sectors, and involves all the main actors in the pharmaceutical field’ (WHO, 2001, p. 4).

2 The term ‘drug’ was the terminology adopted at the time. It has now been replaced by ‘medicines’ in the current literature. However, a number of countries, including Vietnam, still use the term “drug” in relation to their policies. 12

However, access to medicines continues to be one of the biggest challenges confronting the global political agenda (WHO-EMRO, 2007). The United Nation’s Millennium Development Goal 8E is to provide access to affordable essential medicines in developing countries (United Nations, 2008).

Access to medicines is a complex subject and is perceived, defined and measured in many different ways. WHO’s definition, incorporated in the Working Group on Access to Essential Medicines of the UN Millennium Project, defines access to medicines as the percentage of the population who have “access to a minimum of 20 of the most essential drugs”, that are continuously available and affordable at a health facility or medicine outlet, within one hour’s walk from the patient’s home (UN Millennium Project, 2005, p. 27). This definition of access to medicines is conceptualised in terms of both financial and geographical access. It is also used to assess the Millennium Development Goals indicator for access to medicines. This definition of accessibility assumes that the efficacy and quality of medicines are assured, and that required knowledge and guidance are available to ensure proper use of these medicines (WHO-EMRO, 2007).

Lack of access to medicines in developing countries relates to two classes of medicine (UN Millennium Project, 2005). The first is a lack of access to new medicines. This can be because of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement that blocks access to newer essential medicines. It can also arise because there are insufficient commercial incentives for the global pharmaceutical industry to develop new medicines to treat diseases associated with poverty, given the market- driven nature of the industry. The second is a lack of access to existing medicines because of patients’ inability to pay for them. This reason is deemed “the most frequently cited cause of inadequate access to medicines” in developing countries (UN Millennium Project, 2005, p. 26). It is estimated that about 10 million lives per year could be saved by improving access to existing medicines and vaccines (WHO, 2004a).

A useful four-part framework has been developed by WHO and adopted by WHO’s key partners as a tool to evaluate and improve access to essential medicines. Figure 2.1 shows the interconnection between these four parts, which are considered inseparable and of critical importance. To improve access to essential medicines, all four determining factors must be taken into consideration.

Figure 2.1 WHO’s access framework. Source: (WHO, 2004a, p. 2)

2.2.1 Rational selection and use of essential medicines

According to WHO (2004a), from the thousands of medicines available in the market, fewer than 50 different ones are routinely used by individual health professionals. This is because a limited range of medicines can treat most common health problems for the majority of the population. If a country with scarce resources carefully selects a small number of medicines that are the best combination of efficacy, safety and cost- effectiveness to meet priority health care needs, there could be “better health care, better drug management, better use of financial resources and thereby greater access to care” (Quick, 2003, p. 1).

This approach is underpinned by WHO’s essential medicines concept (WHO-EMRO, 2007). Since first produced in 1977, the WHO Model Lists of Essential Medicines have been adopted by most WHO Member States (Executive Board WHO, 2001 cited in Laing et al., 2003, p. 1723). In the Western Pacific Region, 27 out of 37 countries and areas (including Vietnam) have adopted the model as a basis for development of national lists of essential medicines (EMLs) (WHO-WPRO, 2005). Nevertheless, implementation has proved challenging. The problems include: lack of confidence in the concept of essential medicines; misconception about essential medicines (e.g. that they are cheap, of low quality and efficacy); lack of incentives for production and distribution of essential medicines; and the rare use of EMLs for medicine procurement, reimbursement or prescribing (ibid.).

Having national EMLs, however, is not sufficient to ensure their rational use (Laing, et al., 2003). Rational use is also influenced by the actions and attitudes of health care

14 providers, the pharmaceutical industry and the public (Quick, 2003). For example, the misuse of antibiotics, the overuse of injections, and inappropriate multiple medicine prescribing often contribute to irrational medicine use by both providers and consumers (WHO-WPRO, 2005). WHO has developed strategies for Western Pacific Region countries to address these problems. These strategies focus on a comprehensive package of rational medicine use interventions for providers and consumers, including a framework for evaluating their impact. The strategies also include promotion of rational use based on standard treatment guidelines and formularies linked to essential medicines lists; supervision and monitoring of compliance in health facilities; promotion of drug therapeutic committees with clear tasks and functions in hospitals; and finally, monitoring of pharmaceutical promotion in line with ethical criteria (ibid.).

2.2.2 Sustainable financing

Sustainable financing for the purchase of medicines plays a critical role in ensuring effective access. Even when available at reasonable prices, essential medicines are still unaffordable for the poor if they have to pay out of their own pocket. In many developing countries, there is an increasing trend towards private financing of health care (WHO-WPRO, 2005). About 50 to 90 per cent of medicines are paid for by private out-of-pocket expenditure in most low-income countries (Quick, 2003). Cost sharing with patients for medicines in public health services, by user charges or co-payments, shifts the financial burden from governments to patients, and may further impoverish already disadvantaged populations (WHO, 2004a). An added difficulty is that, in several Western Pacific Region countries, sale of medicines is an important source of revenue for hospitals (WHO-WPRO, 2005).

More equitable and sustainable financing mechanisms for general health care and essential medicines are needed. Resources such as donor funding and donations of medicines, and donor assistance in the form of development loans can provide low- income countries with additional sources for health financing in the short to medium term. In the long term, however, all countries need to help themselves, moving towards self-sufficiency. One suggested mechanism is implementation of universal health insurance to tackle the increasing disease burden (WHO, 2004a). Recommended strategies for Western Pacific Region countries also include the establishment of

15 information systems to monitor and analyse medicine expenditure, application of cost containment measures to control medicine expenditure, cost effectiveness analysis in medicines selection, promotion of public insurance schemes, and direct public subsidy for the poor (WHO-WPRO, 2005).

2.2.3 Reliable health and supply systems

Prior to receiving medication, patients need to have their health assessed by well- informed, trained clinicians. They need to have their illness diagnosed appropriately, and assisted by affordable diagnostic tests where necessary. Patients, especially those with chronic diseases, also need help from nurses and other health professionals to adhere to their treatment (WHO, 2004a). Without these preconditions, physical and financial access to medicines can be misdirected. Overall strengthening of both the health system and the supply system plays a crucial role in ensuring full access to appropriate medicines for the whole population.

Reliable supply systems aim to ensure physical access to medicines. This refers to the assurance of timely availability of essential medicines of acceptable quality at all levels of the health care system (WHO, 2004c). A reliable supply system is determined by the following three main components: regulatory control; procurement practices; and supply models.

Regulatory control helps to ensure the quality of medicines, from product development, to manufacture, distribution and storage. Lack of a quality assurance system leads to substandard or more dangerously counterfeit medicines, being manufactured, distributed and used. This has a negative effect on access as valuable resources are wasted on substandard or counterfeit medicines. Counterfeit medicines have substantially increased recently and become an urgent problem related to medicine quality faced by Western Pacific Region countries (WHO-WPRO, 2005). Reasons include the improper enforcement of laws and regulations relating to medicines, lack of quality assurance such as medicine registration, inspection and quality surveillance, or inadequate penalties which are too lenient to deter people from breaking laws or regulations (ibid.).

According to Management Sciences for Health (1997, p. 14), procurement includes “quantifying medicine requirements and selecting procurement methods”. Poor 16 estimation of need leads to the situation where some medicines run out when still needed, while others are overstocked and have to be disposed of, due to expiry dates being reached (WHO-WPRO, 2005). Procurement method selection can also affect efficiency. According to WHO (2004a), bulk procurement in which medicine orders are pooled together increases purchasing power. This may result in lower medicine prices and more reliable supply of medicines. More empirical research is needed however to validate the impact of pooled procurement on medicine prices (Waning et al., 2009)

A good supply system aims at reliability, efficiency, security and ability for quality assurance (Quick, 2003). Each country needs to determine a suitable model for its supply system, depending on the local context. Some common models that are used include central medical stores, a (semi-) autonomous supply agency, a direct delivery system, a prime distributor, and a fully private supply (WHO, 2004a).

Specific challenges for medicine supply and management systems in the Western Pacific Region countries have been identified (WHO-WPRO, 2005). They include inefficiencies due to decentralization of the medicine procurement system, lack of bulk procurement mechanisms and unnecessary variations in programs and organisations carrying out medicine procurement, procurement methods, and quality standards. Remedial strategies include promotion of coordinated medicine management, planning and monitoring systems such as procurement in the public sector based on good procurement practices, national medicines policies, essential medicine lists and standard treatment guidelines. These strategies also encourage collaborative and bulk procurement, training in medicines management, and promotion of information exchange on prices and sources of medicines procurement (ibid.).

2.2.4 Affordable prices

Affordable prices are of fundamental importance within the access framework (WHO & HAI, 2008). If the prices of medicines are too high in relation to local purchasing power, they simply become unaffordable. Hence medicine prices are a public health issue (WHO-EMRO, 2007).

In the Western Pacific Region essential medicines are unaffordable for a large part of the population. Lack of price controls and regulations on price mark-ups, inadequate 17 competition and patent laws, and the absence of an effective generic policy are some of the main challenges faced by these countries. Remedial strategies that need to be considered include: identification and dissemination of practices on pricing policies for essential medicines; adoption of policies on generic medicines; and development of national intellectual property legislation in line with international trade agreements (WHO-WPRO, 2005).

However, strategies to improve the situation also need to include the other three components of WHO’s access framework comprising: rational selection and use of essential medicines; sustainable financing; and reliable health and supply systems. Also, a “national medicines policy cannot succeed in isolation from broader health policies and government policies” (UN Millennium Project, 2005, p. 7). Therefore, coordination with other government departments “dealing with such matters as finance, the training curricula for health professionals, the salaries of public employees, and practices regarding trade, taxation, and custom duties” (ibid.) is necessary to achieve the desired outcomes.

2.3 Medicine prices and their determinants

2.3.1 The pharmaceutical market

2.3.1.1 A market with unique features

Like many consumables, medicines may perhaps be considered to constitute a competitive industry that responds to market forces. In a ‘perfectly competitive market’, the quantity of goods or services available is determined by numerous providers who set the level of their supply output independently of one another, and in response to the price consumers (or purchasers), acting independently of one another, are prepared to pay. Critical to the operation of a competitive market is the assumption that the suppliers of goods and services do not collude among each other to set monopoly prices or participate in arrangements that would exclude potential competitors prepared to offer lower prices for similar quality items entering the market. Likewise, demand for goods and services is required to be set by sovereign consumers who act independently of one another and are technically sufficiently informed to make a choice based on

18 price. However, there are some specific aspects of the pharmaceutical market that distinguish it from a normal competitive market.

Firstly, it is difficult for consumers to compare medicine prices due to the complexity of the products which may include several active compounds and be packaged in many different ways (Jacobzone, 2000). Secondly, payment for pharmaceuticals may partly be by a third party, often a health insurer. This modifies prices as perceived by patients, since real prices may only be the out-of-pocket part that they have to pay. Consequently, patients with health insurance may be less price-sensitive than they would be if paying the full price (ibid.).

Thirdly, there is an information asymmetry between final consumers/patients and medicines sellers or health care providers. Most individual patients do not have sufficient technical knowledge of medicines to make an informed decision, nor do they have sufficient comprehension of their medical suitability for the condition being treated. Therefore, in the prescription medical market, it is more often a third party, such as the physician prescriber, who effectively serves as the sovereign consumer, to decide what medicines a patient will be given (Kees de Joncheere et al., 2002).

Core decisions relevant to determining the demand for medicines are often made by the prescriber who can be insulated from any consideration of medicine cost as usually it is the patient or a health insurer who is obliged to pay. This leads to relative price inelasticity of demand for prescription medicines where escalating prices have little or greatly reduced effect on medicine usage. Patients still have to buy prescribed medicines, irrespective of their prices. In order to protect population health, especially for the poor, medicine prices need to be monitored and this usually involves some government oversight for the public good (OECD, 2008).

2.3.1.2 A market with conflicting objectives

The unique features of the pharmaceutical market produce a wider range of stakeholders than in many other markets. Like other markets, there are suppliers (e.g. pharmaceutical manufacturers, distributors), consumers (i.e. patients), and governments (e.g. the Ministry of Health, Ministry of Trade, Ministry of Finance, etc.) involved in the pharmaceutical market. Unlike other markets, however, there are special participating 19 stakeholders including health care providers who can, instead of the consumers, often determine demand for pharmaceutical products. Stakeholders may include health insurance agencies who serve as the payer on behalf of the patients, and government procurement agencies who may also serve as purchasers of medicines in publicly financed health care systems.

These stakeholders have in common an objective of providing safe, effective and quality assured medicines to improve public health. However, they also have other objectives which may conflict with one another. Patients, for example, may want to access new and more expensive medicines, resulting in higher medicine expenditure that affects the total budget of health insurance agencies (Ess et al., 2003). Reduction of medicine expenditure may align with the objective of health insurance agencies (OECD, 2008), but it may also negatively impact on the quality of health care and constrain prescribing practices of health care providers. Profitability criteria may result in pharmaceutical companies using promotional activities to increase demand for their products, which undermines attempts to improve the efficiency of prescribing. Governments, as representatives of all stakeholders, have to reconcile these competing and conflicting demands. The political reality that many governments feel a need to promote or support local production of pharmaceuticals may complicate the government’s mixed role in the sector. This requires government pharmaceutical policies to be multidimensional, not only enhancing the welfare of patients, but also strengthening economic efficiency, competitiveness and innovation (Jacobzone, 2000; E Mossialos et al., 2004).

2.3.1.3 A heterogeneous market

The pharmaceutical market is not homogeneous. Based on the differences in characteristics of the pharmaceutical products, the market may be categorized into different submarkets, such as the patent medicine market versus the generic medicine market, the traditional medicine market versus the western medicine market, the oral medicine market versus the parenteral medicine market, or therapeutic submarkets (e.g. the antibiotic market, the cardiovascular medicine market etc.). The market can be further categorized into three main types: the over-the-counter (OTC) submarket, the

20 hospital submarket for inpatients, and the general community prescription submarket for outpatients with a prescription (Jönsson, 1994).

The OTC submarket is characterized by well-known medicines that have been on the market for a relatively long time (Ess, et al., 2003; Gerdtham et al., 1998). These medicines can be bought over the counter for self-treatment from pharmacies. In Australia and some developed countries, selected medicines are also available in supermarkets, health food stores and other retailers (TGA, 2011). OTC medicines are often non-reimbursable and financed through patients’ out-of-pocket payment, thus making consumers more price-sensitive. Governments often leave the price of non- reimbursable OTC medicines to be governed by demand and supply rules, which is often termed free pricing (Vogler et al., 2008). In the Netherlands and Portugal, free pricing is in place for all OTC products (GÖG/ÖBIG, 2006).

By contrast, in the hospital and prescription submarket, demand for medicines is largely determined by a physician prescriber rather than by the patients. In the hospital submarket, the range and type of medicines are also subject to the policies of drug and therapeutic committees. Their cost is included in the hospital budget, thus being subject to specific rules. Medicines may be purchased through direct negotiations with manufacturers or by tender, often resulting in a discounted price and/or a rebate in this sector. In most OECD countries, medicines in hospitals are not subject to governmental price regulation (Jacobzone, 2000).

Among the three submarkets, the outpatient prescription submarket is often the largest. According to Ess et al. (2003), the prescription submarket represents 75 to 84 per cent of total pharmaceutical expenditures in most European countries, of which from 50 to more than 80 percent is reimbursed by public funds or social insurance systems. A similar situation exists for OECD countries in which, on average, the prescription market accounts for approximately 80 per cent of total pharmaceutical expenditures and most pharmaceutical expenditure is publicly financed (61 per cent in 2005) (OECD, 2008). The governments of most European and OECD countries target this submarket to reduce health care expenditure (GÖG/ÖBIG, 2006; OECD, 2008; Vogler, et al., 2008). Price regulation in this submarket is facilitated by the fact that it is clearly defined and feasible to evaluate, because of its relative transparency, and “reduction in revenues

21 usually do not directly affect the income of health care providers” (Ess, et al., 2003, p. 92).

2.3.2 Pharmaceutical expenditure

Pharmaceutical expenditure often constitutes the second largest category of recurrent health expenditure (MSH, 1997; Quick, 2003) and a high proportion of the household budget (Quick, 2003; World Bank, 1993). Expenditure on needed medicines can easily result in financial hardship for the household when people have to cut down on other necessities. Pharmaceutical expenditure is increasing in both developed and developing countries. From 1997 to 2005, the average annual growth rate of pharmaceutical expenditure in real terms was 5.3 per cent in OECD countries, which significantly surpassed that of GDP during this period (OECD, 2008). From 1990 to 2000, in low- and middle-income countries, adjusted for price movements, pharmaceutical expenditure in nominal terms increased by 63 per cent and 97 per cent, respectively (WHO, 2004c). Thus, it is understandable that there have been increasing global concerns about pharmaceutical expenditure and corresponding efforts to contain it.

Pharmaceutical expenditure is a function of medicine prices, the volume of medicines consumed, and the interaction between these two variables (Chen & Schweitzer, 2008; Gerdtham, et al., 1998). Numerous reasons for the increasing rise in pharmaceutical expenditure have been identified globally including disease mongering by the pharmaceutical industry. Nevertheless, they still fall into two main groups: medicine consumption (i.e. increases in the use of medicines) and medicine prices (i.e. increases in the price of existing medicines, replacement of older, cheaper medicines by newer, more expensive ones, and the introduction of new medicines for hitherto incurable diseases) (Kees de Joncheere, et al., 2002; NIHCM, 2002). From this perspective, to contain pharmaceutical expenditure, pharmaceutical policies need to be designed to address both medicines prices and consumption.

2.3.3 The determinants of medicine consumption

Medicine consumption is a complex function of physicians’ prescribing behaviour, patient demand and government regulations influencing demand for medicines (Ess, et

22 al., 2003). The following section discusses the first two factors. Government regulations impacting on pharmaceutical demand are presented in section 2.4.

2.3.3.1 Physicians’ prescribing behaviour

Studies have identified several groups of factors influencing the prescribing behaviour of physicians. The first group includes physicians’ knowledge, skills, attitudes, predisposition (Lipton & Bird, 1993; Sutters, 1990), and risk aversion (Haaijer Ruskamp & Denig, 1996). In addition, context and prior experience is important in creating inertia in prescribing behaviour. For example, physicians who have a large number of patients enrolled in a Health Maintenance Organization (HMO) are more likely to prescribe generic medicines for all their patients, regardless of their HMO status (Hellerstein, 1998).

The second group is related to patients. Lipton and Bird (1993) found that some patient or family influences including demands, refusals, demographics and cultural beliefs influence prescribing behaviour. For example, patients from a particular background may be unwilling to take some medicines. Sometimes, they may demand medicines which they may believe to have better efficacy than those that are prescribed. Preference for, and/or aversion to, injections or oral dosage forms of medicine is another example of what occurs in some cultures, such as Vietnam (Falkenberg et al., 2000). The pharmaceutical industry can also drive demand by direct-to-consumer advertising.

The third group, system factors, include pharmaceutical policies, reimbursement, formularies, practice organisation, and pharmaceutical company promotion (Lipton & Bird, 1993; Sutters, 1990). Because physicians work in a regulated system, their medical practice is influenced by government policies and rules and/or regulations of the institutions and associations to which they belong. The pharmaceutical industry with its direct marketing activities is also alleged to be an influential factor in inappropriate prescribing (Bloor & Freemantle, 1996; Gill et al., 1996)

Davis (1997) has provided a useful classification scheme that summarises common factors influencing prescribing behaviour as seen in Table 2.1.

Table 2.1 Factors influencing prescribing behaviour by level of analysis

Level of Influential factors analysis - Regulation, financing and availability of medicines and health care. Population - Power of the pharmaceutical industry. - Culture, tradition, beliefs regarding health and illness. - Health status and prevalence of disease - Proportion of elderly and female patients. Practice - Proportion of low socio-economic class patients. - Urbanisation. - Practice organisation and practice size. - Age and gender. - Attitudes and working style. Physician - Training and education. - Use of information sources. - Patient interaction. - Age, gender, social class. Patient - Social circumstances, expectation, and demands. - Compliance.

Source: Adapted from Davis (1997)

2.3.3.2 Patient demand

In a normal commodity market, a fall in price will result in an increase in the quantity of goods demanded by consumers and vice versa. This principle will apply to the pharmaceutical market if the cost of medicines is borne directly by the patient. However, in most developed countries, medicines are largely subsidised or partly reimbursed by a third party (typically government or a health insurance agency). In such circumstances, only the part remaining to be paid represents the ‘true price’, affecting price elasticity of demand. This is an integral principle of the patient co-payment mechanism, whereby patients are obliged to make some contribution to the financing of their medicines. The effect is to make patients more price-sensitive, often discouraging

24 them from using too many, or excessively expensive medicines and thus decreasing the financial burden on society (Rietveld & Haaijer-Ruskamp, 2002). An account of co- payments is given in section 2.4.3.4.

Another factor that influences patient demand is ‘consumer sovereignty’ (that is, the right of the consumer to determine what they buy and from whom). However, consumer sovereignty with respect to medicines is determined by the ‘agency’ relationship between a relatively well-informed prescriber and a less-informed consumer (Steinke et al., 1999). Therefore, it is often the prescriber who determines the pharmaceutical demand for a patient, apart from the patient’s ability to pay. If the patient is empowered to be involved in the medicine decision-making process and provided with available choices regarding efficacy, safety and cost, the discretion of the provider will be more adequately controlled to account for patient preferences. When patients are price- sensitive due to out-of-pocket payments (which is relevant for up to 90 per cent of the population in low- and middle-income countries: see WHO (2004b) and McIntyre et al. (2006)), patient empowerment will often lead patients to switch to cheaper medicines, provided that patients perceive such medicines to be of equivalent quality. This may change the mix of medicines used by patients, thus lowering total pharmaceutical expenditure. Nevertheless, complete patient empowerment is unlikely to be achieved, especially in low- and middle-income countries, as information and expertise asymmetries are characteristic of all health services (Brinkerhoff, 2004).

2.3.4 The determinants of medicine prices

Studies have identified numerous determinants of the final price of a medicine, but they can be characterised in two main ways.

Firstly, there are components of the original manufacturer’s selling price, also termed the ‘base price’, and exogenous factors impacting on the base price. The base price includes research and development (R&D) costs, manufacturing costs and marketing costs. Exogenous factors include the degree of competition, market intelligence, market size and economies of scale.

Secondly, there are expenses when a medicine moves from the manufacturer’s gate to the consumer or patient. These are often termed ‘hidden costs’ and sometimes can be more than double the base price (Perez-Casas et al., 2001).

A thorough discussion of hidden costs can be found in Levison (2003) and Levison & Laing (2003). The authors classify these costs into two main sources. The first is hidden costs which are under government influence, including import tariffs, port charges, clearance and freight charges, pre-shipment inspection fees, pharmacy board fee, financial costs (e.g. banking fees, contingency fees), importer’s margins, value added tax, central government tax, state government tax, wholesale and retail mark-ups. The second source is the hidden cost of the procurement process, including costs incurred due to product selection and tendering methods, operating costs to run a procurement office, distribution costs, warehousing costs that are associated with keeping an inventory stock and stock loss due to inaccurate quantification, damage, theft or wastage.

In the next four sections, the main determinants of the base price of medicines are briefly discussed.

2.3.4.1 The costs of research and development, manufacturing and marketing

One of the main drivers of cost claimed by the pharmaceutical industry is expensive research and development (R&D). A widely cited and accepted R&D cost estimate was provided by Di Masi et al. in 2003 (Light & Warburton, 2005). Di Masi et al. estimated that the average cost is USD 802 million (in 2000 dollar prices) for research and developing a self-originated new chemical entity (Di Masi et al., 2003). However, a recent study by Light & Warburton (2011) challenges the USD 802 million estimation because of a number of problems, including the sampling and the data, inflated trial costs, exaggerated time for R&D, and use of the mean instead of the median. Considering all these issues, these authors provide a much lower estimate of USD 58.7 million (mean) or USD 43.4 million (median) for R&D cost. Nevertheless, this R&D expense is still considerable and ultimately factored into the base price by the pharmaceutical industry. Moreover, it is estimated that only about 30 per cent of

26 marketed pharmaceuticals earn enough revenue during their patented product lifecycle to cover their R&D costs (Masia, 2006; Schweitzer, 1997). Therefore, in considering the global pharmaceutical industry as a whole profitable entity, prices of these pharmaceuticals are set not only to cover R&D costs, but also to cover the loss of the rest of the 70 per cent of pharmaceuticals, which may run at an effective loss.

Apart from R&D costs, marketing costs are a major contributor to the base price of medicines. Results from several studies have shown that marketing costs are often as high as R&D costs, if not higher. According to Rasmussen (2002), the pharmaceutical industry spends 35 per cent of its revenue on marketing, compared with less than 20 per cent spending on R&D. Figure 2.2 indicates the percentage of sales accounted for by marketing costs, compared with other costs in the pharmaceutical industry over three periods of time: 1973, 1975-80, and 1989.

Figure 2.2 Marketing costs in comparison with other costs in the OECD pharmaceutical industry, 1973-89. Source: (Jacobzone, 2000, p. 91).

High spending on marketing activities has implications for the public purse. Although pharmaceutical promotion efforts educate physicians and consumers about medicines and increase awareness of medical conditions, two problems need to be taken into consideration. Firstly, promotional marketing adds to the cost of medicines since advertising expenses are factored into the final price. Secondly, it can contribute to overuse or misuse of medicines (Gill, et al., 1996; Ma et al., 2003).

Since true manufacturing costs are considered trade confidences, little is known about their structure. In terms of the share in relation to total production costs, the actual costs of manufacturing pharmaceuticals are considered to be low (Schweitzer, 1997). Danzon estimated that all manufacturing and distribution costs account for 25.3 per cent of the total lifetime costs of creating, producing and distributing pharmaceuticals (cited in CFSES, 1999, p. 9). Nevertheless, reducing manufacturing costs through achieving economies of scale might reduce selling prices.

2.3.4.2 Degree of market competition

The degree of competition in the market can strongly influence the price of medicines. A major factor determining the degree of competitiveness in a pharmaceutical market pertains to the national policies adopted relating to the life of national patents, and national policies adopted with respect to generic substitutes on patent expiry.

Patents represent a set of exclusive rights granted by a national government to the licensee for a limited period of time (up to 20 years) in order to reward innovation (Levison, 2003). Before a medicine goes off-patent, only the licensee or their assignee is able to produce and trade the product for commercial purpose. If there is no therapeutic equivalent, a patented medicine can be charged at as high a price as the market will bear. Thus, in countries where a medicine is subject to patent, the brand name product can be much more expensive than its generic equivalent, which may be available in other countries where patent protection is not afforded. This is illustrated by the example of the Indian company Cipla Ltd., a major generic producer, which in 2001 made an offer to Doctors Without Borders to provide anti-retroviral generic products for one year of treatment for their health programs in Africa at a cost of USD 350. However, at the same time, this treatment with a patented brand name product in the West cost between USD10,000 and USD15,000 (McNeil, 2001). The concern here is that while patent system may be necessary to promote innovation, as Light (2010) states current incentives reward companies for developing mainly new medicines of little advantage, and then competing for market share at high prices. During the period 1996 to 2006, only one or two out of 20 newly approved medicines have been truly innovative. The rest of the medicines (about 85 per cent) offer little or no additional value over the existing ones (Light, 2010).

With the advent of the WTO Trade Related Aspects of Intellectual Property Agreement (TRIPS), there has been a robust debate as to its effects on public health. However, few empirical studies have been conducted regarding its effects on medicine pricing (Kaplan et al., 2003). Assessing the benefits and the costs of medicine patents using an historical statistical series, Challu (1991) estimated a number of costs that would be imposed on Argentina after adoption of a product patent system, including a 273.2 per cent increase in medicine prices. Another study examined the relationship between movements in medicine prices and the launch of intellectual property protection in nine developing countries, using manufacturer prices for six therapeutic classes of medicines (Rozek & Berkowitz, 1998). The authors stated that there was no evidence that the consumption of brand versus generic medicine products changed with intellectual property protection. However, their findings showed a change in the composition of medicines sold in six out of nine countries studied, with an increase in market share for brand name products and a decrease in market share for “other” medicines.

The entry of generic medicines to the market after patent expiry also impacts on medicine prices. Studies have shown that generic medicine prices fall with an increasing number of competitors (Reiffen & Ward, 2005) and that generic competition induces significant reduction in the generic-to-brand price ratio (Caves et al., 1991; Congressional Budget Office, 1998; Frank & Salkever, 1997; Grabowski & Vernon, 1992; Reiffen & Ward, 2005). However, after the first few entrants the marginal effect of each entrant on generic prices tends to be negligible (Berndt et al., 2007; Reiffen & Ward, 2005).

It also seems that generic entry does not affect the price of the initial brand name products. While Caves et al. (1991) witnessed a slight decrease in the initial price of brand name medicines with the entry of the first two to three generics, others showed that brand prices either did not change, or even increased after generic entry (Frank & Salkever, 1997; Grabowski & Vernon, 1992; Lexchin, 2004; Regan, 2008). Nonetheless, as generic medicines capture sales that otherwise go to brand name products, and generic prices are much lower on the whole, substantial savings are generated with generic substitution. The Congressional Budget Office of the United States estimated that eight to ten billion dollars was saved in the U.S. in 1994 by substituting generics for brand name medicines (Congressional Budget Office, 1998).

2.3.4.3 Pharmaceutical market intelligence

Pharmaceutical market intelligence refers to the purchaser’s ability to access authoritative information on international medicines prices (Levison, 2003). With better market intelligence, an organisation will be in an improved position to negotiate with pharmaceutical suppliers and therefore will be able to determine a fairer price for a product (Foster, 1991). Because of the importance of market intelligence, a number of initiatives have been established to share and harmonize medicine price information. These include the development of the International Drug Price Indicator Guide published by Management Sciences for Health (MSH, 2008), the WHO/HAI pricing project, providing data on medicine prices, availability, affordability and price components (WHO & HAI, 2008) and the WHO website with international medicines price guides and national medicines price sources (WHO, 2011). In the Western Pacific Region, a source of “Price Information Exchange” has been established to provide comparative information on procurement prices for selected medicines across regional countries (WHO-WPRO, 2009).

2.3.4.4 Market size and economies of scale

Economies of scale have the potential to bring about significant cost reductions. They reduce management costs and depreciation costs of fixed assets and machinery. Whether these cost reductions are passed on in price reductions depends on the level of competition. Bulk purchases from pooled procurement have proved to be an effective means of obtaining a reduced manufacturer’s price. Examples can be seen from experiences of the Gulf Cooperation Council (ACAME, 1999) and the Eastern Caribbean Drug Service (Huff-Rousselle & Burnett, 1996).

2.4. Policy options for cost containment of medicines

2.4.1 Overview of price controls

Almost all developed countries have exercised some form of medicine price control (Rietveld & Haaijer-Ruskamp, 2002). The US is the only major developed country that does not control medicine prices directly as a matter of policy (Critchley, 2006). However, in the US, Health Maintenance Organizations (HMOs) do negotiate the prices 30 of medicines purchased (Rietveld & Haaijer-Ruskamp, 2002). Developing countries, which often lack any form of health insurance, usually have less regulated pharmaceutical markets (Kees de Joncheere, et al., 2002) and often do not regulate pharmaceutical prices at all (Sengupta et al., 2008).

There is a significant body of literature on policy options for cost containment of medicine prices. Much of this work was undertaken in Europe or in OECD countries (see, for example, Ess, et al., 2003; GÖG/ÖBIG, 2006; Jacobzone, 2000; Moïse & Docteur, 2007a, 2007b; E Mossialos et al., 2006; Mrazek & Mossialos, 2004; OECD, 2008; Paris & Docteur, 2007a, 2007b, 2008; PPRI, 2007a, 2007b; Productivity Commission, 2001; Rietveld & Haaijer-Ruskamp, 2002; Vogler, et al., 2008). Some published studies in China are also available (see, for example, Chen & Schweitzer, 2008; Liu et al., 2000; Meng et al., 2005; Sun et al., 2008; Zhen, 2004). However, only a few studies have been conducted in other parts of the world (e.g. South Africa, India, Singapore, Malaysia, the Philippines and Pakistan) such as those by Gray & Matsebula (2000), Sengupta, et al. (2008), Thatte, et al. (2009) and Jirawattanapisal, et al. (2009). A brief summary of medicine pricing, financing and public procurement in Western Pacific Region countries can be found at www.piemeds.com (WHO-WPRO, 2009).

According to Vogler, et al. (2008, p. 58), pricing policies are defined as “regulations or procedures used by government authorities to set or limit the amount paid by purchasers or the amount received by sellers”. Pricing systems which are not regulated or influenced by government authorities and are set by manufacturers, wholesalers or pharmacy retailers are considered ‘free’ or ‘market-based’ (GÖG/ÖBIG, 2006; OECD, 2008; Vogler, et al., 2008). ‘Free pricing’ is adopted in markets for OTC medicines, which are not subject to reimbursement in most OECD countries. For reimbursable medicines, their prices are often regulated and controlled, either directly or indirectly (de facto) (OECD, 2008).

In the outpatient sector, price controls are often exercised in the form of statutory pricing whereby prices are set by the competent authorities on a regulatory, unilateral basis or by price negotiation between the competent authorities and pharmaceutical companies. A combination of statutory pricing and price negotiation, whereby negotiations are an integral part of the statutory pricing is also used in Estonia, Latvia

31 and Poland (GÖG/ÖBIG, 2006; Vogler, et al., 2008). In the inpatient sector, public procurement through either a tendering procedure that grants the contract to the best tenderer, or by direct negotiation with manufacturers, serves as a common means of exercising price controls (GÖG/ÖBIG, 2006; Jacobzone, 2000).

Indirect price controls do not directly fix selling prices. Pharmaceutical manufacturers, wholesalers and retailers are free to price their products. However, when they want to sell their medicines to reimbursement systems, profit limits for the companies are set (profit control) (E Mossialos, et al., 2006; Mrazek & Mossialos, 2004). In cases where profits exceed a certain level; the company is required to reduce profits by cutting prices or repaying excess profit to the purchasers, thus stimulating supply-side cost containment. Another indirect approach is to set price ceilings for reimbursable medicines. Only the cost of listed medicines up to a certain reimbursement price is then subsidized. This approach, described by the Productivity Commission (2001) as reimbursement pricing systems, attempts to stimulate demand-side cost containment by shifting the difference between the real price of the medicine and the reimbursement price to the consumer (Aaserud, et al., 2006; Ess, et al., 2003; E Mossialos, et al., 2006).

Unlike the indirect approach, direct price controls are applicable not only for reimbursed medicines, but also for other groups of products, and they may apply broadly to all pharmaceuticals in the market (E Mossialos, et al., 2006). Direct price controls target the supply side (i.e. the price side of the expenditure equation) (Jacobzone, 2000; Mrazek & Mossialos, 2004; OECD, 2008). These price controls set fixed maximum prices at various levels of the pharmaceutical supply chain, namely the ex manufacturer/ex importer level, the wholesale level, and the retail/pharmacist level (Rietveld & Haaijer-Ruskamp, 2002). Often, medicine prices are first set at the ex manufacturer/ex importer level, and then further controlled at subsequent points (i.e. wholesale and pharmacy retail) through regulated mark-ups. However, prices can also be set at the wholesale level or at the retail level.

Nevertheless, the most difficult task in developing any price control system is to establish what is seen to be a reasonable, fair and appropriate price limit or reimbursement ceiling (Rietveld & Haaijer-Ruskamp, 2002). Countries differ in defining a ‘reasonable’ maximum price, depending on a number of factors including

32 budget limits, prescribing behaviour, patterns of use and the importance of the pharmaceutical industry to the national economy (E Mossialos, et al., 2006). Techniques used to calculate reasonable maximum prices for price regulation or reimbursement also vary. However, combinations of two or more of the following techniques are most commonly used: (1) external price benchmarking, (2) internal price referencing, (3) cost plus pricing, (4) economic evaluation, (5) price negotiations and (6) profit ceilings (Jacobzone, 2000; OECD, 2008; Productivity Commission, 2001; Rietveld & Haaijer- Ruskamp, 2002; Vogler, et al., 2008).

2.4.1.1 External price benchmarking

External price benchmarking is also termed comparative pricing (Rietveld & Haaijer- Ruskamp, 2002), international price benchmarking (Productivity Commission, 2001), or external price referencing (Vogler, et al., 2008). In external price benchmarking systems, international price comparisons with various ‘country baskets’ are used to limit the market entry price, reimbursement price and price increases for an identical or similar medicine (i.e. one containing the same active ingredient) in the domestic market (OECD, 2008; Rietveld & Haaijer-Ruskamp, 2002). The methodology applied for external price benchmarking among countries varies according to the perspective of regulators, purchasers and payers. The essence of external price benchmarking, however, is to determine how prices should differ across each jurisdiction (OECD, 2008).

Three important issues are often taken into consideration when developing an external price benchmarking system. The first issue is what, and how many, comparator countries should be included in the comparator country baskets. Some of the criteria for selecting comparator countries have been outlined by Critchley (2006), OECD (2008) Vogler, et al. (2008). They may include the following:

- Geopolitical and economic considerations (i.e. countries with similar economic comparability and/or geographic proximity) as well as historical links. For instance, as comparators for their country baskets, the Baltic states have selected the other Baltic states, while Central and Eastern European countries have chosen other Central and Eastern European countries;

- Medical considerations (i.e. countries with similar coverage of public health insurance, relative importance of domestic pharmaceutical production and importation); - The level of investment by the pharmaceutical industry. For example, Canada implicitly selected comparator countries that shared its goals of encouraging innovation in the pharmaceutical sector and the domestic presence of a highly invested pharmaceutical industry; and - The average price level for pharmaceuticals. For example, lower income countries have tended to choose other low-price countries, while more wealthy countries have often referred to other high-price countries in their reference baskets. Other countries, such as Canada and Cyprus, have created baskets with a mix of low- and high-price countries.

In general, the basket often consists of about five to ten comparator countries. For example, among countries that participated in the Pharmaceutical Pricing and Reimbursement Information (PPRI) project, six countries had four reference countries, and four countries had nine reference countries in their country baskets. Only Austria and Belgium referred to all other EU Member States. Given the difference in the availability of particular medicines across countries, it has been recommended that as many as 10 reference countries should be included in the basket (Critchley, 2006). Some countries (e.g. Cyprus) have even defined in detail procedures in case of non- availability of the reference medicine on the market (Vogler, et al., 2008).

The second issue is the level at which prices are compared. Most European countries have used ex-factory price for comparison as this approach eliminates the price differences caused by differences in distribution mark-ups (GÖG/ÖBIG, 2006). However, wholesale prices are used in countries such as Finland, Latvia, Netherlands and Slovenia, whereas pharmacy retail price is used in Luxembourg and Slovakia. Poland uses both wholesale and pharmacy retail price for comparison in the external price benchmarking system (ibid.).

The final issue is how to calculate the benchmark price. According to Vogler, et al. (2008), the most common method used has been to take a price average, meaning the proposed price of the candidate medicine is not allowed to exceed the average price in

34 the reference countries (e.g. in Austria, Ireland and the Netherlands). The benchmark price can also be a fixed per cent of the average price in reference countries (e.g. in Slovenia, the benchmark price is 85 per cent for patented, locally produced medicines and 96 per cent for locally produced generics). In some countries, the benchmark is the lowest price (e.g. in Bulgaria and Greece), or the average of the three lowest prices in the basket (e.g. in Norway). In Slovakia, the benchmark is the average of the three lowest prices among comparator countries plus 10 per cent (OECD, 2008).

2.4.1.2 Internal reference pricing

Internal reference pricing involves comparison with the prices of therapeutic comparators already on the market within a country (GÖG/ÖBIG, 2006; OECD, 2008; Vogler, et al., 2008). The essence of the system is how to value differences across products, particularly with respect to claimed incremental improvements of one medicine to another (OECD, 2008). Also termed internal price referencing, this is commonly used to set market entry price (e.g. eight EU Member States use this approach in the pricing process), and it is even more common in defining reimbursement price (e.g. 17 EU Member States have implemented a reference price system - a typical example of internal reference pricing - in their reimbursement process) (GÖG/ÖBIG, 2006). A thorough account of reference price systems is given in section 2.4.3.2. The following section describes the use of internal reference pricing to regulate the price of original products at market entry as well as of generic entrants at the time of inclusion in the reimbursement list.

According to the OECD (2008), internal reference pricing is often used by pricing authorities as a guide to pricing new products that have therapeutic comparators, of which examples are Canada, France, Japan and Switzerland. If the new product is assessed to be innovative with substantial improvement over the existing therapeutic alternatives in terms of efficacy, safety or cost savings, it will be granted a higher price than those of pre-existing comparators (known as the premium price). For example, depending on the innovative level, in Japan a medicine may be classified as: Innovativeness Premium (very innovative), Usefulness Premium I (less innovative) and Usefulness Premium II (minor therapeutic improvement) with a premium price of 70- 120 per cent, 35-60 per cent and 5-30 per cent, respectively, greater than the comparator

35 price. By contrast, if the medicine is deemed to have little or no added therapeutic value over existing therapy, its price is limited to that of therapeutic comparators (OECD, 2008).

Internal reference pricing is also used to regulate the price of generic medicine entrants when they are listed for reimbursement. This practice, which is known as generic price linkage, requires generic medicines to be priced at a specified percentage below the price of the innovator brand product if they are listed for reimbursement. For example, for inclusion in the reimbursement list, generic medicines in France (since 2006) at market entry have had to be priced at less than 50 per cent of the price of the off-patent original preparation (ibid.).

2.4.1.3 Cost plus pricing

In cost plus pricing procedures that are based on production cost, R&D cost and other costs provided by companies; a fixed mark-up will be granted to form the price of individual medicines. Before 1994, Italy applied this form of direct price control by using a formula based on the costs of raw materials weighted by other factors including disease, innovation, manufacturing technology, and the economic impact of the product (Garattini et al., 1994). In Spain, the maximum ex-factory price of a listed medicine is determined by production costs plus a standard rate of return set at 10 to 12 per cent (OECD, 2008). Ecuador regulates the price of locally produced medicines by allowing a 20 per cent margin added to the production cost. With imported medicines, the 20 per cent margin will be added to the landed costs (often cost, insurance and freight prices) plus operating costs (Gray & Matsebula, 2000). However, because of its limitations, cost plus pricing is currently only used in a few EU Member States including Cyprus, the Czech Republic and Greece (GÖG/ÖBIG, 2006). Some Asian countries also use cost plus pricing, including India (Sengupta, et al., 2008) and China (Sun, et al., 2008).

The first limitation is the difficulty in verifying the information on costs and profit margins of companies (Rietveld & Haaijer-Ruskamp, 2002). It is difficult to allocate overhead and research costs to individual medicines. Companies can also easily manipulate their costs by transfer pricing (Gray & Matsebula, 2000), especially in the case of a daughter firm of a multinational corporation. The second limitation is that, being static, the cost plus pricing system prevents regulators and companies from 36 prompt adjustment to changes in market conditions (Rietveld & Haaijer-Ruskamp, 2002). Finally, cost plus arrangements fail to provide incentives for companies to improve efficiency and reduce costs, thus weakening their competitive position compared with their counterparts abroad (ibid.). Nevertheless, the lower average prices of medicines in countries when they used strict cost plus pricing, such as Italy and Spain, compared with that of the European Union, suggests that this approach may have some advantages (Bloor et al., 1996).

2.4.1.4 Pharmaco-economic evaluation

Pharmaco-economic evaluation is the comparison of two or more therapies in terms of their costs (expressed in monetary terms) and their outcomes (expressed in terms of monetary value, efficacy or enhanced quality of life) (Productivity Commission, 2001). The main question posed is whether it is worth spending an additional amount of money to achieve the additional benefits offered by the new medicine compared with the existing product or therapy (Robertson et al., 2003). According to Drummond et al. (2005), four main types of pharmaco-economic evaluations have been applied in the assessment of medicine pricing, these being: Cost-Minimization Analysis, Cost-Benefit Analysis, Cost-Effectiveness Analysis, and Cost-Utility Analysis with each adopting a differing means for measuring outcomes.

In Cost-Minimisation Analysis, the costs of two or more therapies with identical outcomes (e.g. an identical reduction in mortality rates for patients) are compared to select the less costly treatment. In Cost-Effectiveness Analysis, the costs per unit of outcome of therapies are compared where therapies have the same outcome, but the outcome can be achieved to different degrees and measured in ‘natural units’ such as mm Hg or symptom free days. Both Cost-Benefit Analysis and Cost-Utility Analysis compare therapies that have multiple outcomes which may be achieved to different degrees. The difference is that in Cost-Benefit Analysis, outcomes are expressed in monetary terms to compare with monetary cost, in order to select the therapy that provides the largest net monetary benefit. In Cost-Utility Analysis however, outcomes are measured in non-monetary terms, such as the improvement in health status, which is often quantified as the Quality Adjusted Life Years gained (QALYs). Thus, it is used to

37 select the therapy that minimises cost per QALY gained (Drummond, et al., 2005; McKie, et al., 1998 cited in Productivity Commission, 2001, pp. 23-24).

Most European and OECD countries have used pharmaco-economic evaluation in their pricing and reimbursement decisions to varying degrees (Michael Dickson et al., 2003; GÖG/ÖBIG, 2006). Many of them have undertaken this technique on an ad hoc basis (Productivity Commission, 2001), but it has become mandatory in a number of countries. In Europe until 2004, only Finland officially incorporated pharmaco- economic evaluation into its price-setting mechanism (Mrazek & Mossialos, 2004). Now, Austria, Germany, Hungary, Ireland, the Netherlands and Norway all include pharmaco-economic evaluations as one of several criteria assessed for reimbursement purposes by the respective authorities (OECD, 2008).

The pioneer of this approach however was Australia. Since 1993, Australia has made pharmaco-economic evaluation mandatory in the reimbursement process (Productivity Commission, 2001). Around 37 per cent of medicines listed on Australia’s Pharmaceutical Benefits Scheme (PBS) have been subjected to pharmaco-economic evaluation (Birkett et al., 2001). The evaluation system in Australia is considered to be amongst the most developed (Rietveld & Haaijer-Ruskamp, 2002), and stringent in the world (Productivity Commission, 2001). Using a similar threshold at which products are considered cost-effective (cost per QALY), the Pharmaceutical Benefit Advisory Committee (PBAC) in Australia rejects a higher proportion of medicine applications with lower cost per QALY values than does the National Institute of Clinical Excellence (NICE) in the UK (Henry et al., 2005).

Although promising, pharmaco-economic evaluation is considered a developing field in which standard guidelines for measuring cost-effectiveness of new medicines need to be developed and consolidated (Rennie & Luft, 2000). In addition, many problems may occur when pharmaco-economic studies use data from randomised control trials conducted by pharmaceutical companies (O'Brien, 1996). A review of submissions to the Australian pharmaceutical benefits scheme conducted by Hill et al.(2000) showed that, of a total of 326 submissions received between January 1994 and December 1997, 218 (67 per cent) had “significant problems” and 31 had more than one problem. Therefore, only countries having first class experts in a range of disciplines (e.g.

38 pharmacology, epidemiology, biostatistics and medicine) can carry out systematic pharmaco-economic evaluation (OECD, 2008; Rietveld & Haaijer-Ruskamp, 2002). In some other countries, lack of resources prevents them from properly carrying out pharmaco-economic evaluation, although it is still often one of several criteria assessed for reimbursement decisions (Kaló et al., 2008; Moïse & Docteur, 2007a).

2.4.1.5 Price negotiations

In pharmaceutical markets, individual patients, as noted previously, are in a very weak position to enter into realistic price negotiation with medicine suppliers. By contrast, institutional buyers such as governments, health insurers and hospitals, by virtue of their monopsonistic position and high price sensitivity due to budgetary constraints, technical expertise and information, have considerable bargaining power in negotiation with the suppliers. Using the right to include or exclude a medicine from the reimbursement system to negotiate medicine prices with suppliers is a common way for pricing and reimbursement authorities to exert leverage in price negotiations.

Some countries (e.g. Austria, France, Spain and Sweden) have used negotiation models for products with high sales potential under price-volume trade-off agreements with individual companies (Mrazek & Mossialos, 2004). As condition of entry of a product, the government negotiates a set price for reimbursement based on a sales forecast. If the actual sales exceed that forecast, the company is required to pay a rebate. Various negotiation models can also found in the US where Health Maintenance Organizations negotiate medicine prices used to treat beneficiaries (Rietveld & Haaijer-Ruskamp, 2002). The ability to negotiate is greatly enhanced when therapeutic substitutes are available. If there is no therapeutically interchangeable product and the supplier has a monopoly due to patent protection, bargaining power resides with the supplier.

2.4.1.6 Profit ceilings

The setting of profit ceilings is one alternative to fixing cost margins, as in cost plus pricing systems. In the profit control method, a ceiling on the return on capital of the company as a whole is set (Rietveld & Haaijer-Ruskamp, 2002). This avoids the need to separate the costs of R&D and other costs for each product (Hutton et al., 1994) although the difficulty remains regarding industry transparency of earnings and costs. 39

One of the noticeable shortcomings of profit controls is that it may result in perverse incentives (Bloor, et al., 1996). When profits are threatened by reduced sales, companies may actually increase prices to maintain profitability, thus undermining the efforts of authorities to control costs.

A typical example of profit control is the Pharmaceutical Price Regulation Scheme (PPRS) in the United Kingdom. The PPRS is based on periodic negotiation between the Department of Health and the Association of the British Pharmaceutical Industry and is reviewed every few years (Mrazek & Mossialos, 2004). Companies within the scheme are free to set their market entry prices but their return on capital, or the return on sale for those companies that do not have major capital investments in the United Kingdom is capped. Companies can apply for price increases if they miss their targeted return. In each year, they can retain up to 40 per cent over the originally permitted return if none of their products has experienced price increases in the year. However, if profits exceed a certain level, the company will be required to reduce profits by cutting prices, repaying the excess profits to the Department of Health or delaying or restricting previously agreed future price increases (ibid.).

2.4.2 Price controls along the supply chain

2.4.2.1 Price controls at ex manufacturer/ex importer level

Generally, direct price controls focus on defining the maximum ex-factory price or the cost, insurance, and packaging (CIP) price in the case of an imported medicine at market entry, using a combination of some of the above techniques. Upon entering the market, medicine prices can be further controlled by limiting price increases against inflation. According to the OECD (2008), in a number of countries including Switzerland price increases are permitted but pharmaceutical companies are required to file an application providing a rationale for the price increase. In Canada, price increases are limited to inflation; and the United Kingdom does not allow price increases in the year following market entry. Germany does not control price increases, but on occasions has imposed price freezes and regularly demanded across-the-board rebates to tackle deficits of the health insurance funds. Price-freeze and price-cut measures have also been commonly employed, depending on circumstances, in a

40 number of countries such as the United Kingdom, Germany, Switzerland, Italy, Greece and Spain (Ess, et al., 2003). In Australia, mandatory price cuts have been recently introduced (Doran & Robertson, 2009), mainly for generics listed on the Pharmaceutical Benefits Scheme.

2.4.2.2 Price controls at wholesale and pharmacy retail level

Medicine prices at the wholesale and retail level can be controlled in two ways. The first is to directly fix these prices using one or other of the techniques discussed above. Countries fixing wholesale prices include Denmark, Finland, Latvia, Poland, Netherlands, Norway, and Sweden. Countries fixing retail prices include Luxembourg and Slovakia (Vogler, et al., 2008). The second way is by fixing the ex-factory price and then regulating the distribution margins on both wholesale mark-ups and retail mark- ups.

If the wholesale price is set, regulated retail mark-ups are needed so that the retail price is also indirectly fixed. However, if the retail price is set, preceding mark-ups further down the supply chain may not need to be controlled. In this case, manufacturers, importers, wholesalers and pharmacy retailers can negotiate with each other on their charges and margins (Rietveld & Haaijer-Ruskamp, 2002). In Luxembourg and Slovakia, while the retail price is set, retail and wholesale mark-ups are also regulated. Therefore, wholesale price and ex factory price are indirectly fixed (Vogler, et al., 2008).

Different methods have been developed to regulate distribution margins. Fixed or capped mark-ups on the ex-factory price and on the wholesale price are common methods to regulate wholesale and retail margins respectively (OECD, 2008). In the fixed mark-up procedure, wholesale or retail mark-ups are regulated in the form of a fixed percentage (e.g. 30 per cent) added to the ex-factory price or wholesale price. In the capped mark-up method, mark-ups may vary provided that they do not exceed the cap. Another common approach to regulating distribution margins is regressive mark- ups where the percentage mark-up decreases when medicine prices increase (GÖG/ÖBIG, 2006; Vogler, et al., 2008).

For retail margins, apart from controlling mark-ups, countries can opt for payment of fixed fees to remunerate pharmacists’ services separately (OECD, 2008). Remuneration of dispensing pharmacists can be a fixed sum per patient per year (for example, in capitation systems) or a fixed sum per prescription dispensed. The overall objective of these systems is to make the remuneration of pharmacists independent of the volume and the price of the medicines dispensed (Huttin, 1996), thus removing the incentive for supply driven demand.

The effectiveness of these mark-up mechanisms, however, depends on the follow-up activities of governments. In Costa Rica, for example, lack of controls and monitoring systems to enforce the mechanism resulted in loss of effectiveness although the mark-up control scheme had been in force for twenty years (WHO, 1995). Another difficulty in applying these mechanisms is that pharmacists may negotiate discounts on the wholesale price of a medicine (Rietveld & Haaijer-Ruskamp, 2002). Gray and Matsebula (2000) also asserted that pharmaceutical companies are willing to do this, and that they often offer discounts or rebates to preferred customers for their loyalty or for bulk purchases. This is why the official mark-up rate often differs from the actual mark-up in the market. To address the problem, some countries (such as Denmark) have forbidden wholesalers and pharmacies from offering or accepting discounts. In Australia, the government shared in the benefits of generic discounts on offer to pharmacists by demanding lower prices. Other countries, including the United Kingdom and the Netherlands, have introduced “claw back” systems to pull back these discounts to the National Health Services or its equivalent (Rietveld & Haaijer-Ruskamp, 2002).

2.4.3 Reimbursement measures

In most developed countries, governments fully or partly subsidize the consumption of medicines for social welfare and equity reasons for some or all of their population (OECD, 2008; Productivity Commission, 2001; Vogler, et al., 2008). In countries that have established extensive subsidy arrangements for the majority of the population, or those characterized by a national health service rather than social insurance, the government is essentially the only provider and, thus possesses significant market power (OECD, 2008). To limit pharmaceutical expenditure and to manage medicine consumption, governments may use their market power in a number of ways.

2.4.3.1 Positive list or formulary systems

The most common approach is to define a list of those medicines eligible for reimbursement, often called a positive list or formulary (OECD, 2008; Rietveld & Haaijer-Ruskamp, 2002). The way of establishing such a list varies. Some countries, such as Switzerland and Slovakia, include on the list all medicines that have been approved for marketing by regulatory authorities once a decision about price and/or reimbursement price has been taken (Kaló, et al., 2008; Paris & Docteur, 2007b). Others such as Australia, New Zealand, and some parts of Canada (the provinces of British Columbia and Ontario), require the medicine to meet various additional criteria such as cost-effectiveness in order to be listed (Productivity Commission, 2001). The definition of a positive list or formulary may, for some items, specify the particular clinical condition for which the medicine is to be used (OECD, 2008).

Despite the variation in defining a positive list among countries, the principal rule is that the criteria for medicines to be listed on the schedule of benefits should be objective, transparent, statutorily laid down, consistently applied and be by generic name (Rietveld & Haaijer-Ruskamp, 2002). Similar criteria developed by WHO in drawing up its model lists of essential medicines may be applied to avoid threatening patients’ interests due to the limitations placed on the range of reimbursed medicines. Some of the more common dilemmas faced include what particular medicines or therapies should be selected and which conditions should be included for treatment. When all the criteria are met, a draft reimbursement list can be considered with reference to budget availability and financial consequences (ibid.).

Technical concerns also arise when decisions are made either to list or de-list medicines. With the advent of a new medicine with incremental therapeutic improvements over existing medicines, the basic listing issue is whether the improvement is worth the price difference. Although rarely used, pharmaco-economic evaluation is considered useful and important in this context to inform decision-making (Walkom et al., 2006). In many countries, the positive list is updated at short intervals, for example on a monthly basis as occurs in Belgium, Finland and Ireland, or every two weeks in Denmark (Vogler, et al., 2008).

Likewise, de-listing becomes a consideration when the price of a medicine on the positive list increases to a point where the comparative price difference is no longer commensurate with its merits, or where the medicine may have become therapeutically obsolete (Rietveld & Haaijer-Ruskamp, 2002). De-listing criteria need to be the same as those used for listing new medicines.

A variation of the positive list is a negative list which essentially outlines product exclusions rather than inclusions (ibid.). In countries using a negative list, all medicines are automatically reimbursed upon market authorization provided they are not placed on the negative list. A negative list is used in only a few countries, such as Germany, Hungary, Japan, and the UK (OECD, 2008; Vogler, et al., 2008).

2.4.3.2 Reference price systems

In a reference price system, medicines that are therapeutically interchangeable may be grouped together to form a reference group. A single reference price for reimbursement purposes is set for the entire reference group using the internal reference pricing technique. Medicines in the reference group are reimbursed at the lower end, between their retail price and the reference price, except for ordinary co-payment. In cases where the retail price of a medicine is higher than the reference price; the patient has to pay the difference. Therefore, if manufacturers decide to sell their medicines at a higher price than the reference price, they face the risk of losing market share to the cheaper, more highly subsidized products (Aaserud, et al., 2006; Productivity Commission, 2001; Vogler, et al., 2008).

Four main issues need to be taken into consideration when using a reference price system. The first issue is how to organize a reference group. The Anatomical Therapeutic Chemical (ATC) classification system is often used to group medicines. The reference group can be organized based on the ATC 5 level: products with the same active ingredient, such as generic groups. Canada (Ontario), Denmark, Italy, Norway, Sweden, Spain and the US (Medicaid) have all used this approach (Aaserud, et al., 2006; Productivity Commission, 2001). Medicines can also be grouped based on the ATC 4 level: products that are chemically slightly different, but therapeutically equivalent, such as medicines in the statin group. This approach has been used in Australia, Czech Republic, Germany, Hungary, New Zealand and Slovakia (Löfgren, 44

2007; OECD, 2008; Vogler, et al., 2008). Germany goes even further by grouping medicines that are therapeutically similar, but not equivalent (e.g. all medicines for hypertension, or all anti-depressants) (Aaserud, et al., 2006; Paris & Docteur, 2008). Latvia, the Netherlands and Poland group medicines based on a mix of ATC 3, 4 and 5 (Vogler, et al., 2008).

The second issue is type of product. In most OECD countries, the reference group consists only of off-patent medicines (Productivity Commission, 2001). These medicines are usually generics, but may also be ‘me-too’ products. Parallel imported medicines where available are often included in the group (Vogler, et al., 2008). In other countries such as Australia, New Zealand, Canada (British Columbia) and Germany, both patented and off-patent medicines are included in the reference group (Productivity Commission, 2001; Vogler, et al., 2008). In these countries, apart from reference price systems, a range of other factors is taken into account when determining reimbursement prices for new innovative medicines, including production and R&D costs, the therapeutic value of the medicine and the level of innovation over existing alternatives (Productivity Commission, 2001).

The third issue is defining the reference price. Some countries such as Australia, New Zealand and Sweden fix the reference price at the level of the lowest priced product in the group (Moïse & Docteur, 2007b; Productivity Commission, 2001). Others set the reference price by taking the average price of all medicines within a reference group (Burstall et al., 1999). Germany uses an econometric model to convert standard prices of medicines in the reference group to reference prices, and uses the median as the reference price level (López-Casasnovas & Puig-Junoy, 2000).

The fourth issue is that a reference price system needs to be regularly updated to include new generic alternatives when a patent expires. Update intervals can be six monthly (e.g. Belgium, Czech Republic), quarterly (e.g. Estonia, Slovakia, Portugal), monthly (e.g. Italy, Sweden) or fortnightly (e.g. Denmark) (Moïse & Docteur, 2007b; Vogler, et al., 2008). Although reference pricing systems have been shown to limit the use of expensive medicines (Aaserud, et al., 2006), they may also provide an incentive for lower priced medicines to adjust their price upward to the reference price. For such reasons, it is considered that reference pricing should be used in combination with other

45 measures such as requiring official approval of price increases only on reasonable grounds (Rietveld & Haaijer-Ruskamp, 2002), or by initiating compulsory generic substitution (Vogler, et al., 2008).

2.4.3.3 Index pricing systems

In index pricing systems, therapeutically interchangeable medicines are grouped to form an index group which can be considered as a variation on the principle of reference pricing. However, the difference is that in an index price system, the maximum refundable price to pharmacies for medicines in the index group is calculated based on the volume weighted average of price of each medicine and is usually updated frequently, for example quarterly (Brekke, 2003 cited in Aaserud, et al., 2006). Irrespective of which medicines pharmacies dispense, they will be refunded the index price and allowed to keep the difference between the index price and the retail price of the medicine dispensed. Index pricing provides an economic incentive to dispense the medicine with the lower price in the index group. This then leads to a lower index price in the next regular update due to a change in the basket mix of indexed medicines provided. While the third party payer enjoys the lower medicine expenditure because of a lower index price, the increase in the dispensing of cheaper medicines creates incentives for producers to lower their prices if their market share is not to be lost. The index pricing system also has the theoretical potential to drive down prices of the group to a minimum economic floor level.

2.4.3.4 Co-payments

Co-payments, also known as cost-sharing mechanisms, are the most commonly used approach to influence patient demand directly. In co-payment systems, patients are obliged to contribute directly to the costs of the reimbursable medicines they use (OECD, 2008; Rietveld & Haaijer-Ruskamp, 2002). Co-payments aim to increase consumer price sensitivity, thus moderating demand for medicines which are of little or marginal utility to the patient. Co-payments also reduce some of the financial burden to society as a whole by shifting one part of medicine financing directly to the patients themselves (Doran & Robertson, 2009). Four main types of co-payments have been identified as follows (GÖG/ÖBIG, 2006; Vogler, et al., 2008).

The first type is fixed co-payments/prescription fees in which patients are required to pay a fixed fee for each reimbursable medicine item. Prescription fees may vary across different reimbursement categories, or be a single fee for specific reimbursement category. For example, in Australia in addition to any brand premium, a patient is required to pay a fixed maximum amount and the government pays the remaining cost. Co-payment thresholds are adjusted on 1 January each year in line with the Consumer Price Index (CPI), currently set at AUD 5.60 for a concession patient (e.g. aged pensioners and unemployed people) and AUD 34.20 for a general patient (all other consumers) in 2011 (Australian Government Department of Health and Ageing, 2011a). This approach is also used in seven countries that participated in the Pharmaceutical Pricing and Reimbursement Information (PPRI) project: Austria, Estonia, Finland, Italy, Poland, Slovakia, and the United Kingdom (Vogler, et al., 2008).

The second type is percentage co-payments in which co-payments are set in the form of a specified percentage of the total cost of a prescription. For instance, if a medicine is 90 per cent reimbursed, the co-payment is 10 per cent of medicine cost. There are 21 out of 27 PPRI countries that use this approach (ibid.).

The third type is deductible co-payments, also known as a graduated cost-sharing scheme (OECD, 2008). Under this scheme, a fixed amount paid by the patient for a defined period (often one year) is set, below which no reimbursement will be granted. For example, Sweden sets a threshold level for out-of-pocket spending for one year. Over the course of a year, patients pay the full cost of reimbursable medicines until the threshold is reached. After that, patients have to pay a diminishing fraction of the cost when their cumulative spending increases, until a maximum is reached (ibid.).

Finally, in a reference price system, co-payments are the difference between the reference price and the actual pharmacy retail price. This type of co-payment in Australia’s reference price system is named the brand premium or therapeutic group premium (Productivity Commission, 2001).

When co-payments are in place, they add to the patient’s financial burden and may place a potential barrier to safe and timely use of prescription medicines (Doran et al., 2004), and in some cases, they are high enough to impair use of medicines (Paris & Docteur, 2007a). Therefore, mechanisms to protect vulnerable groups such as the 47 chronically ill, children, elderly people, and people with low income are necessary. Almost all European and OECD countries have introduced some mechanisms to exempt, reduce or limit the co-payment for some or all of their population. For example, Hungary and Portugal have a 100 per cent medicines reimbursement scheme for their poor and/or chronically ill people, and Belgium and Estonia provide their poor people with higher reimbursement rates than the standard rate (Vogler, et al., 2008). Australia has introduced a much lower maximum co-payment for a Pharmaceutical Benefit Scheme (PBS)-listed medicine for concession patients than for general patients, together with a “safety net” designed to protect patients from excessive medicine bills (Doran & Robertson, 2009). Similarly, Sweden has set an annual payable out-of-pocket ceiling. Patients only have to co-pay for their medicines until the cumulative amount spent in a year reaches the ceiling. All spending above the ceiling is fully reimbursed (OECD, 2008).

Another factor that needs to be taken into account is that variable co-payments may steer the use of medicines toward products with a lower co-payment. Therefore, to avoid reduction of use of important medicines, governments and third party payers often charge differential co-payments, with lower co-payment rates for important medicines. For example, Belgium classifies medicines into A, B, C, Cs and Cx categories with reducing levels of medical and therapeutic importance and increasing co-payment rates (PPRI, 2007a). Those in category A, which are considered vital medicines (e.g. for treatment of diabetes or cancer) are fully reimbursed. Therapeutically important medicines such as antibiotics, cardiovascular medicines are in category B and have a co- payment rate of 25 per cent, whereas there is an 80 per cent co-payment for contraceptive medicines in category Cx.

Differential co-payments are often intentionally used to steer people towards cheaper products to reduce the total pharmaceutical reimbursement budget. For example, by charging higher co-payments for innovator brand medicines, Switzerland stimulates demand for cheaper generics instead of expensive innovator brands (OECD, 2008). The special form of co-payment associated with a reference price system (i.e. patients co- pay the difference if they prefer to use innovator brand medicines rather than generic products) has a similar impact on changing the mix of pharmaceuticals consumed toward cheaper products in the reference group.

2.4.3.5 Generic substitution

Insisting on the availability of equivalent generic substitution for out of patent medicines is an effective means of reducing costs. Reimbursement schemes can require prescribing doctors to only specify the generic name on the prescription or authorise patients to elect equivalent generic items on dispensing in return for a reduced price. However, generic names may be more difficult to recall than the heavily promoted brand names. Moreover, in the case of combination products, prescribing by generic name may become too complicated (Rietveld & Haaijer-Ruskamp, 2002). Therefore, more often, generic substitution is regulated through generic dispensing policies that allow pharmacists to substitute the prescribed medicine with a generic product (OECD, 2008).

Generic substitution varies across countries. While some countries, such as Australia and Hungary, allow generic substitution but do not make it compulsory (Australian Government Department of Health and Ageing, 2011c; PPRI, 2007b), others such as Sweden and Germany, require pharmacists to substitute a cheaper medicine whenever possible, unless the generic substitution is forbidden by the prescribing clinician (Moïse & Docteur, 2007b; Paris & Docteur, 2008). Substitution is usually for the same substance, strength and form (i.e. generic groups) (PPRI, 2007b). However, it may also be undertaken among therapeutically interchangeable products as in therapeutic interchange programs commonly used in the US Veterans Health Administration (VHA) (Hoadley, 2005). For example, within the VHA’s statin class, lovastatin is selected as the preferred agent. Patients using other statins such as simvastatin or pravastatin were all switched to lovastatin. In addition to the requirement for generic substitution, some forms of incentive may be developed to stimulate cheaper generics dispensing, an example being index pricing systems discussed in section 2.4.3.3.

Experience with generic substitution demonstrates that this policy can only achieve its goals if the quality of generic medicines is assured in terms of therapeutic equivalence with the innovative brand (Rietveld & Haaijer-Ruskamp, 2002; WHO, 2004a). Education for both health professionals and the public alike based on objective scientific evidence is necessary to counter distrust regarding bioequivalence. Finally, financial incentives for prescribing doctors, dispensing pharmacies and patients need to be in

49 place. Busse, et al.(2005) showed that, although generic substitution has been obligatory in Germany since 2002, lack of financial incentives and follow-up action when pharmacists do not substitute medicines appropriately, has meant that the generic substitution rate has been only 7.6 per cent.

2.4.3.6 Other measures influencing demand

A number of other ancillary measures have also been used to influence demand. These actions focus on changing physicians’ prescribing behaviour and educating consumers. Standard treatment guidelines are commonly used in European countries to assist physicians in making decisions about the appropriate treatment for specific conditions (Ess, et al., 2003; Vogler, et al., 2008). Clinical audits and medicine utilization reviews are often conducted to provide feedback performance to prescribers compared with group performance and with the prescribed standard treatment guidelines (OECD, 2008). In Australia, as a quality use of medicine strategy, the National Prescribing Service (NPS) was formed to provide an independent information source to health professionals and consumers (Liaw & Peterson, 2009). Through its Education and Quality Assurance Program for health professionals, a number of case studies, clinical audits and prescribing practice reviews have been conducted (NPS, 2011). The National Prescribing Service has also undertaken national media awareness campaigns and community-based information programs to allow patients to partner with health professionals in making better use of medicines (Robertson, 2007).

By defining the positive list or formulary, governments and third party payers may limit coverage to a specific use among a range of indications for a medicine (Rietveld & Haaijer-Ruskamp, 2002). The use of expensive reimbursable medicines may also be controlled by requiring prescribers to obtain permission from authorities prior to prescribing them, as happens in Australia for certain restricted medicines (Australian Government Department of Health and Ageing, 2011b). The quantity of reimbursed medicines may be limited by setting a maximum total quantity of medicines or a maximum duration of therapy per prescription where clinicians are allowed to prescribe medicines for a specified period (ibid.). Budgeting and General Practitioner (GP) fund holding, in which global financial ceilings on health care expenditure are set at regional

50 or individual GP levels, have also been used in Germany and the UK (Ess, et al., 2003; Rietveld & Haaijer-Ruskamp, 2002).

Educational approaches such as outreach by experts, and mechanisms involving visits and counselling are among the most effective strategies to change prescribing behaviour (Cantillon & Jones, 1999; Grol & Grimshaw, 2003). May, et al. (1999) found that a continuing education and support service using mainly academic detailing methods for community medical practitioners contributed to sustained changes in prescribed NSAID use, with a 70 per cent reduction in hospital admissions over a five-year period in a particular area of metropolitan Adelaide, Australia.

2.4.4 Evaluation of pricing and reimbursement policies

A systematic search in numerous databases including MEDLINE/EMBASE, Science Citation Index and websites by Aaserud et al. (2006) identified and retrieved a total of 246 papers in full text relating to the assessment of the effect of pharmaceutical pricing and reimbursement policies in meeting global health policy goals. However, most of them (226) were primarily reviews, editorials, modelling studies, cross-sectional studies and before and after studies without a control group. Among the remaining 20 papers with a study design of one of the following types: randomised controlled trials; non- randomised controlled trials or controlled clinical trials; repeated measures studies; interrupted time series analyses; and controlled before-after studies, 15 papers were retrieved and assessed before submission of the systematic review. These papers met all the inclusion criteria for the review, reporting on 11 studies, of which ten studies were about reference pricing (reported in 14 papers) and one on index pricing (1 paper). There was no study that evaluated other commonly used pricing policies such as direct price controls, maximum prices and price negotiations. The review did not find any policy analyses from developing countries.

Ten studies assessed the impact of reference pricing systems on some of the following aspects: the level of medicine use, medicine expenditure, medicine prices, health care utilisation and health (mortality). Regarding medicine use, five studies estimated the immediate impact (after a short transition period) of the reference pricing system on the use of reference medicines, but one study had serious limitations. All four studies

51 without serious limitations found an immediate increase by 60 to 196 per cent in the use of reference medicines after the introduction of reference pricing systems. Four studies reported the use of cost sharing medicines (i.e. medicines in the reference group that are more expensive than the reference medicine), showing an immediate decline by 19 to 42 per cent. The relative longer-term change (six months to one year after the introduction of the reference pricing systems), in the use of reference medicines and cost sharing medicines compared with immediate change was not clear-cut, with some studies showing somewhat higher longer-term change while others reported lower longer-term change.

Two studies in the systematic review reporting the impact of reference pricing systems on medicine prices showed a decrease in medicine prices. One study demonstrated a statistically significant price reduction for both generic and innovator brand medicines. The other found a decline in innovator brand prices, but did not report comparable data. There were four studies reporting impact of reference pricing systems on medicine expenditure, but the findings were not as clear-cut as on medicine use level and medicine price level. One study found an immediate increase in medicine expenditure, while two studies found an immediate medicine expenditure reduction. The other study reported a price reduction for two groups of medicines and an increase in another group. By and large, the overall trend was a price decrease after the introduction of the reference pricing systems. These studies demonstrate that reference medicine pricing can reduce third party medicine expenditure by causing a shift in medicine use towards less expensive medicines. Most studies found an increase in health care utilisation, with some being statistically significant, and others not.

The one study in the systematic review that evaluated the effects of index pricing on medicine prices found a price reduction for both brand and generic medicines. However, the price decline for brand medicines was not statistically significant. The long-term effects were reported to be slightly larger than the short-term effect for both brand and generic medicines. Aaserud, et al. (2006) re-evaluated the impact of the index pricing on the medicine use based on data provided in the study and found an immediate decrease by 29 per cent in the use of brand citalopram and an immediate increase by 114 per cent in the use of generic citalopram. The effect after six months was larger for the innovator

52 brand citalopram, with an overall reduction of 43 per cent, while the long-term effect was lower for generic citalopram with an overall increase of 55 per cent.

The systematic review revealed a lack of studies on pricing and reimbursement policies in developing countries. Even in developed countries, relatively few rigorous studies were conducted to assess the effects of pricing and reimbursement policies on prices, affordability, or health outcomes, and most of them dealt with reference pricing. There remains uncertainty about what effects reference pricing would have in other places. This leads to the conclusion that, although the overall logic and rationale of medicine pricing policies is compelling, it is of the utmost importance that local conditions be assessed with stakeholder consultations undertaken before designing and implementing such pricing policies.

2.5 Studies on medicine prices in developing countries

2.5.1 International studies

Domestic medicine prices may not be a sufficient basis for a government to evaluate whether its expenditure on medicines is comparable to related countries at the same stage of development. A significant body of literature exists on international comparisons of medicine prices, such as GAO (1992), (1994), (2000), Andersson (1995), Danzon and Kim (1998), Danzon and Chao (2000), and Productivity Commission (2001). However, they were mainly undertaken in the 1990s and the methodology of many of these studies is problematic with particular concerns about the composition of countries included in the benchmark groups, and the range of medicines included in the economic comparison basket of medicines (Productivity Commission, 2001). Also, much of this work focused only on price comparisons among developed countries, which makes the results difficult to extrapolate to developing countries.

The few small-scale studies in the 1990s in developing countries measuring medicine prices and making international comparisons had similar methodological flaws as those detailed earlier and so, their results were often criticised (WHO & HAI, 2008). In 1998, Consumers International (CI) and Health Action International (HAI) Asia conducted a survey comparing the retail prices of some commonly used medicines in Canada and Tanzania (Bala, et al., 1998). At the time of the survey, Canada had a per capita gross 53 national product of USD 19,380 and for Tanzania, it was USD 120. The average price of 13 surveyed medicines in Tanzania was about 1.5 times higher than that in Canada. Ten out of these 13 medicines had retail prices higher in Tanzania than in Canada. The lowest paid government worker in Canada would have had to work 8 days to buy this basket of medicines whereas, the counterpart in Tanzania would have had to work for 215 days.

A year later, in mid-1999, CI and HAI undertook another study, which was more comprehensive, on the retail prices of 16 medicines in 36 countries, including ten advanced industrial countries, 25 developing countries from Africa, Asia and Latin America and one from the Commonwealth of Independent States (CIS) (Bala & Sagoo, 2000). Results from the survey showed that the prices of the innovator brand medicines were higher in some developing countries in Africa, Asia and Latin America than in ten OECD countries. The retail prices of 15 out of the 18 dosage forms of 11 medicines, for which comparable data were available, were all higher in the majority of developing countries than in the OECD countries.

While these studies showed that prices were higher in low-income countries than in some more wealthy nations, little was known about prices in different sectors within and between low- and middle-income countries as well as the factors that made up the final patient prices (WHO & HAI, 2008). In 2000, Myhr compared prices and availability of a selected number of essential medicines in different sectors of the health care system in four East African countries, Ethiopia, Kenya, Tanzania, and Uganda (Myhr, 2000). Based on their essential status for treating tropical diseases, HIV/Aids/opportunistic infectious diseases, and patent status, a basket of 15 essential medicines was selected. Prices were collected in random facilities from different sectors in rural and urban areas in each country and compared with international reference price data, taken from the Norwegian official price list, as representative of average European prices and from previous international surveys (ibid.).

Myhr’s study confirmed earlier findings of higher retail prices of innovator brand medicines in developing countries than in European countries, and of the wide variation in prices of the same innovator brand medicine across developing countries. She called this “the law of the jungle”. In addition, the author found a general lower availability of

54 surveyed medicines in the public sector than in the private sector. This study was the premise for WHO/HAI to develop a standard methodology for medicine price surveys (WHO & HAI, 2003). The second edition of the methodology manual was published in 2008 (WHO & HAI, 2008).

The methodology has been validated and found to strike an appropriate balance between modest research costs and optimal information for policy (Madden et al., 2010). Nevertheless, using the number of days’ wages needed by the lowest paid unskilled government worker to purchase a course of treatment for an acute disease or a month’s treatment for a chronic disease to assess affordability, the method may result in overestimates as many people earn less than this government worker. Niëns, et al. have recently proposed the use of a different measure: “the proportion of the population being pushed below USD1.25 or USD2 per day poverty levels because of the purchase of medicines” as an appropriate benchmark of medicine affordability (Niëns et al., 2010, p. 1).

Since the introduction of the standard methodology in 2003, the WHO/HAI method has been used in 54 surveys in 46 countries, including Vietnam (Laing et al., 2007). The results of some surveys were compared within and between countries, and synthesized at both regional and global levels. At a regional level, with the help of the WHO Regional Office for Africa and HAI-Africa, medicine price surveys in 16 regional countries were undertaken (Laing, 2005). In Central Asia, four medicine price surveys were conducted between December 2004 and January 2005 in Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan (Waning et al., 2007). Six different states of India also conducted medicine price surveys using this methodology (Kotwani et al., 2007). In August 2007, the WHO Regional Committee for the Eastern Mediterranean published a paper summarizing the results from medicine price surveys in 10 regional countries conducted from 2003 to 2006 to provide policy recommendations for its member states (WHO-EMRO, 2007).

At a global level, several such studies have been undertaken, including those focusing on medicines for chronic diseases (see, for example, Gelders et al., 2006; Mendis et al., 2007; Van Mourik et al., 2010). More comprehensive was a secondary analysis of medicine prices, availability and affordability in 36 developing and middle-income

55 countries conducted by Cameron, et al. (2009). Vietnam was not included in this analysis since its data were not available in the HAI global database of survey results. This secondary analysis showed that medicines were generally expensive, barely available in public health facilities, and where available in private sector outlets, they were priced beyond the reach of the majority of the population. Treatments for acute and chronic illness were therefore largely unaffordable in many countries. Medicine prices in the public sector were often lower than in the private sector in most regions. While the prices of lowest-priced generics were similar between two sectors, in Europe and the Western Pacific Region, innovator brands were more highly priced in the private sector than in the public sector (Cameron, et al., 2009).

In response to survey findings, programs to address these problems have been initiated. A number of countries are now regularly monitoring medicine prices, availability and affordability (HAI, 2008b). A standard methodology for this work is also being developed in the WHO/HAI project. Preliminary findings from monitoring medicine prices, availability and affordability in Kenya showed that quarterly monitoring reports and partnerships between the Ministry of Health and HAI somewhat improved the situation. Medicine availability in Kenya gradually improved, from having only five out of 28 medicines on the Kenya Essential Medicine List available in more than 75 per cent of the public facilities in October 2006, to eight out of 34 surveyed medicines being available in January 2007. The difference between private sector prices and public sector prices was reduced when the 45 per cent difference of higher private prices compared with public prices in October 2006 decreased to 36 per cent in January 2007 (MOH of Republic of Kenya, 2006, 2007).

2.5.2 Vietnam studies

There have been a few studies of Vietnam’s health sector in relation to both the affordability of overall health care and medicines in particular. Health care in Vietnam has typically been characterized as less affordable and less accessible to poorer households (Ladinsky, et al., 2000; Segall, et al., 2002). Research studies have found that, in order to meet healthcare costs, many poor households have been required to reduce essential consumption, sell assets and incur debt. Some people have even been deterred from using health facilities because of cost barriers (Ensor & Pham, 1996).

Early empirical assessments showed that medicines prices in Vietnam were unaffordable and not well controlled. In assessing the affordability of a standard treatment for pneumonia (using the average retail price of a basket of food sufficient to feed one person per day as the benchmark), Falkenberg et al. (2000) found that the medicines cost people the approximate price of two days of food. Ait-Khaled et al. (2000) also showed that inhaled corticosteroids in Vietnam were the third least affordable among eight low and middle-income countries: Burkina Faso, Mali, Vietnam, Syria, Guinea, Ivory Coast, Turkey and Algeria in their study. One year of treatment for a case of moderate persistent asthma in 1998 was reported to cost a nurse in Vietnam 1.7 months of salary. In Turkey and Algeria however, the same treatment apparently cost a nurse 0.4 months (Ait-Khaled, et al., 2000).

There is evidence that in the past, pharmaceutical companies sold medicines with higher prices in Vietnam than in some comparator countries. For example, prices of locally produced antiretroviral (ARV) medicines, although considerably lower than those of imported ARVs, were still five to seven times higher than current international lowest prices (Kuanpoth, 2007). Another quoted example was the higher retail price of 100 Zantac® tablets in Vietnam compared with Australia, New Zealand, Bangladesh, India and Pakistan [Note: Zantac is ranitidine as marketed by GlaxoSmithKline, 150 mg] (Bala, et al., 1998). At the time of that study, the price of Zantac in Vietnam was the least affordable, based both on medicine price and the ability of consumers to pay as measured by the country’s per capita gross domestic product (see Table 2.2).

Table 2.2 Prices of 100 tablets of Zantac 150mg in 1998 (in US dollars)

Countries Australia New Pakistan India Bangladesh Vietnam Zealand GNP per 18,720 14,340 460 340 240 240 Capita 100 Zantac® 23 21 22 2 9 30 tablets 150mg

Source: Adapted from Bala, et al. (1998)

A major limitation of these studies is that they are now somewhat dated, and they only focused on the prices and affordability of one medicine or a particular group of medicines. Therefore, it is difficult to extrapolate the findings of these studies to the broader range of medicines now available to address prevalent diseases and epidemiology patterns in Vietnam. Moreover, these studies did not examine the variation in price and availability between different sectors of Vietnam’s health care system. Nor did they use an internationally standardized methodology when comparing prices and affordability over time or between countries. It is unclear for instance, whether the source data may have been derived at different times or applied at different points along the supply chain with differing comparisons of exchange rates. More recent work is needed using a range of medicines and a standardized comparative approach to be confident about the impact of prices and their variability on access to affordable medicines.

The Vietnam Competition Authority provided an analysis of the structure of the pharmaceutical distribution network, focusing on aspects of competition laws relating to market entry, market withdrawal, and market share of pharmaceutical companies as part of an overall review of the laws relating to anti-competitive behaviours (VCA, 2009). The authors also reviewed the regulatory framework for distribution and competition in Vietnam’s pharmaceutical market, including listing of some medicine pricing regulations. A major finding of the study was that anti-competitive practices engaged in by Vietnam’s pharmaceutical distribution network directly affected medicine prices. Anti-competitive practices included collusive agreements among importers and distributors to limit or control the quantity of medicines sold, using their monopoly position to drive up prices to exorbitant levels. This finding also warrants further investigation to assess the impact on medicine prices and policies.

Using an economic model, Trinh, et al. (2006) assessed the likely impact of stronger intellectual property (IP) rights protection on medicine prices in Vietnam. The authors concluded that stronger IP rights protection would sharply increase pharmaceutical expenditure and reduce the domestic industry’s turnover, but that it would not change total pharmaceutical consumption significantly. In the overview section of their report, using some direct quotes from sources such as “comment by inhabitant in community” (p7), “comment by expert working in the field of social science and social activities”

(p7) or “consumer’s idea” (p9), the authors stated that they also used in-depth interviews to discuss five major factors that they deemed to contribute to higher medicine prices in Vietnam. These factors comprised monopolies in pharmaceutical production and distribution, Vietnam’s business management practices, consumer attitudes, the paucity of pharmaceutical information provided to consumers and the degree of underdeveloped technologies in the Vietnam pharmaceutical manufacturing industry. While these factors are important in determining medicine prices, lack of critical details about the recruitment of participants and the method of qualitative data analysis made it unclear how the authors drew their conclusions.

Other studies have also been undertaken which sought to relate the high medicine prices in Vietnam to the enactment of patent laws. Kuanpoth (2007) provided a comprehensive analysis of current patent laws in Vietnam and the way they can impact on prices, availability and affordability of ARV medicines. The study attributed the current high cost of ARV therapy in Vietnam to the fact that most ARV medicines remain under patent. Other factors considered to contribute to higher prices were the very small market for ARV medicines in Vietnam, and restricted local production of ARV medicines to only one domestic manufacturer. While acknowledging that the patent laws contributed in part to high medicine prices, the study concluded that the level of patent protection afforded pharmaceutical products in Vietnam was in keeping with the Trade Related Aspects of International Intellectual Property Rights Agreement entered into by the Vietnam government. This study provided some good insights into the impact of patent laws and related legislative obligations on medicine prices. However, it still only considered the effect of the legislation on the prices of a few patented medicines, and more analysis is required to fully understand the complexities of medicine prices and their impact.

In relation to government studies in Vietnam, the Drug Administration of Vietnam commissioned a consultancy in 2005, addressing the legislative aspects involved in control of medicine prices (Critchley, 2006). In the subsequent report, the author analyzed some, but not all, shortcomings of the international price benchmarking system regulated in two elements of the pharmaceutical pricing measures in Vietnam: Government Decree No 120/2004/ND-CP (Decree 120) on the management of prices of preventive and curative medicines for human use; and the Pharmaceutical Bill of

Vietnam. The author concluded that medicine price controls in Vietnam were reasonable and appropriate for Vietnam’s stage of economic development and were modest in comparison to the more interventionist price control measures found in most developed countries. However, the author failed to provide evidence of the impact of Vietnam’s price control measures on medicine prices and affordable patient access. Medicine pricing measures in Vietnam have improved somewhat following new legislation since this study, and ultimately, Decree 120 expired on 7 September 2006.

2.5.3 Conclusions

In conclusion, a review of the academic research literature, the ‘grey’ policy literature and the work of major international organisations like WHO and OECD on medicine prices and policies has been undertaken, with every effort being made to identify all relevant documents and the latest available data. The search of this literature has shown that there is a variety of different methods used internationally to directly or indirectly control medicine prices. Each is applied somewhat differently across different nations with varying success, but overwhelmingly, the studies show that successful medicines policies and pricing mechanisms have to be locally tailored to be ‘fit for purpose’.

Of great importance is the finding that while there is a good body of literature on when and how different strategies can be successful in developed nations, there is a dearth of studies that apply to developing countries, with no definitive findings relevant for Vietnam. With the advent of the standardized WHO/HAI methodology, comparable medicine price data in developing countries are being collected. The results of comparative price studies can be of use to the developing world and they can play an important strategic role by focusing attention on major anomalies within developing countries. Additionally, they can indicate where new research is needed to underpin actions to improve the affordability of medicines.

Although there have been a few important studies on Vietnam’s medicine prices, policies and patient access, to date, none of them have identified the root causes underlying high medicine prices or provided holistic analyses of the inherent problems. Vietnam has participated in surveys of medicine prices using the WHO/HAI standard

60 methodology, which had the potential to yield valuable information. However, the data were only analysed at a high level, and were not able to fully explain medicine prices.

The author is not aware of any other studies identifying factors that cause high medicine prices in Vietnam apart from the studies reviewed above. Given the paucity of studies directly relevant for Vietnam, what is needed is a comprehensive analysis including the relevant features of the health care system, medicine policies and regulations and the determinants of supply and demand for medicines. Equally important is an understanding of the pharmaceutical market and its features, including physician responses, community actions and the behaviour of pharmaceutical companies, in setting their medicine prices in response to the broad policy environment and the general structure of Vietnam’s pharmaceutical market. An understanding of the vested interest of all the participating parties in maintaining the status quo is also needed. A comprehensive analysis is required to fully inform the development of policy recommendations directed at improving the affordability of medicines in Vietnam.

Chapter 3. Vietnam’s health care and pharmaceutical system, and its impact on medicine prices

3.1 Introduction

Vietnam’s transition from a socialist economy, to a market-based economy has presented a number of challenges for its past ‘human development’ achievements (Witter, 1996). Free access to health care, including medicines, has been gradually replaced by a system of direct payment by patients (Larsson, 2003). Increased reliance on market mechanisms has led to relative neglect of social mandates and a surge in health costs (World Bank, 2007). This chapter explores the extent to which the reform process has impacted on medicine prices, by outlining Vietnam’s transitional health care system with analyses of the demand for and supply of pharmaceuticals. The main focus of the analysis is on the various administrative processes, characteristics and problems encountered within the pharmaceutical supply chain in Vietnam.

3.2 Vietnam’s transitional health care system

3.2.1 Vietnam’s health performance

The Socialist Republic of Vietnam’s population in 2008 comprised 87,096,000 people and increased to 88,069,000 people in 2009, of which seventy two per cent resided in rural areas (WHO, 2010b). Administrative governance of the country is structured on four basic levels: central, provincial, district and commune. There are 63 provinces/cities which come under national administration. The provinces are further subdivided into 659 districts/precincts which are made up of 10,732 communes/wards (WHO, 2007a). The five most important cities in the country are Hanoi, Ho Chi Minh City, Haiphong, Danang and Cantho with Hanoi being the capital, and Ho Chi Minh City being the major industrial city.

From the perspective of key indicators of health outcomes such as child and maternal mortality, Vietnam has achieved standards similar to those found in much wealthier

63 countries (World Bank, 2007). However, Vietnam’s health care system is deemed to be weak in the distribution of health attainment across regions, income groups and medical conditions (WHO, 2000b; World Bank, 2007). The gap in health outcomes between the rich and the poor has widened, especially with respect to child survival (World Bank, 2007). A large proportion of health spending is financed by out-of-pocket patient expenses (WHO, 2010a), although the Vietnam government has initiated reforms aimed at redressing this imbalance, including subsidization of the poor and expansion of public health insurance (World Bank, 2007).

3.2.2 Historical background

Historically, Vietnam’s health care system relied on “grassroots care” delivered by Commune Health Stations (CHSs) and Village Health Workers (VHWs) to reduce communicable diseases (World Bank, 2007). During the war period from 1945 to 1975, an extensive network of primary health care facilities was established in North Vietnam with the aim of achieving universal coverage. This reached nearly 100 per cent in urban areas and 75 per cent in rural areas (Witter, 1996). In South Vietnam, a strong private health sector dominated until private enterprises, including health care services, were banned in 1975 upon unification with the North (Larsson, 2003).

Post 1975, Vietnam suffered severe financial pressures, including costly post war reconstruction, an economic blockade by the United States, withdrawal of aid from the former U.S.S.R and a soaring inflation rate (Chalker, 1995; Witter, 1996; Wolffers, 1995). The expansion of the ambitious network of free public health services to the South added further to economic strain, resulting in poor maintenance of facilities and a lack of basic equipment and medicines in many health stations and hospitals (Witter, 1996). The domestic pharmaceutical industry was only able to meet 30 per cent of the population’s demand for medicines. Most essential medicines had to be imported (Wolffers, 1995).

3.2.3 The “Doi Moi” economic reforms

In 1986, a policy of “Doi Moi” (reform) was launched, leading to dramatic social and economic transformation. A shift from a centrally planned to a “socialist oriented market economy” was initiated with a return to household-based farming, removal of 64 restrictions on private sector activities in commerce and industry, rationalization of State-owned enterprises, removal of price regulation and subsidies on essential commodities and openness to foreign trade (Chuc, 2002; WHO, 2003; Witter, 1996). As a result of these reforms, there has been a remarkable reduction in the incidence of poverty and impressive economic growth (WHO, 2007a). An annual average per capita GDP growth rate of more than 7 per cent from 1987 to 2009 helped Vietnam to be aligned with middle-income countries by 2010 (World Bank, 2010).

In the health sector, important reforms were introduced in 1989. Vietnam’s near universal, publicly funded and provided health services were converted into a highly unregulated private-public mix system (Sepehri et al., 2008). A number of market- oriented measures were implemented, including the introduction of user fees, legalization of private pharmacy and medical practices, and liberalization of the production and sale of pharmaceuticals (WHO, 2007a). At the same time, the provision of free medicines dispensed through the public health system was discontinued (Larsson, 2003). Spending on medicines, user fees and increased autonomy for health facilities and health care providers led to substantial increases in out-of-pocket health expenditure (World Bank, 2007). In 2008, out-of-pocket expenditure on health accounted for 55.5 per cent of total health expenditure (WHO, 2008).

3.2.4 Health insurance and subsidization for the poor

In 1992, the Vietnam government issued a national Health Insurance Decree calling for compulsory health insurance for people in salaried employment. The first compulsory health insurance scheme was created, requiring a monthly levy of three per cent of the employee’s salary, of which one per cent is paid for by the employee and two per cent by the employer. At the same time, the take up of voluntary health insurance was encouraged for dependents, students and farmers (BMI, 2009). To mitigate against growing out-of-pocket health spending, the government subsidized participation of the poor in the mainstream programs, most noticeably through Prime Ministerial Decision No. 139 of 2002, which created provincial-level health care funds for the poor (World Bank, 2007).

In 2008, the Health Insurance Law was passed and it came into effect on July 1, 2009. Under this legislation, it was proposed that Vietnam attain universal health coverage by 2014. The legislation also stipulated that the level of health insurance would be sufficient to cover from 80 to 100 per cent of the cost for medicines and health care services, depending on the level of insurance undertaken. The medicines eligible for public health insurance reimbursement were limited to the schedule of main medicines used in public health facilities issued by the Ministry of Health (MOH). The latest schedule was promulgated in decision 05/2008/QD-BYT of the Ministry of Health. The schedule comprises 750 western medicines, 57 radioactive substances and marking compounds, 95 traditional medicinal products, and 237 traditional medicinal preparations (Bộ Y tế, 2008). The public health insurance scheme does not cover medicines that are purchased directly at a retail private pharmacy. By 31 May 2010, public health insurance coverage included 53 million people, representing approximately 62 per cent of the population (Từ Lương, 2010).

3.2.5 National Medicines Policy

A National Medicines Policy has been in place in Vietnam since 1996, with two basic goals being (1) to ensure a regular and adequate supply of good quality medicines at affordable prices, and (2) to ensure rational use of medicines (Government of Vietnam, 1996). The National Drug Policy, as it is known in Vietnam, consists of eight elements comprising: (1) Schedule of essential medicines and rational use of medicines, (2) Quality assurance of medicines, (3) Manufacture supply, import and export of medicines, (4) Traditional medicines, (5) Training of pharmaceutical personnel, (6) Drug information, (7) Strengthening pharmaceutical management, and (8) Scientific research, domestic and international cooperation in the pharmaceutical field (ibid.).

The schedule of essential medicines is comprised of medicines which are considered to be the most cost-effective in the treatment of the major health problems confronting the majority of the population. The Vietnam government has issued five Essential Medicines Lists (EMLs) with the latest promulgated in 2005, containing 449 essential medicines (MOH of Vietnam, 2005b). Promulgation of the Essential Medicines Lists serves firstly to focus prescribing on those medicines included, and secondly, to set a price ceiling on their purchase for health agencies throughout the nation, with the

66 objective of ensuring the availability of quality essential medicines at reasonable prices (Bộ Y tế, 2005). Monitoring antibiotic prescribing and use, the establishment of hospital drug and therapeutic councils, together with the issue of standard treatment guidelines, and development of a pharmacopoeia are further approaches used to improve the rational use of medicines. However, the National Drug Policy fails to provide for the opportunity of consumer consultation and engagement in these processes. Given that a large proportion of Vietnamese patients self-medicate or consult directly with private pharmacies, the National Drug Policy has had a limited impact in improving the rational use of medicines (Chuc, 2002; Larsson, 2003).

In order to improve efficiencies and encourage competition, other features of the National Drug Policy need to be taken into account. They include reinforcing the centralized management of production and distribution of medicines with restrictions to market entry that serve to favour locally produced products through restraint of trade. US research-based pharmaceutical companies claim that these features fetter competition, reduce efficiencies, and most importantly, impede the transfer of technology (PhRMA, 1999).

These features are also sometimes cited as conflicting with the principles of the World Trade Organization (WTO), of which Vietnam has been a member since 2007. Some aspects of protectionism were phased out when Vietnam fully adopted the WTO’s rules in January 2009. For example, foreign pharmaceutical companies are now allowed to open branch offices in Vietnam, and are able to import their products directly, although they are still barred from distribution. As part of its membership application of the WTO, Vietnam has pledged to cut import duties on pharmaceuticals to an average 2.5 per cent within five years of accession (BMI, 2009).

3.2.6 Administrative health care structures

Vietnam’s health care system is organized into four levels (see Figure 3.1), which are briefly described below:

State administration Professional guiding network

Government

Central Central & private National Production & General Ministry of Research general-specialized Med./Pharm. health service pharmaceutical Institutes hospitals Colleges; medical provision companies/ Health technical secondary sector factories schools

Provinces

Preventive City/ provincial/ Secondary Production & Provincial/Private regional/ private Med./Pharm. health service Pharm. Provincial health facilities general hospitals schools provision companies/ Health units factories Bureaux

Districts

Preventive Clinical & Training classes for health District health teams laboratory facilities workers at grassroots levels pharmacies District Health Centers

Clinics in Regional Private Private Communal offices, clinics/maternity clinics, pharmacies/ medicine Communes factories & homes traditional Medicine outlets stores schools healers

Commune Village health Health workers Stations

Note: Direct provision of professional guidance, manpower.

Indirect supervision and guidance on professional practice.

Figure 3.1 Structure of the health care system of Vietnam. Source: (MOH of Vietnam, 2005a)

a) At the central level, the Ministry of Health is the government agency responsible for state management of health care throughout the country, including direct control of 32 general and specialized national hospitals (GSO, 2009b), which are located in the major cities (World Bank, 2007).

b) There are 63 provincial health bureaux responsible for health care within the provinces. Each province has at least one general hospital and some specialized hospitals, providing the major medical specialities for curative care. For preventive care, there are centres such as preventive health centres, anti- HIV/AIDS centres, food safety centres, etc. c) District health centres are responsible for the delivery of preventive and curative care in districts without a separate district hospital. In districts with a separate district hospital, the district health centre only provides preventive care while the district hospital is responsible for curative care (MOH of Vietnam & Ministry of Home Affairs of Vietnam, 2008). d) At the commune level, 98 per cent of communes have a Commune Health Station (CHS) (GSO, 2008), with an average 3-5 health workers. CHSs are responsible for providing primary health care to the local population, including preventive care, family planning, normal child delivery, and overall health promotion. They also supply basic medicines and manage the operation of the local network of village health workers (World Bank, 2007).

According to the government’s 2006-2012 economic plan, health care investment will be increased and the current network of public health care facilities reorganized. The current hospital network in urban areas will be expanded with the construction of a number of new facilities, scaling up from 500 to 1,000 beds to provide the majority of health services when general hospitals are transformed into multi-use clinics or specialist institutions. In rural districts, there will be 50 to 200 bed hospitals (BMI, 2009).

3.2.7 An emerging private health sector

Since 1989, the private health sector has expanded rapidly. The number of licensed private health units increased from virtually none in 1986, to around 65,000 in 2004, including 30,000 private health clinics, 23,000 private pharmaceutical units, and 12,000 traditional health units. These figures do not include a large number of unlicensed facilities (World Bank, 2007).

In 2008, 22 new private hospitals were licensed and constructed, in addition to the existing 74 private hospitals with 5,600 beds. Private hospitals account for about 3 per cent of the total number of hospital beds in Vietnam (MOH of Vietnam & Health Partnership Group, 2008).

The private health sector now plays an increasingly important role in health care services in Vietnam, since it handles 60 per cent of ambulatory out-patient consultations (Ha et al., 2002; World Bank, 2007). However, private health units are concentrated in big cities, especially in Hanoi and Ho Chi Minh City. In rural areas, private medical care providers are mainly traditional healers and private providers operating without licenses, such as public health workers doing some extra work out of their public facilities (World Bank, 2007). Most private practices are conducted by public health workers (Chalker, 1995). It is estimated that about 70 per cent of doctors working in the private sector are also publicly employed (WHO, 2007a; World Bank, 2007).

3.3 Demand for medicines

3.3.1 Epidemiological patterns and lifestyle changes

Over the past two decades, Vietnam has experienced a marked decrease in the proportion of communicable diseases. As a proportion of all mortality causes, mortality due to communicable diseases dropped from 52.10 per cent in 1986 to 16.53 per cent in 2005 (MOH of Vietnam, 1995, 2005a). While there has been a significant reduction or eradication of some vaccine-preventable diseases such as polio, newborn tetanus etc., the leading causes of infectious mortality (predominantly Tuberculosis and HIV/AIDS), have rapidly increased (Government of Vietnam, 2006).The number of people living with HIV increased 12 times from 1995 to 2005 (WHO, 2007a). In recent years, Vietnam has also experienced newly emerging infectious diseases such as SARS, and avian influenza (H5N1). Pneumonia, acute bronchitis, influenza; diarrhoea and gastroenteritis of presumed infectious origin were among the leading causes of communicable disease morbidity in 2005 (MOH of Vietnam, 2005a).

There has also been a strong increase in non-communicable, lifestyle-related diseases, injuries and accidents. The proportion of mortality due to non-communicable diseases climbed from 41.80 per cent to 61.14 per cent and from 6.10 per cent to 22.33 per cent 70 for injuries and accidents (MOH of Vietnam, 1995, 2005a). Of particular concern is that one quarter of children under five are still malnourished (WHO, 2007a). Lifestyle changes due to increasing household income, coupled with an aging population are deemed responsible for the increasing burden of non-communicable diseases, injuries and accidents. Common non-communicable diseases among children include nutritional disorders, asthma, and vision disorders, while cardiovascular disease, diabetes and cancer are commonly found among the elderly (WHO, 2007b). In 2005, transport accidents and hypertension were among the leading causes of non-communicable disease morbidity. Intra-cranial injuries with a rate of 2.82 per 100,000 population, overtook communicable diseases as the most common cause of mortality (MOH of Vietnam, 2005a).

3.3.2 Health care financing

Vietnam’s total health expenditure has rapidly increased, especially in the past few years. By 2008, total health expenditure reached 76 US dollars per person per year (WHO, 2010a), in line with expectations, given the country’s development level. Among many reasons for the growth in health spending has been the increase in basic wages and the growth in the number of patients. Significantly, the increase in medicine prices is estimated to account for 30 per cent of the growth in total health expenditure (World Bank, 2007).

Multiple policy reforms directed at mobilizing different resources for health care since 1989 have resulted in a fundamental transformation of Vietnam’s health financing system. Vietnam’s public funded health services have shifted to a mixed health financing system (Sepehri, et al., 2008). The structure of health financing has recently improved with a higher proportion of public health expenditure (General Government Expenditure on Health) and reduced private expenditure (MOH of Vietnam & Health Partnership Group, 2008). In 2008, the proportions of public and private health expenditure were 38.5 per cent and 61.5 per cent of total health spending, respectively (WHO, 2010a).

A major component of public health expenditure is the national budget allocation for health (often referred to as the state budget). It has increasingly grown, especially from

2006 when the government started to purchase compulsory health insurance for the poor in accordance with Decree No. 63/2005/ND-CP. However, the state budget allocation accounts for only a quarter of the total health expenditure (Lieberman & Wagstaff, 2009; Lindholm & Thanh, 2003; WHO, 2008). In 2006, Vietnam ranked 189th out of 191 countries surveyed on state budget allocations for health as a percentage of the total state budget expenditure (BMI, 2009). Currently, almost 60 per cent of the total recurrent state budget allocated for health is used for paying salaries, allowances and a portion of social insurance for health workers. The remaining 40 per cent is mainly used for development investment for the health sector (MOH of Vietnam & Health Partnership Group, 2008).

Another important component of public health expenditure is social health insurance. As a percentage of public health expenditure, it has been rising, from 7.0 per cent in 1995 to 32.3 per cent in 2008 with a peak of 38.8 per cent in 2006 (WHO, 2010a), making health insurance one of the most important health financing resources in Vietnam. Such an increase can be explained in part by the allocation of the state health budget to support or purchase health insurance cards for the poor and social welfare target groups. In 2007, among the insured, 41 per cent were covered by health insurance for the poor (MOH of Vietnam & Health Partnership Group, 2008).

Household out-of-pocket expenditure accounts for about 90 per cent of the total private health expenditure. In the period 1995 to 2008, out-of-pocket expenditure ranged from 54.8 to 66.3 per cent of total health expenditure (WHO, 2010a), large enough to potentially result in greater poverty and inequity in accessing health care (WHO, 2005). The rising household out-of-pocket spending on health is partly because of increasing user fees in public hospitals (MOH of Vietnam & Health Partnership Group, 2008). However, as a percentage of total household health expenditure, 30 per cent is used to pay user fees, both official and unofficial, while the remaining 70 per cent is spent on medicines and medical consumables (World Bank, 2007). Increases in medicine prices also contribute to the growing magnitude of absolute household out-of-pocket expenditure on health.

3.3.3 Use of medicines

Post 1989, expenditure on medicines markedly increased. Per capita medicine consumption increased from USD 0.5 in 1986 (Falkenberg, et al., 2000) to USD 16.45 in 2008 (DAV, 2009b). Nevertheless, medicine consumption represents only 1.4 per cent of Vietnam’s GDP (BMI, 2009). Moreover, the increase in per capita medicine consumption has not been accompanied by a rational use of medicines. Self-treatment, lack of regulation of the pharmaceutical market, and a lack of information infrastructure needed for optimal use of available resources have all resulted in the irrational use of medicines and wasteful expenditure by customers who are unable to assess their quality (Chuc, 2002; Witter, 1996).

Self-medication continues to be the most common response to illness in Vietnam. It is estimated that two-thirds of people rely on self-medication when they get sick (Gertler & Litvack, 1998; Giang & Allebeck, 2003; Lieberman et al., 2005), with private pharmacies becoming the first, and often only, contact with health services. Dramatic increases in self-medication have arisen because of laxity in drug law enforcement. ‘Prescription Only’ medications are freely available for direct purchase contrary to the law with little accompanying information relevant to their use. Antibiotics are the ‘Prescription Only’ medicines, which are most frequently purchased from private pharmacies without prescription or adequate user instruction (Chuc et al., 2001; Chuc & Tomson, 1999; Dat et al., 1997). Use of pharmaceuticals through self-medication is therefore often inappropriate.

The Ministry of Health has issued a number of regulations relating to private pharmacy practice designed to link pharmacies into the health system. However, a lack of, or inadequate, enforcement of regulation of the pharmaceutical market, especially in the private sector, has led to medicines frequently being dispensed by unqualified staff (WHO, 2007a). Consequently, the quality of pharmacy services is often sub-standard (Chalker et al., 2000).

The use of medicines prescribed by a health worker can be problematic. The lack of up- to-date medical knowledge means that physicians often prescribe medicines that are no longer used, or have even been withdrawn by the manufacturer as in the case of

Mexaform (clioquinol) for the treatment of simple diarrhoea (Wolffers, 1995). Meanwhile, clinical pharmacy in Vietnam is fledgling and the role of pharmacists is mainly to dispense medicines according to doctors’ prescriptions, rather than to engage in pharmaceutical care and quality use of medicines. In addition, the income of health workers is directly linked to prescribing patterns, both in the private sector (Hoa et al., 2007) and in the public sector (WHO, 2007a). This has encouraged over-prescribing with little concern for appropriateness and effectiveness. Falkenberg, et al. (2000) found that on average, there were as many as 3.8 medicines per prescription with a high rate of injections being common. Over-prescribing is also related to the lack of an information system to document medicine-related morbidity and mortality so that health workers are not held accountable for accidents or errors in the prescribing and administration of medicines (WHO, 2007a).

3.4 Supply of medicines

FDI = Foreign Direct Investment

Figure 3.2 The pharmaceutical supply chain in Vietnam. Source: author’s analysis.

Health sector reforms, introduced since 1989, have shifted Vietnam’s pharmaceutical supply chain from a centrally controlled system to a market-oriented system with the participation of private enterprises (Larsson, 2003). The opening of the country to foreign trade and the liberalization of rules governing pharmaceutical manufacture, sale and distribution led to a 300 per cent increase in medicine production and a ten-fold increase in importation from 1988 to 1992 (Witter, 1996). The fledgling Vietnam pharmaceutical industry has since started to emerge, while imported medicines have increasingly entered the Vietnam market. From 2000 to 2008, the total market size for pharmaceuticals rose at an average annual growth rate of 17 per cent, reaching USD 1.42 billion in 2008 (DAV, 2009b). Figure 3.2 shows a schematic representation of the current pharmaceutical supply chain in Vietnam.

3.4.1 Importation of medicines

Imported medicines are sourced either directly from international pharmaceutical manufacturers or through international distributors. By the end of 2008, 438 foreign companies had obtained a ‘License for Foreign Companies to Conduct Operations in Medicines and Raw Medicinal Materials in Vietnam’, which is often referred to as a trading license (DAV, 2009a, 2009b). Most of these companies are small to medium- sized generic companies, although world leading research-based companies are also represented, including Johnson & Johnson, Pfizer, GlaxoSmithKline, Hoffmann-La Roche, Sanofi-Aventis, Novartis, and AstraZeneca. India, Korea, China, France and Germany represent the top five countries in which the licensed companies are based. However, in terms of import share, France, India, Korea, Switzerland, and Germany are the leaders, with the share in total medicine importation value being 18.76 per cent, 13.78 per cent, 10.73 per cent, 6.59 per cent, and 5.44 per cent, respectively (DAV, 2009a). Despite being a world leader in the pharmaceutical field, the US is not especially prominent in the Vietnam market.

The importation of medicines plays an important role, particularly with respect to specialized medicines. By the end of 2008, there were 10,339 imported medicines covering 909 active substances registered for sale in Vietnam, averaging 11 brands per one active substance. Although the range of imported products is much wider than those locally produced, there is trading duplication on a few active substances. For example,

75 one substance, cefixim, had 308 imported brands with current registration numbers in Vietnam at December 2008.

Prior to 1st January 2009, foreign companies were not permitted to import medicines directly into Vietnam. Their products were required to be imported via a local Vietnamese company holding an import-export license from the Ministry of Health. This incurred a mandatory importation fee that ranged from one to three per cent of the total value of the contract, depending on the circumstances. However, with the accession to the World Trade Organization in 2007, Vietnam agreed to allow foreign pharmaceutical enterprises to directly import pharmaceuticals into Vietnam from 1st January 2009 (Cao, 2008). To be licensed, companies have to comply with the Pharmaceutical Law, establish warehouse facilities that meet the Code of Good Storage Practice, and have a pharmacist with a certificate of pharmaceutical practice in charge.

3.4.2 Domestic medicine production

Domestic medicine production has accounted for an increasingly growing market share, from 36.1 per cent in 2001 to 50.2 per cent in 2008 (DAV, 2009b). Local manufacturers comprise State-owned enterprises (SOEs), Limited Liability Companies, Joint Stock Companies, Joint Ventures, and 100 per cent foreign-owned companies. By 31 March 2008, there were 171 local pharmaceutical manufacturers, of which 93 produced Western medicines and 78 produced traditional Oriental medicines. Manufacturers are disproportionately distributed, being mainly located in the South-Eastern region of the country (72 companies), Red River delta (57 companies) and Cuu Long River delta (19 companies). Only one manufacturer is located in the North-Western area and two are in the Highland areas (Cao, 2008).

Prior to 1996, State-owned enterprises were the only participants in the Vietnam pharmaceutical market authorized to manufacture and process pharmaceutical products. From 1996-1997, the domestic pharmaceutical industry started to expand as a result of the licensing of private manufacturers. By 1998, there were 125 State-owned enterprises and 180 private, limited liability companies engaged in the processing and manufacture of imported semi-finished products, or raw materials, in Vietnam (VCCI, 2008) .

The Asian financial crisis of 1997 meant that many State-owned enterprises incurred losses (Truong, 2006). Consequently, the Vietnam government undertook rationalization of State-owned enterprises, directed at industry consolidation and improvement of efficiency. The restructuring of State-owned pharmaceutical enterprises reduced the number of these companies to 110 by 2001 (VCCI, 2008). In 2002, the government’s “Equitisation program” (co phan hoa – similar to privatization) was launched, leading to the transformation of State Owned Enterprises (SOEs) into Joint Stock Companies (Truong, 2006). The restructuring of State-owned enterprises and the “Equitisation program” have had a profound impact on the domestic pharmaceutical industry. Production lines have been upgraded, new technologies adopted, and a broader range of pharmaceutical preparations and forms have been introduced, including soft capsules, prolonged-release medicines, freeze dried injections and high quality parenteral and transfusion products (DAV, 2009b; VCCI, 2008).

Foreign companies are playing an increasing role in domestic production. Overseas companies wanting to establish themselves in the domestic pharmaceutical manufacturing sector have a number of available options. They may apply for an investment license as a fully foreign-owned enterprise, as a joint venture enterprise, or under a business cooperation contract. While fully foreign-owned enterprises and joint venture enterprises are constituted as separate legal company entities with limited liability, participants in business cooperation contracts cannot limit their debt liability.

By the end of 2008, there were 37 foreign direct investment (FDI) projects in the Vietnam pharmaceutical market, of which 25 (worth USD 192.9 million) had come into operation, including 22 investing in drug production (DAV, 2009b). Foreign-invested projects have resulted in high capital expenditure being undertaken in Vietnam, with the employment and training of local personnel in high technologies arising from significant technological transfers into the country. In a study of a selection of antiretroviral medicines, Kuanpoth (2007) found that the cost of domestically produced products is somewhat lower than would be the case if imported from overseas.

Foreign companies may also elect to have their patented or innovator brand products produced under license by a domestic manufacturer. For example, Bayer, Ciba Geigy, Mead Johnson, Merck & Co, Roche, Sandoz, Upjohn and Warner Lambert, and

GlaxoSmithKline licensed the domestic manufacturer OPV Pharmaceutical Company to produce some of their products in Vietnam (BMI, 2009). Under these arrangements, the licensing company transfers the technology and expertise required for manufacture of the medicine to the domestic Vietnamese manufacturer.

Sub-contracting manufacturing arrangements between foreign manufacturing companies and domestic producers are also permitted. Under the toll arrangements authorized by Circular No. 06/2004/TT-BYT of the Ministry of Health, the principal foreign pharmaceutical companies holding a trading license in Vietnam may subcontract with a domestic third party manufacturer to carry out some or all stages of the manufacturing process. The principal company then pays the third party a toll fee for each item produced. Toll manufacturing not only uses spare production capacity of local manufacturers, but also results in significant technological transfer and experience gained with international good manufacturing practice (GMP) standards and procedures.

Reforms have been continuously introduced to bring domestic pharmaceutical manufacturers up to international GMP standards. All domestic manufacturers were required to meet WHO-GMP standards by 31 June 2008 to be eligible to produce Western medicines. However, by March 2008, among the 93 domestic manufacturers producing Western medicines, there were only 53 companies meeting WHO-GMP standards. An additional 24 companies met the less rigorous ASEAN-GMP standards, and they are required to apply for WHO certification upon the expiry of the original permit. The remaining 16 manufacturers did not meet any type of GMP standards. All 22 FDI companies met GMP standards, of which 16 complied with WHO-GMP and 6 with ASEAN-GMP (Cao, 2008).

While significant progress has been made in the modernization and rationalization of the domestic pharmaceutical industry, more work needs to be done to bring it up to international standards (BMI, 2009; VCCI, 2008). Limited research and development (R&D) facilities, inadequate financial capacity, and outmoded administrative and business practices characterise most domestic manufacturers. The majority still focus their production on lower-cost and lower-technology generic products (BMI, 2009). The Vietnam Pharmaceutical Corporation (Vinapharm), a conglomerate representing all State-owned pharmaceutical manufacturers, is the most prominent domestic producer.

This company is still handicapped by poor marketing and productivity problems, compounded by outmoded production facilities that are “in dire need of modernisation” (BMI, 2009, p. 64). Only a few domestic pharmaceutical manufacturers are technically and financially capable of competing with foreign pharmaceutical producers.

The inability of domestic manufacturers to synthesize or manufacture raw materials, especially active pharmaceutical ingredients (API) creates additional difficulties for the local industry. About 90 per cent of the raw materials used in domestic production are imported (Cao, 2008), mainly from China, India, and Singapore (VCCI, 2008). Nearly 95 per cent of imported API are antibiotics, vitamins, and antipyretic, analgesics and anti-spasmodic drugs (MHBS, 2010), reflecting a concentration of domestic pharmaceutical production on only a few therapeutic classes. By the end of 2008, there were 9,727 locally produced medicines, representing 491 active substances registered for sale in Vietnam, averaging 20 locally produced brands per one active substance. Some active ingredients are in hundreds of brand named products; an example being paracetamol which is included in some 344 domestically produced brands registered for sale in Vietnam. This has led to a plethora of manufacturers competing for a very limited, and often uneconomic, market share.

Vietnam is one of the few countries where traditional medicines are fully integrated within the health care system (BMI, 2009). By the end of 2008, there were 1,804 locally produced Oriental medicines registered for sale in Vietnam (DAV, 2009b). However, the total turnover of Oriental medicines, produced by the 78 domestic manufacturers in 2007, accounted for only four per cent of local production. Moreover, by March 2008, none of these manufacturers had complied with GMP standards (Cao, 2008). Nevertheless, in keeping with the National Drug Policy the government has committed to the development of a strong traditional medicine sector, which aims to make up 30 per cent of the local market by 2015 (BMI, 2009) by modernizing and westernizing dosage forms of traditional medicines.

3.4.3 Medicine distribution

Medicine distribution in Vietnam is a complex activity which may involve a number of intermediaries from manufacturers to consumers. A typical pharmaceutical supply chain

79 may consist of the following components: primary manufacturing, secondary manufacturing, market warehousing/distribution centres, wholesalers, and retailers/hospitals (Shah, 2004). The pharmaceutical supply chain in Vietnam consists of a vast array of components, serving a population of 87.096 million as follows:

x 180 domestic pharmaceutical manufacturers (including 22 FDI producers), 90 importers, and 800 domestic wholesalers/distributors (DAV, 2009b) ; x Three FDI enterprises investing in drug logistics (DAV, 2009b); x 438 foreign pharmaceutical companies (DAV, 2009b); x 39,172 retail medicine outlets, including 9,066 private pharmacies (DAV, 2009b); x 13,460 public health care facilities, including 974 hospitals, 781 regional polyclinics and 10,917 commune health stations (GSO, 2009b); x 74 private hospitals and more than 30,000 private health clinics (MOH of Vietnam & Health Partnership Group, 2008).

Locally produced medicines from Vietnam’s pharmaceutical manufacturers can be distributed either directly to retailers and health care facilities, through their own distribution system, or indirectly through other wholesalers or distributors before reaching retailers and health care facilities and consumers. Vietnamese manufacturers holding a retail license are also able to supply medicines directly to end users.

By contrast, FDI logistic companies and foreign pharmaceutical companies are not permitted to distribute pharmaceutical products directly in Vietnam. Their products have to be sold to domestic pharmaceutical distributors for distribution, thus adding another layer to the cost structure of medicines for no obvious gain other than being an enshrined practice. International pharmaceutical manufacturers with a trading license in Vietnam, who are not established in Vietnam as an FDI company, can supply their medicines via their local registrant company or a local importer. International distributors are only permitted to supply their medicines to a local importer. However, FDI producers can directly distribute the products they manufacture in Vietnam (MOH of Vietnam, 2006) (see Figure 3.2).

3.4.3.1 Vietnam’s pharmaceutical importers

Most of the 90 pharmaceutical direct import-export companies are State-owned enterprises or joint stock companies that have been transformed from State-owned enterprises (locally called equitised companies). The network of these companies is widespread. In addition to national centralised companies, almost every province has a provincial firm. The initial market share of State-owned pharmaceutical enterprises and equitised companies, at both central and provincial levels, is directly attributable to their historical monopoly position as the former sole provider of medicines, and the initial protectionism afforded to them by Directive No. 03/1997/BYT-CT dated 25 February 19973. In 2008, the preferential policy in favour of domestic companies was phased out when Directive No. 03/1997/BYT-CT was annulled by the MOH Decision 31/2008/QD-BYT dated 22 August 2008.

The current market share of these companies now mainly relies on their mandated import activities and logistics services (VCA, 2009). The biggest importers comprise central State-owned and equitised companies located in Hanoi or Ho Chi Minh City and local State-owned and equitised companies based in the big cities. The nine biggest importers in 2007 accounted for three-quarters of the total market share of imported Western medicines (VCA, 2009). Although Vietnam’s pharmaceutical importers report big turnovers, their earnings are limited to one to three per cent of the import value as stipulated by the mandated import fee. The main proportion of turnovers in fact belongs to, and is managed by, foreign manufacturers and their international distributors who set both the imported price and the selling price of their products, as well as undertaking marketing and promotion (VCA, 2009).

3 Directive No. 03/1997/BYT-CT dated 25 February 1997 of the MOH Concerning the Supply, Management and Use of Drugs at Hospitals directed that all hospitals under MOH management were required to purchase medicines from three central State-owned companies, each with its own regional responsibility (i.e. the North, Central, and South Vietnam). Reacting to this measure, provincial authorities implemented a similar scheme, that all provincial hospitals were required to purchase medicines from provincial suppliers or distributors. 81

3.4.3.2 International pharmaceutical distributors and their foreign direct investment logistics companies

The three international distributors who have established FDI companies and are registered for warehousing and other logistics services (such as sale order processing, invoicing, delivery and transportation) for pharmaceutical and health care products in Vietnam are Zuellig Pharma, Diethelm and Mega Product (DAV, 2009a).

Although they are not allowed by law to distribute pharmaceuticals directly in Vietnam, they are involved in almost all points of the distribution process. They have enormous experience in the international distribution of pharmaceuticals, including a professional working style and widespread networks of distribution agencies, customers and medical representatives. It is these three companies that hold sway over the Vietnam pharmaceutical distribution network (Cao, 2005). Therefore, most of the world leading pharmaceutical companies use these three FDI logistics companies, in combination with a Vietnamese counterpart, to distribute their specialized medicines (see Figure 3.2). For example, Zuellig Pharma Vietnam through their current Vietnamese counterpart PhytoPharma distributes medicines for 33 world leading international pharmaceutical manufacturers, which are worth approximately 20 per cent, by value, of the total Vietnam pharmaceutical market (Zuellig Pharma Asia Pacific, 2010).

3.4.3.3 Private pharmaceutical wholesalers and distributors

Important to Vietnam’s pharmaceutical supply chain is the 800 private pharmaceutical companies registered as wholesalers and distributors. These companies divide into two groups with different business strategies. The first group focuses on the free market, where medicines, both over-the-counter (OTC) and prescription-only medicines, are sold without ‘detailing’ (a process whereby specially trained personnel visit prescribers to explain the technical and medical advantages of their particular products) to physicians. The free market consists of ‘cho thuoc’ (places where wholesalers gather to trade pharmaceuticals) and private pharmacies. The second group focuses on the hospital market (hospital pharmacies and pharmaceutical departments) where medicines are sold by detailing.

Apart from “buying and reselling” medicines in Vietnam, which has created a multi- layer distribution network, private wholesalers and distributors also import medicines for resale. However, unlike international distributors, because of their relatively small scale, limited financial capacity and poor management, the private wholesalers and distributors rarely attract leading international pharmaceutical manufacturers to distribute their expensive innovator brand products. Instead, their activities are directed at low cost generic products often sourced from small international generic manufacturers.

Unlike multinational pharmaceutical manufacturers who often establish their Vietnam representative office to promote sale of their products, most of the small international generic manufacturers are not usually responsible for their medicines after they have been sold to local wholesalers. Thus, how the item is later promoted to hospitals and clinicians and the eventual price charged down the supply chain are matters of concern for local private wholesalers and distributors. For those who focus on the free market, setting low selling prices for their medicines is the main means of achieving market penetration.

The Ministry of Health Circular 13/2009/TT-BYT regulates activities on medicine information and advertisement. Article 5.3 of the Circular prohibits the use of material or financial benefit under any form to influence doctors and consumers to promote prescription and use of medicines. However, like other regulations, it is inadequately enforced. As will be evident in later chapters, companies responsible for the onward selling to hospitals often set highly inflated selling prices to gain sufficient revenue to fund their promotional marketing activities to prescribers. In somewhat of a paradox, the level of direct marketing and promotion to prescribers offsets low competitive pricing as a key factor in gaining market share in this part of the supply chain.

3.4.3.4 Retail medicine outlets and hospital pharmacies

In the retail sector, patients can buy medicines from retail medicine outlets or hospital pharmacies. There are 39,172 retail medicine outlets across the country, including 9,066 private pharmacies, mainly located in big cities (DAV, 2009b). Pharmacists with a university degree and five years experience can be licensed to operate private pharmacies. In remote areas, assistant pharmacists are able to apply for licenses. By 83 law, licensed pharmacists must always be physically present when they are open for business. In practice, licensed pharmacists are not always on duty. Many private pharmacies, whose owners are public servants and licensed for after-working time only, still operate their pharmacies during working hours (Chuc, 2002).

In addition, dispensing of prescription-only medicines without a prescription is a common practice in private pharmacies, although it is prohibited (BMI, 2009). Since 1987, when private pharmaceutical practice was legalized, private pharmacies have grown and taken over a large proportion of primary health care as first line medical care providers, but the regulatory system has not been able to keep up with this rapid change (Larsson, 2003). Vietnam’s National Drug Policy is aimed at ensuring sufficient supply of quality medicines and the promotion of rational use of medicines but does not specifically mention self-medication or the role of pharmacists and Good Pharmacy Practice (GPP) (Chuc, 2002; Larsson, 2003). Implementation of GPP under the Directive No. 01 in 2008 of the Minister of Health was intended to resolve these problems, but by March 2009, only 5 per cent of private pharmacies (444 pharmacies) met GPP standards (DAV, 2009b).

One of the reasons for slow implementation of GPP in private pharmacies is that the regulation of prescription-only medicines has not been sufficiently enforced. No financial inducements have been offered by the government in return for accreditation and compliance with GPP in private pharmacies. In fact, GPP private pharmacies that are required to adhere to the convention of prescription only medicines are disadvantaged in competing with non-GPP private pharmacies, which follow no such conventions. This is not an issue, however, for hospital pharmacies as patients always present with a prescription from their hospital-based doctor. Out of 437 hospital pharmacies in 37 provinces and cities implementing GPP, 140 pharmacies (32 per cent) had met the GPP standard by March 2009, (DAV, 2009b). Nevertheless, in relation to assessing hospital pharmacies, the Vice Minister of Health of Vietnam responsible for the pharmaceutical sector said in a press meeting on 11 July 2008:

‘Currently, more than 1,000 hospital pharmacies account for 60-70 per cent of retail pharmaceutical market share. However, medicine prices in hospital pharmacies are 30 per cent higher than the market price, quality and sources of

medicines are out of control, and the operation of hospital pharmacies is disorderly’ (Thanh Hải, 2008).

3.4.3.5 Hospital tender procedures and practices

Joint Circular 10/2007/TTLT-BYT-BTC of 10th August 2007 required pharmaceutical departments of public hospitals to purchase medicines using a tendering system. The tender may be conducted by the provincial government for all hospitals in the province, as well as at the individual hospital level. Competitive tendering is seen as a means of encouraging lower prices by guaranteeing successful tenderers a monopoly of supply over a given period. In addition, the Ministry of Health is required periodically to publicise the maximum price for medicines purchased for public health insurance or by a government budget arrangement, with the intention of creating a ceiling on tendered prices.

Tender boards are responsible for drawing up the tender schedule of medicines and then deciding on successful tenders. Membership of provincial tender boards comprises provincial government officials and nominees of selected hospitals in the province. Membership of hospital tender boards often comprises the director of the hospital as chairperson, the chief pharmacist as deputy chairperson, together with senior clinical department heads and the hospital finance officer.

Tender medicines are drawn from the basic medicine list, also known as the public health insurance reimbursement list, issued by the Ministry of Health. The local hospitals customize their tender in accord with the basic Ministry of Health list and the needs of the medical specialties offered by their clinical departments. A notional tender fee is required on the submission of both provincial and hospital tenders. Tender intervals may vary from six months to one year, and in some circumstances may be extended up to two years. Unlike hospital tenders, provincial tenders are let by name only, with no guarantee as to the volume of medicines that may be used. Provincial tenders were established in 2006 with the objective being to achieve economies of scale in the tender process and also to simplify administrative processes and their attendant costs.

3.4.3.6 Supply of medicines by medical practitioners

Medical practitioners are generally precluded from dispensing medicine to patients under Vietnamese law, except for a small emergency supply. However, many practitioners operating from some 30,000 private clinics throughout the country sell medicines to patients, in contravention of the law (BMI, 2009). Since revenue derived from the sale of medicines to patients represents a significant proportion of doctors’ income, it is a powerful motivator, encouraging private medical practitioners to supply medicines directly to patients. The practice is further facilitated by the poor enforcement of regulation prohibiting such practices.

Private medical practitioners are reportedly unwilling to give patients the reasons for supplying a medicine, or even to provide a detailed prescription, for fear patients will not return if they have recurrent symptoms, as patients prefer to obtain the medicines directly themselves (Xuan, 1992). Some private doctors, especially those in rural areas, even remove medicines from their packaging, so that they are unidentified (Hoa, et al., 2007). When doctors de-identify medicines, patients cannot compare prices or seek out more competitive pharmacies, decreasing the opportunity for patients to be price- sensitive. The practice is facilitated by the fact that many private doctors are not officially registered, although there is a requirement to register with local health authorities when establishing a private practice. There is no registration procedures associated with a professional medical board, as is the norm in developed countries. The authorities cannot fine companies who supply medicines to these doctors because in Vietnam, many transactions are made without invoices and on a cash-in-hand basis with inadequate enforcement of the law.

3.5 Implications for medicine prices

Vietnam has made important economic progress since initiating the Doi Moi reform in 1986 which has had a profound impact on the health care system. The health sector reforms since 1989 have transformed Vietnam from a publicly funded and provided health care services to a private-public mix system. This transition has however, created a pharmaceutical market with a number of deficiencies.

3.5.1 Ineffective governance

The Drug Administration of Vietnam (DAV) under the Ministry of Health is the pharmaceutical regulation authority in Vietnam. The role of the DAV is oversight of units and individuals which deal with manufacturing, importing-exporting, and buying and selling of pharmaceutical products. Most medicines must have product registration, as indicated by a valid visa number prior to marketing in Vietnam, although the DAV can allow medicines without a visa number to be marketed, to avoid shortage of these medicines on a case-by-case basis. A roadmap of meeting good practices is adopted to ensure the quality of medicines from suppliers to patients. Manufacturers have to comply with the code of Good Manufacturing Practice (GMP), importers with Good Storage Practice (GSP), distributors with GSP and Good Distribution Practice (GDP) and retailers with Good Pharmacy Practice (GPP). Recently, a Drug Price Management Division under the DAV has been established, to be responsible for State management of medicine prices.

Although a Pharmaceutical Law has been introduced, the attendant pharmaceutical regulation system has not kept up with the rapid changes in the pharmaceutical market, especially the rise of the private health sector. The degree of likely non-compliance was underestimated at the time that the reforms to free up the sector were introduced. The newly established Drug Price Management Division has only four staff members and faces difficulties in the management of prices of 20,066 medicines, especially while the medicine pricing policies are in the start-up phase. This task has become even more difficult in the absence of a strong regulation enforcement capacity, with a shortage of pharmaceutical inspectorate personnel and a weak, inconsistent and unclear sanction system.

3.5.2 A poorly organized and internationally dependent market

Vietnam’s pharmaceutical market is heavily dependent on imports. Approximately 50 per cent of pharmaceutical products still have to be imported About 90 per cent of domestic pharmaceutical products rely on imported raw materials. This high dependence on imports means that domestic medicine prices are subject to price fluctuations in international prices, as well as fluctuations in the exchange rates.

The domestic pharmaceutical industry is characterized by limited R&D facilities, insufficient financial capacity and poor management. Most local pharmaceutical manufacturers comprise small-scale operations with outdated manufacturing technology and duplicated production processes. The WTO requirement for domestic pharmaceutical manufacturers to comply with GMP standards has led to a wave of consolidation of the local industry involving multi-million dollar investment. This investment, however, needs to achieve a return on the capital invested as a legitimate cost of production, and this is eventually reflected in medicine prices.

The current pharmaceutical distribution network needs reorganisation. The many layers within the distribution network, each contributing a compounding mark-up along the supply chain, serve to inflate the final price of medicines to patients. Unnecessary duplication in manufacturing, importing and trading medicines leads to fierce counterproductive competition for an uneconomic share of an increasingly shrinking market.

3.5.3 Market imperfections

Reforms in Vietnam’s hospital sector have been based on a strategy of devolved responsibilities, with local administrative personnel empowered to address problems at a local level, and emphasis being placed on cost recovery by the application of user-pay principles. The increased operational and financial autonomy of hospitals regulated in Decree No. 10/2002/ND-CP has provided managers with wide latitude in almost all areas, except in setting fees. In some hospitals where ‘Khoan quan – contracting and controlling’ policy is applied, doctors are also paid on the basis of a set percentage of the treatment costs of the patients they treat including the cost of the medicines prescribed. This is in addition to their base salary and creates a positive inducement to over treat patients and prescribe more expensive medicines. The government partially or indirectly funds the sector through salaries and administrative expenses. To keep health care services affordable, the government also sets prices for basic health care services, such as medical consultations, below their economic cost.

On the supply side, the pricing authorities use a maximum allowable mark-up of 30 per cent of CIF prices as an unwritten-rule requirement in granting a product registration

88 number for pharmaceuticals. This produces a number of unintended effects. Firstly, since it is not formally regulated, the system is applied on a case-by-case basis, thus providing fertile ground for corruption, related to the circumvention of price setting procedures. Secondly, since the allowable mark-up is a fixed percentage, the more expensive the medicine, the greater the mark-up for pharmaceutical companies. This provides an incentive for companies to import more expensive products to trade, given the relative price inelasticity of demand for pharmaceutical products (OECD, 2008).

Vietnam’s pharmaceutical market is not perfectly competitive. Relative price inelasticity of demand results when a supplier enjoys a monopoly position by virtue of a patent held on an innovator brand product. Manufacturers of branded generics can achieve similar monopolistic positions by engaging in anticompetitive behaviours that amount to restraint of trade. The provision of various ‘rewards’ and inducements for prescribing their branded generic products exclusively is but one example. End users of these medicines are often passive consumers in the sense that they tend to purchase only that brand the clinician recommends. The end result in both cases is that price elasticity of medicines is reduced.

3.5.4 The role of public health insurance in containing medicine prices

The success of the government’s reform strategy will partly hinge on the organisation of public health insurance, as the main mechanism to improve access to health care and finance the delivery of health services (World Bank, 2007). However, numerous challenges exist, including low coverage, wide use of a fee-for-service provider payment mechanism and a lack of specialized skills for the operation of the public health insurance system (MOH of Vietnam & Health Partnership Group, 2008). Vietnam Social Security (VSS) is the government agency responsible for medicine reimbursement from the public health insurance authority, paying around USD 650 million for medicines in 2010. However, it still lacks involvement in controlling the procurement and prices of medicines paid by public health insurance authority (Quốc hội khóa XII, 2010). This is principally because Circular 10/2007/TTLT-BYT-BTC, which regulates medicine tendering, fails to mention a role for VSS in the price setting and tendering process.

3.6 Conclusions

In this chapter, a comprehensive contextual analysis has been provided of Vietnam’s pharmaceutical market in the context of the overall health care system. This review covers all of the relevant literature and data that was accessible and provides a platform for further investigation of medicine prices and policies and their impact in Vietnam. The overall health sector reforms adopted by the Vietnam government have combined a reliance on market mechanisms with the subsidization of the poor in mainstream social welfare programs. This combination has led to increased public health expenditure accompanied by substantial increases in patient out-of-pocket expenses, especially for medicines. It follows that social return on health expenditure will be greatly enhanced by initiatives directed at improving the efficiency and effectiveness of current health policies, coupled with a broader macro-economic objective of improving the national economy at large: the net effect being to increase the level of GDP per head of population.

As a commodity, medicines in Vietnam are priced more or less based on the supply- demand relationship. However, the price elasticity of demand for medicines is very low because of their monopoly, resulting from either a natural monopoly of patented innovator brand medicines or a prescriber monopoly of branded generic medicines. The price inelasticity of demand for medicines without effective controls from the government and the third party payer (i.e. public health insurance - the VSS), coupled with the prevalence of irrational use of medicines and the inefficiency of the financing system, the local pharmaceutical industry and the distribution network may partly result in high medicine prices in Vietnam.

In order to contain health care costs in general, and pharmaceutical expenditure in particular, a combination of multiple strategies may be needed. While reorganisation and modernisation of the local pharmaceutical industry and the distribution network is necessary, other actions are needed. These include facilitation of the quality use of medicines, extension of public health insurance coverage to be truly universal, effective purchasing by the public health insurance system, and improvement of the governance system of medicine pricing authorities. Prior to formulating sound recommendations for

90 effective medicine pricing policies however, reliable information on medicine prices, availability and affordability for the people of Vietnam is required.

Chapter 4. Availability and affordability of medicines in Vietnam

4.1 Introduction

The second objective of this thesis is to examine the availability and affordability of medicines in Vietnam. To meet this objective, data from a national survey of medicine prices and availability in Vietnam funded and overseen by the WHO were analysed and reported in this chapter. The author of this thesis was involved in all steps of this survey, from design to data collection to analysis and writing up the report. Specifically, the author was a member of the advisory committee responsible for designing the survey that included choosing study sites and selecting supplementary medicines (see sections 4.2.1 and 4.2.2). The author was also selected to be the data collection supervisor of Hanoi team, the data analyst and the country report writer of this survey project.

4. 2 Methods

The methodology adopted in the survey was that developed by the World Health Organization (WHO) and Health Action International (HAI) for assessing medicine price, availability, and affordability (WHO & HAI, 2003).

4.2.1 Sampling

A systematic sampling method was used to select medicine outlets. Five geographical regions in Vietnam were selected as survey areas, namely Hanoi (Capital), Haiphong (North), Danang (Central), Daklak (Central Highland) and Ho Chi Minh City (South). In each area, the main general public hospital was chosen as the sampling site. Six other public health facilities reachable within four hours’ drive from the main hospital were also randomly selected. The for-profit medicine outlets of these public health facilities, where patients are charged for medicines, constituted the public sector sample. The private sector sample was identified by choosing one private, for-profit retail pharmacy closest to each of these public outlets. In each public health facility, apart from its for- 93 profit medicine outlet, the not-for-profit component of the pharmaceutical department, which mainly serves insured patients, was selected as the “other sector”, as defined in the methodology.

4.2.2 Medicines surveyed

Table 4.1 Basket of 42 medicines surveyed in Vietnam in 2005

Medicine Name Core List International Vietnam’s No (yes/no) comparison EML yes yes yes 1 Aciclovir 200 mg capsule/tablet yes yes yes 2 Amitriptyline 25 mg capsule/tablet yes yes yes 3 Amoxicillin 250 mg capsule/tablet yes yes yes 4 Atenolol 50 mg capsule/tablet Beclomethasone 50 mcg/dose yes yes yes 5 inhaler yes yes yes 6 Captopril 25 mg capsule/tablet Carbamazepine 200 mg yes no yes 7 capsule/tablet yes yes no 8 Ceftriaxone 1 g/vial injection Ciprofloxacin 500 mg yes yes yes 9 capsule/tablet Co-trimoxazole 8+40 mg/ml yes yes no 10 suspension yes no yes 11 Diazepam 5 mg capsule/tablet yes no yes 12 Diclofenac 25 mg capsule/tablet yes yes no 13 Fluoxetine 20 mg capsule/tablet yes yes yes 14 Glibenclamide 5 mg capsule/tablet Hydrochlorothiazide 25 mg yes yes yes 15 capsule/tablet yes no yes 16 Indinavir 400 mg capsule/tablet yes no no 17 Losartan 50 mg capsule/tablet yes no no 18 Lovastatin 20 mg capsule/tablet yes no yes 19 Metformin 500 mg capsule/tablet yes no yes 20 Nevirapine 200 mg capsule/tablet 94

yes no yes 21 Nifedipine Retard 20 mg tablet yes yes yes 22 Omeprazole 20 mg capsule/tablet yes no yes 23 Phenytoin 100 mg capsule/tablet yes yes yes 24 Ranitidine 150 mg capsule/tablet yes yes yes 25 Salbutamol 0.1 mg/dose inhaler no no yes 26 Acetylsalicylic acid 500mg tablet no no yes Amoxicillin + Clavulanic acid 27 500mg/125mg tablet no no yes 28 Cefuroxime 250mg tablet no no yes 29 Chlorpheniramine 4mg tablet no no yes 30 Clotrimazole vaginal 100mg tablet no no yes 31 Co-trimoxazole 480mg tablet no no yes 32 Dexamethasone 0.5mg tablet no no yes 33 Digoxin 0.25mg tablet no no yes 34 Enalapril 5mg tablet no no yes 35 Erythromycin 250mg tablet no no yes 36 Furosemide 40mg tablet no no yes 37 Gliclazide 80mg tablet no no no 38 Ketoconazole 5g, 2% cream no no no 39 Loratadine 10mg tablet no no yes 40 Metronidazole 250mg tablet no no yes 41 Nifedipine 10mg tablet no no yes 42 Piroxicam 20mg tablet

Of the 42 medicines included in the survey basket, 25 belonged to the list of core medicines included by WHO/HAI, and 17 were selected as supplementary medicines (see Table 4.1). The core medicines were selected on the basis of global disease burden, while the supplementary list was chosen for local clinical relevance, with input from the advisory committee consisting of practicing pharmacists, academics, and experts from

95 the DAV and WHO. As shown in Table 4.1, 35 out of 42 medicines surveyed are on the current Essential Medicines List of Vietnam.

For each medicine, information was collected on the availability and price of the innovator brand (IB), and the lowest-priced generic equivalent (LPG) found at each medicine outlet.

4.2.3 Data collection and entry

Twenty trained data collectors visited medicine outlets in pairs and recorded data on a standardized form, with the support of a representative of the provincial health bureau in each survey area. Four types of prices were recorded, namely procurement price and patient price in public medicine outlets, patient price in private pharmacies and insured patient price in the pharmaceutical departments of public hospitals. The procurement price data were collected only if the public medicine outlet had invoices available as authenticating evidence. The unit prices were calculated and checked by area supervisors at the end of each day of data collection. Five area supervisors were also responsible for validation of 10 per cent of all data collected from medicine outlets. Checked data were then entered into a pre-programmed Medicine Price Workbook (version 4.01) using a double entry technique. A data checking function of the Workbook was run to highlight outliers for verification.

4.2.4 Data analysis

Price results were calculated for each medicine only if the medicine was found in at least four outlets and were reported as median price ratios (MPR) for each medicine type in each sector. The MPR is the ratio of a medicine’s median price across outlets to a median international reference price (IRP), an external standard to make medicine to medicine comparisons. In this study, the median unit prices in the Management Sciences for Health (MSH) Price Indicator Guide were used as the IRP because of their wide availability and annual updating. The 2004 MSH IRPs were used as defaults, since the Vietnam survey was conducted in 2005. They are the median of actual procurement prices offered by not-for-profit suppliers or international tender prices to developing countries for multi-sourced products (MSH, 2008). Cut-off points of MPRs of 1.0, 1.5

96 and 2.5 for public procurement price, public patient price and private patient price, respectively have been considered acceptable local price ratios (Gelders, et al., 2006).

Availability was assessed as the percentage of surveyed facilities stocking the medicine concerned on the day of data collection. In the assessment of availability, the following ranges have been used (Gelders, et al., 2006):

x <30% very low x 30-49% low x 50-80% fairly high x >80% high

Affordability was assessed as the number of days’ wages needed by the lowest paid unskilled government worker to purchase a course of treatment for an acute disease or a month’s treatment for a chronic disease. More than one day’s wages to pay for the treatment was considered poor affordability4.

Local comparison analysis was conducted across five surveyed areas, namely Hanoi, Haiphong, Danang, Daklak and Ho Chi Minh City, following the method published by Babar et al. (2007). Only medicines found in all five areas were selected for price comparison using a Kruskal-Wallis test with p < 0.05 being used as the significance level.

As outlined in Chapter 2, at a global level the data on medicine prices and availability in 45 national and sub-national surveys conducted in 36 countries using the WHO/HAI methodology were synthesized by Cameron et al. (2009). In their secondary analysis, summary results were presented for 15 medicines, which were included in at least 80 per cent of the 45 surveys to increase comparability of the findings. Results were also presented individually for four commonly used medicines: amoxicillin 250 mg capsule or tablet, ciprofloxacin 500 mg capsule or tablet, glibenclamide 5 mg capsule or tablet, and salbutamol 200-dose inhaler 0.1 mg/dose. These medicines were selected to indicate how well summary data represent results for individual medicines, and

4 Personal communication with Mr. Martin Auton, (Global Project Officer – medicine pricing, Health Action International Global), who was a WHO advisor conducting training for the Vietnam team undertaking the medicine price survey in 2005. 97 illustrate differences between treatments for chronic and acute conditions (Cameron, et al., 2009).Vietnam was not included in the secondary analysis since its data were not available in the HAI global database of survey results. In this chapter, the data from Vietnam were compared with the results reported by Cameron et al. to assess Vietnam’s position in relation to availability and affordability among countries of similar economic status, as well as comparing them with countries within the same region.

In 2007, Vietnam was ranked in the low-income group according to the World Bank and in the WHO Western Pacific Region (WPR). India was excluded from the comparison, although also in the low-income group in 2007, because of the unique nature of the Indian pharmaceutical market.

Most comparable countries conducted their survey in 2004, using MSH 2003 median unit prices as the IRP. Therefore, the medicine price data in Vietnam for international comparisons were adjusted from 2004 MSH IRPs to 2003 MSH IRPs, taking into account a correction for inflation or deflation between the survey year 2005 and the base year 2004 (using CPI), and adjusting for the purchasing power parity (PPP) of the Vietnam currency (VND) (HAI, 2008a).

Although the patient price data were corrected for inflation/deflation and also adjusted for the PPP of VND, the procurement price data were not adjusted for PPP, but for exchange rates using the official exchange rate for the USD in the survey year. This was because most public procurements should have been able to purchase comparable prices by using competitive international tenders, regardless of the purchasing power of the local currency.

4.3 Results

Of the outlets sampled, data on procurement prices were collected from 31 public medicine outlets, public patient prices from 33 public medicine outlets, private patient prices from 33 private pharmacies, and public insured patient prices from 35 public hospital pharmaceutical departments.

4.3.1 Medicine availability

The mean availability of IBs and LPGs was 19.6% and 33.6%, respectively in the public sector, 34.7% and 58.1%, respectively in the private sector, and 10.9% and 40.4%, respectively for insured patients in the not-for-profit public sector (see Table 4.2). Low availability of LPGs was also found for essential medicines. Of the 42 medicines studied, 35 were listed on the Vietnam National Essential Medicines List (Bộ Y tế, 2005). A separate analysis for these 35 medicines showed that in the public sector, mean availability was 19.6% for IBs and 37.1% for LPGs.

Table 4.2 Mean availability and ranges for IBs and LPGs by sectors for 42 medicines surveyed in 2005 in Vietnam. Innovator brand medicines Lowest priced generic medicines Public Private Other Public Private Other sector sector sector sector sector sector Mean 19.6% 34.7% 10.9% 33.6% 58.1% 40.4% Max 78.8% 100% 74.3% 87.9% 100% 94.3% Min 0% 0% 0% 0% 0% 0%

IB=innovator brand. LPG=lowest-priced generic. Medicine availability=percentage of surveyed medicine outlets stocking the medicine concerned on the day of data collection

Overall, all sectors showed greater availability of LPGs than IBs. However, the opposite applied to some individual products, namely atenolol, nifedipine, and salbutamol inhaler. Beclomethasone inhaler and fluoxetine were found not to be available in any medicine outlets although beclomethasone inhaler is on the current Essential Medicines List of Vietnam.

4.3.2 Medicine prices

The procurement prices in the public sector were 8.29 times the IRPs for 23 IBs and 1.82 times the IRPs for 33 LPGs (see Table 4.3). Prices of some IBs such as acetylsalicylic acid, atenolol, ciprofloxacin, diclophenac, loratadine, nifedipine, omeprazole, and piroxicam and of one LPG, piroxicam, exceeded 10 times the IRPs. The public procurement system seemed highly variable, since it could also procure 99 some extremely cheap LPGs such as dexamethasone and losartan with prices of 0.4 and 0.21 times the IRPs, respectively. Prices for individual medicines were fairly stable across outlets for IBs, whereas they varied dramatically for LPGs. Some medicines had prices varying between less than one, to tens of times the IRPs, an example being LPG piroxicam (0.85 to 23.80 times the IRPs), showing both reasonable and excessive prices for the same medicine (see Appendix 1 and Appendix 2). In some public medicine outlets, three LPGs: amoxicillin plus clavulanic acid, gliclazide, and metronidazole were more expensive than IBs.

Table 4.3 Median price ratio* of IBs, LPGs in the public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005.

Medicine Public procurement Public sector Private sector Other sector types prices prices prices prices Adjusted for official Adjusted for PPP of VND in 2005 ‡ exchange rate Q4 2005†

IBs 8.29 46.58 44.61 38.88 LPGs 1.82 11.41 8.30 8.59 IB=innovator brand. LPG=lowest-priced generic. PPP: Purchase Power Parity. VND: Vietnam currency unit. *Ratio of the median local price to the MSH international reference price. †Official exchange rate for US dollar in quarter 4, 2005: USD 1= VND 15,907.00. ‡PPP of VND in 2005: international dollar 1=VND 3,218.607. Information on the official conversion rate for USD was from The International Monetary Fund: International Financial Statistics (IMF, 2009), and the source of national PPP was The International Monetary Fund: World Economic Outlook Database (IMF, 2007).

Following adjustment for PPP in 2005, the public patient sector prices were 46.58 times the IRPs for IBs and 11.41 times the IRPs for LPGs; 44.61 for IBs and 8.30 for LPGs in the private sector and 38.88 for IBs and 8.59 for LPGs for insured patients (see Table 4.3). In the private sector, among 24 medicines for which both IB and LPG were found together, IBs were 5.6 times more expensive than LPGs. This sector also witnessed substantial price variability across outlets for both individual LPGs and IBs (see Appendix 1 and 2). Table 4.4 shows price data for 35 medicines on Vietnam’s current Essential Medicine List.

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Table 4.4 Median price ratio* of IBs, LPGs on the current Essential Medicine List in the public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005.

Medicine Public procurement Public sector Private sector Other sector types prices prices prices prices Adjusted for official Adjusted for PPP of VND in 2005 ‡ exchange rate Q4 2005†

IBs 8.24 45.44 45.69 38.88 LPGs 1.86 11.92 8.30 8.56 IB=innovator brand. LPG=lowest-priced generic. PPP: Purchase Power Parity. VND: Vietnam currency unit. *Ratio of the median local price to the MSH international reference price. †Official exchange rate for US dollar in quarter 4, 2005: USD 1= VND 15,907.00. ‡PPP of VND in 2005: international dollar 1=VND 3,218.607. Information on the official conversion rate for USD was from The International Monetary Fund: International Financial Statistics (IMF, 2009), and the source of national PPP was The International Monetary Fund: World Economic Outlook Database (IMF, 2007).

4.3.3 Affordability

Affordability was largely dependent on the choice of therapeutic classes, types of medicines and whether the provider is seeing the patient in a public or private setting sector. For example, while amoxicillin is recommended in national treatment guidelines as the first choice antibiotic to treat an acute respiratory infection, many doctors often opt to use cefuroxime or ceftriaxone injection for their patients. In 2005 a worker would have had to work 0.7 days to treat an acute respiratory infection with LPG amoxicillin (250 mg three times daily in 7 days) but would pay 15.9 days’ wages with LPG ceftriaxone (1vial 1g daily in 7 days) in the public sector. The same treatment required the worker to earn 83 days’ wages extra to afford IB ceftriaxone rather than LPG (98.9- 15.9).

With chronic diseases such as a peptic ulcer, two medicines used to treat this condition were surveyed namely ranitidine and omeprazole. A one-month treatment using IB ranitidine (150 mg twice a day) cost 22.1 and 21.1 days’ wages in the public and private sector, respectively. While low-priced generics of ranitidine were available in the private sector, the LPG ranitidine would have cost the worker 1.3 days’ wages. In the 101 public sector, the so-called LPG ranitidine would have cost 13.9 days’ wages, an added 12.6 days’ wages compared with the private sector. If prescribed IB omeprazole (20 mg daily) instead, the cost would have been 50.9 days’ wages in the public sector and 48.9 days’ wages in the private sector (see Figure 4.1).

IB Ceftriaxone An additional 83 days for LPG Ceftriaxone the IB

An additional 15.2 days if being prescribed another therapeutic LPG Amoxicillin

Public sector IB Omeprazole Private sector

IB Ranitidine

An additional 12.6 days if buying in the public sector where the low-priced generics LPG Ranitidine were not available

0 20 40 60 80 100 120 Number of days' wages IB: innovator brand. LPG: lowest-priced generic equivalent

Figure 4.1 Differences in affordability of a treatment for an acute respiratory infection and a one-month treatment for a chronic peptic ulcer between therapeutic classes, types of medicines and sectors in Vietnam.

4.3.4 Variation across regions

Consistent with the national trend, the mean availability of sampled medicines was higher for LPGs than for IBs, and higher in the private sector than in the public sector for both IBs and LPGs in all five regions. The two main hubs for distribution of pharmaceuticals to the North and South of Vietnam, Hanoi and Ho Chi Minh City, had the highest mean availability among regions. In Hanoi, 72.4% LPGs and 43.2% IBs were available in the private sector and in Ho Chi Minh City 65.3% and 52.4%. Haiphong had the lowest mean private sector availability of 39.8% for LPGs and 15.6% for IBs.

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Of all 84 medicines studied (42 IBs and 42 LPGs), 12 medicines were found in all five study sites. A Kruskal-Wallis test revealed no significant difference in MPRs level of these 12 medicines across five study sites with χ2 (4, n=120) = 1.763, p = 0.779.

4.3.5 International comparison

4.3.5.1. Medicine availability

60 60.7 56 Minimum 50 50.1 43 Maximum 40 Mean 36.1 34.8 30

Average availabilityAverage (%) 20

0 WPR Low Income Vietnam WPR Low Income Vietnam (n=5) (n=15) Public sector (n=6) (n=17) Private sector Public sector Public sector Private sector Private sector World Bank low-income group and WHO Western Pacific Region

Figure 4.2 Mean percentage availability of lowest-priced generic medicines in Vietnam, in comparison with the average of country-level mean percentage availability of lowest-priced generic medicines in the World Bank low-income group and the WHO Western Pacific Region (WPR). Source: Adapted from Cameron A. et al. (2009)

The mean percentage availability of the sample of 15 LPGs in Vietnam was 34.8% in the public sector and 56.0% in the private sector. This is similar to the average of the country-level mean percentage availability of medicines across the World Bank low- income countries. Compared with the Western Pacific Region, Vietnam had lower availability of medicines in the public sector, but slightly higher availability in the private sector (see Figure 4.2). For individual medicines, their availability was not consistent with the overall data for Vietnam and the Western Pacific Region. For example, in the public sector while the availability of three medicines LPG amoxicillin 103

250 mg, LPG glibenclamide 5 mg and LPG Salbutamol 0.1 mg was markedly lower in Vietnam than in the Western Pacific Region, the availability of LPG ciprofloxacin 500 mg was almost fourfold higher in Vietnam (see Table 4.5).

Table 4.5 Mean percentage availability of individual lowest-priced generic medicines in Vietnam, in comparison with the average of country-level mean percentage availability of individual lowest-priced generic medicines in the WHO Western Pacific Region. Mean availability (range) - Mean availability (range) -

public sector (%) private sector (%)

WPR (n=5)* Vietnam WPR (n=6) Vietnam

Basket of 15 medicines 43.0 34.8 50.1 56.0

(22.2-79.2) (33.6-77.6)

Amoxicillin 250 mg 74.0 48.5 87.9 81.8 capsule/tablet (30.8-100) (72.5-100)

Ciprofloxacin 500 mg 24.5 84.8 57.3 100 capsule/tablet (0-75.0) (0-97.2)

Glibenclamide 5 mg 40.6 27.3 45.0 51.5 capsule/tablet (0-100) (0-94.4)

Salbutamol 0.1 mg/dose inhaler 48.3 6.1 52.0 33.3

(0-100) (7.8-97.2)

Data for WPR are mean (range). WPR: Western Pacific Region. *Fiji did not survey the public sector

Source: Adapted from Cameron A. et al. (2009)

4.3.5.2. Medicine prices

While other low-income countries achieved an average public procurement price of 17% higher than the IRPs for LPGs, the Western Pacific Region and Vietnam both had procurement prices averaging 44%-45% more than the IRPs (see Figure 4.3). For individual medicines, their public procurement prices varied and were not consistent with the overall data for Vietnam and the Western Pacific Region. The public procurement price for LPG amoxicillin 250 mg was the same in Vietnam and in the 104

Western Pacific Region, whereas for LPG glibenclamide 5 mg, it was fourfold higher in Vietnam than in the Western Pacific Region. By contrast, the public procurement price was lower in Vietnam for LPG ciprofloxacin 500 mg (1.45 vs. 2.55) (see Table 4.6).

6 5.37 5

4 Minimum 3 2.94 Maximum Mean 2

Median price ratios price Median 1.44 1.45 1 1.17 0.59 0 0.09 WPR (n=6) Low income (n=16) Vietnam World Bank low income group and WHO Western Pacific Region

WPR: the Western Pacific Region. *Ratio of the median local price to the MSH international reference price.

Figure 4.3 Median price ratio* in public procurement for LPG medicines in Vietnam, in comparison with those in the World Bank low-income group and the WHO Western Pacific Region. Source: Adapted from Cameron A. et al. (2009)

Prices for patients in Vietnam were higher in the public sector than in the private sector for both IBs and LPGs (32.12 times the IRPs for IBs and 7.53 times the IRPs for LPGs in the public sector versus 31.75 for IBs and 6.09 for LPGs in the private sector). This trend deviated from other countries where medicines in the private sector were often more highly priced (Cameron, et al., 2009). Compared with the average level in the Western Pacific Region, Vietnam had markedly lower prices for LPGs in both the public and private sector, but only slightly lower prices for IBs in the private sector. The trend was similar for individual amoxicillin 250 mg, whereas it was in the opposite direction for salbutamol 0.1 mg/dose. Ciprofloxacin 500 mg was recorded as having substantially lower prices for both IBs and LPGs in both sectors in Vietnam than in the Western Pacific Region (see Table 4.6).

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Table 4.6 Median price ratios* of public procurement prices, public patient prices, private patient prices for LPG medicines, and private patient prices for IBs in Vietnam in comparison with those in the Western Pacific Region in 2004.

Public Public patient Private patient Private patient procurement prices prices for LPGs prices for LPGs prices for IBs for LPGs WPR Vietnam WPR Vietnam WPR Vietnam WPR Vietnam Median across 1.44 1.45 11.95 7.53 11.25 6.09 34.21 31.75 basket of 15 (n=6) (n=4) (n=6) (n=5) medicines Amoxicillin 250 1.23 1.20 9.32 6.96 11.08 6.09 26.23 † mg (n=4) (n=3) (n=5) (n=2) capsule/tablet Ciprofloxacin 2.55 1.45 81.71 7.53 32.94 5.65 195.96 131.80 500 mg (n=1) (n=1) (n=4) (n=3) capsule/tablet

Glibenclamide 5 1.68 6.67 56.97 36.51 34.59 30.43 99.57 160.64 mg (n=4) (n=1) (n=4) (n=3) capsule/tablet Salbutamol 0.1 0.95 † 4.64 † 4.32 5.56 8.60 9.88 mg/dose inhaler (n=4) (n=2) (n=6) (n=5)

Data for WPR are means (number of surveys). WPR: the Western Pacific Region. LPG=lowest-priced generic. IB=innovator brand. *Ratio of the median local price to the MSH international reference price. † median price ratio was not calculated since medicine prices were found in less than four medicine outlets

In the private sector in Vietnam, the median brand premium (the percentage difference in price between IBs and LPGs for matched pairs of medicines) was 460%, much higher than the average brand premium of 337.7% in this sector among the World Bank low- income group (Cameron, et al., 2009). For some individual medicines, such as ciprofloxacin 500 mg capsule/tablet or omeprazole 20 mg capsule/tablet, the figure was as high as 2,233.3% and 2,560.1%, respectively.

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4.3.5.3 Affordability

Despite the comparative lower prices, medicines in Vietnam were much less affordable than in the Western Pacific Region. Data presented in Table 4.7 show the affordability of treating one acute infection and three chronic illnesses in different sectors for LPGs and IBs between Vietnam and the Western Pacific Region in 2004.

Table 4.7 Number of days’ wages of the lowest-paid unskilled government worker needed to purchase a course of treatment in Vietnam in comparison with those in the Western Pacific Region in 2004. Public sector, LPG Private sector, LPG Private sector, IB WPR Vietnam WPR Vietnam WPR Vietnam Adult respiratory infection; 0.4 0.7 0.4 0.6 0.5 † amoxicillin 250 mg (n=3) (n=4) (n=2) capsule/tablet, three per day for 7 days Diabetes; glibenclamide 5 mg 0.7 2.6 0.7 2.1 1.6 11.3 capsule/tablet, two per day for 30 (n=1) (n=4) (n=3) days* Ulcer; ranitidine 150 mg 1.2 13.9 1.7 1.3 5.5 21.1 capsule/tablet, two per day for 30 (n=4) (n=6) (n=3) days* Asthma; salbutamol 0.1mg/dose 1.1 † 0.7 3.1 1.4 5.5 inhaler, 200 doses (n=2) (n=6) (n=5) Data for WPR are means (number of surveys). WPR: the Western Pacific Region. LPG=lowest-priced generic. IB=innovator brand. *One month has been used as a course of treatment for chronic illnesses. † number of days’ wages was not calculated since medicine prices were found in less than four medicine outlets

4.4 Discussion

In 2005, Vietnam faced the inadequacy of the public system in terms of medicine supply for the poorest sector. In contrast to other countries in the Western Pacific Region, Vietnam medicine prices in the public sector were higher than in the private sector. Public procurement and public patient prices were high for both LPGs and IBs. While LPGs were of low availability, a large number of IBs were found in public

107 medicine outlets. Medicines were unaffordable for the lowest paid unskilled government worker, and even less so for the large percentage of the population who earned below this benchmark.

Lack of availability of low-priced generics in the public sector made the lowest-priced generics in this sector for some medicines (such as ranitidine) still more than ten times the IRP. Adjusted for the PPP in 2005, the price of LPG ranitidine in the public sector was 27.42 times the IRP, while in the private sector it was 2.52 times the IRP. Hence, simply promoting the use of generic medicines will not result in savings for patients without mechanisms to ensure a low price. Fixing prices using external price benchmarking or internal reference pricing techniques, where the price of the medicine of interest is compared with those of identical or similar products within or between countries, could be considered as one option (Mrazek & Mossialos, 2004; Rietveld & Haaijer-Ruskamp, 2002). A more flexible alternative might be a reference pricing system where a reimbursement ceiling is set for a medicine based on the prices of equivalent products already marketed (Jacobzone, 2000).

In 2005, the public procurement system was found to be inefficient, as Vietnam’s public hospitals had to purchase LPGs at a price 82% higher than the IRP. Due to lack of a sound and clear regulation about mark-ups in the public sector at the time of the survey, there were mark-ups of 13.8% for IBs and 26.8% for LPGs. High mark-ups on already high procurement prices led to even higher patient prices in this sector. To make public facilities a primary treatment option for the poor, the government needs to reduce medicine prices in this sector by improving procurement efficiency and regulating reasonable mark-ups. The government is well placed to negotiate medicine prices given it is the principal purchaser/financer of medicines through public hospitals and related public treatment facilities.

In comparable low-income and Western Pacific countries, public sector prices were usually lower than or equal to private sector prices (Cameron, et al., 2009). The lower medicine prices experienced in the private sector in Vietnam reflect the more efficiency of the sector in comparison with public institutions. However, when buying a sample of 15 medicines from private pharmacies in 2004, patients still had to pay 6.09 times the IRPs even for the LPGs. The situation was worse if patients were prescribed IBs, which

108 had a brand premium of 460% in the private sector. These results indicate huge scope for reducing medicine spending or creating efficiencies with more people being able to receive treatment with the same expenditure through appropriate use of generic medicines. Nevertheless, to ensure the success of a strong competitive generic medicines policy, apart from mechanisms to ensure the low price of generics, four preconditions must be met: the existence of supportive regulations providing for substitution of generic medicines where therapeutically equivalent; the operation of a reliable quality assurance program to ensure like is compared with like and discount prices do not equate to discount quality; the attainment of professional and public acceptance; and the existence of financial incentives (WHO, 2004a).

Affordability of medicines was a significant problem in Vietnam and it remains so. Results from this study, however, show that affordability varied with therapeutic classes and types of products. Therefore, improvement in the rational use of medicines and patient choice should play an important future role, especially given that self-treatment and irrational prescribing and dispensing are common in Vietnam (Dat, et al., 1997; Larsson et al., 2006; Larsson et al., 2005; Okumura et al., 2002). Interventions that have proved effective in other developing countries include financial measures (e.g. direct financial incentives) (Riewpaiboon, 1998) and professional measures (e.g. standard treatment guidelines; essential drug lists; drug and therapeutics committees; problem- based basic professional training; and targeted in-service training of health workers) (Laing et al., 2001). Multi-component interventions have so far proved to be a good way to improve pharmaceutical practice in Vietnam and are thus likely to hold the most promise for better access to more affordable medicines for the whole community (Chalker et al., 2002; Chuc et al., 2002)

Compared with other countries in the Western Pacific Region, medicines in Vietnam were less affordable, despite having markedly lower prices. Similar findings were reported in Kyrgyzstan, Tajikistan, and Uzbekistan where medicine prices were lower but less affordable compared with those in Kazakhstan (Waning, et al., 2007). This result has two implications. Firstly, it suggests that the price of medicines per se is not necessarily predictive of affordability. Secondly, it indicates a much lower average salary level in Vietnam than in the Western Pacific Region overall. While improving people’s incomes across society is a long term goal, financial initiatives such as

109 universal health insurance will also improve medicine affordability as will improvements in macroeconomic outcomes that increase the average disposable income of people in Vietnam in line with growth in GDP.

The limitations inherent in the standardized WHO/HAI methodology used to assess medicine affordability apply equally to this study. Firstly, the methodology does not take account of differences in medicine prices, which may arise in relation to differences in volume of product used in each country. Secondly, the WHO/HAI methodology only gauged the cost of a single medicine for a particular condition, whereas in Vietnam more than three medicines were often prescribed on each occasion for the same condition (Falkenberg, et al., 2000; Larsson, et al., 2005). Other additional treatment costs such as consultation fees and diagnostic tests were also not included. Moreover, many Vietnamese earn less than the lowest paid government worker. Therefore, using the number of days’ wages needed by the lowest paid unskilled government worker to purchase a course of treatment may overestimate the medicine affordability for the most of the population. The unaffordability of medicines in Vietnam would be better representative of reality if all these factors were taken into account. “The proportion of the population being pushed below USD1.25 or USD2 per day poverty levels because of the purchase of medicines” may be a better measure of medicine affordability in future studies as recently proposed by Niëns, et al. (2010).

Finally, given the intensive resources required to undertake this medicine prices, availability and affordability study, as suggested by WHO/HAI (2008), this study should be repeated every three to five years as an integral part of national policy. For regular price, availability and affordability monitoring to measure the effectiveness of changes in Government policies, a modified method that is simpler and more sustainable is needed. A full methodology for medicine prices and availability monitoring has been proposed by WHO/HAI (2008) with general guidelines and minimum standards for countries to customize the proposed monitoring methodology to their national context.

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4.5 Conclusions

The findings of this study showed that, in comparison with the international benchmark, medicines in Vietnam were high in price, and low in both availability and affordability, especially in the public sector, although they were less highly priced than those in the Western Pacific Region. There were 33.6 per cent of medicine outlets in the public sector in which the generic medicines concerned were available at the time of survey. The availability of essential medicines was somewhat higher, reaching 37.1 per cent of public medicine outlets but still at low level. The median public procurement price was 1.82 times the IRPs for generics, but for some individual medicines it was less than half the IRP. Adjusted for Purchasing Power Parity in 2005, the prices for patients were 46.58 times the IRPs for IBs and 11.41 times the IRPs for LPGs in the public sector; 44.61 for IBs and 8.30 for LPGs in the private sector. Pharmaceutical treatments were thus largely unaffordable for a majority of the population.

The exploration of unusual findings of medicine prices in Vietnam is necessary prior to formulating sound, effective medicine pricing policies. The anomalies in the expected trends with medicine prices being higher in the public sector than in the private sector, as well as some generic medicines being more expensive than their corresponding innovator brands (which only occurred in the public sector), suggest abnormal components in the price structure of medicines in this sector. The extremely high medicine prices in Vietnam in comparison with the international benchmark point to the ineffectiveness of Vietnam’s medicine pricing policies. Nevertheless, these issues cannot be fully understood without further study including an attempt to gain some insights through a qualitative analysis of key issues. Therefore, in the next chapter, the effectiveness of Vietnam’s medicine pricing policies is assessed and presented using a qualitative documentary analysis. An in-depth understanding of underlying factors leading to high medicine prices and the anomalies is also explored through subsequent qualitative studies presented in Chapters 6 and 7.

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Chapter 5. Medicine pricing policies in Vietnam

5.1 Introduction

Assessment of the effectiveness of Vietnam’s medicine pricing policies is the third objective of this thesis to identify the factors influencing the poor performance of medicine pricing policies in Vietnam. To fulfill this objective, a study was conducted to review relevant legislation and to analyse the strengths and weaknesses of current medicine pricing policies, their impact on stakeholders and the effect on end prices. Feasible policy options with implementation options are recommended to ensure medicine prices are set at reasonable levels.

5.2 Methods

A systematic analysis of the relevant documents was undertaken in consultation with the Vietnam Ministry of Health officials from April to July 2008. All relevant available regulatory documents in Vietnamese (or English where available) were obtained and analyzed. All legislation and sub-legislation from January 1989 to March 2008, including laws, ordinances, decrees, and administrative circulars, regarding medicine prices and pricing policies were reviewed. Technical reports on the implementation of these regulatory documents were also examined.

The main sources of these documents were:

x The Drug Price Management Division of the Drug Administration of Vietnam; x The Inspectorate of Vietnam’s Ministry of Health; x The website of the Ministry of Justice of Vietnam: http://vbqppl.moj.gov.vn/law/vi/index_html (later replaced by the current website: http://vbqppl.moj.gov.vn/Pages/vbpq.aspx); and x A commercial law website: http://legal.khaitri.vn/.

Web-based searches were conducted on Vietnamese language documents as they related to key topics such as giá thuốc (medicine price), chính sách giá thuốc (medicine pricing 113 policy) and quản lý giá thuốc (medicine price control). The initial list of identified documents was expanded by checking cross-references stated in the legal basis section of each regulatory document. Consultations with officials in the Drug Price Management Division of the Drug Administration of Vietnam were also undertaken, in order to allow them to suggest other relevant documents and reports that were not readily available from public sources.

An analytical framework was developed for the three components of the policy cycle: formulation, implementation and accountability (Rist, 1994). Policies and legislation related to medicine pricing were analyzed for the extent to which they were appropriately developed and sufficiently implemented to control medicine prices. Also investigated was the degree of all stakeholders’ accountability in this process. Based on the policy cycle framework, a structured set of questions adapted from Rist (1994) was developed to facilitate analysis (see Appendix 3).

Individual regulatory documents were analyzed by the researcher using the questions developed. Technical and inspection reports on the implementation of these documents were used to assist in answering these questions. Where documentary data were not available, consultations with medicine pricing authorities were conducted. Answers obtained were compared across different policy documents to assess the regulatory reforms.

5.3 Results

Vietnamese law is based on legislative and sub-legislative regulatory documents, not case or common law. Legislative documents comprise the Vietnam Constitution, Laws or Law Sets, and Resolutions of the National Assembly. The sub-legislative regulatory documents include Ordinances, Resolutions of the Standing Committee of the National Assembly; Decrees of the government (often issued to elaborate laws/ordinances); and Ministerial Circulars (to guide implementation of Decrees) (NAV, 2008). All relevant government ministries were involved in drafting the regulatory documents. Industry groups and relevant stakeholders were also consulted prior to the drafting of the documents.

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An extensive discussion of all legal instruments and policies introduced by the Vietnam government post 1989 that might influence medicine prices (see Table 5.1) goes beyond the scope of this thesis. Instead, this analysis focuses on the most pertinent current medicine pricing provisions regulated by Pharmaceutical Law No 34/2005/QH11, elaborated in government Decree 79/2006/ND-CP; and the implementation Joint Circular 11/2007/TTLT-BYT-BTC-BCT. Also investigated were past pricing provisions, outlined in Joint Circular 08/2003/TTLT-BYT-BTC and in government Decree 120/2004/ND-CP. These documents form the basis of current medicine pricing policies.

Table 5.1 Legislative and sub-legislative documents from January 1989 to March 2008 influencing medicine prices in Vietnam

Groups Promulgator Name of regulatory documents Date of issuance NA Ordinance on Prices No 40/2002/PL- 26/4/2002 UBTVQH10 The general Gov’t Decree No. 170/2003/ND-CP, detailing 25/12/2003 management the implementation of a number of of prices articles of the Ordinance on Prices No 40/2002/PL-UBTVQH10 MOF Circular No. 15/2004/TT-BTC, guiding 9/3/2004 the implementation of government Decree No. 170/2003/ND-CP of December 25, 2003 MOH &MOF Circular No 08/2003/TTLT/BYT-BTC 25/7/2003 guiding the declaration and publication

of prices of preventive and curative medicines for human use

Gov’t Decree No 120/2004/ND-CP on 12/5/2004 The State management of prices of preventive and management curative medicines for human use of medicine NA Pharmaceutical Law No 34/2005/QH11 14/6/2005

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prices Gov Decree No 79/2006/ND-CP regulating 9/8/2006 in detail the implementation of a number of articles of the Pharmaceutical Law MOH, MOF, Joint Circular No 11/2007/TTLT-BYT- 31/8/2007 and MOIT BTC-BCT guiding the State management of prices of human-use medicines MOH Decision No 3016/1999/QD-BYT 6/10/1999 regulating the organization and The State operation of hospitals’ drug stores management MOH & Joint Circular No 20/2005/TTLT-BYT- 27/7/2005 of medicine MOIT BTC guiding the implementation of prices in bidding for the purchase of medicines in public public medical establishments hospitals MOH & Joint Circular No 10/2007/TTLT-BYT- 10/8/2007 MOIT BTC providing guidance on bidding for the purchase of medicines in public medical establishments

NA: National Assembly, Gov’t: Government, MOH: Ministry of Health, MOF: Ministry of Finance, MOIT: Ministry of Industry and Trade

5.3.1 Context of medicine pricing regulations in Vietnam

In 2003, the Vietnam government requested that the Ministry of Health, in cooperation with the Ministry of Finance, issue a joint Circular intended to guide the management of prices of essential medicines. The objective was to stabilize medicine prices at a reasonable level (Văn phòng Chính phủ, 2003a). Subsequently, Joint Circular 08/2003/TTLT-BYT-BTC (Circular 08) was issued and came into force on 21 August 2003, expiring on 16 October 2007. It is necessary to note that the government intention was to control the pricing of medicines on the essential medicine list. However, the drafting of the regulation was broadened to include all preventative and curative

116 medicines marketed in Vietnam, thus increasing its jurisdiction. Circular 08 required the declaration and publication of medicine prices, with retail prices being published on medicine packaging in order to improve price transparency.

Circular 08 had limited success as medicine prices kept increasing. From 2003 to 2004, prices of some medicines rose fourfold (Bộ Tài chính, 2004), and the medicine and health component of the consumer price index (CPI) increased by 13.8 per cent, almost double the CPI (GSO, 2009a). In response, the government urged the Ministry of Finance, in collaboration with the Ministry of Health, to submit a Decree on the management of medicine prices to the government for approval (Văn phòng Chính phủ, 2003b). Subsequently, government Decree No 120/2004/ND-CP (Decree 120) on the management of prices of preventive and curative medicines for human use was promulgated. The Decree came into effect from 4 June 2004 to 7 September 2006. This Decree was the first legal instrument issued by the Vietnam government specifically designed to manage medicine prices.

The declaration and publication of medicine prices was adopted as a main strategy. Decree 120 limited the prices declared in Vietnam using the external price benchmarking technique as its international comparison system. In addition, Decree 120 requested the Ministry of Finance to regulate maximum mark-ups for pharmaceutical wholesalers and retailers to limit the distribution margins. Further controls regulated in this decree were for medicines directly ordered and purchased by the State without a tender or medicines purchased by hospitals and other health care institutions and paid for by the Stage budget and public health insurance. The prices of the former were directly determined by the Minister of Finance while those of the latter were controlled by a tendering process.

Decree 120 was replaced by Decree 79/2006/ND-CP (Decree 79), enacted on 9 August 2006. Decree 79 regulated in detail the implementation of a number of Articles of Pharmaceutical Law No 34/2005/QH11, including elaborating Article 5 of the law on “State management of medicine prices”. A year later, Joint Circular No 11/2007/TTLT- BYT-BTC-BCT (Circular 11), the result of cooperation among the Ministry of Health, the Ministry of Finance, and the Ministry of Industry and Trade, was promulgated to guide implementation of government Decree 79 on State management of medicine

117 prices. Circular 11 came into force on 16 October 2007 and replaced Circular 08. Circular 11 together with Decree 79, which was effected on 7 September 2006, comprise the current medicine pricing policy in Vietnam. While Circular 08 and Decree 120 were the basis to develop the medicine pricing provision in Vietnam’s Pharmaceutical Law, Decree 79 and Circular 11 are regulatory documents that provide details of this pricing provision and currently determine medicine pricing policies in Vietnam.

5.3.2 The price declaration and publication of medicine pricing policies

The regulatory framework for medicine pricing is based on a modified free market pricing structure. Pharmaceutical Law No 34/2005/QH11 states that medicine suppliers and distributors are free to set prices of their products based on market forces, subject to stabilization by the State. The declaration and publication of price information aimed at improving transparency has been one of Vietnam’s main mechanisms for stabilizing pharmaceutical prices.

5.3.2.1. The reasonableness of declared prices and published prices

Circular 08 did not regulate the reasonableness of the declared and published prices. After it came into effect on 21 August 2003, the prices of a number of medicines increased sharply. For example, one box of 10 dissolvable tablets vitamin C 1g, a commonly used medicine in Vietnam, had a price of USD 1.23 to 1.29 in July 2003 (USD 1 = VND 15,508). It was sold with a price of USD 1.42 to 1.48 in September 2003, while the published price was USD 1.61/box of 10 tablets (Lệ Hà, 2003). Pricing instruments other than Circular 08 used one or more tools such as selected international comparisons and imposition of maximum distribution margins to ensure reasonable declared prices.

International comparison systems

Decree 120, Decree 79, and Circular 11 all used a comparative pricing system. This system attempted to ensure that the prices of medicines in Vietnam were reasonable in relation to comparable countries. There are, however, differences in the use of the comparative pricing system across pricing instruments, based on the type of prices used 118 for comparison, the standard of comparison, and the selection of countries for comparison.

None of the Vietnamese regulations explicitly and clearly defined the type of prices to be applied in international comparisons (i.e. ex-factory price or wholesale price or retail price, before or after taxes). By requiring foreign manufacturers to not set a price in Vietnam higher than that of the medicines of the same category sold in comparator countries, Decree 120 implicitly referred to ex-factory price for comparison. However, it did not indicate if the price was before or after taxes were applied. Decree 79 stated that declared prices could not be higher than corresponding prices for medicines of the same categories sold in comparator countries, implying a range of prices for comparison. Circular 11 used as a benchmark the average cost, insurance, and freight (CIF) price of the medicine that the foreign producer had sold to other comparable regional countries, but did not specify what type of prices declared in Vietnam should be used for comparison.

Decree 120 and Decree 79 used the highest price standard and category base for international comparisons. They required the price of a medicine sold in Vietnam “to be not higher than” prices of medicines of “the same categories” sold in comparable countries. In contrast, Circular 11 used the average price standard and a medicine-to- medicine comparison base. It stated that the declared price of a medicine imported into Vietnam was not to be higher than the “average CIF price” of “this medicine” sold in comparator countries.

Decree 120 specified comparator countries as those having similar medical and commercial conditions as Vietnam. It did not, however, nominate the comparator countries, nor specify selection criteria. It was not until Decree 79 that specific criteria were nominated, with statistical indices similar to those of Vietnam (see Article 10(4)): (i) per capita gross domestic product (GDP) per year; (ii) per capita GDP at purchasing power parity (PPP) per year; and (iii) networks of providing services for preventive medicine, medical examination and treatment, functional rehabilitation, and health improvement and medicine supply. In 2008, two years after Decree 79 came into force, the Ministry of Health proposed a list of comparator countries: Thailand, Malaysia, Indonesia, The Philippines and Cambodia. This feature, however, has yet to be

119 implemented. Similarly, Circular 11 required the government to decide and announce the list of comparators annually, but no list of comparator countries has yet been announced.

Maximum distribution margins

Maximum distribution margins to ensure the reasonableness of wholesale and retail prices were only explicitly used in Decree 120. Decree 120 allowed wholesalers and retailers a separate maximum margin for their services. The Ministry of Finance was required to regulate these maximum mark-ups. However, up until Decree 120 expired on 7 September 2006, there was no implementation Circular to guide this provision. As a result, no specific wholesale or retail margin was set or regulated.

A number of preconditions intended to ensure the reasonableness of medicine prices declared in Vietnam have either not been regulated or not administratively enforced. This, together with the shortage of personnel and resources for assessing the reasonableness of declared prices of all medicines marketed in Vietnam, has meant that most of the information on medicine prices declared by pharmaceutical companies has not been analyzed or validated. This situation has been exploited by pharmaceutical companies to an unacceptable degree, as shown by discrepancies in declared and actual medicine prices outlined in the following real example. For ethical purposes, the name of medicine and company has not been identified.

The CIF price of medicine X in the Vietnam customs declaration for an imported commodity was USD 4.5/box of 100 capsules. However, the registrant (Company A) declared to the Drug Administration of Vietnam a false CIF price of USD 34.4/box, 764% higher than the actual CIF price was declared (see Table 5.2) (USD 1 = VND 15,700). Without validation from the Drug Administration, this inflated, false CIF price enabled the company to declare a reasonable-looking retail price of USD 44.6/box (approximately 30% higher than the false CIF price5 and still lower than the price in India, which was also unchecked). After being imported from Company A, this

5 It is an unwritten rule among Vietnam pricing authorities in appraising the pharmaceutical registration dossier, that before granting a market license (locally called a visa number) the difference between the declared selling price and declared CIF price of a medicine should be at, or below, 30% of the CIF price otherwise the registrant of the medicine will be asked to explain how they set that declared selling price. Without sound justification the medicine is unlikely to get a license visa number. 120 medicine went through several rounds of “buying and re-selling” and the final price to hospitals and clinics was USD 41.4/box, still below the declared price of USD 44.6/box, but 920% higher than the real CIF price.

Table 5.2 Price declaration provided to the Drug Administration of Vietnam by the registrant Company A for medicine X

No Brand Visa Ingredient Strength Dosage Packing Price in CIF Retail name Number form India price in Vietnam 1 X … Y 200 mg Capsule Box of 10 51.0 34.4 44.6 Strips x 10 (USD) (USD) (USD) capsules

Source: Data collected from the Drug Administration of Vietnam, 2008

5.3.2.2 Other declaration and publication provisions

Relationship between the declared price and published price or selling price

Circular 08 and Decree 120 did not regulate the relationship between the declared and published prices, or between the declared and selling prices, while Decree 79 did not regulated it sufficiently. By contrast, Circular 11 required medicine producers or importers to declare the final wholesale price of medicines for the entire wholesale chain. Wholesalers were not permitted to sell medicines to retailers at prices higher than those declared. Nevertheless, the relationship between the declared price and the actual retail prices was not regulated.

Responsibility for publishing retail prices on medicine packages

Other pricing regulations required retailers to publish retail prices on their medicine packages. Circular 08 also required the pharmaceutical manufacturers and importers to do the same thing. However, this provision was opposed by a number of manufacturers and importers when implemented on 1 October 2003. Consequently, the Ministry of Health first delayed the deadline for implementation of this provision to 1 November 2003 (Official dispatch No 9080/YT-QLD of 22 September 2003), then postponed it further to 1 January 2004 (Official dispatch No 9251/YT-QLD of 29 September 2003).

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Table 5.3 Summary of preconditions of declaration and publication mechanisms used in Vietnam pricing regulations

The reasonableness of declared prices Declaration and publication provisions

International Wholesale/ Selling prices Re-declaration Selling comparison standard retail or published for price prices not mark-ups prices not increases being higher being higher than than declared published prices prices Circular 08 no no no no yes (2003)

Decree 120 Highest Category yes no no yes (2004) price base

Decree 79 Highest Category no partly yes yes (2006) price base

Circular 11 Average Medicine- no yes yes yes (2007) price to- medicine base

Re-declaration

Neither Circular 08 nor Decree 120 regulated how established medicines could receive a re-declared price in future years. However, Decree 79 and Circular 11 required changes to be made to the system of setting declared prices. Producers or importers wanting to sell their medicines at prices higher than those originally declared were required to make a re-declaration with an explanation prior to applying the new price. In Table 5.3 there is a summary of the characteristics of the declaration and publication mechanism used in the pricing regulations of interest.

5.3.3 Other pricing provisions

Except for Circular 08, all pricing instruments prescribed additional price controls for two targeted medicine groups. The first group included medicines directly ordered and purchased by the State, not using a tender process. The prices of these medicines were

122 determined directly by the Minister of Finance. The second group comprised medicines purchased by hospitals and other health care institutions that were paid for by the State budget and health insurance. The prices of these medicines were controlled by a tendering process, first regulated in Joint Circular No 20/2005/TTLT-BYT-BTC of 27 July 2005 and subsequently by Joint Circular No 10/2007/TTLT-BYT-BTC of 10 August 2007. The successful tender prices were not allowed to be higher than the latest maximum price as announced by the Ministry of Health every six months. However, the Ministry of Health has yet to find a way of determining this maximum price. Accordingly, no price-cap or price ceiling has been implemented to date.

5.4 Discussion

Vietnam’s legislation and regulations regarding medicine prices are numerous and quite complex. A full analysis of all the relevant documents has been provided in this chapter to ensure that the context for medicine pricing policies is well understood and taken into account when formulating recommendations to improve access to affordable medicines.

The legislative and associated instruments in Vietnam were intended to ensure transparency of medicine prices along the supply chain, through the mechanism of price declaration and publication of price information. The initiatives however have been less successful than expected because they did not address all the preconditions necessary for the laws to operate effectively in practice. These included the need for reasonableness of prices declared by the pharmaceutical industry and the need to define the relationship between declared, published and selling prices. Additionally, some provisions of the regulations were not monitored or effectively enforced.

5.4.1 The reasonableness of declared prices and published prices

Circular 08 was deficient in that it did not require the declared and published prices to be reasonable. Thus, pharmaceutical suppliers declared and published medicine prices as high as the market would bear, resulting in sharp increases in the price of many medicines. In response, the Ministry of Health was forced to declare that Circular 08 was not for the management of medicine prices, but only for implementation of price declaration and publication. In retrospect, Circular No 08 might be considered to have been of limited benefit in controlling escalating medicine prices when first introduced. 123

Although Decree 120, 79 and Circular 11 did require reasonableness of declared prices, the assessment tools were either not complete, or inadequate. Firstly, the type of price for international comparison was not specified. The final consumer price of a medicine is generally composed of four parts: an ex-factory price paid to the manufacturer; a wholesaler’s margin paid to the wholesaler; a retailer’s margin paid to pharmacies; and whatever taxes are imposed on medicines. The price varies along the supply chain (Elias Mossialos & Mrazek, 2002). A valid comparison is only achieved when prices are compared at similar levels of the supply chain. Without specification of price type, comparisons used in Vietnam were less effective than they might have been.

Practical consideration was not given to the inclusion of the whole price range for comparisons regulated in Decree 79. The comparison with “corresponding price” resulted in a number of comparisons between a range of prices from import price to wholesale price to retail price or including additional taxes. This caused intractable difficulties in the collection of comparative price data as a benchmark for enforcement.

Circular 11 should have clearly indicated that the price at the same level (the CIF price) declared in Vietnam was the comparator. When implemented, the effect was that the system could only ensure the reasonableness of the CIF price, (i.e. the price at ex- manufacturer/importer level). Although medicine prices were controlled at the wholesale level through declaration of the final wholesale price for the entire chain, criteria for assessing the reasonableness of the declared price were not clear-cut, causing further compliance difficulties for suppliers.

Secondly, consideration should have been given to the level of the comparison base and standard. The use of category base comparisons posed methodological dilemmas of category definition. Comparisons can be applied to different levels of medicine groups such as those that have identical bioactive ingredients (ATC 5 level), a group of analogue medicines (i.e. chemically slightly different but related medicines with comparable or identical indications – ATC 4 level), or a group of all medicines used to treat a particular condition (ATC 3 level) (M Dickson & Redwood, 1998; Ioannides- Demos et al., 2002; McLaughin, 1997). Using a medicine-to-medicine comparison, specifying the same active ingredients, strength and dosage form, as regulated in Circular 11 avoids this methodological problem.

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Using the highest price comparison standard proved problematic. A strict interpretation of the comparison “not higher than” implies that the price in Vietnam could be as high as the highest price among the comparator countries. Using this approach, the Vietnam government unwittingly created an opportunity for pharmaceutical suppliers to set the highest price for each medicine, resulting in higher average prices in Vietnam than in the comparator countries. Using the average price standard as in Circular 11 overcomes this problem. However, if the comparators include one or more countries with unreasonably high prices, the outliers will result in a higher average price. Choosing a broader list of comparators and taking the average price in the three lowest-priced countries among those referenced, as modeled by Columbia or the Slovak Republic, may be a solution (KEL, 2010; OECD, 2008). Alternatively, the median price standard can be used to reduce the influence of outliers.

Finally, because no list of comparators was established in Vietnam, the external price benchmarking system could not be employed. Although the current criteria for selection are specific, it seems difficult to find another country with entire networks of health care and medicine supply similar to Vietnam, as regulated in Decree 79. More flexible criteria for medical condition are needed (see section 4.3). Selecting countries with some form of price control to ensure prices in the calculation are not unreasonably high, or where reliable medicine price information is available, could also be considered.

5.4.2 Declaration and publication provisions

Prior to marketing in Vietnam, a medicine must be registered with the Ministry of Health with a declared price nominated by the registrant company. The Ministry issues an approval license, usually valid for five years after which the product must be re- registered. However, in accepting the declared price, Circular 08 and Decree 120 did not take into account the life-span of the approval license. It failed to provide for the re- declaration of prices in response to changed economic circumstances, such as adjustments for inflation over the life of the license. Thus, registrants were implicitly encouraged to declare the highest possible price to accommodate future cost fluctuations.

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Overcoming shortcomings of previous pricing regulations, Decree 79 and Circular 11 required producers or importers to declare increases in prices with an explanation prior to their application. This important clause provided a legal framework for monitoring increases in medicine prices, as well as ensuring they remain realistic throughout the license period. The clause also permitted suppliers to change their prices after the declaration, thus releasing the cost pressure associated with having a fixed price for the entire five-year approval cycle.

Such a provision however, is only effective if the declared prices are reasonable. The motive remains for suppliers to ‘hedge’ their prices to leave room for future increases. This is problematic because it counters the effect of price declarations. The suppliers can take advantage of this feature to charge consumers higher prices based on the hedge price declared to the government. The authorities also cannot monitor increases in medicine prices if they are still below the hedge declared prices. Medicine prices can decrease naturally (e.g. when a medicine goes off patent) affording an opportunity which would be lost by reliance on this declaration and publication mechanism. Thus, over-regulation in a functioning market may be counterproductive, keeping prices artificially high.

All pricing regulations have stipulated that pharmaceutical suppliers cannot sell their products at a price higher than those published. This has enabled the published price to be a ceiling to control actual selling price. The success of this mechanism has depended therefore on the assurance of the reasonableness of the published price. The reasonableness of prices however could not be assessed since the provision of maximum retail margin was not implemented (Decree 120), nor was there any provision of maximum retail margin to be regulated (Decree 79 and Circular 11). There was also no provision to regulate the relationship between the published and declared retail prices. As a result, pharmacies often published hedge retail prices that were much higher than actual selling prices, sometimes 200% more than the selling prices (Inspectorate of the MOH of Vietnam, 2007).

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5.5 Recommendations

While external price benchmarking is widely used to limit medicine prices, different countries select different baskets of comparator countries based on their own goals (OECD, 2008). As Vietnam aims to control medicine prices, criteria to select comparator countries may include: (1) commercial conditions: per capita GDP both in real terms and at purchasing power parities; (2) medical conditions: coverage of public health insurance; relative importance of domestic medicine production and imports; per capita medicine spending (as a share of total health care spending and as a share of GDP); (3) systems for controlling medicine prices and; (4) availability of price information (Critchley, 2006). International cooperation to develop price information linkages would be beneficial. This would enable Vietnam to obtain reliable data to ensure integrity in medicine price reporting.

The Drug Administration of Vietnam needs to regularly analyze medicine price trends, including declared prices and those paid by public healthcare facilities. This would assist in future policy development and facilitate monitoring of the integrity of reported medicine prices, as well as the effectiveness of pricing regulating measures. Methodologies to assess the ongoing effect of pricing policies on medicine prices are required. The development of a drug-pricing bureau with research capacity would be of considerable help in formulating and monitoring medicine policies and prices in Vietnam.

Current medicine pricing instruments in Vietnam do not prevent significant fluctuations below declared prices. Stricter direct limits on price increases are needed. Given Vietnam’s heavy dependence on the international pharmaceutical market (Cao, 2008), a complete freeze on medicine price increases, although not uncommon in many European countries (Mrazek & Mossialos, 2004), would be impractical at this stage. Limits on the frequency of price increases in Vietnam however may be a policy option. Specific limits on permissible medicine price increases, such as limits to increases in the Consumer Price Index, may provide a better basis for an assessment of reasonable price increases when medicine prices are renewed (Critchley, 2006).

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Another problem of current pricing system in Vietnam is that it is equally applicable for all medicines marketed in Vietnam. However, as discussed in Chapter 2 the pharmaceutical market is not homogenous. It is necessary to distinguish between patent protected as well as single or limited source products and multisource products such as generics. While the former is characterized by a monopoly of supply, the latter is characterized by fierce competition among different suppliers. Different approaches are therefore likely to be necessary for each group of products. Further studies on relevant strategies to control each type of products are needed to formulate a comprehensive solution for affordable medicines in Vietnam.

Other provisions of the Pharmaceutical Law, such as measures to promote generic medicines and the domestic pharmaceutical industry, may also be desirable to complement medicine pricing policies, entailing in some cases new legislation. However, regulation alone may not guarantee improved access to affordable medicines. Setting prices too low, without taking into consideration socio-economic factors, may induce pharmaceutical companies to withdraw products from sale to prevent loss, thus reducing the availability of medicines (Rietveld & Haaijer-Ruskamp, 2002).

5.6 Conclusions

Analysis of the vast number of legislative and regulatory reforms demonstrates that, in recent times, substantial improvements have been made in regulations of medicine price controls in Vietnam. While appropriate legislation is pivotal to control medicine prices, it is however, insufficient alone to achieve the required changes. Also critical is the enforcement of legislation and ongoing monitoring, including the socio-economic factors affecting prices. The market system is generally very good at circumventing government controls and doing so legally or illegally, as shown in this chapter. Therefore, a topic that needs to be further researched is whether in Vietnam, government controls are the best way of achieving lower, more affordable medicine prices. When government controls are in place, the other challenge is that they must be continually updated to cope with changes in the market which can occur quite rapidly. Thus, more work is still needed to ensure reasonable medicines prices in Vietnam that will provide affordable access for the population.

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Chapter 6. Root causes of high medicine prices in Vietnam

6.1 Introduction

In this qualitative study, the underlying factors contributing to high medicine prices in Vietnam were examined in an endeavour to explain the findings of the quantitative survey of medicine prices presented in previous chapters. This qualitative study sought answers from interviews with key stakeholders to the following research questions: (1) how are medicine prices set in Vietnam? (2) what factors influence medicine prices? and (3) what are the main components contributing to the final price of medicines? As the interviews progressed and the initial data analysis evolved, it became clear that the key stakeholders (study participants), considered “informal payments” (a form of corruption) to be the dominant component of high medicine prices. Consequently, the study then focused in more depth on the underlying causes of informal payments, resulting in additional data collection and further analysis. Given the reported importance of informal payments, this aspect was treated separately (Chapter 7). However, details of the whole study and the main findings of factors causing high medicine prices in Vietnam are presented in this chapter.

6.2 Methods

6.2.1 Method selection

According to Lee and Renzetti (1990, p. 512) research which ‘potentially poses for those involved a substantial threat’ is regarded as sensitive research. Research may be considered threatening if it poses an intrusive threat for participants because it deals with deeply personal issues that are private, stressful or fearful; it impinges on the interests of those being studied; or it studies deviance or social control (Lee & Renzetti, 1990). Medicine prices are often regarded as trade secrets (WHO & HAI, 2008) and high medicine prices have recently been a concern in the public domain in Vietnam (Trinh, et al., 2006). Studying the reasons for high medicine prices in Vietnam not only 129 intrudes into the private sphere of pharmaceutical companies, health professionals and employees, but also deals with issues of social control that impinge strongly on the interests of the people being studied. Given these features, this study is considered to be highly sensitive research.

In-depth interviews are recommended for research dealing with highly sensitive subject matters (National Science Foundation USA, 1997). Using open-ended questions and free probing, researchers can tap personal experiences about sensitive issues and gain first hand explanation about participants’ views without forcing them to tick predetermined choices that may not reflect their views. This study used ‘the general interview guide approach’, or in other words semi-structured interviews with an interview guide being prepared in the form of an index of topics to be discussed over the course of the study (Patton, 1990). Because the index plays the role of a reminder, rather than a set of rigidly sequenced questions, the researcher is free to ask questions on whatever issue emerges while at the same time keeping the focus on a predetermined topic.

6.2.2 Participant recruitment

The logic of qualitative sampling is to gain a better understanding (Morse, 1991). Choosing study participants is based on their ability to provide the greatest chance of revealing data to answer the posed research questions (Glaser, 1978; Ritchie, 2001). Purposive sampling, the primary approach used in qualitative research, targets appropriateness or selection of information-rich cases, which Patton (1990, p. 169) defines as ‘those from which one can learn a great deal about issues of central importance to the purpose of the research’.

Researchers also should select good participants who are ‘articulate, reflective, and willing to share with the interviewer’ (Morse, 1991, p. 127). Snowball sampling, which allows researchers to generate a larger sample by asking participants to identify further appropriate individuals, has proved particularly effective in locating participants for sensitive research (Faugier & Sargeant, 1997; Hendricks & Blanken, 1992). A combined method of purposive and snowball sampling was adopted for recruitment of each group of study participants.

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To identify the root causes of high medicine prices, two groups of participants were identified as potential sources of information: pharmaceutical companies and private pharmacies, who set their own medicine prices, and government officials who were responsible for controlling medicine prices. Based on the preliminary findings that informal payments made to health care providers were a dominant factor, a new group of participants, namely prescribers and hospital pharmacists, were included to further investigate this aspect.

Within each group, participants were selected according to a maximum diversification criterion (Russo & McPake, 2010) to capture a full range of views. Specifically, the pharmaceutical companies and private pharmacies included directors, managers, medical representatives of pharmaceutical companies (including state-owned enterprises, domestic private companies and foreign companies working in all three areas: production, importation and distribution), and the owners of private pharmacies. The government official group included officials from the Ministry of Health (MOH) and the Ministry of Finance (MOF) who dealt with medicine pricing, financing, insurance and taxation. The health care provider group included hospital pharmacists and prescribers in four specialties: internal medicine (equivalent to family or general practitioners in other health care systems); surgery; obstetrics and gynecology; and pediatrics. Two different geographic areas were sampled: Hanoi in the North, and Ho Chi Minh City in the South, the two biggest cities in the country.

6.2.3 Interview instruments

A preliminary interview guide was constructed with five broad topics for discussion to identify the root causes of high medicine prices, as follows:

1. Expenses incurred along Vietnam’s pharmaceutical supply chain; 2. Medicine price controls that the Vietnam government has put in place; 3. The pharmaceutical distribution network in Vietnam; 4. Domestic pharmaceutical production in Vietnam; 5. Suggested solutions for stabilizing medicine prices;

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After some initial interviews, the preliminary interview guide was expanded to include the following additional stimulus topics relating to the emergent theme of “informal payments” as follows.

1. Types and examples of informal payments; 2. The practice of listing and de-listing a medicine into and from the MOH health insurance reimbursement list; 3. Tendering practices used in hospital procurement of medicines; 4. The rationale behind prescribers recommending particular medicines to their patients; 5. Differences in the efficacy of medicines, and also the various marketing strategies adopted by multinational pharmaceutical companies and by domestic pharmaceutical companies to accommodate these differences; 6. The types of interactions and associations physician prescribers have with pharmaceutical companies; 7. The types of gifts and gratuities from pharmaceutical companies that were considered ethically acceptable; 8. Factors causing prescribers to collude with pharmaceutical companies; and the converse; 9. Factors preventing prescribers from being in collusion with pharmaceutical companies; and 10. Suggested solutions for combating corrupt practices.

Two descriptive tools were used to prompt discussion. The first was a division of the pharmaceutical supply chain into different stages (see Figure 6.1) developed by the World Health Organization and Health Action International (WHO & HAI, 2008). Using this division allowed the researcher to discuss and document expenses incurred when a medicine moves along the supply chain, from manufacturer to distributor(s) to patient. The second tool used was the pharmaceutical management cycle (see Figure 6.2). This cycle describes the pharmaceutical supply chain in terms of four basic functions: selection, procurement, distribution, and use of medicines (MSH, 1997, p. 14).

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x Selection includes reviewing the prevalent health problems, identifying treatments of choice, choosing individual medicines and dosage forms, and deciding which ones will be available at each level of health care; x Procurement comprises quantifying medicine requirements, selecting procurement methods, managing tenders, establishing contract terms, assuring medicine quality, and ensuring adherence to contract terms; x Distribution consists of clearing customs, stock control, stores management, and delivery to medicine depots and health facilities; and x Use involves diagnosing, prescribing, dispensing and proper consumption by the patient.

Figure 6.1 The staged approach to price components. Source: WHO & HAI (2008, p. 134) 133

Selection

Management Support Use Organization Procurement Financing Information Management Human Resources

Distribution

Policy and Legal Framework

Figure 6.2 The pharmaceutical management cycle. Source: Management Sciences for Health (1997, p. 15)

These four components of the cycle are inter-dependent and sequentially organized. The four functions are held together by management support systems that include organization, financing and sustainability, information management, and human resources management (MSH, 1997). Using this cycle allowed the researcher to identify improper practices in the four components of the cycle, as well as shortcomings of management support systems that caused informal payments in Vietnam’s health sector.

6.2.4 Ethical issues

Ethics approval (HREC 07135) for the study was obtained from the Human Research Ethics Committee of the University of New South Wales. Careful consideration was given to the ethical features of this study and the possible impact on participants who disclosed sensitive information. A safety and risk management strategy was developed, aiming at protecting the researcher, ensuring the confidentiality of the data including the identity of participants, and ensuring that the results reported in this thesis did not compromise participants and key stakeholders involved in the study (see Appendix 4).

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6.2.5 Data collection and analysis

6.2.5.1 Data collection

After four initial interviews, subsequent participants were identified through the snowball sampling method explained earlier. In-depth, semi-structured interviews were conducted from April 2008 to December 2009. Interviews took place wherever the participants chose, in their office, their home or other convenient places to assist with making them comfortable and at ease with this sensitive research

Two individual interviews with research participants from the pharmaceutical industry turned out to be group interviews as the primary participants came to the interview with other pharmaceutical industry representatives, who were also friends or used to be students of the researcher. Four group interviews were also conducted with doctor participants instead of individual interview, following the suggestion of the primary participants. Two re-interviews occurred where confirmation of original material was required given the long time frame which was due to the extensive documentation needed for this work.

Before each interview, the purpose of the study was briefly described and written informed consent obtained (see Appendix 5). Each in-depth interview, whether individual or group, lasted from one to two hours and was audio taped. Two participants asked the researcher to stop audio taping when they talked about corruption. Another two participants did not want to be taped at all. In these cases, the researcher was careful to respect the views of the study participants and responses were recorded by hand written notes instead. All interviews were conducted in Vietnamese.

Following the completion of each interview, verbatim transcription was undertaken. After reviewing the transcript several times to obtain a sense of the whole, a summary sheet of about one page was compiled (c.f. Miles & Huberman, 1994), containing the main topics discussed in the interview and emerging themes to be further investigated and/or unanswered questions for the next contact. This preliminary analysis was conducted to guide the data collection process, with the emerging themes being addressed further in subsequent interviews. The combination of the summary sheet, the

135 transcript, and field notes from the interview formed one interview record for final analysis.

6.2.5.2 Data analysis

The decision was taken to analyze the data in Vietnamese rather than using translated English versions for two reasons. Firstly, due to lack of an equivalent word or phrase, there are words or concepts that cannot be translated from one language or cultural context to another, leading to the distortion or loss of meaning (Baker, 2001; Patton, 1990; Tsai et al., 2004). Secondly, even when linguistic equivalence is obtained, the nuance and intricacies of the original language are often lost in translation without consideration of the functional and cultural equivalence (Penã, 2007). The literary devices (e.g. metaphors, analogies and proverbs), which are very much reliant on cultural context and difficult to translate, are often needed in qualitative analysis because of “their ability to bring richness, imagery and empathetic understanding to words” (O'Leary, 2005, p. 261).

The interview records were analyzed in two stages. Initially, a thematic analysis was undertaken to identify the full range of issues that arose when participants discussed root causes of high medicine prices in Vietnam. A theoretically informed analysis followed to seek answers to questions about the underlying causes of informal payments, and to examine how the analysis of one theme – informal payments – might contribute to existing understandings, models and theories of corruption in the health sector. In the thematic analysis, a coding system was developed based on the topics in the interview guide. In the subsequent theoretically informed analysis, another coding system was developed based on a theoretical framework of corruption in the health sector developed by Vian (2008). Based on principles of economics and good governance, this framework, which was reported to consolidate a number of the corruption concepts and models that had been developed previously, classifies explanatory factors for corrupt behaviours into three main groups - opportunities, pressures, and rationalization. Coding and querying was undertaken using QSR NVivo Version 8 software (c.f. Bazeley, 2007).

The coding process was assisted by one highly experienced, non-Vietnamese qualitative advisor using triangulation of researchers (Patton, 1990). Five of the most information- 136 rich interview records (three for the thematic analysis and two for theoretically informed analysis) were translated into English with back-translation to consider conceptual equivalence and cultural appropriateness. They were then cross-coded by the qualitative advisor to refine the coding systems. The researcher used the refined coding systems to code the rest of the interview records. Initial coding was reviewed in full by the advisor following the English translation. Discrepant views were resolved by discussion.

The process of developing and refining coding systems involved building coding trees. Codes were compared and sorted into an organizational structure in which related codes were grouped and put under a broader category, based on conceptual relationships – ‘the same sort of things’ (Bazeley, 2007, p. 105). During the coding process, analytical notes were created using a project journal and memos. They were later used in the final stage of analysis, functioning also as an audit trail to document all decisions made to assist in maintaining theoretical rigour, as well as supporting evidence for the conclusions (Gifford, 1998; Morse & Field, 1995; Tesch, 1990).

After all codes were classified and sorted into trees, connections across trees were made. Descriptions and patterns of association classified by codes were followed by comparison of differences between individuals and groups. Matrix coding queries and text search queries assisted to identify the conditions, giving rise to each association pattern. Codes focusing “around a common, broader concept, or are connected in a broader theme or theoretical relationship” across trees were grouped together using a set in NVivo (Bazeley, 2007, p. 112). Relationship nodes and models were also used to generate these types of connections and to inform the synthesis of final conceptual frameworks.

6.2.6 Data presentation

Participants in each group were numbered according to their interview order. Direct quotes from individual and group interviews are cited either within text, wherein quotes are presented in italics, or between texts, wherein quotes are cited as a separate paragraph that is indented and italic. By way of example, quotes are also tagged as below.

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(Pharm07-Private): The private pharmaceutical company in individual interview number 07.

(Pharm20-Foreign in Groupinterview02-Pharm): the foreign pharmaceutical company number 20 in group interview number 02.

6.3 Results

6.3.1 Participant characteristics

Overall, 43 in-depth interviews with 60 participants were conducted, including 37 individual interviews and six group interviews. Some respondents participated in both individual and group interviews. Table 6.1 gives detailed sample characteristics. Because the early findings of this study pointed to the need to focus on the relationship between private pharmaceutical companies and prescribers in public hospitals, the final sample was skewed towards these two groups.

Table 6.1 Characteristics of participants

Participant group Total Sector Gender Number Public Private Foreign Male Female Pharmaceutical Industry 28 3 18 7 16 12 Pharmaceutical company managers 18 3 12 3 15 3 Medical representatives 6 0 2 4 1 5 Private pharmacy owners 4 0 4 0 0 4

Policy makers 7 7 0 0 4 3 MOH officials 5 5 0 0 3 2 MOF officials 2 2 0 0 1 1

Health care providers 6 25 24 17 1 13 12 Prescribers 21 21 16 1 12 9 Hospital pharmacists 4 3 1 0 1 3

Total 60 34 35 8 33 27

6 The sum of health care provider participants in different sectors is higher than the total number because many prescribers working in public hospitals also have part-time jobs in private clinics and/or foreign hospitals and clinics. 138

6.3.2 Factors influencing medicine prices

Participants mentioned various salient issues relating to the pricing of medicines. In this thesis, the main focus is on the key findings that are relevant to policy development or amenable to direct intervention to improve access to affordable medicines in Vietnam.

The key factors influencing medicine prices in Vietnam elicited in participant interviews included: patent and monopoly positions, market intelligence, economies of scale, source and quality of medicines and informal payments. Other ancillary components of the final price of medicines such as the cost of lost stock, marketing cost, retail mark-up and Value Added Tax (VAT) also contributed to high medicine prices.

6.3.2.1 Patent and monopoly

All participant groups considered the price of innovator brands to be high due to their monopoly position; the general perception being “a monopoly automatically leads to high prices”. The high prices of innovator brand were also attributed to the “costly R&D expenses”. The reported problem in the Vietnam pharmaceutical market was that a monopoly occurred not only with patented medicines, but also with off-patent innovator brands. Study participants from domestic pharmaceutical companies (both state-owned and private), expressed concern regarding their inability to “negotiate with producers of innovator brands” irrespective of whether the medicines were patented or off-patent. They said this was because “innovator brand companies have their own distribution channels already”. Domestic companies therefore, were reported to be “only able to import generics”, resulting in a monopoly in supply of innovator brand medicines, irrespective of their patent status.

Prescriber groups also said that the pre-eminent quality of medicines from reputable companies (e.g. medicines from Europe), meant they were the only appropriate choice for patients with severe illnesses. Although the perceived quality of medicines may not be equal to the actual quality, the respondents were adamant that the differences between medicines were clearly evident by the lack of an appropriate clinical response in particular situations and pointed to subsequent clinical success with the brand product. This behaviour allowed some companies to set a higher price.

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6.3.2.2 Market intelligence

Participants from private and state-owned pharmaceutical companies considered market intelligence (information on pharmaceutical manufacturers, products and prices), as a weakness of Vietnam’s pharmaceutical importers. Because of limited information about medicine prices in international markets, importers said they were unable to choose the cheapest available procurement price. Instead, companies could only choose the cheapest medicines from the limited markets they had access to, or they had to rely on “some traditional markets such as India, Korea and some Eastern European countries”. Participants claimed that this limited choice contributed to the high prices of medicines in Vietnam.

Poor market intelligence also reportedly resulted in add-on costs for private pharmaceutical companies. The following three sources of market intelligence for an imported medicine were elicited: 1) importers who had imported medicines to resell, 2) an intermediary, the so-called “consultant” who could be “a mandated importer, but more often a foreign representative office” and 3) the foreign manufacturer. Because of poor market intelligence, private pharmaceutical companies rarely contacted foreign manufacturers directly to negotiate prices and buy medicines. Instead, they often relied on a third party (the first two sources), thus incurring add-on costs, either in the form of “a medicine seeking fee” for the consultant or from the importer’s mark-up.

6.3.2.3 Market size and economies of scale

Participant responses pointed to market size and economies of scale driving prices higher as reflected in the following words of a private pharmaceutical company manager.

Vietnam is not a big pharmaceutical market, with a market size of around USD 1 billion. It would be relevant to Vietnam if we had about five manufacturers big enough to produce medicines for the whole market. Currently, we have hundreds of factories so the capacity of each factory is not high, leading to higher costs of production and higher prices. (Pharm01-Private)

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This quote points to the inefficiency of Vietnam’s pharmaceutical supply system with a small market being shared by far too many suppliers, leading to duplication of facilities and an inability to obtain significant economies of scale, thus driving up prices of locally produced medicines.

Participants from private pharmaceutical companies also acknowledged their “small- scaled business”. Thus, Vietnamese pharmaceutical traders appeared to not only lose the chance of obtaining lower prices from international pharmaceutical producers because of bulk purchase, but also be less attractive to some foreign manufacturers, especially those from “Western Europe and North America” in doing business. Consequently, Vietnam companies were reportedly limited to importing generic medicines from Asia and selected pharmaceutical manufacturing countries in other parts of the world, such as “Eastern Europe” and “South America”

European partners don’t want to trade with small companies. They often ignore small orders of USD 20,000 to 30,000. That is why small domestic companies have to buy Indian and Korean products, since Indian producers are willing to supply to orders of around USD 10,000. In contrast, European producers never reply to the orders of USD 10,000 – 20,000. That is why, although we like to trade European medicines, we can’t buy them. (Pharm07-Private)

6.3.2.4 Source and quality of medicines

Participants’ responses suggested that sources of medicines were associated with their quality. All participants believed that innovator brands, often from big international companies in Western Europe or North America, had higher quality and efficacy than their generic versions. Even with generics, medicines from Western Europe and North America were believed to have higher quality than those from Eastern Europe. Medicines from Eastern Europe were also believed to be of higher quality than those from Asian countries.

Highest quality medicines are from big multinational companies [...]. The sources of very poor quality generics are from India, Korea and elsewhere. Even with innovator brands of big companies such as […] [name of an innovator brand], the quality currently [produced in India] is much lower than 141

before [produced in England]. Generic medicines from Eastern Europe or big companies in India have better quality […]. (Dr07 in Group interview01- Doctors)

Innovator brand medicines were perceived by participants as having the best quality and efficacy, but also the highest price. The prices of generic medicines seemingly varied depending on the perceived quality of their raw materials and the quality assurance process.

Our Indian business partners said that the price of a medicine made from Indian active pharmaceutical ingredients (API) was USD 1 but if I accepted that the medicine was made from Chinese API they could sell it to me with half price, only USD 0.5. Therefore, the price will go with the quality [...] they could offer me a cheaper price but I have to accept API of the medicine from lower quality sources [...] API of cefixim from Austria or Italy has a current price of USD 700 to 1,200 per kg. However, if we buy it from China, the price is only USD 200- 300 while from India it is USD 400-500 (Pharm06-Private)

6.3.2.5 Informal payments

The domestic pharmaceutical company participants reported that their relative inability to distribute medicines sourced from Western Europe meant that they had to buy medicines sourced from Asia, Eastern Europe and South America to trade. These medicines were reported to be of lower quality although the buying price was cheaper. Participants also reported that when they sold these medicines in the “free market” (private pharmacies for retail and cho thuoc – a place where wholesalers gather to trade medicines), they often set a competitively low price for their medicines using a “competitive pricing strategy” to influence final customers (the patient) to achieve market share. They asserted that this was because the free market operated in a similar way to many other economic markets.

However, participants stated that it was different in the “hospital market” (hospital pharmacies and pharmaceutical departments) where the selling price of a generic medicine was set at “80 per cent of the innovator brand price for European generics and 60-70 per cent for Asian products” or by “multiplying the procurement price by 2.5 142 to 3 times for European medicines and by 3.5 to 4 times for Asian products”. The way they set the prices was said to be due to the unavailability of routine bioequivalent (BE) testing7, which “has just been done for very few medicines”. In the absence of proper testing, Vietnam distributors were unable to quell health care providers’ skepticism of, and uncertainty about, the quality and efficacy of their generic products, especially Asian sourced medicines. To induce hospitals to procure their generic medicines of perceived lower quality and for prescribers to recommend them, participants reported that Vietnam distributors had no choice but to offer material benefits to gain market access, thereby causing inflated selling prices.

People using generics assume that the products are cheap, but in fact they are paying an extremely high price against the real value of the medicines. They have to pay for the commission that pharmaceutical companies give to physicians. If this type of medicine had not had a commission, nobody would have prescribed these ‘lởm khởm’ [bad quality] products. These medicines would surely have not been able to be sold. (Pharm05-Foreign)

Informal payments were the reason most frequently cited for high prices of generic medicines in Vietnam. A typical situation was that “patients have to pay a virtual price that contains informal expenses of up to 40-60 per cent of this price”, including “informal payments to authorities, commissions for prescribers, and kickbacks to hospital pharmaceutical departments”. The following quote shows how medicine prices differed when sold into two different markets.

A tablet of cefixim, a third generation cephalosporin, which is imported from India, for example, and sold with the INN [International Non-proprietary Name] name of cefixim in the OTC market without being detailed to physicians, had a price of USD 0.11 – 0.125 per tablet. However, the same medicine, also from India, having its own brand name, and imported by another company to sell in hospitals with detailing to doctors, is sold at USD 0.5 – 0.6 per tablet. (Pharm01-Private)

7 This test is used to assess the expected in vivo biological equivalence of two proprietary preparations of a medicine, often between a generic medicine and its innovator brand. If two products are said to be bioequivalent, it means that they would be expected to be, for all intents and purposes, the same.

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For illustrative purposes, different price components, both formal and informal, for a generic medicine imported from an Asian country and sold into the Vietnam hospital market, are depicted in Figure 6.3. The figure is derived from data provided by a pharmaceutical company study participant with respect to one of its products. All the price components were re-calculated as a percentage of the final end sale price. A thorough account of these components is presented later in this chapter, as well as in Chapter 7.

Cost, insurance, Fixed costs freight (CIF) price, such as 17% operation cost, salary etc, 14% Profit, 15%

Mandated import fees, 2% Commissions for prescribers, 40% Cost to manipulate Kickbacks to hospital CIF price, 2% pharm dept, 5% Relationship building expenses, 5%

Cost, insurance, freight (CIF) price Fixed costs such as operational cost, salary etc

Mandated importation fees Cost to manipulate CIF price

Relationship building expenses Kickbacks to hospital pharm dept

Commissions for prescribers Profit

Figure 6.3 Example of the component price structure of an imported medicine sold in the Vietnam hospital market

6.3.2.6 Other components of the final price of medicines

When a medicine moves along the supply chain from the manufacturer, to the wholesaler, then the retailer, and finally to the consumer, its price will rise to reflect the value added along the way (Elias Mossialos & Mrazek, 2002). These formal 144 components, also known as hidden costs (Levison, 2003), include insuring and shipping costs, landed costs, wholesale mark-ups, retail mark-ups and taxes. The following sections describe some of the most important formal components of pricing that emerged from the information given by study participants.

Since the Vietnam government only allows 90 companies to import pharmaceuticals (DAV, 2009b), other companies wanting to supply imported medicines into the country do so indirectly through a licensed importer. They pay them a mandated import fee which includes the importer’s mark-ups, as reflected in the following quote.

[...] you have to pay a mandated import fee if your company doesn’t have import license. It is about 1.5-3 per cent, [...] 2 per cent on average depending on the value of the shipment. (Pharm07-Private)

Another component that participants referred to was the government levied import tariff. For example, “oral ampicillin has a preferential import tariff of 15 per cent”. Because this cost was incurred early in the medicine supply chain, later percentage mark-ups had a multiplying effect on the final price.

Participants from the pharmaceutical industry spoke of wholesale mark-ups with two dominant groups: overhead expenses (such as rent, staff salaries, electricity, security and loss) and selling expenses (such as sale force salaries and marketing costs) as reflected in the following quotes.

Another issue is expired products. If we cannot win a tender after one year, the medicine will expire and we have to destroy it. How are we to be reimbursed for this loss? [...] We have to calculate it as an expense contributing to the final price of the medicine (Pharm07-Private)

Marketing cost is huge. You know that for a medicine to penetrate a market [...], pharmaceuticals are not like fish, shrimp or other ordinary commodities. Because of the uniqueness of the pharmaceutical market, the target customers are different. The expenses for doctors, for holding conferences, seminars or even for printing promotional leaflets are very high. We have to pay high salaries to our promotional staff since they are pharmacists. We also do clinical

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trials, providing samples for free. All these expenses cost a great deal. (Pharm06-Private)

Retail mark-ups seemed to be set unreasonably high, as noted by participants from the private pharmacy group. This was said to be because of the lack of regulation on retail mark-ups.

[...] with not-too-expensive medicines [often locally produced medicines] we have higher mark-up […] for example, the sale is only USD 0.5 but our profit is as much as USD 0.4. Almost 50 per cent of patients, who come to my pharmacy, are sold one medicine of this type. (PharmacyOwner02)

One pharmacy owner admitted that in some cases, when a medicine had an “uncommon trade name” even when it is a locally produced medicine, these could be sold “with a price even higher than that of the innovator brand”.

Participants also reported the impact of Value Added Tax (VAT) on the final price of medicines. They said that while hospital pharmacies often requested “red invoices” (a VAT invoice) when procuring medicines, private pharmacies seldom required VAT invoices. Thus, they did not have to pay a VAT of 5 per cent for medicines purchased, as did hospital pharmacies. This was alleged to cause higher final prices of medicines in hospital pharmacies than in private pharmacies, although the retail mark-up in the public sector was regulated.

6.3.2.7 Ineffective control by government

Participants reported that except for innovator brand medicines, all the factors influencing high prices of generic medicines could have been prevented if there had been better and more effective control by government authorities, as reflected in the following words of a study participant from a foreign pharmaceutical company.

Generally speaking, law is law and we still do what we have to do. Nobody follows rules and regulations. Vietnam’s pharmaceutical market is the most ‘chuối’ [disorganized] in the world […]. If they [the government] really want to control, they can. However, the concern is whether they want to control or not […]. Nevertheless, you cannot interfere with the price of innovator brands at 146

this stage. Innovator companies have a global pricing policy, which is very clear. If they cannot have expected profit, they will withdraw their products from this small market [...]. If you want to reduce medicine prices, you should focus on low quality medicines supplied by private traders. (Pharm05-Foreign)

6.4 Discussion

The qualitative study provided rich and novel data about medicine prices and policies in Vietnam, which is essential knowledge for improving access to affordable medicines. The factors contributing to high medicine prices in Vietnam as revealed by study participants and described in this chapter, apply to varying degrees to both innovator brand and generic medicines. Participants reported that for patented innovator brand medicines, there are often no substitutes. Price elasticity of demand for these products is therefore very low. This enables companies to set as high a price as the market can bear, to recoup their costly R&D expenses and the additional costs associated with guaranteed quality, maximizing profits.

With off-patent innovator brand medicines or generic products of reputable pharmaceutical companies from Western Europe or North America, a relative monopoly is still enjoyed. This is especially so in treatment of severe diseases because of their perceived pre-eminent quality and efficacy over that of other generic equivalents sourced from Asian countries. The monopoly of multinational companies in distribution of these products through three FDI logistic companies (see also Chapter 3) also adds to the general monopolistic position of these medicines, irrespective of their patent status. This monopoly develops initially as a consequence of patent protection and continues as ‘brand loyalty’ in common with most market systems. Their monopolistic position results in relative price inelasticity of demand.

Poor market intelligence, failure to obtain economies of scale due to fragmented markets, and small-scale business have limited the range and scope of importation by domestic pharmaceutical companies. As a result, their imports have been derived mainly from Asian countries and selected Eastern European and South American nations. Medicines sourced from these countries were perceived to be low in quality and efficacy. In order to compete against innovator brands or generic medicines from

147 reputable companies in Western Europe and North America, domestic pharmaceutical traders reported having to resort to making informal payments first to induce hospital pharmaceutical departments to procure their products, and then for clinicians to prescribe them to patients. These informal payments were reported to add a significant additional cost component to the final price.

In most cases, the premium prices set by innovator brand medicines created a price ceiling for those competing generics perceived to be of lower quality and efficacy. In other cases, the use of informal promotional payments, as a trade-off to attain a viable market share, made the price of competing generics higher than that of innovator brand medicines. This effect explains one of the unusual findings in the quantitative price surveys (see Chapter 4). In addition to informal payments, other components also added to the final price of medicines in Vietnam. Among them, the most important one reported by participants was an unreasonably high retail mark-up. This was reportedly caused by a lack of regulation on the mark-up in the private pharmaceutical retail sector and the information asymmetry between patients and medicine sellers. Ineffective control of these practices by government was claimed to be fertile ground for high medicine prices to flourish. These themes are represented in the model depicted in Figure 6.4, which provides a diagrammatic summary of the main features identified in the qualitative study as explaining high medicine prices in Vietnam.

The reasons given by study participants for high medicines prices and the many contributing factors have implications for future policies and practices and are discussed in detail in Chapter 8. However, prior to formulating effective solutions, it is necessary to have a more in-depth understanding of informal payments, as a significant and previously unexplored component, reported to add to the price of perceived low quality generic medicines. The issue of why and how informal payments occurred and how they influence high medicine prices is more fully addressed in the next chapter.

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Patented Monopoly of Relative price inelasticity High innovator Patent suppliers of demand wholesale brands prices

Competition No regulated Distributed by 3 FDI retail logistics companies mark-ups Off- via their Vietnamese patent counterparts WE/NA Perceived Monopoly of products source of high quality prescribers & medicines of medicines branded generics Information asymmetry

Distributed Market by domestic intelligence traders Asian source Perceived Informal High retail of medicines low quality payments prices of

Economies of medicines medicines of scale

Ineffective government controls

FDI: Foreign Direct Investment, WE: Western Europe, NA: North America

Figure 6.4 Model of interaction of factors causing high medicine prices in Vietnam

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Chapter 7. Why and how informal payments occur

7.1 Introduction

The overall findings of the qualitative study were outlined in Chapter 6. Unique and in- depth information was gathered about how medicine prices were set. Informal payments were reported to be a significant factor contributing to the high price of generic medicines distributed by domestic pharmaceutical traders. This factor is further explored in this chapter as a unique opportunity to understand this little studied feature.

Informal payments are a form of corruption, which is defined as the abuse of entrusted power for private gain (Transparency International, 2010). To understand why and how informal payments occur, the perspectives of both the givers and recipients of inducements were considered. While the givers were invariably the pharmaceutical companies, the recipients were reported to vary, ranging from officials in the health sector, in tax offices and in market management departments to prescribing medical practitioners. Informal payments to prescribers, however, were the most frequent type of payments cited by pharmaceutical company participants.

The theoretical framework of corruption in the health sector developed by Vian (2008) is the model used to help explain the findings of the qualitative study. It classifies explanatory factors for corrupt behaviours into three main groups: opportunities for corruption; pressures for corruption and rationalization of corruption. The analysis reported in this chapter focuses on data from the qualitative study that helps to explain high medicine prices. The innovative conceptual model developed also adds to theories of corruption.

7.2 Opportunity for corruption

The main categories related to the opportunities for corruption of which study participants spoke included the degree of personal discretion afforded participants and a lack of transparency and accountability in administrative procedures, coupled with a

151 low possibility of detection and follow-up enforcement. Each of these factors together constituted opportunities for corruption that contributed significantly to inflated medicine prices.

7.2.1 Discretion

Discretion refers to the autonomous power of officials to make decisions (Vian, 2008). Lack of, or an inadequate auditing system, means that officials can make arbitrary decisions. Participants reported a wide range of areas in Vietnam’s health sector where this discretion was exercised improperly, including medicine tendering practice in public hospitals and the ensuing prescribing practices.

In relation to tenders, pharmaceutical company participants noted that there was a lack of uniformity of specifications for selecting contractors to supply medicines across public hospitals. This enabled tender committees to organize discriminatory terms and conditions which favoured particular tenderers as reflected below.

[Hospitals] require that you must have three years selling your products to the hospitals to be able to go to the next round of tendering, so although your price is cheaper, you are still kicked out [...]. They don’t even let you attend the tender. If you cannot attend the tender, then when will you get three years of experience? [...]. Hospitals set a lot of hurdles and virtual barriers for tendering so they can use them to fail companies that don’t have “good relationships” with them although the prices of these companies are cheaper. (Pharm07- Private)

Discretion was also represented by the concept of “a low level of democracy” when participants talked about provincial hospitals. In central hospitals, prescribers often had some role in deciding which medicines to procure and use. However, in most provincial hospitals, pharmaceutical departments had autonomous power in making decisions on medicine procurement and were thus able to influence prescribing of particular medicines in their hospitals. Pharmaceutical company participants stated that informal payments as a percentage of the sale were dependent on the level of ‘democracy’.

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[…] the kickback to hospital pharmaceutical department ranges from 3-15 per cent [of the sale]. It depends. With pharmaceutical departments of provincial hospitals it can be up to 30 per cent [...] in provinces with low level of democracy where the pharmaceutical department can “eat” [take] all, doctors have no voice, it can be 30-40 per cent [of the sale] and doctors have nothing or just a little. (Pharm09-Private in Group interview01-Pharm)

Similarly, with prescribers, discretion was manifested by their freedom to prescribe medicines. Pharmaceutical company participants reported that in consulting rooms, prescribers had full freedom to prescribe whatever medicines they thought would best suit their patients. By contrast, in inpatient treatment blocks, prescribed medicines were limited to the hospital formulary list and the availability of medicines in hospital pharmaceutical departments. Prescribing medicines in return for commissions was reported to be more prevalent in consulting rooms than in inpatient treatment blocks and the commission for prescribers in consulting rooms was often higher.

Prescribers in consulting rooms have more, often up to 65 per cent [of the sale] […]. The commission for prescribers in inpatient treatment block is only around 15-35 per cent (Pharm09-Private in Group interview01-Pharm)

Doctor participants pointed out that where freedom of prescribing was limited, such as for doctors in teaching tertiary hospitals, prescribers often had to think twice before prescribing as their behaviour was always being observed by their students. However, if prescribers were free to prescribe whatever they wanted without adequate controls, they were more likely to abuse their discretionary power for private gain.

7.2.2 Transparency

Transparency is a principle that allows stakeholders to access information on “not only the basic facts and figures, but also the mechanisms and processes” (Transparency International, 2010). The disclosure of information on how decisions are made, as well as measures of performance helps to reduce the discretion of government officials and reinforce accountability. However, transparency was considered to be “one of the weakest points in governance in Vietnam” Study participants indicated a lack of

153 transparency in a wide range of areas; from regulations to implementation of the regulations in the health sector. Four key areas are discussed here.

Firstly, sometimes the regulations were said to be lacking in transparency because they contained vague provisions that enabled the authorities to act at their discretion and cause difficulty for pharmaceutical companies wishing to comply. Consequently, participants said that they were often forced to break regulations in their daily business and were therefore open to being harassed and cajoled for inducements.

When they [authorities] come, you have to stop everything to welcome them. If you don’t treat them well, you will die because sooner or later they will find your alleged breaches of regulations [...]. (Pharm14-Private)

With our regulations, anywhere the authorities look, they will find alleged breaches of regulations. [PharmacyOwner03]

Secondly, pharmaceutical company participants often spoke of a lack of transparency in implementation of tender regulations. They said that when opening the tenders, the selection committees did not publicly reveal the bid prices received. This led to the situation reflected below.

Pharmaceutical departments decide everything. Who will be successful in tender is known beforehand because those [pharmaceutical companies] who have bribed tender committees are informed of our prices, and then they change their price accordingly. (Pharm09-Private in Group interview01-Pharm)

Thirdly, transparency also refers to timely access to needed information. By law, the Ministry of Health is required to periodically announce the maximum price of medicines paid by the state budget and public health insurance and then to publish the successful tender prices on its website. However, participants reported that the Ministry of Health has yet to find a way of determining this maximum price and the successful tender prices were “often published six months to one year after tenders had been let”.

Fourthly, lack of transparency was also reported in Vietnam’s financial system where most transactions were undertaken on a cash-only basis.

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In Vietnam, all financial activities are done with cash-in-hand so we cannot control corrupt practices. We need to do transactions through bank accounts. In an economy without a transparent financial system, we cannot control corrupt practices. (Pharm04-Stateowned)

Participants also said that increasing transparency would prevent corrupt practices. For example, in hospitals where tender software was used to undertake tendering, they said that all tender specifications were transparent and that tender dossiers were assessed by the same computerized rules, rather than at the discretion of individuals. This reduced lobbying pressure and the need for informal payments to the tender committees. However, participants indicated that only a small proportion of hospitals had introduced tender software. They suggested that:

The most important thing is transparency, but transparency in Vietnam is low, thus we need to use the internet for tendering because it assesses the information using uniform codes of decision making, not the personal discretion of individual human beings anymore. When we use uniform computer based decision making, no one can intervene [the result of tender]. We don’t even have to go to see the director of hospitals. (Pharm09-Private in Group interview01- Pharm)

7.2.3 Accountability

According to Brinkerhoff (2004), accountability refers to the obligation of individuals or agencies to inform other actors about their decisions and actions, to justify or explain them, and to suffer sanctions and punishment for non-performance, misconduct or corrupt behaviours. While the first two components of accountability (i.e. providing information on what was done and why) form answerability, which is the essence of accountability, the expected magnitude of any applicable punishment and sanctions for misconduct “gives teeth to accountability” (Brinkerhoff, 2004, p. 372).

Participants stated that poor answerability in Vietnam’s health sector created more autonomous prescriber power, encouraging prescribers to order unnecessary medicines for their private gain.

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I know there is a doctor who prescribes four tonics in one prescription […]. That is because patients don’t know what they are for. If patients know about this, how can the doctor prescribe like this? We don’t have to explain what medicines are used for what purposes […] so patients still have to buy all medicines prescribed. If it is explained that these are four similar tonics, patients are surely not going to buy them all. (Dr17 in Group interview03- Doctors)

While asymmetries in information and expertise are characteristic of all health services (Brinkerhoff, 2004), exploiting them is a manifestation of poor answerability. Doctor participants admitted exploiting such asymmetries as reflected in the following quote.

When working in consulting rooms, we divide patients into two groups. Those from the country [...]. The second group is patients in [...] [name of a city] and they have more than enough knowledge to recognize which medicine is from Europe. At first glance they can say this is a good or bad quality medicine. Therefore, with city patients don’t be silly to prescribe those medicines [low quality medicines with high commission] […], we automatically recommend them high quality medicine from Europe. (Dr18 in Group interview04-Doctors)

Health insurance fund agencies serving as the agents of individual patients often play an important role in holding healthcare providers accountable (Brinkerhoff, 2004). However, as revealed in a group interview with doctors, in Vietnam the public health insurer was considered not to have fulfilled this function, making answerability poor.

In some cases where answerability did exist, participants asserted that the punishment and sanctions for misconduct were poor. For example, talking about the fine for breaching the declaration provision of the pricing regulation, one participant said that “a fine of USD 12.5 is not enough to even threaten a kid in year 3”. This led to ‘sanction resistance’ as reflected below.

However, the problem is how to punish for a breach of regulations. Our sanctions are often not strict enough. For example, with the regulation of 30 per cent CIF price, companies are willing to be fined to break it. Accepting the fine

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makes sense because the profit we get by breaking the regulation is much more than the fine. (Pharm07-Private)

Similarly, doctor participants thought that the sanctions for misconduct in public hospitals were not strict enough to deter prescribers’ inappropriate behaviour and actions. In many public hospitals, when collusion between prescribers and pharmaceutical companies was detected, the corrupt doctors were just “given verbal warnings”, “withheld ABC8 bonus” or had to “move from one department to another” at worst. Mild sanctions made people think little of complying with the law.

Dismissal was most frequently reported by doctor participants as a symbol for strictness of sanction. One doctor participant emphasized that “losing a job will lead to a series of problems”, thus suggesting that Vietnam needed to “have stricter sanctions to make the laws powerful”.

7.2.4 Enforcement

Brinkerhoff (2004, p. 373) states that “sanctions without enforcement significantly diminish accountability”. Enforcement relies on the probability of detection of corrupt acts and the probability that punishment will follow detection. To enforce accountability, detection and monitoring systems are needed to collect evidence on corrupt practices. However, these systems were reported to be generally insufficient in Vietnam’s public health care sector as reflected below.

Two antibiotics with the same active ingredient are prescribed in one prescription but nobody monitors this. (Pharm20-Foreign in Group interview02- Pharm)

Nevertheless, detection and monitoring systems varied. Participants reported that in Ho Chi Minh City, hospitals generally had better detection systems than in Hanoi, and inpatient treatment blocks had better detection and monitoring systems than in consulting rooms. The existence of these systems acted as a deterrent to some extent.

8 Levels of performance classification of health professionals in public hospitals: A-the best, C-the worst 157

It [prescribing for commission] happens mostly in consulting rooms, because in in-patient treatment block what medicine is prescribed is clearly recorded in the patient record so they are afraid. In consulting rooms, patients just take the prescription then leave buying their medicine outside so there is no evidence of what is prescribed. (Pharm05-Foreign)

When corrupt practices are detected, the enforcement mechanisms that may follow are only effective if those who engage in such practices are punished strictly, demonstrating the need for accountability and responsiveness to government agencies (Brinkerhoff, 2004). Enforcement needs to be associated with strict sanctions, regulated in broad legal frameworks by institutions capable of enforcing them. Doctor participants said that in Vietnam “the laws do exist but the enforcement is poor”. Two main reasons were identified for poor enforcement.

The first reason was insufficient institutional capacity in the public sector. At the health facility level, participants were concerned about the inability of those in power to punish the guilty. They said that “if found to be corrupt, whether they will be punished depends on a number of factors”. By contrast, doctor participants said that when they worked in the private sector, they did not dare to prescribe medicines for private gain because they would be sacked immediately by their managers. Organizational mechanisms in the private sector seemed to empower the directors of private hospitals or clinics, allowing them to have direct control over hospital rules and policies, and decisions on dismissal of their staff.

The pre-eminence of my hospital over public hospitals is that at the beginning of the establishment, the management board has laid down as a policy the development of a model hospital without informal payments […]. For example, two nurses were sacked because of being caught behaving corruptly. We are unanimous throughout the hospital [about the policy] so that all staff are afraid of breaching our regulation. If they are caught they will be sacked. (Chief pharmacist01)

Lack of personnel and heavy workloads also contributed to the insufficient institutional capacity in the public sector. Participants said that if doctors in public hospitals wanted to prescribe expensive medicines that were set aside for severe cases (marked with an 158 asterisk in their hospital formulary list), they had to consult with their department head and/or the hospital director to explain the reasons and get approval. However, this answerability was reported not to be enforced in many busy tertiary public hospitals at the central level because of “patient overload” in these hospitals. Rather, it was only “done for form’s sake”. A doctor participant said that “if we have to hold a consultation for every single case we will spend the whole day just holding consultations and cannot do anything else”.

At the government level, both central and local, insufficient institutional capacity was also noted. Participants stated that although legal and regulatory frameworks existed, the concern was “who will monitor the implementation of these regulations”. The Ministry of Health and the Drug Administration of Vietnam were reported “not to have sufficient personnel and resources to monitor and inspect every single facility”. Similarly, in provincial health departments “the personnel are not enough for management, with only one or two inspectors per province”. Post-inspection was considered one of the weakest points in government enforcement mechanisms.

The second reason for poor enforcement in Vietnam’s public health sector was the apparent lack of commitment to action by management boards. A consensus among all participant groups was that department heads or directors of public health facilities all knew that their staff were taking informal payments from pharmaceutical companies but little was done to address the problem. This was because “they may also engage in corrupt practices for private gain so they can’t give lessons to others”.

It takes time. We cannot do anything just overnight. The main concern is if there is someone wanting to solve this or not. They all benefit from that so nobody will deprive their benefit themselves. (Dr01)

Overall, lack of enforcement or selective enforcement undermines trust in the government. A consensus among participants was that they did not think the government could combat corrupt practices. This was repeatedly raised by participants. Most participants believed that “at least in the next 10 years, Vietnam is still not able to address the corrupt practices in the health sector”. In fact, participants were so convinced of the lack of any consequence that they said:

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We dare to tell you all our secrets because when you are able to address the problem [corrupt practices in the health sector], our hair will have turned white. This problem has existed for many years. (Pharm09-Private in Group interview01-Pharm)

A culture of impunity was created and participants asked “who will enforce the law, who will address the problem when abuses come from the chiefs”. This perception that no action would follow encouraged public prescribers to engage in corrupt practices as reflected below.

To advance their own economic position, they [other prescribers] have to do things that are a little bit under the law and at the beginning they are afraid of that. However, later on, if they find that they break the law without any penalties then they will keep doing so and it becomes normal. (Dr02)

7.3 Pressures for corruption

Participants’ responses revealed two salient categories of pressures for corrupt practices. They were related either to the pharmaceutical market or to health care processes and structures.

7.3.1 Pharmaceutical market related factors

Participants spoke of typical features of the pharmaceutical market that placed pressures on companies to make informal payments including products, sales, regulations, and market survival.

7.3.1.1 Product related factors

Special requirements for pharmaceutical registration, including the requirement of an expiry date, were reported by pharmaceutical industry study participants as placing a heavy pressure on them to sell their medicines prior to their expiry date.

Medicines have been imported. If they are not sold out, they will expire in the store then the company will ‘die’ [fail]. Therefore, the more collaborators the better, even then the profit left [for the company] is very small, and the money 160

mainly goes into the pocket of collaborators and prescribers. The company still has to go ahead. Otherwise, they have to throw their medicines away [...] so they have to sell at all costs. By any means, they have to approach the prescribers to promote use of these medicines. (Pharm05-Foreign)

Low quality, efficacy and reputation of a medicine were also mentioned as contributing to corrupt practices. For example, doctors were easily persuaded to prescribe innovator brands and generic medicines from Europe as these were believed to be highly reputable, of high quality and efficacy. However, Asian generic medicines traded by domestic companies were considered to be lower in quality and efficacy and therefore, companies resorted to strategies such as “buyout” to create incentives for prescribers. With this strategy “all the needs of a prescriber such as car, money, etc. were satisfied”. In return, the prescriber had to work for these pharmaceutical companies, as illustrated by a doctor in one of the group interviews.

In my hospital, there is a doctor who was the head of a clinical department. After checking we found that there was evidence of collusion between her and a pharmaceutical company because she prescribed too frequently a medicine of this company. We decided to transfer her to another department but she insisted on staying there for a while to use up the medicines [...] because she had signed a form of contract [with the pharmaceutical company]. She took a big amount of money from the company then she had to use a certain quantity [of this medicine] in a certain period. (Dr16 in Group interview03-Doctors)

Pharmaceutical industry participants reported that, like kickbacks to hospital pharmaceutical departments, higher commissions were required for prescribers to use Indian or Korean sourced medicines (30-40 per cent of the sale) and lower commissions for European products (about 15 per cent). Participants indicated that initially, medicines perceived to be of lower quality from India and Korea were preferred because of higher commissions. However, after a while, many patients treated by these medicines did not get better. For patients with severe or recurrent illness, prescribers had to choose better European products instead. This was why European medicines with lower commissions were still able to be sold.

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7.3.1.2 Sales representatives related factors

There seemed to be a consensus among study participants that multinational pharmaceutical companies did not allow their medical representatives to resort to kickbacks and commissions. However, some participants indicated that pressure to achieve targets and the fear of being sacked led to some pharmaceutical company representatives ignoring company policy by giving money directly to prescribers. Such money was not in the form of a percentage of the sale paid to prescribers, as was normal practice of private domestic traders. Rather, it was considered as “gratitude to prescribers for their support”.

7.3.1.3 Regulation related factors

Pharmaceutical industry study participants reported that Vietnam’s medicine pricing authorities used an unwritten rule in appraising the pharmaceutical registration dossier of companies before granting a market license (locally called a visa number). If the difference between the declared selling price and the declared CIF price of a medicine was more than 30 per cent of the CIF price, the registrant of the medicine would be requested to provide a rationale. If not forthcoming, the registrant would be unlikely to get a visa number.

Using the “buyout” marketing strategy, private pharmaceutical companies had to set a high selling price for their medicines that was several times the buying price to cover selling costs (2.5 to 3 times for European medicines and 3.5 to 4 times for Asian products). Consequently, pharmaceutical companies faced the problem of not being able to get a product visa number from the Vietnam regulation authorities. Pharmaceutical companies seemed to solve this problem either by declaring a lower selling price or a higher buying price. The former approach is reflected below.

[...] so we keep violating the regulation. If the Ministry of Health catches us, we will pay a fine but we still violate the regulation [...]. We declare a fake virtual, low selling price to get a visa number for our product. Then when we’ve got the visa, the real price will be adjusted depending on the market. (Pharm07-Private)

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With the latter approach, pharmaceutical companies manipulated the buying price up to a level that was about 30 per cent lower than their planned selling price. Participants reported two ways of doing this. The first way is outlined in the following quote.

You can call it support from exporters. For example, you plan to hold conferences in 10 big hospitals with total costs of USD 100,000 and you can ask the producer to support that expense. They will calculate this expense into the price of medicines and you will have the price increased. (Pharm02-Stateowned)

However, pharmaceutical industry study participants said that, because of strict laws against “money laundering” in Europe and North America, this approach was almost impossible when the manufacturers were from these regions. Rather, it was only used with generic manufacturers from “India, Korea, some countries in Eastern Europe and South America”.

The second way, used more often, was that Vietnamese pharmaceutical companies established a “virtual company” in countries with low rates of corporate tax such as “Singapore or Hong Kong”. Medicines from foreign manufacturers were exported to a virtual company with the real buying price. From the virtual company, the price of medicines was inflated up to a level that was close to the planned selling price in Vietnam, and then exported to Vietnam. Pharmaceutical companies were then able to get a visa number for their medicines, selling at a high price in Vietnam, while paying low corporate income tax in Singapore or Hong Kong.

Participants noted that establishment of a virtual company overseas was costly. Only big companies with great financial potential were able to manipulate the buying price by themselves. Other companies had to hire big companies to do so, and then pay them a price manipulation fee of “4 per cent of the difference between the real price and the manipulated price”.

7.3.1.4 Survival in the market

There were some differences of opinion between Ministry of Health study participants and pharmaceutical industry participants about the impact of demand and supply on medicine prices. While pricing authority participants from the Ministry believed that

163 increase in pharmaceutical supply would “help to stabilize medicine prices”, pharmaceutical industry participants claimed that the demand and supply theory was not applicable to Vietnam’s pharmaceutical market, especially for prescription-only medicines. When the Vietnam government tried to increase supply of pharmaceuticals by providing for additional potential competitors, instead of reducing prices to attract more demand as with normal commodities, pharmaceutical suppliers increased their prices to fund increased inducements to prescribers, so as to maintain and/or increase their market share. This was because “the utmost aim of every company is to sell their medicines in the market and gain profit to survive”. Without an adequate market share made possible by informal payments, participants said that they simply could not survive.

Study participants pointed out that prior to the health sector reform in 1989, when only some State-owned pharmaceutical enterprises produced and supplied medicines to the domestic market, there was no competition among pharmaceutical companies.

At the beginning, doctors did not have that behaviour [taking commission from pharmaceutical companies]. In the time of the subsidy period9 there had been nobody thanking by cash […]. We did not have many medicines, there was no competition. Only a few medicines were available and we automatically prescribed them. (Dr04)

Following the health sector reforms, the introduction of multinational pharmaceutical companies and domestic private companies to the market created significant competition. The setting of a high enough price or mark-up, to fund the payment of commissions to ensure adequate market share, became a matter of ‘life and death’ for domestic pharmaceutical companies. Compliance with the regulations also worked against company survival. Participants said that, to survive, companies had no choice but to break the law.

My company complies with regulations, setting prices with a mark-up of only 30 per cent the CIF price. Other companies don’t comply with regulations. They set their prices with higher mark-up, and then their products are sold faster because

9 The period prior to ‘Doi moi’, an economy reform of Vietnam in1986, was followed by the health sector reforms in 1989 (See also Chapter 3). 164

their commissions and kickbacks are higher [...]. So we also have to break the regulations in order to be able to sell our medicines. (Pharm08-Private)

Competition between domestic pharmaceutical companies led to an escalation in the level of informal payments. They became increasingly high as companies vied with one another to offer a higher rate in order to win market share. Commissions given to prescribers to recommend these medicines were reported by pharmaceutical industry participants to be as high as 60 per cent-65 per cent of the sale. With increasing competition in more recent years, companies seemed to resort to additional strategies such as paying key opinion leaders, who were “chiefs” and played a decisive role in the procurement and use of medicines in the hospital. According to doctor participants, key opinion leaders were given “gifts by way of stocks”, becoming significant shareholders in the companies. Apart from the value of the stocks given, key opinion leaders received annual dividends from the companies concerned.

Fierce competition among domestic pharmaceutical companies also forged alliances with different companies who dealt with complementary products. As an alliance of several companies, the conglomerate would be able to “buyout” the targeted prescribers. In this case, the prescriber was ‘tối đa hóa’ (maximized) to serve as a prescribing machine for the conglomerate. The prescriber “did not even know what the medicines they prescribed look like”. Participants suggested that prescribers of this kind were often those in consulting rooms of big hospitals and they prescribed according to a standard “formula” that contained exactly the same four to five medicines for almost every patient.

Study participants agreed that officially, multinational companies did not have a commission policy for prescribers to address the issue of competition. Instead, these companies often approached prescribers “in a professional way” by holding “seminars or group presentations” to introduce the superiority of their products. However, facing strong competition from domestic companies, some multinational pharmaceutical companies also seemed to apply buyout strategies, such as offering “a luxury holiday package” as incentive for “using their products until the sales reached a certain amount”.

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7.3.2 Healthcare processes and structures

Study participants’ responses suggested various factors related to health processes and structures that placed pressures on pharmaceutical companies to make informal payments, and on prescribers to take these payments. The six most commonly reported factors were: 1) the tender system; (2) the information system; (3) the taxation system; (4) the role of the private and public sectors; (5) the remuneration system; and (6) workplace pressures.

7.3.2.1 The tender system

Pharmaceutical company participants felt that lobbying was necessary to be successful in the tendering process. For a tender to be eligible for consideration, the active substance of a medicine had to be listed on the public health insurance reimbursement list issued by the Ministry of Health. According to pharmaceutical company participants, they had to “lobby to put medicines on the list of the Ministry of Health”, and this involved making informal payments. By contrast, authority officials felt unduly pressured when they applied objective criteria in listing or de-listing particular medicines as reflected below.

A representative of [name of a company] came here. I knew in the gift bag there was cash. I told her “I know what you say but all scientific evidence proves that your medicine is not effective” […]. She threatened me that in her company there were people whose parent was this person or that person [high ranking authorities who can negatively influence the participant’s position] […]. They used the association [name of a professional association] to put pressure on the Ministry of Health, they came to my home to lobby me and then when they were not successful they threatened me […]. I was very stressed […]. Other people who have my position may ‘kiếm chác’ [earn] a great deal but I don’t […]. Some medicines [with unclear effects] were de-listed but still there are many that tons of cash are being paid for. (MOHofficial02)

Pharmaceutical company participants reported making informal payments to the hospital authorities for two reasons: to get their medicines on the hospital formulary list, and to be successful in the tender. Each hospital developed its own formulary list as a 166 basis for tendering and prescribing medicines. The hospital formulary tender list often comprised of two lists, an innovator brand name medicine list and a generic list. Whereas the trade name of the medicine was specified in advance when tendering for innovator brand medicines, tendering for generic medicines only specified the active substance in advance, thus allowing more competition in the tender. Being on the innovator brand medicine list of the tender was of great advantage to suppliers.

In my company, expense for tender lobby is limited, only about USD 250 - 300 per product. But it is for putting the product into the brand name list before tender. To be successful in the tender is a different story. I’ve heard there are products, especially Korean and Indian ones, of which the expense is up to USD 1,000 per product […]. By lobbying to be in the brand name list, then the medicine will be our own. The price will be brand name prices, thus being higher than in the generic list. (Pharm23-Private in Group interview02-Pharm)

Regular “kickbacks” comprising a fixed percentage of the sale was also reported to be given to hospital pharmaceutical departments and hospital pharmacies. They ranged from 2 per cent to 30 per cent of the sale (most commonly around 5-10 per cent), depending on the level of competition, the quality, and the original source of the medicines. Medicines from Europe were often reported to be associated with a reduced kickback of about 5 per cent, while medicines from India received higher kickbacks.

Study participants reported that multinational pharmaceutical companies did not provide regular kickbacks. Instead, they had different ways of promoting their medicines. They invited members of the tender committees to domestic and/or overseas conferences, and sponsored all travel and accommodation that was “very costly”. They also had a separate budget for their “sales force” (sales staff) to buy gifts to lobby tender committees at the beginning of each “tender season”.

Lobbying in the tender processes was reported to be so common and necessary that many companies had to establish a “separate division specializing in lobbying for tenders”. More recently, many hospitals have used tendering systems to procure medicines, not only for hospital patients, but also to serve un-insured outpatients in hospital pharmacies. Thus, the pressure to be successful at tender has become greater, creating more incentives for pharmaceutical companies to lobby tender committees 167 harder. When “everybody pays money to lobby tender”, “the amount spent for tender lobby increasingly grows”. In key markets, pharmaceutical companies were willing to “bribe [influential people] with a Camry [a Toyota car] to be successful in tender”.

7.3.2.2 The information system

Lack of a reliable information system to record the prescribing patterns of physicians was reported to lead pharmaceutical companies to establish specific mechanisms to pay prescribers ‘working for them’. Participants from private companies stated that they had to hire a nurse in each clinical department and pay them a monthly salary of USD 10 to 15 to record “who prescribed what and how many medicines”. In consulting rooms, pharmaceutical companies relied on information provided by hospital pharmacies. They reported that staff in hospital pharmacies ran a service of counting prescriptions for pharmaceutical companies with a fee of around “USD 10 per product per month”.

7.3.2.3 The taxation system

Pharmaceutical company study participants reported that the right of taxpersons to impose an estimated tax ‘considered reasonable for their company’ compelled them to pay bribes to ensure a low estimated tax. By law, the estimated corporate income tax was determined based on factors such as business activities, turnover or charter capital of the company. In practice, it was based on how the company treated the tax officials.

If we don’t treat our taxmen well, they will force us to pay a higher estimated tax and we will die. An estimated tax of 1 per cent of estimated turnover they ask us to pay now is low. If making them unhappy, they impose a 5 per cent of estimated turnover, then we still have to pay that amount. (Pharm06-Private)

The high rate of corporate tax in Vietnam was reported by pharmaceutical company participants to provide incentives to enter into various schemes aimed at tax evasion.

We wish that the corporate tax rate decreases more. Now it reduces to 25 per cent but it is still high. Singapore has effective corporate tax of only 5 per cent. If our tax rate is 5 per cent, I will not evade it. I will hire tax agencies to do straightaway, submitting 100 per cent real invoices. Our tax rate is too high.

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The rate is submitted to reduce to 25 per cent [...]. It’s still too high so we still have to evade it. (Pharm06-Private)

Taxable income is basically determined by the level of turnover, less cost of goods sold, less tax-deductible expenses. This led to three reported ways of reducing taxable income: decrease in turnover; increase in the cost of goods sold; and increase in tax- deductible expenses. Reducing turnover as a strategy is illustrated by the following quote:

It’s because pharmaceutical companies don’t have to invoice when selling medicines to private pharmacies. No, it’s not that they don’t have to invoice but they don’t have to provide invoice to pharmacies10. The price sold to private pharmacies is very high but they invoice, for example, a half price just to handle corporate tax and they don’t give the invoice to their customers. In the income statement, tax agencies will find a very reasonable modest profit. (Pharm01- Private)

The second way was increasing the cost of goods sold. Pharmaceutical company participants stated that, while some companies increased the buying price overseas, other firms handled the issue domestically, by issuing invoices for the medicine of a principal company to go “one circle through three to four intermediary companies”, each company increasing the price of the medicine “to some ten percent”. Thus, when the medicine came to the principal company, its price was already inflated. This enabled the principal company to sell the medicine to hospitals with a price that was several times the imported price, without being obvious to the tax office. This arose because, “tax office doesn’t pay attention to the CIF price but only the difference between the buying and selling price”. In return, the principal company had to pay a fee to intermediary companies or “I help you this time, then you have to help me another time”.

The final way of reducing taxable income, used by “almost all pharmaceutical companies”, was to increase the tax-deductible expenses, especially since their informal

10 The tax currently imposed on private pharmacies is a fixed amount, resulting from an initial estimate of the tax office on the basis of the business size of the pharmacies, rather than on the actual taxable income. Thus, private pharmacies often do not request an invoice when procuring medicines. 169 payments were (of course) not claimable. An expense that was reported to be often manipulated was staff salaries. Pharmaceutical companies made up contracts with virtual staff then “declared higher number of staff”, thus increasing total salary expenses. Another approach to manipulating tax-deductible expenses was to buy fraudulent “fake” input invoices.

Tax evasion comes at a price however, as pharmaceutical companies have to bribe taxation officials.

They know that we evade corporate tax […]. To ensure you pay a low tax, you have to lobby them. As an unwritten law, you will keep two thirds and taxmen will get one third of the amount you evaded. (Pharm07-Private)

7.3.2.4 The role of the private and public sectors

Pharmaceutical company study participants stated that the dominant market position and high concentration of the hospital market led to public hospitals exerting considerable market power and dominance over pharmaceutical companies. To be able to sell their medicines in public hospitals, pharmaceutical company participants felt compelled to make informal payments to public health care providers. By contrast, they received less pressure for informal payments when selling medicines in private hospitals or clinics. They suggested that privatization of public hospitals could reduce informal payments and bring about lower prices of medicines.

When you privatize healthcare services, the fair competition will increase. The service quality of hospitals will be better because of high competition. They have to buy good quality products with reasonable prices to maintain the hospitals […] and the prices of medicines must reduce […]. In fact, now we sell our medicines to private hospitals and it is a different story because they bargain directly to have a lower price for quality medicines. (Pharm06-Private)

7.3.2.5 Remuneration systems and financial pressure

An inadequate level of remuneration was the most frequently reported factor leading prescribers to engage in corrupt practices. Often, participants spoke of inadequate

170 salaries that were insufficient for prescribers to satisfy their essential needs, especially those who had just graduated. Salary inadequacy was what participants believed led prescribers to take up informal payments as a way of subsidizing their low salary. A doctor participant in internal medicine admitted that currently “the main income of doctors in internal medicine is from pharmaceutical companies, by way of commission”. A pharmaceutical company study participant said:

[…] only for food it costs them (prescribers) almost USD 100 per month, whereas their monthly salary is just USD 100, how can they raise their children, how will they deal with when they are sick, how can they buy their house? […]. We need to pay them properly, and then the corrupt practices will reduce. (Pharm14-Private)

Participants also spoke of financial pressures in a broader way. This referred to the pressure of having money not only to satisfy their basic needs, such as food and clothes, but also higher ranking needs such as further education, residential accommodation, motor vehicles, holidays and travel. Even the rich were said to experience financial pressure to maintain their life style. This explains why many prescribers still colluded with pharmaceutical companies, although they were comparatively rich. This finding would indicate that increasing income alone may not necessarily stop the collusion between prescribers and the pharmaceutical industry.

Everybody needs stability. It means that even when they are earning a lot they still worry [...]. Last month they earned USD 5,000 and were living in a rank of people earning USD 5000; playing golf with a cost of some thousand dollars, all of a sudden their income reduces by half, then they are not able to play golf any longer; feeling disappointed immediately so they have pressure. The poor have their pressure but the rich have their pressure too, just different types. (Dr09 in Group interview01-Doctors)

Another theme that emerged was unfairness in prescriber remuneration. Doctor participants complained that their salary did not correspond to their responsibility and qualifications. To be a doctor, they had to be very intelligent students to enter medical schools and their university training was longer than for other professions. Upon graduation, they had to work harder and had more responsibilities dealing with life and 171 death decisions. Yet, their salary ranked “at the 17th among 19 professions paid directly by the government”. The salary of a public doctor with 20 years experience was reported to be less than the salary of an engineer who had just graduated working in an IT or banking area. The remuneration for the healthcare service of clinicians was compared with that of labour work such as “pumping up a tyre in a street” or “a cleaner”, leading to discontent particularly among more junior doctors. A doctor explained how the unfairness in remuneration led to some of them resorting to corruption.

I think unfairness causes discontent. People look out and recognize that this guy doesn’t do anything, but still earns a lot of money. He spends freely without thinking, going out with his wife and children all days then buying a beautiful modern car whereas we stick with our old bicycle, lacking food. His children have been sent to famous schools overseas while our children have to study in “lởm khởm” [low quality] local schools […]. Finally, we feel that that’s not OK. We think to ourselves, oh dear he can take [money from corruption] so we can take too. Why don’t we take it? If we don’t take it, it will be taken by others. (Dr04)

Unfairness was reported to be even more important than a low salary in explaining corrupt practices. A doctor said that “in the past the salary was very low too” but when the whole society was poor, financial pressure did not automatically lead to corrupt practices.

7.3.2.6 Workplace pressures

Doctor participants reported that in their daily work, pressure from their managers, their colleagues or their subordinates could also influence their prescribing behaviours and response to corrupt practices. The level of these pressures varied across departments and facilities. For example, one doctor talked about the heavy pressure coming from his department head.

In fact, I don’t need commission. I don’t know about others but with me money has never been a matter. I have never cared about commission but there are a lot of influences. For example, my boss tells me that you are only allowed to use 172

this medicine. Who dare not to listen to him? You don’t want to listen right? Stop operation. Now working in a surgery department and your name is not in the operation schedule, can you imagine? Your boss just puts your name off the list, in two weeks then you will do whatever he tells you to do. There are factors that make us have to follow [engage in corrupt practices] although we don’t want to. (Dr12 in Group interview02-Doctors)

However, many others stated that although pressure from managers did exist, it was just mild pressure. Some doctors used the metaphor “turning the green light” to indicate that they received an encouraging signal from their managers to use a certain medicine after their department was financially sponsored by the company trading this medicine. There were also doctors who said that they “have never had any pressure from bosses”.

Doctor participants also pointed out that sometimes they had pressure from their subordinates to engage in corrupt practices. A department head said that she had a policy that her department would only use high quality medicines from multinational pharmaceutical companies. However, she found it hard to explain to her staff that there was no commission when prescribing these medicines in the context where “other pharmaceutical companies gave doctors too much”. Finally, to reconcile this situation, she had to ask companies whose medicines were being used in her department to pay “a little commission of USD 0.25 instead of USD 0.75 [per vial]” or set aside an amount to “buy a gift for my staff”.

Patient overload was also reported to affect prescribers’ behaviour, as explained below by a doctor.

In a consulting room, 50 patients are queuing so we have to try to discharge them as soon as possible […]. It’s impossible to open MIMS to check for every single patient […]. Patients are queuing, waiting for, and crying outside […] so for example with antibiotics, I prescribe from only three companies. That’s enough. I can’t remember more [...], of course the information on products from companies with an unclear commission policy will not remain in our mind. Those with a clear commission policy will be remembered better [...]. I choose broad spectrum antibiotics to cover everything. (Dr21 in Group interview04- Doctors) 173

7.4 Rationalization of corruption

In addition to the factors discussed above, participants also spoke of socio-cultural factors and individual beliefs and attitudes that helped people to normalize and justify corrupt practices. The following sections discuss the two most salient sub-categories: the normalization of corruption; and self-interest maximization.

7.4.1 The normalization of corruption

Corrupt practices in Vietnam were reported to be so prevalent that all participants considered it an inevitable part of Vietnamese society and therefore embedded in the cultural fabric. A number of factors contributed to this normalization of corruption.

7.4.1.1 The prevalence of corrupt practices

Doctor participants used the prevalence of corruption in Vietnam as an excuse for their corrupt practices.

It’s not only the health sector being corrupt, but it’s the whole society, every sector. The higher ranking [in the society], the worse people are. You should know that when corrupt practices become normal, incorrupt people become the minority and in the society’s eyes, they become abnormal. Thus, how can you tell us to stay outside [the society, not engage in corrupt practices]? (Dr07 in Group interview01-Doctors)

Corrupt practices seemed to pervade every aspect of the society. The recruitment and career advancement process in the healthcare sector was no exception.

I think in the near future, we cannot solve the problem [of corrupt practices in the health sector]. Simply put, it is because they [doctors] have to buy their position in hospitals with a lot of money. They have just graduated how they can have much money [...] if they don’t take money from pharmaceutical companies or patients. (Pharm14-Private)

Those who engaged in corrupt practices, particularly junior doctors, rationalized their behaviour stating that “abuses come from the chiefs” and “before being in management 174 positions, they all did the same as we are doing now [engage in corrupt practices], and that their corrupt practices was “nothing compared with that of big people [high ranking people] and it is big people who hold sinecures […], they don’t do much but grab all manna”.

According to study participants, in a society where informal payments were necessary to get things done, even people who did not want to engage in corrupt practices still had to do so. Therefore, “it is impossible for the health sector to be uncorrupt in a corrupt society”. Pharmaceutical industry participants said “[they] have to adapt to the given market, although they want to do business with integrity”, while doctor participants justified that “in this context, it is doctors who are influenced by the society rather than they are the cause of the problem”.

7.4.1.2 Other social norms

The pragmatism of mutual support seemed to add to the normalization of corruption. Pharmaceutical company participants said that giving commissions to prescribers was “a normal thing [understandable and acceptable]” because “thanks to their [doctors’] contribution, our company can develop”. Therefore, “when the company has profit, our customers [the doctors] have to have profit too”. This logic was also encountered by doctor participants as reflected below.

Of course, with mild infection for example, I like prescribing the medicines of those who often come to see me. To be honest, everybody will be like that. We will prescribe medicines with so-so quality but have commission for us. Everybody is like that. Those who often come to visit us, taking care of us, to be honest we will pay more attention as a way of thanking them. (Dr21 in Group interview04-Doctors)

Some participants pointed to the belief that corrupt practices were an inevitable consequence of the political shift to a market economy. Pharmaceutical company participants said that “in pharmaceutical business, ‘marketing đen’ [unethical marketing] with commission for doctors is a side effect of the market economy that is unavoidable”. They emphasized that fair competition did not exist. This perception led

175 to the rationalization that to compete with others, their collusion with prescribers was inevitable.

Similarly, doctor participants believed that at a certain stage of development of every country, corrupt practices were inescapable. They claimed that at the current stage of development, Vietnam had to live with corruption. Corrupt practices therefore became acceptable socially, especially in the smaller context of the health sector.

Our viewpoint is that Western people often tell me that our country is widely corrupt. My answer is 100 years ago Western countries were the same, no different at all. As a development rule, on attaining a certain level of development, corrupt practices will disappear. (Dr02)

7.4.2 Self-interest maximization

Doctor participants reported that, before deciding whether or not to engage in an improper behaviour, they had to consider the expected consequences of their actions. They weighed the costs and benefits of engaging in the improper behaviour versus not engaging, and opted to maximize their self-interest. Doctor participants said that while the benefit of colluding with pharmaceutical companies was the financial gain from corrupt practices, the cost was a risk of losing their “assets”. These assets included (1) professional ethics; (2) personal values; (3) knowledge and skills; (4) advancement opportunity; (5) reputation; and especially (6) employment.

7.4.2.1 Professional ethics

Professional ethics were reported by doctor participants to be a factor preventing them from engaging in corrupt practices as reflected below.

With me patients are first. It’s not because they [pharmaceutical companies] give me more or less then I prescribe more for them. It depends on the severity of patients. With severe patients, I still have to use good quality medicines of big companies even if they don’t have commission at all, I still have to. This is principle. (Dr19 in Group interview04-Doctors)

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Nevertheless, participants acknowledged that the ethical degradation of the whole society, together with the various pressures of life, eroded professional ethical standards. Medical ethics weakened when financial gain from corrupt practices “increased to a level that was rewarding enough”. A doctor participant suggested that it was more important to “create an institutional mechanism that does not allow people to engage in misconduct, even when their professional ethics weaken” than just try to increase professional ethics.

A problem that seemed to lend complexity to professional ethics was the confusion over what was deemed to be ethical behaviour. Some doctor participants considered it was ethically acceptable to take offers from pharmaceutical companies (e.g.. precious gifts, holiday packages and even commissions) as long as the offer was given without their asking for it, or after their recommendation of a particular medicine.

[The pharmaceutical companies] come and give me cash every month. They said that ‘you have used this quantity [of products] so I give you this amount [of money]’. However, I don’t know the commission accounting for how many percent [of the sale] and I don’t know if I have prescribed many or few, and I don’t care about this. I only know that I have selected their medicines and they come to thank me. (Dr17 in Group interview03-Doctors)

Another example of medical ethics confusion was that doctors considered medicines as a normal commodity. Because they were “customers of pharmaceutical companies”, taking gifts or commissions from pharmaceutical companies was seen to be similar to a customer receiving a promotional gift, a normal act that occurred in every type of trading in Vietnam. Some doctor participants believed that it was morally acceptable if commissions were for the collective rather than individual interests, such as sponsoring a holiday package for all members of a clinical department.

7.4.2.2 Personal values

In addition to professional ethics, other moral norms such as “conscience” and “dignity” were also reported to prevent people from engaging in corrupt practices. Participants stated that as well as personality factors, an important determinant of whether a person was morally better than others was his or her good family tradition. 177

I think family tradition is very important. Why I have never been bought over? In the past, my grandfather and then my father used their own money to exchange for our freedom [...]; they exchanged their entire asset for freedom [talking about the participant’s family who dedicated their entire asset to the Vietnam revolution in August 1945 to have the country’s independence]. Why now I have to exchange my freedom for some pence. Although I am not rich, I can’t do this. To be honest, many people nowadays sell their freedom too cheap. (MOHofficial02)

7.4.2.3 Knowledge and skills

Most doctor participants believed that prescribers’ knowledge and expertise influenced their behaviour and responses to corrupt practices. A common view was that the more the expertise, the less the susceptibility to corrupt practices.

People with good expertise often don’t prescribe for commission. They are less influenced by medical representatives […], whereas those with low expertise often prescribe for their own interest. (Dr05)

However, some doctor participants indicated that individual personality or lifestyle preference and needs were more important than knowledge in influencing behaviour.

Lack of knowledge led to an inappropriate use of medicines for patients, reducing doctors’ medical ethics. Some doctor participants said that in Vietnam, prescribers had a “tendency to use broad spectrum antibiotics for any case of infection” that they deemed severe because they did not “have enough knowledge” to select better, but narrower, spectrum antibiotics. Given that there was “no legal framework to protect doctors in case the infection got worse” doctors without up to date knowledge on appropriate antibiotics used powerful and broad spectrum antibiotics to protect themselves, although a cheaper, narrower spectrum medicine might be better.

7.4.2.4 Advancement opportunity

Another asset that was often reported by doctor participants as hindering them from engaging in corrupt practices was their advancement opportunity. Participants stated

178 that some people did not dare to engage in corrupt practices because they wanted to keep themselves “clean” to have opportunities for advancement in the future. By contrast, those without opportunities for promotion (i.e. those about to retire, or those with very poor expertise), were considered to be more likely to commit undesirable conduct for private gain.

Now, the worse the doctors, the more money they have. It’s ridiculous. The ‘lởm khởm’ [poor expertise] doctors or those who are going to retire can recommend whatever medicines. Without incentive for promotion, they can prescribe whatever medicines regardless of efficacy and rationale. (Pharm05-Foreign)

When asked at what age doctors were more likely to prescribe medicines for a commission, a common answer was that both old and young doctors were equally vulnerable. However, the older doctors, who had a certain position in hospitals, were reported to be more likely to engage in collusion with pharmaceutical companies than the younger ones because “young doctors have a long future ahead”. If they were caught being corrupt, “their future would be negatively affected”. A participant described a typical corrupt doctor as follows:

They [corrupt doctors] are often senior doctors, at least having been working for around ten years and also having had a certain position in their hospital […]; junior doctors have a long life ahead so they have to think twice. (Chiefpharmacist01)

7.4.2.5 Reputation

Reputation was also an asset that doctors could lose. Doctor participants reported that when they worked for their own private clinic, they always prescribed high quality medicines to ensure successful outcomes that built their reputation. This was because in the private sector, poor quality providers were eliminated as patients selected higher quality providers. By contrast, such automatically enforced accountability was reported not to exist in the public hospitals because, regardless of their performance, prescribers still received their government salary. Additionally, in the context where public hospitals were always over-crowded, “there was no incentive for them to attract more patients”. 179

When working in private clinic, we don’t care about the commission from pharmaceuticals. We have to do the best thing for patients, selecting the best medicines. Our treatment has to be successful; otherwise patients will not come back. (Dr14 in Group interview03-Doctors)

7.4.2.6 Employment

The risk of losing one’s employment was another individual deterrent to engaging in corrupt practices. All participant groups argued that the higher the salary, the less likely that the doctors would engage in corrupt practices to risk their well-paid job.

You have to solve the problem of income. For example in [name of a foreign- invested hospital] you can’t induce doctors with commission to have medicines prescribed because doctors in this hospital are very well paid so they are very scared of being sacked if they do the wrong thing. (Pharm16-Private in Group interview01-Pharm)

A Ministry of Health official compared doctors in Vietnam and their colleagues in France as follows:

In France, a doctor is really a doctor. When working in a hospital, their salary can make them a good living then they never lose themselves. The financial gain from corrupt practices does not overweigh the cost of losing their job so they never exchange. This is different from Vietnam. When I started to work, my only wish was I didn’t have to do too much extra work outside and still had enough money to raise my children. (MOHofficial01)

7.5 Discussion

In this chapter, informal payments and their impact on medicine prices have been examined in depth via interviews with key stakeholders. The results point to the importance of corrupt practices as one of the many contributing elements to unaffordable medicines, outlined in previous chapters.

The theoretical framework of corruption in the health sector developed by Vian (2008), has been used in this chapter to frame the reasons for corrupt practices in Vietnam’s 180 healthcare sector elicited by study participant responses. Vian’s framework consists of three main categories: opportunities; pressures; and rationalization. Analysis of the emergent concepts derived from the qualitative study led to the additional development of a new and extended theoretical framework of corruption, comprising systemic factors and individual factors to explain corrupt practices (see Figure 7.1).

Opportunities Pressures for for corruption corruption

Individual factors

Self-interest maximization

Rationalization for corruption

NormalizationRationalization of corrupt

Systemic factors

Figure 7.1 A new theoretical framework of corruption in Vietnam’s health sector

In this new framework, systemic factors comprising of opportunities for corruption, pressures for corruption and normalization of corruption act as a necessary condition, while individual factors with the core of self-interest maximization play the role of a sufficient condition for corrupt practices. The dominant corrupt behaviours discussed in this chapter (i.e. the collusion between prescribers and pharmaceutical companies) can be conceptualized in the form of a ‘Trade-off’ model (see Figure 7.2) that represents the interaction between the individual and systemic factors. The evidence gained from the qualitative study in this thesis suggests that when the latter are imbedded in the former, corruption is created. Consequently, a matrix of intervening factors for corrupt practices has been produced by the researcher from the two classification systems: Opportunities- Pressures-Rationalization and Systemic-Individual, presented in Table 7.1. 181

‘Trade-off’ model explaining corrupt behaviour

Self-interest maximization

Governance

Assets Financial reward from Discretion corruption Professional Personal Transparency ethics values Societal norms Knowledge & Accountability Reputation Skills Normalization of corruption Enforcement Advancement Employment Prevalence of corruption opportunity Opportunity Remuneration system for corruption Corruption in Rationalization Vietnam’s Salary Pressure for health sector corruption

Figure 7.2 The Trade-off model of corrupt behaviours in the collusion between prescribers and pharmaceutical companies in Vietnam

Figure 7.2 summarizes the main features of this theoretical framework. Among individual factors, the most salient theme of self-interest maximization is the centre of the model. The dominant theme of governance among systemic factors plays a role at the base of the scale, making people face the trade-off between financial gain from corrupt practices and their assets. If governance is poor, then people do not have to choose. They can gain financially from corruption without worrying about losing their assets. Rather, corruption gains will be added to their assets, making the total asset bigger, satisfying their self-interest maximization. Therefore, in an environment with poor governance, people are more likely to engage in corrupt practices.

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Table 7.1 Matrix of intervening factors for corrupt practices in the model

Systematic factors Individual factors

Poor governance None Discretion Transparency Accountability corruption corruption

Opportunities for Enforcement Inducement pressures None Pharmaceutical market related factors Product related factors Sales representative related factors Regulation related factors Survival in the market Healthcare structures and processes Tender system Information system Taxation Pressures for corruption for corruption Pressures Role of the private and public sectors Remuneration systems and financial pressure Workplace pressures Normalization of corruption Self-interest maximization The prevalence of corruption Professional ethics Other social norms Personal values Knowledge and skills Advancement opportunity corruption corruption Reputation Rationalization for Rationalization Employment

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A doctor interviewed in the qualitative study used an interesting metaphor which illustrates the applicability of this model to the situation of medicine prices and policies in Vietnam. He said:

It‘s like a tiger. When the tiger is not hungry, it doesn’t have any need. People are the same. When they don’t have to worry about money, they don’t have a need to earn money. To do so, we need an appropriate direct remuneration system. On the other hand, we need a functioning monitoring system. Although the tiger is full, we still need an electric stick and an iron fence; otherwise it can jump out at any time. People are similar, human beings are good in principle but when they have the opportunity, they are easily corruptible in the absence of penalties. (Dr02)

This new theoretical model helps to explain the varying engagement in corruption between individuals in a society. Although the systemic factors are similar, the differences in individual factors lead to behavioural differences and responses to corrupt practices.

Participants interviewed in the qualitative study provided clear examples and ample information that, although many factors contributed to high medicine prices in Vietnam, systemic corruption remains a powerful driver of unaffordable generic medicines. Not everyone succumbed to the pressure to engage in corrupt practices, but it was reported to be quite prevalent. In summary, poor governance created the opportunity for corrupt practices. Low salaries inevitably put pressure on some people to be corrupt. Poor remuneration reduced the weight of their assets, making financial gain from corruption more rewarding. Individual factors (such as scant ethical beliefs, personality attributes) together with some systemic factors (including the prevalence of corruption in society and societal norms) helped some (but not all) people justify their corrupt behaviours. Overall, these three groups of factors, namely the opportunity for corruption, pressure for corruption and rationalization of corruption, moderated by the principle of self- interest maximization and trade-off decisions, together explained elements of corruption in the health sector, which participants said contributed strongly to high medicine prices in Vietnam.

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Chapter 8. Discussion and Policy Recommendations

8.1 Introduction

The objective of this thesis was to research medicine prices and pricing policies in Vietnam. Four studies were conducted that examined medicines prices in Vietnam from the perspective of the impact of demand and supply factors, the availability and affordability of medicines, the effectiveness of pricing policies, and the underlying causes of high medicine prices. The investigative research strategy adopted was a mixed methods approach of quantitative and qualitative studies, together with analyses of policy and legislation. The findings from all four studies are integrated in this chapter to better understand the researched problems and provide an evidence base for the policy recommendations and conclusions.

8.2 Review of the research objectives

As outlined in Chapter 1, the ultimate aim of this research was to improve access to affordable medicines for the whole of Vietnam’s population. However, prior to formulating recommendations for effective medicine pricing policies, a sound problem definition was required. An in-depth understanding of the determinants of patient access to affordable medicines, based on the specific situation in Vietnam and comparative global experience was needed, and formed the basis of the four studies for the thesis.

In Chapter 2, a review was provided of the international literature on access to medicines, including the dominant paradigms and research findings of WHO, OECD, and other similar international organizations. The academic peer-reviewed literature was also searched for studies in this field, and pertinent findings were reviewed. In particular, the WHO access framework was identified as a useful way to characterise the mechanisms involved in achieving affordable medicine prices, the most challenging component. Chapter 2 also covered the international literature on the factors that influence medicine prices, directly or indirectly, including policies on the containment of pharmaceutical expenditure and consumer access to affordable medicines.

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There were four specific objectives in this thesis. The first was to analyse how demand and supply of pharmaceuticals in Vietnam affected medicine prices. In Chapter 3, Vietnam’s health care and pharmaceutical system was reviewed, with an analysis of both the demand and supply sides of the pharmaceutical market. An analysis was also provided of the processes, characteristics and problems inherent in Vietnam’s pharmaceutical supply chain and their implications for medicine prices and the development of future medicine pricing policies.

The second study objective was to examine the price, availability and affordability of medicines in Vietnam. Accordingly, in Chapter 4, data from a survey of Vietnam’s medicine prices, and their availability and affordability were gathered using the standard WHO/HAI developed methodology. These data were analysed and compared with results from other countries within the Western Pacific Region at a similar development stage to Vietnam.

The third study objective was to assess the effectiveness of Vietnam’s medicine pricing policies. In Chapter 5, results from this policy analysis were outlined. The analysis of medicine pricing policies covered the strengths and weaknesses of the legislation and regulations that determine medicine pricing policies and the subsequent impact on medicine prices.

The fourth study objective was to identify underlying factors causing high medicine prices. Using qualitative in-depth interviews, the research reported in Chapter 6 explored the full range of issues that arose when informed stakeholders discussed the root causes of high medicine prices in Vietnam. This study also examined the different price components when medicines move along the supply chain, identifying the dominant contributory price components and the underlying causes of high medicine prices.

In Chapter 7, the dominant theme that emerged from the qualitative study - informal payments - was further explored to see if the data collected could help to explain some of the corrupt practices in the health sector, and thereby aid with the development of future policy recommendations to improve access to affordable medicines in Vietnam.

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8.3 Synthesized results of the research

A key component of the mixed methods approach is integration, where the researcher mixes or integrates the quantitative and qualitative data collection and analysis (Tashakkori & Teddlie, 1998), in order to corroborate one element with another.

In explaining the causes of high and unaffordable medicine prices in Vietnam, the findings of all four studies were integrated, following the four components of the WHO access framework outlined in Chapter 2. These synthesized findings are discussed below and form the basis of the policy recommendations and conclusions.

8.3.1 Vietnam’s medicine prices and availability problems

As reported in Chapter 4, the availability of essential medicines in the Vietnam public sector was low. Adjusted for the Purchase Power Parity of Vietnam’s currency, medicines prices in Vietnam in 2005 were excessively high, especially in the public sector, compared with the international benchmark. Most pharmaceutical treatments were assessed as being unaffordable for the lowest-paid government worker, and even less affordable for a large part of Vietnam’s population who earn well below this benchmark. This finding of high medicine prices and unaffordability is consistent with results from previous studies on Vietnam (Ait-Khaled, et al., 2000; Bala, et al., 1998; Falkenberg, et al., 2000; Kuanpoth, 2007).

Paradoxically, Vietnam’s public sector was worse than the private sector in supplying appropriate and affordable medicines to the population. The availability of medicines in the public sector was found to be lower than in the private sector and the median prices of medicines were higher in the public sector than in the private sector. Equally important is that, in some public hospital pharmacies, some generic medicines were found to be more expensive than innovator brands. These unusual findings could not be adequately explained in the absence of further investigation, which was carried out via the subsequent qualitative in-depth studies.

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8.3.2 Reasons for unaffordable medicine prices in Vietnam

8.3.2.1 Selection of medicines

As reported in Chapter 3, the schedule of essential medicines and promotion of rational use of medicines was the first element of Vietnam’s National Drug Policy (NDP) to be implemented, with the current essential medicine list (EML, established in 2005) consisting of 449 medicines. However, as detailed in Chapter 3, EMLs were not fully utilized as the basis for pharmaceutical procurement, reimbursement or prescribing. Instead, in response to political pressure and additional needs of hospitals the Ministry of Health simultaneously developed alternative expanded lists of main medicines used in public health facilities for this purpose. The current list of main Western medicines (established in 2008) contains 750 medicines/active substances, almost double the number of current essential medicines. In addition, in Chapter 7 evidence was provided that the medicine selection process could be unduly influenced by corrupt practices.

Adoption of too wide a schedule of medicines, including some that are less cost- effective, counters the basic principles of an essential medicines schedule. It also dilutes the monopsony purchasing power of the government or third party payers, by weakening their ability to negotiate a better price. This can then lead to additional inefficiencies in procurement, distribution and other supply activities, resulting in higher prices.

8.3.2.2 Use of medicines

As outlined in Chapter 3, the use of medicines in Vietnam was found to be problematic for both health providers and consumers, with a high proportion of inappropriate self- medication. Vietnam’s National Drug Policy only mentions the rational use of medicines from the provider side, without addressing self-medication, facilitating the role of pharmacists as consumer advisors or actively promoting good pharmacy practices (Larsson, 2003). Hospital Drug and Therapeutic Committees (DTC) have been established and standard treatment guidelines and national pharmacopoeia developed. Nevertheless, the dissemination of these measures, in the absence of ongoing monitoring and supervision of prescribing practices and adherence to the pharmacopoeia, has impeded achievement of Vietnam’s National Drug Policy goals. 188

The irrational use of medicines has been further hampered by a number of factors. They include misinformed views on the Essential Medicines List, a distrust of the quality and efficacy of generic medicines, lack of enforcement of separation of prescribing and dispensing and inappropriate profit-driven prescribing behaviour. As described in Chapters 6 and 7, many physicians used prescribing for revenue generation to cross subsidize their low government paid salary, with the aim of ensuring a good life, which they considered they deserve. As a result, medicine prices at the patient level have been grossly inflated. Often, the prescribing of medicines has been based on supply driven demand, rather than on evidence - based clinical need. Corrupt practices, partly driven by the need for clinicians to earn economic living, remain a dominant factor affecting the use of medicines in Vietnam.

8.3.2.3 Pharmaceutical pricing regime

In 2006, by Decision No 10/2006/QD-BYT, the Ministry of Health assigned the Drug Administration of Vietnam to be responsible for assisting the Minister of Health to fulfil the task of State management of medicine prices regulated by the Pharmaceutical Law. Accordingly, the Drug Price Management Division was established with four staff who have mainly been involved in the management of the pharmaceutical profession, rather than the economic aspects of medicine delivery. However, as reported in Chapter 3, medicine-pricing authorities are responsible for the new and difficult task of controlling the prices of more than 20,000 medicines registered for marketing in Vietnam’s pharmaceutical market. This mission will be difficult to achieve without increased personnel to do the work.

The findings outlined in Chapter 5 also demonstrated that high and unaffordable medicine prices in Vietnam had their genesis in a sub-optimal pharmaceutical pricing regime. The current pricing framework, arising from the pricing provision of the Pharmaceutical Law and associated medicine pricing regulations, is ostensibly based on free pricing. This permits pharmaceutical companies to set their own prices freely based on market forces. The government ensures the transparency of price information through a formal price declaration and publication system. Currently, the market entry price of a medicine must be declared to the Drug Administration of Vietnam by medicine registrants or manufacturers. Declared prices are published on the website of

189 the Drug Administration of Vietnam. Wholesalers and retailers are required to publish their wholesale and retail prices, respectively. Retail prices must be published on the final unit package of the medicines. Wholesalers and retailers must not sell medicines at prices higher than their published prices.

However, the current pricing framework is internally conflicted with its principle of free pricing as it includes provisions to control Cost, Insurance, and Freight (CIF) prices of imported medicines through an external price benchmarking system. The CIF price declared for an imported medicine must not be higher than the average CIF price of this medicine sold in comparator countries with similar medical and commercial conditions to Vietnam. In addition, declared wholesale prices of both imported medicines and locally produced medicines are regulated using a “cost plus” pricing technique. The reasonableness of these prices is assessed based on input costs (including declared CIF prices for imported medicines and production costs for locally produced medicines), and the fluctuation of input costs and foreign exchange rate. Real wholesale prices in the market must not be higher than the declared wholesale prices. Suppliers wanting to sell their medicines at prices higher than those originally declared are required to make a re-declaration to the Drug Administration of Vietnam with an explanation prior to applying new prices. In the case of public procurement, the prices of medicines in hospitals, which are paid out of the State budget and health insurance, are supposed to be controlled through the setting of maximum reimbursement prices and the use of competitive tendering processes. By contrast, in private retail pharmacies, pharmacists are free to set their own retail prices.

Nevertheless, the external price benchmarking system in Vietnam does not work well because of the failure to enforce the policy requirement that declared prices should not be higher than average prices in comparator countries. Although it has been five years since the Pharmaceutical Law came into effect, suitable comparator countries are yet to be approved for comparison. Essential technical issues, such as appropriate sources of price information in the comparator countries, identification of comparable products with appropriate adjustment for changes in exchange rates, and a schedule of compliance audits remain to be resolved.

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Assessing the reasonableness of the declared wholesale prices is also problematic. While the quality of the assessment depends on the quality of the input data and the assessment criteria, the input information on prices provided by pharmaceutical companies is rarely validated. Moreover, in the absence of transparent and statutory criteria, whether the price of a medicine is reasonable or not is determined at the discretion of the pricing authorities. As reported in Chapter 7, this causes difficulties for pharmaceutical companies doing business in Vietnam’s pharmaceutical market, providing opportunities for corrupt practices.

In public hospitals, the Ministry of Health has not yet found a suitable mechanism for setting the maximum price levels for medicines funded out of the State budget and by health insurance agencies. Techniques for defining these maximum reimbursement prices have yet to be established. Pricing of medicines in Vietnam is still largely determined by market forces, with a tendering system being the sole mechanism to control prices of medicines procured in the public health facilities.

8.3.2.4 Pharmaceutical procurement system

Vietnam has yet to have a national central procurement office to administer the purchase of medicines in government health care facilities. Currently, public medicine procurement is decentralized to individual health care facilities or to the provinces. This leads to unnecessary duplication and inefficiencies, as well as diluting the opportunities to gain significant economies of scale through larger bulk purchases.

Five main problems exist in the current tender arrangements for the procurement of medicines in the public sector. The first problem, discussed in section 8.3.2.1, is that medicine procurement is not limited to essential medicine lists. Instead, a much larger list of main or basic medicines developed by the Ministry of Health is used which dilutes the inherent advantage of a comparatively restricted list.

The second problem, outlined in section 8.3.2.5, is that appropriate methodologies have yet to be established to set “fair” maximum reimbursement prices for medicines. Currently, bid prices are evaluated against the previous year’s prices or previous bidding prices (WHO-WPRO, 2009) which may not have been assessed as being reasonable. 191

The third problem is related to tender practices. It is a common practice in Vietnam to arrange discriminatory terms and conditions for market entry that favours particular tenderers, in return for various forms of gratuities and bribes. The scope of this practice is reportedly so widespread that it can result in a significantly inflated tender price to cover costs as reported in Chapter 6. This is consistent with the findings of Pham (2010) who stated that in many cases, the successful tender prices are much higher than the prevailing market retail price.

The fourth problem is that whilst the Vietnam Social Insurance (VSI) is the agency responsible for the reimbursement of medicine costs under public health insurance, it is essentially a passive ‘price taker’. This has arisen as a function of the current medicine tendering regulations Joint Circular No 10/2007/TTLT-BYT-BTC, which does not regulate the role of the VSI in the tendering process. As a result, the opportunity has been lost for the VSI to use its purchasing power to lower medicine prices. In 2009, the VSI paid USD 475 million for reimbursable medicines and it is estimated that this reached USD 650 million in 2010. However, the VSI provincial offices were only involved in medicine tendering in 13 out of 63 provinces (Quốc hội khóa XII, 2010).

The final problem is the wide use of the fee-for-service provider payment mechanism, which links physicians’ prescribing to revenue generation. This method of reimbursement, called the retrospective payment method, provides prescribers with incentives to deliver more services, whether or not they are medically necessary (Wouters, 1999). This reportedly led to supply-driven demand with overuse of more expensive medicines than is clinically necessary. The overall result is overspending of health insurance funds, leading to significant inefficiencies and reduced patient access to medicines for the same expenditure. Overall, system improvements are required.

8.3.2.5 Patent and monopoly issues

As outlined in Chapter 6, lack of competition, because of a monopoly in production, importation and distribution of patented innovator brand medicines, was the main reason for high prices of these patented medicines. Even when innovator brand medicines go off patent, the local pharmaceutical industry has rarely been able to produce competitive products. Participants commonly reported a virtual monopoly in importation and distribution of these off-patent medicines. This trend was also 192 illustrated in Chapter 3 where it was reported that most multinational companies were found to select three international distributors, Zuellig Pharma, Diethelm, and Mega Lifesciences to distribute their specialized products in Vietnam. The result is a limited number of distributors who are dominant in Vietnam’s specialized medicine market. In Chapter 6, it was reported that because of their position of market power, multinational companies might enter into various price maintenance arrangements with their distributors to artificially inflate medicine prices and lessen competition. A similar response was also documented in a recent report of the Vietnam Competition Administration Department (VCA, 2009).

As stated in Chapter 3, Vietnam fully adopted the WTO’s rules in January 2009. The move to full adoption of the TRIPS agreement, and other international agreements containing obligations relating to intellectual property rights may restrict the supply of low-priced generic medicines in Vietnam. In addition, the regulation of prescription- only medicines is not sufficiently enforced. This means that instead of International Non-proprietary Name (INN) medicines, more expensive branded generic or innovator brand medicines might be prescribed and dispensed. With no robust mechanism to control the prices of innovator brand medicines, coupled with the prevalence of collusion between physicians and pharmaceutical companies to drive up prices of branded generic medicines, the end result is that patients have to pay high prices for their prescribed medicines. In Chapter 4, it was shown that patients were likely to pay a brand premium of 460 per cent when they were prescribed innovator brand medicines. If a branded generic product was prescribed, patients still had to pay a price from 60 to 80 per cent of the innovator brand price, sometimes even higher than the innovator brand price as reported in Chapter 6.

8.3.2.6 Government taxes and duties

As shown in Chapter 6, government taxes, charges and duties contributed to inflating the final sale price of medicines in Vietnam. This finding is supported by Bate et al. (2006) who showed that the Vietnam government imposed overall taxes and tariffs averaging 12.7% on goods in Chapter 29 and 30 of the Harmonised System (HS)11.

11 Goods classified in Chapter 29 are organic chemicals that are often used in the manufacture of pharmaceutical products. Goods classified in Chapter 30 are pharmaceuticals, including API, completed medicines, bandages, gauze etc. 193

While the import tariffs may contribute to government revenue, they often generate an insignificant amount of less than 0.1% of Gross Domestic Product (Olcay & Laing, 2005). For example, in 2002, pharmaceutical tariffs, both for active pharmaceutical ingredients and finished products, only generated 0.0453% of Vietnam’s GDP (ibid.), accounting for 0.037% of overall government revenue and 0.466% of the overall public health care budget (Bate, et al., 2006).

Moreover, the initial taxes such as import tariffs and VAT occur early in the supply chain, thus having a multiplying effect as they inflate prices further down the line through the application of various mark ups and margins. The multiplying effect is significant because there are so many intermediaries in the supply chain. In this context, although taxes generate revenue, taxing medicines might be considered false economy in the long term. This is because the government will have to pay the final inflated price when public health insurance achieves universal coverage, as stipulated in Vietnam’s Health Insurance Law.

8.3.2.7 Financing

As outlined in Chapter 3, the proportional allocation within Vietnam’s health care budget has recently improved from the perspective of increased public access to essential healthcare. However, in absolute terms, patients’ out-of-pocket spending on health is sharply increasing, and it still accounts for more than 60 per cent of the total health expenditure, large enough to result in greater poverty and inequity in access to health care. The reasons for high out-of-pocket payments for health care and medicines are numerous, including a slow increase in allocation of the state budget on health and slow expansion of public health insurance coverage. The remaining high household out- of-pocket expenditure on health, together with the high prices of medicines as reported in Chapter 4, make access to health care in general, and to medicines in particular, unaffordable for low-income groups.

8.3.2.8 Pharmaceutical distribution network

As outlined in Chapters 6 and 7, medicines supplied to Vietnam’s pharmaceutical market are characterised by stakeholders as belonging to one of four groups: innovator brands; European or North American branded generics; Asian branded generics; and 194

Non-Proprietary Name generics. As the system of quality assurance for medicines in Vietnam is under-developed with very little testing for bioequivalence prior to market authorisation, these different groups of medicines are perceived to be of very different quality. The first two groups are believed to be of much higher quality than the remaining two groups. This results in different marketing strategies being adopted for each group, leading to pricing differences for products that are perceived to be of premium quality.

Innovator brand, European and North American generic manufacturers

As outlined in Chapters 6 and 7, initially, innovator brand manufacturers and European and North American generic manufacturers promoted their medicines by professional detailing, continuing education, and clinical seminars and conferences to emphasize the high quality and efficacy of their leading products. They often selected a monopoly distribution agent through one of the three international distributors, Zuellig Pharma, Diethelm, and Mega Lifesciences, as reported in Chapter 3. A commonly used pricing strategy was “price skimming”, that is setting a relatively high price for their products at first to quickly recover initial outlays while they held a monopoly position. Over time, prices were lowered as competition arose. These marketing strategies were quite open and transparent.

The marketing approach extended to arranging key opinion leaders to participate in local clinical seminars and to the funding of health professionals to attend overseas conferences. Sponsoring a clinical department in a particular research program was also used to promote a particular product. However, when competition increased, the marketing approach shifted to payment of personal gratuities such as the purchase of gifts for personal use. The results of the qualitative study reported in Chapters 6 and 7 confirmed that gratuities might include such generous provisions as sponsorship of holiday packages overseas for physicians and key opinion leaders.

Asian generic manufacturers and Vietnam’s distributors

As outlined in Chapter 3 and confirmed by participants’ reports in Chapter 6, domestic pharmaceutical traders are rarely engaged by leading international pharmaceutical manufacturers to distribute their high quality but expensive products. This is largely 195 because of their relatively small scale of operations, limited financial capacity and poor administration. For these reasons, domestic distributors largely directed their operations to low cost generic medicines sourced from small Asian generic manufacturers.

Participants in the qualitative study confirmed that a commonly held view was that discount prices are associated with discounted quality. Local distributors reportedly have had to rely on inducements and gratuities to obtain market entry to sell their products to compete against innovator brand medicines, European, and North American branded generics. The lack of regulations on ethical promotion of pharmaceuticals also provides a potentially fertile ground for pharmaceutical companies to use kickbacks and commissions to induce providers and clinicians to use their products.

As described in Chapters 6 and 7, gratuities and commissions were frequently given to tender committees for procurement, and to clinicians for prescribing perceived low quality generic products. The payment level and associated commissions were reported to be in the order of 40 to 60 per cent of the final sale price. Under these arrangements, selling prices are set based on what the market will bear, rather than the economic value added to the product. Ordinarily, these prices are lower than the originator brand equivalent, but significantly higher than the original purchase price paid by the distributor, leading to a significant surplus profit along the way. In some instances, the final price for a generic medicine was set even higher than the innovator brand product because of the need to factor in inducements to the various decision makers, tender boards and prescribers to ensure market access and appropriate market share.

The gain to the distributor is primarily in terms of gaining access to the market, as most of the surplus revenue or ‘profit’ is needed to be given to the prescribers, medicine tender committees of the hospitals and/or chief pharmacists by way of gratuities and incentives. The magnitude of the surplus profit drives market share, notwithstanding the lower quality of many of the generic medicines. Results from the qualitative study reported in Chapters 6 and 7 help to provide a better understanding of the unusual findings in public hospital pharmacies, with some generic medicines being more expensive than their corresponding innovator brands, as reported in the quantitative survey (see Chapter 4).

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The existence of non-price competition based on informal payments, which is prominent in the hospital market, also explains the unusual variation of medicine prices between the public and the private sector reported in Chapter 4. The example of the price for cefixim (reported in Chapter 6), clearly illustrates how informal payments led to a situation where a branded generic of cefixim was sold in the public sector at a price five times more expensive than a generic named cefixim sold in the private pharmacies. The same explanation may be applicable for the case of the price of ranitidine reported in Chapter 4. The lowest-priced generic (LPG) ranitidine in private pharmacies was found to be ten times cheaper than the so-called LPG ranitidine, which was available in public hospital pharmacies. Given the time lag between the quantitative study results (medicine prices in 2005) and the qualitative data seeking to explain the observations (interviews conducted from April 2008 – December 2009), the qualitative studies not only help to explain the anomalies in medicine prices in 2005 but also confirm that these anomalies still prevail. This is indicative that medicine pricing policies in Vietnam still require remedial action, especially with respect to the endemic corruption issues, as well as all the other aspects outlined in Chapter 5.

Foreign Direct Investment and domestic pharmaceutical manufacturers

As discussed in Chapter 3, the domestic pharmaceutical market is progressing, but it still suffers from three main weaknesses. Firstly, limited research and development (R&D) facilities coupled with inadequate working capital and outmoded administrative and business practices, means that domestic manufacturers still focus production on lower-cost and lower technological generic products (BMI, 2009). Secondly, reliance on the international market as the source for active ingredients (API) and associated raw materials means that the cost of locally produced medicines are subject to fluctuations in the prices of raw pharmaceutical ingredients sourced from the international market. The need to finance such purchases from foreign exchange funds is an additional complication adding to domestic medicine prices. Recent devaluation of the Vietnam Dong against international hard currencies also increases the selling prices of imported medicines, which are in Vietnam’s currency. Finally, in the absence of a general strategy directed at industry rationalization, a plethora of domestic manufacturers has been competing against each other for a very limited and uneconomic market share.

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This has resulted in the domestic pharmaceutical industry failing to achieve the required economies of scale, resulting in increased costs leading to unaffordable medicine prices.

A poorly organized and regulated distribution network

The domestic pharmaceutical distribution network in Vietnam is in need of rationalisation. There are reportedly too many intermediaries in the supply chain with each factoring in a cost margin. This inevitably leads to an inflated final price, especially in the absence of an effective pricing policy that limits the various distribution mark-ups. As reported in Chapter 5 and Chapter 7, it is not uncommon for wholesalers to let distributors cycle their products through several levels of distribution before they are finally retailed. This practice leads to inflated wholesale prices, which provide an additional source of revenue, perceived to be vital to pay inducements to doctors and hospitals to prescribe and/or purchase their medicines. The cycling of drug products through a series of intermediaries also allows wholesalers to limit their taxation liabilities. In addition, retail pharmacies are able to exploit the information asymmetry between them and patients, enabling pharmacies to set a retail price as high as the market will bear, as described in Chapter 6.

8.3.2.9 Corrupt Practices

As discussed in Chapters 6 and 7, corrupt practices manifested in the form of informal payments and gratuities emerged as a significant threat woven through all components of the pharmaceutical management cycle from selection to procurement, to distribution through to use of medicines. The reasons underlying corrupt practices are complex, varied and interdependent.

From the perspective of the providers of payments and gratuities, the pharmaceutical companies, such actions are seen as necessary to secure market access or an economic market share, in circumstances where the product may be considered less acceptable due to questionable quality or perceived low quality. Payments and gratuities are also reportedly directed at remedying perceived difficulties in the tender system, the taxation system and especially the pressures for survival in an imperfectly competitive market. These factors ostensibly drive domestic pharmaceutical traders, who distribute branded generics sourced from Asian or less reputable pharmaceutical producing countries, to be 198 inextricably linked and bound financially to healthcare providers. Typically, informal payments and gratuities were most often made to prescribers and key opinion leaders and they accounted for a considerable proportion of the final prices.

While the recipients of informal payments varied, study participants from pharmaceutical companies said that informal payments were most often made to prescribers. From the physicians’ perspective, the reasons for taking informal payments were complicated. They were classified into two main groups: systemic factors and individual factors. Systemic factors consisted of opportunities for corruption, pressures for corruption and the normalization of corruption, and were conceived as a necessary but often not sufficient condition for collusion. Individual factors, of which the main one was self-interest maximization, were important and often constituted a sufficient condition for corrupt practices. When the latter were imbedded in the former, corrupt practices were prevalent. The interdependent interaction of individual and systemic factors to create corruption was thoroughly investigated and analysed, resulting in the creation of an innovative theoretical explanatory framework, with the core being the ‘Trade-off’ model.

Using the Trade-off model as an explanatory reference point, it is evident that physicians carefully weighed the costs and benefits of acting corruptly against the costs and benefits of acting with integrity, and finally opted to act in such a way that maximized their self-interest. The benefits they gained from corrupt practices were financial, while the costs including a risk of losing their “assets”. Their assets included professional ethics, personal values, knowledge and skills, advancement opportunities, reputation and employment. Testing the model against the data showed that the higher the salary, the less likely it was that prescribers would engage in corrupt practices to risk their well-paid job. This self-interest maximization, together with the normalization of corruption, such as the prevalence of corrupt practices in society and other social norms, created a vacuum in which corruption appeared to be justified and accepted as normal practices.

Governance played a role to induce prescribers to face the trade-off between financial gain from corrupt practices and preservation of their assets. If governance is poor, to a level that prescribers believe that there will be no punishment following their corrupt

199 practices, they will seemingly often engage in corrupt practices to secure financial gain. Thus, their total assets increase, satisfying their self-interest maximization. Therefore, eradication of poor governance is a critical success factor to system improvements. Too much discretion without adequate controls, lack of transparency and accountability, and poor enforcement creates opportunities for corruption.

8.4 Policy recommendations

Given the ongoing challenges confronting improved access to affordable medicines for the people in Vietnam, as identified in this thesis, it is timely for the 1996 National Drug Policy of Vietnam to be further strengthened, and extended in scope with the broad involvement of all stakeholders. The strengthened policy needs to be based on the essential medicines concept, which as a principle, should be integrated into broader national health policy strategies in a comprehensive and balanced way.

The National Drug Policy should have as its objectives the provision of medicines of sufficiently high quality and standard delivered in a manner, which ensures their affordability, timely access and appropriate use. A sustainable financing system is required with the promotion and development of a viable local pharmaceutical industry. Specifically, the following policy options are recommended for consideration.

8.4.1 Rational selection and use of essential medicines

8.4.1.1 Rational selection

National standard treatment guidelines need to be updated and strengthened based on the best available evidence regarding efficacy, safety, quality and cost-effectiveness. In alignment, the current essential medicine list (EML) should be reviewed, evaluated and revised systematically, based on standard treatment guidelines, taking into account the current WHO model list of essential medicines and using a collaborative approach that involves all relevant stakeholders at different levels of the health care system. The EML needs to be used as the basis to develop formularies for hospitals and for procurement and reimbursement decisions made by public health insurance authorities. Incentives for production and distribution of essential medicines should be created, such as fast-track registration, tax exemptions or effective financing mechanisms, to improve the 200 availability of essential medicines. In brief, all government policy resources should be put into ensuring safety and quality of medicines on an agreed EML.

8.4.1.2 Rational use

A National Strategy for Quality Use of Medicine is required as a main component of the National Drug Policy. The use of medicines in health facilities needs to be directed, supervised and monitored using standard evidence based treatment guidelines, EMLs and formularies. The Drug and Therapeutic Committees in hospitals need to be strengthened with clear tasks and functions. A comprehensive but feasible package of interventions including educational, regulatory, managerial, financial and systems interventions for providers and consumers needs to be developed to improve the rational use of medicines and to eliminate profit-driven prescribing behaviours.

Consumer education programs should be considered to raise awareness about patients’ own choices between innovator brand medicines and generic equivalents, rather than totally depending on the physician’s prescription or pharmacist’s recommendation. Given that self-medication is prevalent in Vietnam, the regulation of prescription-only medicines needs to be further developed and fully enforced. The role of dispensing pharmacists also needs to be enhanced to fulfil the task of supportive patient education about medicines and their use, especially given they are often the first line health providers.

8.4.2 Affordable prices and sustainable financing system

8.4.2.1 Strengthening the current pricing regime

Developing a pricing bureau with research capacity

A national pricing bureau needs to be established. Additional staff equipped with economic knowledge and expertise in medicine price controls are needed to develop a pricing bureau with research capacity within the Drug Administration of Vietnam. Development of a multi-stakeholder, independent pricing review and policy advisory committee to assist the bureau would also seem prudent. This would enable the

201 perspectives of different stakeholders to be taken into account and would also serve to improve transparency in the public setting of medicine prices.

Clarifying free pricing or price control

Vietnam is seeking to promote the concept of a market economy. This is reflected in the principle of free pricing for medicines regulated in the Pharmaceutical Law. However, medicines are a special commodity, directly affecting the health of the people. In order to protect public health, free pricing is not usually applied in the pharmaceutical market. In fact, there are very few developed countries where, “technically speaking, no price control is exercised” (Vogler, et al., 2008, p. 59). Most developed countries with their much longer history of market economy, have exercised more interventionist price controls than those in Vietnam (Critchley, 2006). Moreover, when setting maximum CIF prices of imported medicines or maximum wholesale prices of all medicines, free pricing is already breached. The coming amendment of the Pharmaceutical Law, therefore, should clearly indicate that because of public health reasons, free pricing is not to be applied to medicines.

Defining a submarket for medicine price control

The Vietnam government needs to decide if it will control prices of all medicines in Vietnam’s market, or only focus on a certain submarket. As recommended in section 8.4.1.1, when a revised EML is also the medicine list for procurement, reimbursement, prescribing and use in hospitals, price controls should be limited only to medicines on the agreed EML. At the current stage of development, it seems more feasible for the government to further narrow down price controls to essential medicines in the public sector, where payment for medicines mainly comes from the State budget and public health insurance. In the private sector, increasing market competition and consumer choice can be a solution. International experience shows that in most developed countries, prices are only controlled for reimbursable medicines in the outpatient prescription submarket (Ess, et al., 2003; Vogler, et al., 2008).

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Strengthening the system for declaration of medicine prices

The current system of price declaration in Vietnam has three objectives: (1) to improve the transparency of price information, (2) to use “fair” declared prices as a cap for actual prices in the market; and (3) to stop price increases at the will of suppliers.

Firstly, to improve transparency of price information, the Drug Administration of Vietnam needs to incorporate all declared prices for all medicines into one database with a search function. This would enable stakeholders to search the declared price of a particular medicine according to its trade name, API, registration number, etc. The database needs to be able to update re-declared prices and be displayed in a clear, user- friendly form. The Drug Administration of Vietnam also needs to publish the successful tender prices on its website, adopting the same principles. Equally important will be to provide quality information as does the Global Fund (The Global Fund, 2011).

Secondly, to be sure that a “fair” price is declared, a mechanism to guarantee the reasonableness of declared prices needs to be established. For a fair declared CIF price of imported medicines, the external price benchmarking system should be strengthened and enforced. Therefore, the pricing bureau needs to:

- Develop criteria for the selection of the comparator countries to implement the provision of external price benchmarking; - Develop methodologies for international price comparisons; - Establish information sharing linkages with regional countries on medicine prices and pricing policies, especially the comparator countries; and - Improve verification of price information declared by pharmaceutical companies.

Nevertheless, two things need to be taken into consideration. Firstly, given the intensive work required for implementing the external price benchmarking system, this system should be initially limited to innovator brand and high volume products that have substantial value. Secondly, because the comparative price is at ex-importers level (i.e. CIF price), the external price benchmarking system, when fully developed and enforced, could only assure the reasonableness of the CIF prices declared. To make the final consumer sale price reasonable, a maximum allowable distribution mark-up is required. A separate 203 maximum wholesale mark-up and maximum retail mark-up should be regulated. Alternatively, the whole distribution mark-up could be controlled, with wholesalers and retail pharmacies negotiating with each other on their charges and margins. The maximum, regressive, retail mark-up regulated under Decision 24/2008/QĐ-BYT for medicines sold in hospital pharmacies has been a positive step, which could perhaps be refined to apply to all medicines.

While the current pricing system attempts to set prices of locally produced medicines at wholesale level, transparent criteria for assessment of the reasonableness of the declared wholesale prices need to be developed with publication of decisions and their justification. In addition, when the wholesale prices are fixed, retail mark-up also needs to be regulated.

To ensure that the provision of the declared prices serves as an enforceable cap on actual prices charged in the market, the pricing bureau should:

- Establish a medicine price monitoring system to regularly report on medicine price trends, including trends in prices declared with the Drug Administration of Vietnam; trends in prices paid by the State budget and health insurance agency; trends in Consumer Price Index (CPI) and the pharmaceutical component of CPI; and trends in the relationship of prices in Vietnam to those in the comparator countries; - Plan to undertake audits to ensure compliance; and - Develop methodologies to assess the effectiveness of all pricing policies.

Finally, to stop price increases being at the will of suppliers, stricter direct limits on price increases (as suggested in Chapter 5) may be a policy option. Specifically, the Drug Administration of Vietnam could limit the frequency of price increases to once or twice a year at a fixed date, or use an agreed system to require official approval of price increases, which would only be granted on reasonable grounds. Another approach would be to allow price increases, but limit medicine price increases to increases in the CPI. This measure has been applied in Canada for patented medicines, assisting them to maintain a modest average price increase rate of 0.3 per cent in 2009, compared with 8- 9 per cent in the US where there is no public control on price increases (PMPRB, 2010).

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Reviewing, updating and de-listing the positive list

The pricing bureau would need to be a key stakeholder, together with the Vietnam Social Insurance authority and the Treatment and Examination Administration of Vietnam, in the formulation, evaluation and revision of the positive list (i.e. the national formulary, currently called the list of main/basic medicines used in public health care facilities). The criteria for medicines to be listed would need to be developed to ensure that they are objective, transparent, statutorily laid down, consistently applied and by generic name approved in the pharmacopoeia. An industry-paid, independent medicine standards agency should also be established. This agency would be responsible for the technical certification of medicines included on the positive list to ensure a level playing field with respect to quality. When quality is assured, price should be another important criterion for medicines to be listed. An internal reference pricing technique might be used to set maximal reimbursement prices. To determine these prices, as India and many European countries do, the government should purchase or negotiate access to IMS Health data. The current positive list should be reviewed to de-list all medicines that are widely considered useless or superfluous, or obsolete medicines that have, in effect, been supplanted by a better alternative at reasonable cost. De-listing should also be used as an effective tool to require manufacturers to lower excessively priced medicines. The positive list should be reviewed and updated at shorter intervals, such as monthly or quarterly.

8.4.2.2 Adoption of a national generic medicines policy

Vietnam’s Pharmaceutical Law already provides for medicine substitution (Article 27.c) and encourages the purchase of domestically produced medicines with cheaper prices for public procurement purposes (Article 49.2.a). These provisions need to be implemented by adoption of a more comprehensive generic medicines policy. The first step to ensure the success of a generic medicines policy is a reliable quality assurance system. Also, bioequivalence testing should be a compulsory criterion for granting a marketing authorization for generic medicines, which are ineligible for a biowaiver as suggested by WHO (2006), as is commonly required in many countries such as Australia (TGA, 2010) and Brazil (Homedes et al., 2005). A systematic approach to the biowaiver decision has been established by the International Pharmaceutical Federation

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(FIP) and published in the Journal of Pharmaceutical Sciences (http://www3.interscience.wiley.com/cgi-bin/jhome/68503813) as well as the FIP website (http://www.fi p.org/). When the actual quality of medicines is assured, the perceived low quality of generic medicines can be addressed. This can be achieved by publishing details of GMP inspections as per the WHO Prequalification Programme and publishing test results as does the Global Fund.

The next step is to strengthen and enforce current prescription-only medicine regulation. The use of International Non-proprietary Name medicines for all procurement and reimbursement in public facilities should be required. Generic substitution (where there is no objection from physicians), needs to be required rather than allowed in dispensing from public facilities. Regressive retail mark-up should be used to create incentives to dispense lower priced generics. Programs to ensure the same efficacy, safety and quality of lower price of generic medicines need to be established to obtain professional and public acceptance. However, simply promoting the use of generics will not result in savings for patients without corresponding mechanisms to ensure a low price but high quality manufactured generic medicines.

8.4.2.3 Improvement of public sector procurement of medicines

The structure of Vietnam’s medicine financing system needs to move towards being more equitable and sustainable. The state budget allocation for medicines needs to be increased faster to meet the health care needs of the whole population. Public health insurance policies should be continuously updated to expand public health insurance coverage in a sustainable way. The provider payment method requires reform to a prospective payment (e.g. case-based or capitation payment) rather than retrospective payment (e.g. fee-for-service) which tends to be cost-enhancing (Wouters, 1999). The capacity of the public health insurance system also needs to be upgraded, with the Vietnam Social Insurance agency (VSI) being a key stakeholder in defining reimbursement prices and tendering procedure. A new government decree on medicine tendering regulating the role of the VSI in tendering procedure is therefore required.

As the public health insurance system progresses towards universal coverage, the VSI needs to take the advantage of being the biggest third party payer by defining reimbursement prices for prescription medicines paid by the VSI for insured 206 outpatients. A reference price system is one policy option that could be pursued. In the inpatient sector, public procurement through a tendering procedure needs to be continued to promote competition for lower prices. However, the tendering procedure and practice needs to be upgraded to increase efficiencies and reduce or eliminate the opportunity for corrupt practices.

Pooling procurement of medicines to create economies of scale should be undertaken through a national tendering procurement system and should be phased in very carefully combined with a rigorous prequalification program, product testing and post marketing surveillance. Public procurement should be limited to the EML only. Standard tender software with all terms and conditions being publicly specified should be used. Gradually, medicine tendering could be undertaken online. The model of online bidding developed by the Ministry of Planning and Investment (http://muasamcong.mpi.gov.vn) for public procurement of assets and goods funded by the State budget should be considered as a good model that could be replicated.

8.4.2.4 Reduction or elimination of duties and taxes

Vietnam’s Tax Law should be reviewed and amended towards reducing or exempting taxes and duties for all medicine items included on the national formulary (the positive list of reimbursable medicines).

8.4.2.5 Use of WTO/TRIPS flexibility

Vietnam’s Intellectual Property (IP) law authorizes the state to use compulsory licensing to remedy anti-competitive practices. Therefore, signs of anti-competitive practices, such as fixing or maintaining unreasonable purchase or selling prices, or engaging in price fixing or other collusive agreements with other companies from companies holding patents should be investigated prior to granting compulsory licenses. However, to avoid any unnecessary delay in granting compulsory licenses, Vietnam’s IP law should be amended to waive the following two conditions: (1) prior negotiation with the patent holder and (2) when the supply is predominantly for the domestic market since they are exempt from the TRIPS Agreement (Kuanpoth, 2007). Other WTO/TRIPS compatible safeguards such as parallel import should also be used as necessary to increase a fair competition in Vietnam’s pharmaceutical market. 207

8.4.3 Supply and distribution system

Domestic pharmaceutical manufacturers, distributors and pharmacies should be rationalized by tightening the criteria for license application and renewal. Apart from good practices standards (e.g. GDP, GSP, and GPP), minimum legal capitalization should be regulated. Existing undercapitalized providers should be required to increase their capital to be eligible to sell their products to hospitals. The minimum legal capitalization needs to increase gradually, so that after a certain period, the distribution network contains only big, long-term companies with the capability to supply medicines for bulk purchase from central tender procurement system. This would help to shorten the supply chain by removing all unproductive intermediaries.

8.4.4 Systems improvement to minimize the opportunity for corruption

The innovative ‘Trade-off’ model developed in this thesis provides a useful new framework to understand and explain the corrupt behaviour of some prescribers in Vietnam. It also points to sustainable solutions for addressing the root causes of collusion between pharmaceutical industry and physicians, reportedly the underlying reason for high medicine prices. To prevent collusion, two preconditions must be met: (1) prescribers need to confront the trade-off between losing some of their assets and potential financial gain from corruption; and (2) prescribers’ assets need to outweigh the likely financial gain from corruption.

The first precondition will only be met if there is strong governance. Therefore, improving governance systems in the health and pharmaceutical sector is highly recommended. Strategies may include increasing appropriate control on discretionary activities (i.e. clarifying decision-making processes through standard operational procedures; dividing tasks between individuals to create checks and balances; and strengthening information systems). Equally important is improving transparency, accountability and enforcement mechanisms as reported elsewhere (see Vian (2002, 2008), Brinkerhoff (2004)). E-health is commonly used in developed countries to improve the transparency and accountability in prescribing medicines. A contractual arrangement with individual medical practitioners could be created such that loss of a

208 provider number (or the like), would be a major deterrent to accepting informal payments.

Given that appropriate enforcement is both time consuming and resource intensive, Vietnam could opt to develop service delivery markets in such a way that accountability is automatically enforced when poor quality providers are eliminated, as purchasers select higher quality, more entrepreneurial providers (Brinkerhoff, 2004). To create these markets, reform in health financing where the government budget is assigned to beneficiaries rather than healthcare providers is needed.

The latter strategy could be achieved by reducing some of the financial gain from corrupt practices and increasing prescribers’ assets. On the one hand, upgrading the pharmaceutical distribution network and strictly enforcing the pricing policies suggested above would limit the mark-ups of pharmaceutical companies for selling expenses, thus reducing inducements to prescribers. An electronic based accounting system for all transactions associated with the production and distribution of medicines could be obtained to establish an easily accessible audit trail and to eliminate the opportunity for fraud and illicit practices associated with a cash economy.

Ethical criteria for pharmaceutical promotion need to be developed and implemented as a legislative regulation with strict sanctions for violations, such as withdrawing business licenses. Also important is to promote pharmaceutical industry self-regulation. It has taken a long time, but now in many Western countries (e.g. Australia and the UK), the marketing codes for multinational companies are effective and enforced making a difference to practice. For example, in Australia, the Australian Pharmaceutical Manufacturers Association Code of Conduct (APMA code), which was first introduced in 1960, was reported to be jealously guarded by APMA members. Being continually on the outlook for breaches by their competitors deters pharmaceutical companies from marketing activities against the APMA code (Tasman Asia Pacific, 2000).

On the other hand, medical practitioners’ assets also need to be increased. Firstly, higher standards of professional ethics need to be enhanced through strengthening the medical ethics content in the undergraduate curriculum of health care professionals. A health professional code of conduct also needs to be developed and enforced in Vietnam. Secondly, the knowledge and skills of physicians should be enhanced through 209 continuing education programs. Most importantly, a sufficient direct remuneration system, separate from kickbacks and commissions for pharmaceutical sales, should be established. Given the importance of health care professionals to the health of the whole population, the following special remuneration system for health workers should be considered. Hypothetically, instead of having the current income system consisting of a low standard salary legally paid by the government with commissions illegally paid by pharmaceutical companies, physicians could be remunerated to the same amount by one high salary, legally and transparently, co-paid by both the government and patients. In return, patients would pay a lower price for medicines. If pharmaceutical companies did not have to pay commissions to physicians, they could then reduce their medicine prices. The net benefit would be improvement in the rational use of medicines, translating into savings within Vietnam’s total medicine expenditure.

8.5 Contribution of the thesis

The significance of this thesis is that it provides the most thorough analysis of medicine prices and pricing policies in Vietnam to date. Using the standardized WHO/HAI methodology makes it possible to compare results with those of other countries at the same development stage and within the same region, a task that previous studies failed to achieve (WHO & HAI, 2003). Moreover, the Vietnam analysis of medicine prices, availability and affordability shows significant intra-regional differences (i.e. between Vietnam and the Western Pacific Region). While the inter-regional analysis cannot fully explore these features, they are critically important data for understanding within- country pharmaceutical trends and hence, for national policy formulation and analysis.

This thesis also uses a policy analysis based on a framework of the key elements of the policy cycle. This work has provided substantial in-depth understanding of the contextual framework of medicine pricing laws, regulations and policies in Vietnam, identifying where additional improvements can be made to stabilize medicine prices. Also, given the paucity of rigorous quantitative studies evaluating pharmaceutical pricing policies (Aaserud, et al., 2006), this thesis has demonstrated a potential alternative methodology to examining medicine pricing policies. Based on the findings reported in this thesis, the methodology is likely to be more applicable to developing

210 countries, which often lack a reliable and systemic data source on medicine prices, a precondition for rigorous quantitative assessment of pricing policies and their impact.

Using a mixed methods approach, this thesis provides a better understanding of the inherent and complex problems of medicine prices and pricing policies in Vietnam. A full range of reasons for high medicine prices has been identified, including the informal payments for corrupt practices that have not yet been comprehensively addressed by policy makers and regulating authorities. The underlying causes of high medicine prices form the basis for evidence-based policy recommendations. The Trade-off model developed in this thesis has provided a mechanism to assess elements of corrupt practices. The root causes of high medicine prices have been better understood as part of the myriad of contributing factors. The innovative Trade-off model has also contributed to existing theories of corruption in the health sector. Indeed, the Trade-off model is a unique research contribution by the author of this thesis to the field. In addition, however, a practical contribution has been made with the development of evidence-based policy recommendations to improve access to affordable medicines for the people of Vietnam.

8.6 Conclusion

This thesis sought to answer four important interrelated research questions for the development of policy recommendations to ensure more affordable medicine prices in Vietnam. They comprise the impact of supply and demand of pharmaceuticals on medicine prices; the price, availability and affordability of medicines; the effectiveness of medicine pricing policies that the Vietnam government has put in place; and underlying factors causing high medicine prices in Vietnam.

The findings from the studies conducted to answer each of the above research questions indicated that compared with the international benchmark, medicines in Vietnam were high in price and low in both availability and affordability, especially in the public sector. Adjusted for Purchasing Power Parity in 2005, prices in the public sector were 46.58 times the international reference price for innovator brand medicines and 11.41 times for the lowest-priced generic equivalents. Although less highly priced than those

211 in the Western Pacific Region overall, medicines in Vietnam were less affordable because of a much lower average salary level.

The studies also demonstrated that recently, substantial improvements have been made in regulations of medicine price control within Vietnam. However, current medicine pricing policies have yet to reach their full potential. This is because the medicine pricing regime is not yet complete. Current pricing policies aim to set maximum CIF prices for imported medicines through an external price benchmarking system and to set maximum wholesale prices for all medicines through a cost plus pricing system. Both these systems lack some of the administrative prerequisites to be practically workable. In addition, there is as yet, no mechanism to control retail prices at the pharmacy level.

Results from the four studies also showed that low price elasticity of demand for medicines was a direct reason for high medicine prices. Lack of suitable substitutes was an important cause of price inelasticity of demand for innovator brand medicines, resulting in high innovator brand prices. Study participants claimed that more complex, intrinsic features of Vietnam’s health system drive up prices of perceived low quality branded generics medicines, distributed by domestic pharmaceutical traders. Economic survival pressures, in an imperfectly competitive market, were said to force both these domestic pharmaceutical distributors and prescribers to be linked financially. While individual factors, such as professional ethics and personal values, influenced physician behaviours and their response to corruption, entrenched or intractable systemic issues including lack of transparency and accountability and poor legislation enforcement emerged as important factors perpetuating corruption. Collusion between domestic pharmaceutical traders and prescribers resulted in a reduced level of competition, thus allowing domestic traders to set an unreasonably high price for their branded generic products to recoup their informal payments. Generic prices were often found to be set at about 80% of corresponding innovator brands and sometimes even higher.

Systemic features contributing to high medicine prices included a sub-optimal pricing regime, lack of fair competition due to monopoly of supply, lack of economies of scale in domestic production, inefficiencies in the local distribution network, over reliance on the international markets, insufficient market intelligence, unrealistically low salaries

212 for prescribers, and a general lack of transparency and accountability in administrative procedures.

A range of policy measures and changes, incorporated in a renewed and comprehensive National Drug Policy, is required to improve access to affordable medicines in Vietnam. Short-term recommendations include amendments to the current National Drug Policy, with better development and enforcement of the current medicine pricing regime. Medium-term measures include the public health insurance system taking an active role in price setting and reform of the domestic market. Industry rationalization is needed, with appropriate capital and technological investment to achieve improved efficiencies and economies of scale. Longer-term goals include health system improvements to address poor governance, low remuneration of prescribers, with additional measures to limit the scope for corrupt practices.

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Appendix 1: Median price ratio* of individual innovator brand medicines in the public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005

Public procurement prices Public sector prices Private sector prices Other sector prices Adjusted for official exchange rate Q4 2005 † Adjusted for PPP of VND in 2005 ‡ Median Min Max Median Min Max Median Min Max Median Min Max Acetylsalisilic acid 30.45 28.33 31.43 168.55 155.35 194.18 165.06 145.64 242.73 § § § Aciclovir 5.18 5.13 5.38 28.60 26.95 29.95 27.89 26.20 29.95 § § § Amitriptyline § § § § § § § § § § § § Amoxicillin § § § § § § § § § § § § Amoxicillin + Clavulanic acid tab 2.13 1.48 2.42 11.31 8.37 12.44 11.00 8.61 11.96 11.29 8.45 12.81 Atenolol 20.83 15.67 23.08 117.85 92.85 129.99 112.24 89.28 153.56 113.92 77.43 131.24 Beclometasone inhaler § § § § § § § § § § § § Captopril 7.27 6.65 7.27 41.06 34.22 42.03 38.32 36.95 47.90 39.30 32.67 43.80 Carbamazepine 8.29 7.25 9.97 47.21 42.64 51.78 45.69 41.12 53.31 § § § Ceftriaxone injection 3.78 3.18 3.93 18.90 16.05 20.98 17.77 14.33 18.34 18.70 17.81 21.30 Cefuroxim 1.95 1.91 2.26 10.74 9.88 11.17 10.31 9.45 11.17 9.63 9.18 11.01 Chlorpheniramin § § § § § § § § § § § § Ciprofloxacin 32.11 30.89 32.43 176.92 167.68 184.94 172.61 166.44 197.27 § § § Clotrimazole vaginal tab 4.30 4.21 4.71 23.21 21.35 26.11 23.21 21.76 52.22 § § § Co-trimoxazole suspension § § § § § § § § § § § § Co-trimoxazole tab § § § § § § § § § § § § Dexamethason § § § § § § § § § § § § Diazepam § § § § § § § § § § § § Diclofenac 19.58 16.61 22.42 105.52 86.17 205.17 117.24 87.93 187.59 § § §

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Digoxin § § § § § § § § § § § § Enalapril 7.73 5.15 8.14 40.30 30.16 45.01 40.22 27.15 43.24 38.46 24.39 58.07 Erythromycin § § § § § § § § § § § § Fluoxetine § § § § § § § § § § § § Furosemid § § § § § § § § § § § § Glibenclamide § § § § § § 158.96 137.28 173.41 § § § Gliclazide 3.12 2.52 3.74 16.79 14.69 18.89 16.79 15.95 19.31 13.16 12.39 17.30 Hydrochlorothiazide § § § § § § § § § § § § Indinavir § § § § § § § § § § § § Ketoconazol cream 8.49 7.64 10.06 46.58 40.39 49.71 43.53 40.39 49.71 42.50 40.78 47.54 Loratadin 15.42 14.47 16.04 85.41 80.08 90.75 80.08 58.72 90.75 § § § Losartan § § § § § § § § § § § § Lovastatin § § § § § § § § § § § § Metformin 4.01 3.65 5.04 23.01 20.71 24.93 21.10 13.43 28.77 19.83 18.87 23.00 Metronidazole 9.85 8.76 11.11 56.18 48.68 62.14 51.78 31.07 258.91 49.66 44.01 52.20 Nevirapine § § § § § § § § § § § § Nifedipine 10.39 9.61 12.99 56.49 51.35 82.17 55.21 42.37 64.19 52.64 30.59 183.90 Nifedipine Retard 15.88 10.93 16.40 82.74 64.16 92.87 75.98 50.66 84.43 § § § Omeprazole 23.35 22.34 28.02 124.03 119.02 145.32 119.02 58.17 137.81 § § § Phenytoin § § § § § § § § § § § § Piroxicam 31.04 31.03 32.97 167.94 161.06 178.44 188.94 157.45 209.93 153.39 146.07 153.39 Ranitidine 8.20 7.81 8.22 43.66 40.61 47.40 41.63 35.54 46.71 40.51 32.90 46.91 Salbutamol inhaler 1.85 1.83 2.05 9.79 9.44 20.41 9.75 9.44 10.97 9.20 9.14 10.71

PPP: Purchase Power Parity. VND: Vietnam currency unit. *Ratio of the median local price to the MSH international reference p rice. † Official exchange rate for US dollar in quarter 4, 2005: USD 1= VND 15, 907.00. ‡PPP of VND in 2005: inter national dollar 1=VND 3,218.607. §Median price ratio was not calculated since medicine prices were found in fewer than four medicine outlets.

Information on the official conversion rate for USD was from The International Monetary Fund: International Financ ial Statistics (IMF, 2009) , and the source of national PPP was The International Monetary Fund: World Economic Outlook Database (IMF, 2007).

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Appendix 2: Median price ratio* of individual lowest-priced generic medicines in the public procurement sector, public sector, private sector, and other sector (not-for-profit public sector) in Vietnam in 2005

Public procurement prices Public sector prices Private sector prices Other sector prices Adjusted for official exchange rate Q4 2005 † Adjusted for PPP of VND in 2005 ‡ Median Min Max Median Min Max Median Min Max Median Min Max Acetylsalisilic acid 1.93 1.57 12.18 12.43 6.51 90.68 9.71 8.74 67.96 9.22 7.86 83.60 Aciclovir 1.82 0.76 3.03 7.49 4.49 17.47 7.49 3.74 17.22 7.86 2.99 15.61 Amitriptyline 1.76 1.57 2.10 10.36 9.32 15.53 10.36 8.54 62.14 6.78 5.64 10.25 Amoxicillin 1.21 0.63 2.80 7.02 4.39 12.29 6.14 4.39 19.31 6.09 4.00 16.76 Amoxicillin + Clavulanic acid tab 1.67 1.20 1.84 9.11 6.70 10.53 7.18 4.98 10.05 8.44 5.35 10.40 Atenolol 5.20 4.70 7.95 29.64 27.50 42.85 28.57 2.68 42.85 27.52 23.21 28.74 Beclometasone inhaler § § § § § § § § § § § § Captopril 1.36 0.69 2.53 8.21 4.11 13.69 6.84 4.11 9.13 7.45 3.91 12.69 Carbamazepine § § § § § § 6.85 0.47 16.75 7.20 3.35 14.96 Ceftriaxone injection 0.53 0.42 1.26 3.04 2.29 6.53 2.75 1.95 5.96 4.57 1.81 7.68 Cefuroxim 1.04 0.80 1.65 6.45 4.73 10.74 5.16 0.69 6.88 5.46 3.44 7.88 Chlorpheniramin 2.20 1.01 4.40 13.98 6.21 46.60 15.53 9.32 155.35 11.50 4.66 110.92 Ciprofloxacin 1.90 0.62 15.45 9.86 3.70 88.77 7.40 0.92 16.03 7.77 3.45 37.18 Clotrimazole vaginal tab 1.74 0.48 3.82 9.21 5.80 20.55 8.46 2.42 15.96 8.60 3.19 8.61 Co-trimoxazole suspension § § § § § § 33.81 17.36 38.38 § § § Co-trimoxazole tab 1.48 0.11 8.32 9.14 5.25 43.41 9.14 4.57 41.12 5.26 4.11 42.31 Dexamethason 0.40 0.31 0.69 2.82 1.58 9.72 2.26 1.58 11.30 2.03 1.36 47.45 Diazepam 2.32 2.03 4.71 14.79 11.47 24.41 20.34 14.79 29.59 8.51 5.92 34.99 Diclofenac § § § § § § 11.14 3.52 29.31 5.42 2.46 21.10

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Digoxin 4.34 3.67 16.78 24.66 19.92 88.77 24.66 7.40 83.84 21.13 16.27 80.78 Enalapril 2.35 1.22 3.50 12.59 6.99 18.10 9.05 3.52 17.09 9.82 6.03 19.00 Erythromycin 1.01 0.85 1.64 5.53 4.62 9.98 6.24 4.99 9.98 4.94 3.68 5.90 Fluoxetine § § § § § § § § § § § § Furosemid 1.82 0.88 5.89 12.95 5.18 32.36 12.95 5.18 32.36 9.06 4.14 20.78 Glibenclamide 6.58 2.92 10.38 36.13 16.62 59.97 30.11 15.90 57.80 34.60 13.94 52.82 Gliclazide 2.28 1.44 2.63 13.44 8.40 15.11 13.02 4.20 17.63 12.59 5.63 14.90 Hydrochlorothiazide 3.08 2.62 14.93 25.89 16.18 77.67 25.89 12.95 38.84 15.64 13.45 38.88 Indinavir § § § § § § 5.28 5.01 5.42 § § § Ketoconazol cream 1.73 1.07 2.67 17.09 5.44 40.39 15.53 6.21 40.39 19.08 5.59 35.89 Loratadin 1.77 1.36 6.26 10.34 7.47 36.30 10.68 5.34 32.03 8.59 4.79 26.69 Losartan 0.21 0.20 0.32 1.14 1.10 1.83 1.16 0.63 1.96 § § § Lovastatin 5.66 1.26 7.66 32.31 7.46 44.27 7.46 4.66 24.86 § § § Metformin 2.31 1.01 3.88 13.81 6.00 19.18 11.99 1.38 19.18 14.10 7.86 32.09 Metronidazole 1.72 1.17 6.29 11.41 6.21 90.10 10.36 3.11 62.14 8.70 5.49 92.38 Nevirapine § § § § § § 4.32 3.24 6.40 § § § Nifedipine 1.14 1.04 4.16 6.42 6.16 20.54 6.50 4.62 15.41 7.61 5.14 19.98 Nifedipine Retard 2.46 0.68 3.23 13.51 4.22 16.89 13.51 11.82 16.89 13.14 10.64 16.11 Omeprazole 1.04 0.52 3.03 5.64 3.13 15.89 4.47 0.38 51.99 5.26 2.66 16.44 Phenytoin § § § § § § 8.14 5.18 109.02 § § § Piroxicam 14.44 0.85 23.79 41.67 5.04 134.35 7.35 3.15 121.76 66.99 4.85 115.46 Ranitidine 4.93 0.38 5.26 27.41 2.54 33.51 2.54 1.02 28.43 23.21 3.72 32.90 Salbutamol inhaler § § § § § § 5.48 5.33 6.09 § § §

PPP: Purchase Power Parity. VND: Vietnam currency unit. *Ratio of the median local price to the MSH international reference p rice. † Official exchange rate for US dollar in quarter 4, 2005: USD 1= VND 1 5,907.00. ‡PPP of VND in 2005: international dollar 1=VND 3, 218.607. §Median price ratio was not calcu lated since medicine prices were found in fewer than four medicine outlets.

Information on the official conversion rate for USD was from The International Monetary Fund: International Financial Statistics (IMF, 2009) , and the source of national PPP was The International Monetary Fund: World Economic Outlook Database (IMF, 2007).

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Appendix 3: Medicine pricing policy in Vietnam: Documentary

analysis framework

Adapted from Rist R (1994). Influencing the policy process with qualitative research. In: Denzin N, Lincoln Y, editors. Handbook of qualitative research. London, England: Sage Publications: 545-57.

1. General information: 1.1. What is the document title and issuer? 1.2. What is the date of issuance? 1.3. What is the type of the document? 1.4. What is the scope and subject of application of the document? 2. Policy formulation: Addressing this component will assess if past and current pricing policy has been appropriately developed. 2.1. What is known about the policy problem or condition at hand? 2.1.1. Are there clear definitions of the problem or conditions for the pricing policy to address? 2.1.2. What are they? 2.1.3. How well can they be measured? 2.2. What is known about previous initiatives in response to controlling medicine prices? 2.2.1. What regulations have been previously initiated? 2.2.2. How long did they last? 2.2.3. Who developed them? 2.2.4. In what context were they developed? 2.2.5. How successful were they? 2.2.6. How receptive were the stakeholders to these regulations? 2.2.7. How did the stakeholders react to the regulations? Did they request help or resist the regulations? 2.2.8. What outcomes resulted because of the regulations, both anticipated and unanticipated?

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2.3. What is known about the previous efforts and their impacts that would help policy makers choose among alternatives? 2.3.1. What was the time period for measurable outcomes or impacts to appear? 2.3.2. How did the policy makers in those circumstances keep public support and keep the coalition intact long enough for the results to emerge? 2.4. What is known about the chosen alternative (the current policy of interest)? 2.4.1. What are the measures policy makers choose to address the problem or condition? 2.4.2. What are their strengths and weaknesses? 3. Policy implementation: Addressing this component will determine if the pricing policy of interest was efficiently implemented to control medicine prices. 3.1. What is known about the implementation process? 3.1.1. What is the degree to which the policy is reaching the intended audience? 3.1.2. What are the aspects of the policy that are, or are not, operational? 3.1.3. Is there the institutional capacity to respond effectively to the enforcement of the policy? 3.2. How has the problem changed over time and has the implementation of policy changed with it? 3.2.1. Has the problem improved, worsened or remained static? 3.2.2. Do the aims of the policy still match the assumptions and previous understanding of the problem? 3.2.3. Are there subsequent complementary changes within policies related to the current problem? 3.3. What and how do institutions or agencies respond to the problem? 3.3.1. Do the policy makers, policy implementation staff have the same understanding of the problem? 3.3.2. What has been the transformation of the relevant institutions’ or agencies’ understanding that have taken place when the policy is actually being implemented? 4. Policy accountability: Addressing this component will determine if there has been accountability in relation to the pricing policy of interest. 4.1. Were the objectives met?

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4.1.1. What were the anticipated and unanticipated outcomes in relation to controlling medicine prices? 4.1.2. Were changes in the understanding of medicine pricing practice due specifically to the policy? 4.1.3. What social changes, if any, resulted from the policy? 4.1.4. What were the strengths and weaknesses of the organizational structure that was used to implement the policy? 4.2. What changes occurred within the medicine price problem? 4.2.1. Has the policy changed with current circumstances? 4.3. How accountable was the organization in the implementation of the policy? 4.3.1. Was the policy appropriately managed or supervised? 4.3.2. Was data regarding drug pricing practice used in decision making?

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Appendix 4: Safety and risk management strategy

1. Data collection: 1.1. All interviews and other data collection used in this study were in line with the protocol that had been granted ethics approval by the University of New South Wales Human Research Ethics Committee. 1.2. All participants were informed of the research aims and objectives and advised to read the enclosed participant information statement and consent form before being asked to sign the consent form. 1.3. Only information from participants who had signed the participant information statement and consent form was included in the thesis. 1.4. All information was kept in a locked filing cabinet or on a password secured computer as per UNSW guidelines. Backup copies of all data collected have been placed on a secure virtual drive on the University’s file servers. The thesis data will be stored for 7 years and then destroyed. 1.5. Only research staff directly connected with the study had access to the files. 2. Data cleaning, analysing and result reporting: 2.1. All data collected specifically for the purpose of the research were coded so as not to identify individuals (pharmaceutical companies, medicines, pharmacies, medicine outlets, hospitals, government officials, etc.). 2.2. Any identifying information recorded during interviews with participants was removed after the transcribing process to ensure anonymity of the collected data. 2.3. All information by which participants could be identified (although not directly related to the participants) was also removed after the transcribing process. 3. Publication and dissemination of the study: 3.1. No information identifying participants was used in any form of publication or reports. 3.2. All publications and dissemination of the study were subject to peer review (with the approval of supervisors). 3.3. All publications and dissemination of the study followed ethical guidelines and the UNSW approved protocol.

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Appendix 5: Informed consent

THE UNIVERSITY OF NEW SOUTH WALES AND MINISTRY OF HEALTH OF VIETNAM

PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM For people attending the interview/focus group discussion

Analysis of policies and possible solutions for affordable medicine prices in Vietnam

You are invited to participate in a study of policies and solutions for affordable medicine prices in Vietnam. We hope to learn about the medicine prices and the medicine pricing policies in Vietnam, about retail price differences, both in the country and internationally. We also hope to understand how these prices are determined and how we might better control them. You were selected as a possible participant in this study because your expertise relates to drug pricing issue.

If you decide to participate, we will invite you to discuss these issues in a small group with other people who also have their expertise related to drug pricing or in an interview with a researcher. The researcher is from the University of New South Wales. These discussions or interview will last approximately one hour and will be recorded on a tape recorder for later transcription by the researcher.

We cannot and do not guarantee or promise that you will receive any benefits from this study.

Any information that is obtained in connection with this study and that can be identified with you will remain confidential and will be disclosed only with your permission, except as required by law. If you give us your permission by signing this document, we plan to publish the results in scientific journals and share these results with your Ministry of Health. In any publication, information will be provided in such a way that you cannot be identified.

Complaints may be directed to Dr. Cao Minh Quang, Ministry of Health of Vietnam, 138 A Giang Vo St., Hanoi, Vietnam (Tel +84 4 8463093, email: [email protected]) who will then forward these to the Ethics Secretariat, The University of New South Wales, SYDNEY 2052 AUSTRALIA (phone 9385 4234, fax 9385 6648, email [email protected]). Any complaint you make will be investigated promptly and you will be informed of the outcome.

The results of this study will be reported to Vietnam MOH then the reports will be distributed to participants through government reports.

Your decision whether or not to participate will not prejudice your future relations with the University of New South Wales and Ministry of Health of Vietnam. If you decide to participate, you are free to withdraw your consent and to discontinue participation at any time without prejudice.

If you have any questions, please feel free to ask us. If you have any additional questions later, Mr. Nguyen Tuan Anh tel. +61(2) 93852588, mobile: 0411312237, email: [email protected] will be happy to answer them. You can also contact the supervisor, A/Prof. Rosemary Knight, Tel +61(2)93853811, email: [email protected] or Dr. Cao Minh Quang, Tel +84 4 8463093, email: [email protected]

You will be given a copy of this form to keep.

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THE UNIVERSITY OF NEW SOUTH WALES AND MINISTRY OF HEALTH OF VIETNAM

PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM (continued) For people attending the interview/focus group discussion

Analysis of policies and possible solutions for affordable medicine prices in Vietnam

You are making a decision whether or not to participate. Your signature indicates that, having read the information provided above, you have decided to participate.

…………………………………………………… .……………………………………………………. Signature of Research Participant Signature of Witness

…………………………………………………… .……………………………………………………. (Please PRINT name) (Please PRINT name)

…………………………………………………… .……………………………………………………. Date Nature of Witness

REVOCATION OF CONSENT For people attending the interview/focus group discussion

Analysis of policies and possible solutions for affordable medicine prices in Vietnam

I hereby wish to WITHDRAW my consent to participate in the research proposal described above and understand that such withdrawal WILL NOT jeopardise any treatment or my relationship with The University of New South Wales, Ministry of Health of Vietnam

…………………………………………………… .……………………………………………………. Signature Date

…………………………………………………… Please PRINT Name

The section for Revocation of Consent should be forwarded to

A/Prof. Rosemary Knight or Dr. Cao Minh Quang Head of School Director-General - Drug Administration of School of Public Health & Community Medicine Vietnam University of New South Wales Vice Minister of Health of Vietnam Third Floor, Samuels Building 138A Giang Vo St., Hanoi, Vietnam Sydney NSW 2052 Australia

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