NHI: Its impact on pharmaceutical pricing and the operational costs of drug manufacturers

Occasional paper 7/2020



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Author: Dante Mashile

(Accredited Public Relations Practitioner), National Diploma in Journalism, Certificate in Project Management (Netherlands), BA, Postgrad. Diploma in Telecoms and Information Policy, Master of Development Studies

Abstract


There is uncertainty about the impact of the proposed National Health Insurance (NHI) on the pricing of pharmaceutical products and the return on investment (ROI) for local pharmaceutical companies. Currently, differential pricing between the public and private sectors exists. Pharmaceutical companies supply the public sector with low-cost products, based on a tender system. Costs can remain low as the public sector is able to purchase in large volumes. Pharmaceutical companies make their profits primarily in the private sector, where medication is sold at higher prices.


The NHI pharmaceutical purchasing model will be based on negotiated pricing, with a balancing of government policy that prioritises reduced medicine costs, and the goal of facilitated industrial development. The presence of a single purchaser of pharmaceutical products may give the NHI significant buying and supplying power, with the potential to drive pharmaceutical product prices down by at least 15% through reduced logistics and dispensing fees. However, there is uncertainty about whether a single purchaser under the NHI will necessarily reduce pharmaceutical costs. Pharmaceutical companies may price their loss of profit, currently generated in the private sector, into the price of products supplied to the NHI scheme. Some may also withdraw from the South African market if they are not allowed to price in a way that allows them to match their current profits. This may result in an increase in the price of pharmaceuticals supplied to the NHI scheme, since pharmaceutical companies will still have an ROI obligation to their shareholders. While importing cheaper medicines from abroad remains an option, government may not choose that route because of its negative effect on the balance of payment, employment and domestic capital formation.


An opportunity exists for South Africa to explore public-private partnerships (PPPs) in NHI delivery to leverage the expertise of private sector companies and the regulatory and institutional capacity of the public sector. The 2018 Health Market Inquiry report of the Competition Commission found that there is nothing that stops the state from using PPPs in addressing the delivery of healthcare services in the public sector, especially with a rich and a well-developed legal and policy framework for PPPs, under the auspices of the National Treasury (Compcom, 2019).


Introduction


African health systems are often fragile, and governments’ failure to prioritise healthcare and allocate sufficient resources for health is at the heart of the continent’s fragile health systems (WHO, 2011). The 2001 Abuja Declaration sought to correct this by securing a commitment from African Union governments, which stipulated that at least 15% of national budgets should be allocated to the health sector (Biegon, 2020). However, despite the consistency in health spending, the South African government has yet to reach this target. The consolidated health spending, as a share of consolidated government expenditure, ranged between 13.4% and 14.1% over the 2013/14 to 2019/20 period, and fluctuated between 3.7% and 3.9% of the gross domestic product (GDP) (UNICEF, 2018).


The proposed National Health Insurance


The National Health Insurance (NHI) proposed by the South African government aims to pool funds in order to provide access to affordable quality care for all South Africans and long-term residents. Care is based on the health needs of the population, irrespective of their socio-economic status (DOH, N.d.). The NHI is founded on the basis of universal health coverage (UHC), which is guided by the principle that every South African will have a right to access comprehensive healthcare services free of charge at the point of use. Care can be sought at any recognised health facility across multiple levels of care, including clinics, hospitals and private health practitioners. The NHI is consistent with the South African Constitution, which states that healthcare is a human right, and this right should not depend on the wealth of the individual or where they reside (DOH, N.d.).


The primary principle underpinning the NHI, is social justice. This is recognised through (a) the constitutional right to access healthcare; (b) social solidarity, which refers to financial risk protection for the entire population; (c) effectiveness through the implementation of evidence-based interventions; (d) equity, which ensures UHC and care according to need; (e) affordability, ensuring that services will be procured at reasonable costs, while recognising that health is a public good; and (g) efficiency, which will be ensured by creating new administrative structures that avoid duplication across national, provincial and district spheres of governance.


NHI financing


It is envisaged that the NHI will be established through the creation of a single fund that will buy services on behalf of the entire population. Funds will be collected through a combination of mandatory prepayment sources, primarily based on general taxes. Most employed South Africans will, therefore, contribute to the NHI Fund. All South African citizens and permanent residents will be allowed to access services included in a basic package of care, such as preventative and primary healthcare, medicines and emergency medical services. This model is similar to that of medical aid schemes and their stipulated prescribed minimum benefits (PMBs).


However, two key differences between these models exist (DOH, N.d.).


  1. The NHI will cover employed or unemployed long-term legal residents, regardless of their income level.

  2. The health condition of clients will influence the type of healthcare that they may receive, not their socio-economic status (the salary that they earn or their employment status).


Essentially, under the NHI, the basic package of care will be available to all citizens, regardless of their income, economic status or the nature of their disease.


The burden of disease and health outcomes


The burden of the coronavirus had further exposed the weaknesses of South African health system and has intensified pressure on the government to implement UHC through the NHI. The NHI aims to bring about healthcare policy reform that will, among other things, address the high burden of disease, allowing government to address the high cost of private healthcare and improve the quality of public healthcare facilities. Government spends vast sums of money on healthcare for the majority of people, and yet, they are receiving poor quality care in public facilities, and health outcomes are still poor. This is due to a lack of focus on disease prevention, and a delay in receiving appropriate, timely and adequate healthcare. The result is higher-than-optimal levels of disability-adjusted life years (DALYs; WHO Metrics) (Grosse et al., 2009; Wang et al., 2018)


The effects of NHI: Equitable access through NHI


In 2014, the WHO Consultative Group on Equity and UHC published a comprehensive report, Making Fair Choices on the Path to Universal Health Coverage, detailing strategies that countries should adopt when moving towards healthcare coverage for the entire population. The report provided exhaustive guidelines on how to expand coverage to more people, services that should be covered and the prioritisation of healthcare resources to achieve UHC (Wang et al., 2018).


Many countries have largely adopted the WHO’s report guidelines to a UHC approach. China, however, followed an approach that would, at face value, not be viewed as uniform and equal. The country’s system was designed to respond to the various needs of population segments in an equitable manner. The Chinese model had bespoke regional differences, including various sources of funding that were initially outside of the national pooling system, but it still increased cover for the majority of the population (Wang et al., 2018).


The lesson from China’s experience is that the UHC guidelines should be tailored to the needs of each country and its economy (Wang et al., 2018). The private healthcare sector serves a minority of the population, who have relatively good access to money and resources (Naidoo, n.d.; Discovery, 2019; Sithole, 2015). The cost of medical aid cover for members is, however, rising far quicker than consumer price inflation.


The Council of Medical Schemes 2015/2016 Report showed that medicines and consumables dispensed by pharmacists and providers other than hospitals amounted to R22.3 billion in benefits paid to members over that period. However, medical aid members had to settle co-payments of about 20% over and above the member benefits during that period (CMS, 2016). In-hospital consumption of medicines and consumables by medical aid members drives the co-payment expenditure up further (Rovira & Darbà, 2001). It suggests that the inflation of 7.5% for medical care and health expenses in 2020 will translate into member benefit increases of R1.68 billion over a five-year period (Forbes, 2019).


According to IQVIA, an American multinational company operating in the health information technology and clinical research space, the pharmaceutical private sector recorded an annual spending of R30 billion in prescriptive medicine and R15 billion in over-the-counter (OTC) medicine in market sales as of July 2020. This amounts to a combined total private sector expenditure of R45 billion (Insights - IQVIA, N.d.).


The 2020/2021 consolidated government expenditure on health is R230 billion, which is 103.5% higher than total private sector pharmaceutical medicine costs (R45 billion). Public healthcare expenditure is higher than private sector pharmaceutical expenditure. This warrants the need to harness the combined investments of private and public sector healthcare spending, especially in the context of the NHI. And South Africa must take advantage of the combined and integrated healthcare and pharmaceutical investment of both the private and public sectors, with all the benefits of improved quality of service, affordable service and well-trained healthcare professionals (National Treasury, 2020). South Africa deserves an integrated healthcare system that offers quality of service that is affordable and deriving value for money.


Price control mechanisms


Improved access to healthcare services has been a focal point in South Africa for two decades now (Bangalee & Suleman, 2015; Moodley & Suleman, 2019). With this, improved access to lower cost pharmaceuticals is required. Various transparent price control mechanisms have been introduced to regulate prices in the pharmaceutical market. These include capped annual price increases, to which the Department of Health (DOH) Pharmaceutical Economic Evaluation (PEE) refers to as a single exit price (SEP) adjustment and mandatory generic substitution for medicines with expired patents (although clients/patients still have the choice to purchase originator products or brand-name products). An SEP is the maximum price at which a manufacturer must sell all scheduled substances to wholesalers, distributors and pharmacies, irrespective of the volume sold. The SEP was introduced in 2004 as part of an attempt to increase transparent pricing of medicines sold in the private market, with the aim of putting a stop to discounts and additional levies on medicines (Bangalee & Suleman, 2015; Chowles, 2017; Moodley & Suleman, 2019; DOH, N.d.).


The current pricing of pharmaceutical products


The pharmaceutical pricing system in South Africa is regulated by the SEP mechanism in the private sector and by state tender pricing in the public sector. Competition between firms through a bidding system and, to some extent, volume-based pricing determines the state tender price.


The relationship between state tender prices and private sector SEPs is unclear. Some companies balance their return on investment by engaging in both a higher-priced, lower-volume market, and a lower-priced, high-volume market for the same product, or across an entire portfolio. The reality may be that some firms, notably the generic manufacturers, operate in both markets based on what achieves the highest profit. However, there are some single-source suppliers that sell to the private sector at similar prices than those offered to the public sector. Others, in both the generic and originator sectors, operate only in the private sector and do not participate in the state tender system at all.


The impact of SEP and private sector costs


Research has demonstrated that SEP regulation had a positive impact on both originator and generic medicine pricing in South Africa immediately after the introduction of this regulatory mechanism. However, according to Statistics South Africa (Stats SA), the rise in medical scheme fees, along with an increase in food and non-alcoholic beverage prices, contributed significantly to the rise in the consumer price index (CPI), which indicates the price increase of a standard basket of items. Annual consumer price inflation was 3% in September 2020, down from 3.1% in August 2020 (Stats SA, 2020)


In February 2020, Stats SA measured the cost of medical schemes, as well as the fees charged by private sector medical practitioners and hospitals. They found inflation on medical products to be approximately 6.4%. Medical inflation consists of various medical costs. Notably, painkillers were up 10.2% and vitamin prices were up 9.1%. The costs of medicines, hospital fees and doctors’ fees contributed to the overall consumer and medical inflation, which have to be contained (Stats SA, 2020).


The SEP regulatory system is not entirely fool proof, because there is a possibility that manufacturers could use higher logistics fees to incentivise wholesalers and distributors to stock their own brands and thereby push for those products down the value chain (Bangalee & Suleman, 2015). A better logistics fee structure has a direct lever in creating a preference for certain medicine brands being stocked and distributed in the market. The logistics fee is a strategic area of negotiation between wholesalers and distributors. The logistics fee is a percentage of the SEP and it varies. The average charge is 6%, with the general trend being between 7.4% and 12.5%. In fact, there are differences in the logistics fee as a proportion of the SEP within identical manufacturing groups. The manufacturers offer a logistics fee in order to make their products competitive for retail pharmacy buyers. It is the manufacturer that sets the terms attached to the logistics fee. The SEP should not impact the integrity of the supply chain. Currently, the SEP is not as robust as it could be, leaving room for improvement in the system and for better pricing regulation.


The impact of the state tender system


Increasingly, the state tender system is being negatively affected by the failure of suppliers to bid because of a lack of supply of raw materials and active pharmaceutical ingredients (APIs), which are the required ingredients in medications. This forces the state to engage in procurement based on quotations received from pharmaceutical companies, and, at times, they have to pay the SEP. It is therefore difficult to determine the net effect on total pharmaceutical expenditure in line with a more active procurement policy under the NHI. There is a likely possibility that some prices that are currently being paid by the state will not be attainable under the NHI. However, in some cases, total expenditure may actually be lower if procurement actively and aggressively uses the monopsony power of the NHI Fund.


Mandatory generic substitution


Generic substitution policies mandate the availability of generic medicines maintained that generic substitution policies were vital for cost containment, as they prevented brand names from charging inflated prices (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016). These policies cover internal and external reference pricing and the use of limited lists, such as essential medicines lists and treatment guidelines that form the basis of care. Such generic substitution policies have been identified as important cost-saving measures.


International/external price benchmarking, a widely used policy instrument to control the prices of pharmaceuticals that are protected by intellectual property rights, draws on countries with similar economic backgrounds and/or geographic closeness, who use it as a benchmark during negotiations between government and the pharmaceutical industry for new medicinal products of high therapeutic value. Additionally, external reference pricing provides institutional buyers and regulators with a benchmark for negotiating the price of a pharmaceutical product. South Africa and other emerging markets have also used this instrument, even though they are outside of the European Union market.


The other instrument to use is reference pricing or internal reference pricing. This is what an employer or insurer pays, up to an established maximum price, for a healthcare service. The reference price is set at a level that allows patients to receive a healthcare service from various high-quality providers without an additional contribution. This promotes the rational use of similar drugs to control overall pharmaceutical expenditure with no associated negative health outcomes and with no discriminatory effects.


It was noted that when the mandatory offer of generic substitution was introduced in South Africa in 2003, implementation in the public health sector was delayed. However, the private sector (medical schemes and managed healthcare service providers) showed a commitment to use lower-priced generic medicines. That said, even in the private sector, the take-up is lower than in major developed markets (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016).


Single medicines selection process


To a greater extent, another policy consideration is the use of the single medicines selection process, supported by the more explicit use of health technology assessments (HTAs). This would narrow the gap between the public and private sectors. It is important to acknowledge that the Essential Medicines List (EML) might inform the selection of medicines that should be available at all entities offering NHI services, because, as stipulated in the National Drug Policy of 1995, these could not necessarily be the only medicines available. The regulatory framework governing the EML should require a regular review of the list.


HTAs are a fair, evidence-based and a dependable approach to determining the criteria for the inclusion of services and new technologies for incorporation into the NHI healthcare platform. It is also imperative that the HTA is established before the implementation of the NHI. The HTA system could assist in identifying and informing decisions about the funding of health services and technologies.


Therefore, South Africa needed a strong and working HTA system that would best inform the provision of the NHI services. Health technology assessment could strategically be one of several tools needed to implement the NHI more broadly and in order to achieve the aim of evidence-based and affordable health care for all South Africans, eventually contributing to the improvement of the nation’s health (Siegfried et al., 2017).


Reimbursement model


An additional policy that was implemented is a reimbursement model, which is informed by pharmacoeconomic data, and used to set up potential options for an integrated health system (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016).


NHI and pharmaceutical purchasing


The healthcare market does not operate under the same conditions that exist in an open, competitive market. This is because, in the public sector, the idea of pricing from a consumer or funder standpoint is not a straightforward concept, as services are not sold as they normally would be in the competitive market. The price of goods is not determined by the existence of a market where consumers and producers determine the price. Although input or manufacturing costs may be used to set market prices, marketing and distribution costs are excluded (Ramjee, 2013). The public sector system absorbs all costs that lead to positive externalities – that is – a healthy society. Such benefits are not always recognised by individuals, resulting in lower demand than what there ought to be. There needs to be an incentive for stakeholders in the healthcare sector to maintain the sustainability of the overall sector. The key stakeholders (wholesalers, retailers, hospitals and dispensers) should be permitted to thrive, even under the NHI system. We should caution policymakers not to link one overarching instrument centred on the pricing of medicines to everything associated with NHI. Equally, a singular market-orientated competitive approach will not solve the healthcare morass in South Africa.


Enhancing plurality of provision


The plurality of provision through the inclusion of multiple care providers in the public and private sectors, was addressed ahead of the NHI implementation (Ramjee, 2013). Differential payment mechanisms used for providers, especially those accredited under the NHI, have been established in order to level out the playing field. Such policy considerations would provide clarity on aspects such as input costs, profit margin and logistics fees, among other costs. The state is able to attain substantial discounts for pharmaceutical and surgical products due to its buying power. However, an assessment of the financial effect of this discounted pricing, and the mix and volume of products purchased, still has to be unpacked. Arguably, there are salient differences in the basket of goods purchased between the private and public sectors.


Admittedly, there is a strong relationship between the mix of goods used, the magnitude of discounts obtained, and the differential pricing of goods that are used across the sectors. Despite the benefits that are produced as a result of increased transparency in the prices of medicines, evidence shows that a highly regulated market that pushes for low medicine prices may inadvertently have negative consequences. Price regulation is required, however, price thresholds may lead to wayward economic benefits for pharmaceutical businesses (Bangalee & Suleman, 2015).


It follows then that price setting and formulation development purely using the free market would not work in the NHI setting. The public health system can be transformed by a combination of governance reforms and decentralisation, the NHI bill favours a centralisation of the system. The NHI implementation would require supervisory structures, such as boards for hospitals, district authorities (the recently launched District Service Delivery Model, is a model of implementing service delivery, that will ensure a coherent planning, budgeting and execution of service delivery projects in all districts by all three spheres of government could be used here as well) and statutory councils that would be protected from political appointments and interference. Health service delivery should be entirely depoliticised. The private healthcare sector is required to implement the Health Market Inquiry recommendations. With the guidance and backing of the Department of Health, pricing regulator should be established to manage annual price negotiations for hospitals and doctors, and establish an information regulator to bring quality of care information on private and public health services to the surface.


The NHI legislative process is required to shape an integrated healthcare system, preferably resembling the best features of a functional, quality healthcare service, which is operationally robust in delivery, to the public and private sectors. The NHI organisational make-up needs to consider the price regulation when establishing its operational structures, to include the concept of the price regulator as highlighted by the Health Market Inquiry Report commissioned by the Competition Commission.


Breaking down the sectoral divide


The impact of NHI financing


The financing mechanism proposed under the NHI will change the way in which citizens purchase healthcare. The funds used to purchase healthcare will be pooled into one central fund, instead of through 10 different government departments and 78 medical schemes. The state will act as the purchaser, using the common sizeable pool of funds. This can be used strategically when purchasing goods and services needed to run the healthcare system. While this single purchaser system is proposed, multiple lower level governmental purchases will be used. The purchasing will be done at the district or sub-district levels. Therefore, the system will be adjusted and provincial Departments of Health, who are currently deemed the health authorities, will no longer act as the purchasers of medications.


The final drafting of the amendments to the Medical Aid Schemes Act may impact the SEP. The prices of medications under the NHI, and the reimbursement of medications not covered by the NHI Fund (for example, medicines that are outside of the benefit package or excluded from the formulary) will be adjusted.


The NHI will have to consider the potential impact of moving from a system of primarily procuring only one pharmaceutical brand of medicine, to a system based on maximising reimbursement in terms of price. This will allow a broader range of producers to participate in the NHI market. As the market is currently highly concentrated, such a move would encourage new competitors to participate. To preserve the integrity of tendering-based healthcare systems, policymakers and other industry players should regularly inspect the functioning of tendering policies in order to rapidly address problems such as price increases and supply disruptions (National Treasury, 2015).


Addressing the divide


Possible changes could involve combining public sector and private sector stock, however, with the high out-of-pocket consumption of medicines, the separation between public and private sector stock may remain to some degree. Out-of-pocket medicines are still often covered under complementary insurance. The medical aid schemes have tried to control the rising expenditure by making exclusions to the regulated Prescribed Minimum Benefits package, leading to the rising trend in co-payments.

The price of medical scheme contributions has been brought into the spotlight because members are struggling to afford their contributions. The number of out-of-pocket payments has increased as a result of the high cost of premiums (Ataguba & Goudge, 2012) and the exclusion of coverage for certain types of services and providers.


The NHI Fund will not be able to pay for all treatments. If the inclusion of treatments in the basic benefit package is based on cost-effectiveness analyses, gene-based cancer treatments, for example, may be excluded. A more profitable market outside of the NHI Fund may always exist, and pharmaceutical companies may be discerning about who they choose to sell to and where. Globally, we have seen tendering used by countries that procure large quantities of products on an infrequent basis (once or twice a year) from a central medical store, which is often reliant on donor funding. Importing medicines has not proven useful in South Africa, even though it has been legally possible since 2003.


NHI and pharmaceutical companies' drug pricing


The introduction of transparent pricing aimed at ensuring that no one could supply medicine according to a bonus or rebate system, or any other incentive scheme (Moodley & Suleman, 2019). Regulating the pharmaceutical market and enabling access to quality pharmaceutical therapies was attempted through the use of generic medicines in order to lower costs and control prices, while making a transparent price available in the private market (Moodley & Suleman, 2019).


SEP in practice


SEP allows for the addition of a small mark-up for the dispensing fee of the pharmacist or dispensing doctor. The appropriate dispensing fee is charged by licensed persons and entities. In line with the March 2020 update, if the SEP of a scheduled medicine is less than R128.00, the dispensing fee must not exceed 30% of the SEP. Where the SEP of a scheduled medicine is greater than or equal to R128.00, the dispensing fee must not exceed R38.40 (excluding VAT) (DocWeb, N.d.).


The combination of the introduction of SEP and capped annual medicine price increases led to an overall decrease of 22% in medicine prices in South Africa in the first year after the introduction of SEP. The introduction of SEP managed to reduce medicine price inflation, improve medicine price transparency, and ensure that clients pay the same price for medicines irrespective of where they buy them (pharmacies, hospitals or dispensing doctors). Careful consideration of a pricing model that balances fair competition and supports a thriving pharmaceutical sector is essential under the NHI.


The annual rate of increase for the sale of medicines is based on an SEP formula, and the Health Minister has the discretion to make decisions outside of this. However, this is not always done. The pharmaceutical industry demanded that the formula must be restructured in order to adequately reflect market forces. The industry’s view is that the percentage increases authorised by the Minister do not accurately reflect real market conditions in line with the inflation associated with input costs, salaries and wages.


The likely impact of NHI through a SEP lens


Inflation leads to increased manufacturing costs for the pharmaceutical companies, but regulation only permits a price increase at a later stage. This is currently a long delay and is causing financial strain for pharmaceutical companies. Further strain is being felt, particularly by those with low profit margins, due to the depreciation of the rand and the low-price increases permitted. The weakness, from a regulatory perspective, is that untimely implementation will have negative consequences for the pharmaceutical industry and funders, who base their planning on the SEP adjustment.


The DOH PEE unit is responsible for enforcing, monitoring and evaluating the SEP within the pharmaceutical industry (MPR, N.d.; DOH, N.d.). Any changes to the SEP have to be submitted to the PEE unit for assessment and approval before implementation.


The schedule below shows the structure and breakdown of the Department of Health SEP.



a) Manufacturer price contains the direct and indirect cost of manufacturing the medicine,

including freight and forwarding costs for imported medicine. It also contains a profit

margin. Research and development costs are covered under the manufacturing price.

b) Logistics fees are costs added to the manufacturing price to cater for all costs associated

with taking the medicine from the manufacturing company to the dispensing pharmacy

or doctor. The revenue of pharmaceutical distributors and wholesalers are included in

this. Logistics fees are capped at 15% and varies from 9%, depending on the nature of

the product/medicine (Bangalee and Suleman, 2016).

c) Value-added tax (VAT) is currently at 15%.

d) Therefore, an SEP of R100 is broken down as shown in the schedule above.


Channel workflows


The flow chart below illustrates the value chain from the drug manufacturer to the end user, the client. This value chain differentiates between the private market price and government tender price, and highlights the fact that the NHI will not drive private drug manufacturers out of business simply based on price.


Source: (Author, 2020)

Based on the two channel workflows above, it can be concluded that:


a) The main difference between the tender price and private SEP channel flows is logistics

fees.

b) Government uses its own economies of scale (lower cost of production as a result of

increased volume) and avoids logistics fees completely. Manufacturers may negotiate

with government in very rare cases, where delivery does not follow typical government

processes. Under government funding, logistics fees will not be included in the pricing of

the medicine, but will be included under the NHI operations. Provinces will establish their

own distribution arrangements to ensure that medicines and medical supplies are

distributed in the most cost-effective manner. Where appropriate, provincial authorities

may contract distribution to the private sector. Currently, the distribution of drugs and

medical supplies to public sector health facilities takes place at least once a month.

c) Depending on the value of the tender and revenue guaranteed from the tender,

manufacturers can reduce the tender price to below the manufacturing price, which is a

trade-off between higher profits per unit (pricing) and higher profits due to more units

sold (quantity).


While it is clear that SEPs are higher than tender prices, it is also clear that the difference between the two cannot simply be two-fold. Therefore, the NHI will need to find a new way of pricing medicines effectively. Countries that have established UHC, such as Spain and the UK, show that a regulated framework for drug pricing has to be institutionalised (Rovira & Darbà, 2001). Other common features of the system were generic substitution and reference pricing. However, significant price control mechanisms targeted branded products or originators and not generics.


Generic pricing


Generic prices were broadly controlled by market forces. South Africa applied the same concept through the DOH PEE. Branded products or originators with existing patents are benchmarked against Brazil, Australia, Canada and Spain (DOH, N.d.). This ensures that the manufacturing price more closely approximates real-world costs and are aligned with international pricing. Generic medicine prices can be lowered to less than the manufacturing cost during the tender process.


The flow chart below shows the anticipated value chain from the drug manufacturer to the end user when the NHI is fully implemented.


Source: (Author, 2020)

In the public sector, logistics fees are unknown, meaning that the end user is not aware of the fees. However, there are costs funded by the taxpayer. These relate to transporting medicines directly to the client. In some cases, the private sector may be used to distribute medicines to clients. Currently, in the private sector, pharmaceutical companies also pay marketing fees to pharmacies and wholesalers over and above the logistic fees paid to wholesalers. The amount paid does not affect the price of medicines, however, it affects the profits obtained by pharmaceutical companies. These fees range from 15-30% of the SEP. Under the NHI monopsony, these fees will be reduced, and are likely to not exceed 15%. These fees cannot cause the price of medicines to increase. It is more likely that they will form part of NHI Fund operational costs.


Decreased supply


As clients gain access to medicines through the NHI, generics are likely to grab a generous slice of the pie. However, the main challenge for pharmaceutical companies will be to stay competitive by providing more cost-effective products. If government continues to award supply contracts solely based on price under the NHI regime, it will place tremendous pressure on pharmaceutical suppliers of generic medication, who have already dropped their prices significantly in an environment where annual increases are highly regulated.


The probable reality is that suppliers who are unable to manufacture other products because of cross-contamination and other restrictions may exit the market. The net result may be that certain firms leave the South African market, and certain brands, including essential medicines, may no longer be available locally. For suppliers whose tenders were unsuccessful, and who may have to wait for the next round of tenders, there is a financial risk to continue maintaining their facilities in order to wait for the next round of tendering. Supply security would be compromised, leading to significant stock-outs as suppliers choose not to increase production during this time. Stock-outs have a negative impact on patient motivation and adherence.

This leads to mistrust in the system. The implication is that we may have a more concentrated and potentially less competitive pharmaceutical market, and users may end up losing.


The NHI system does not require a highly concentrated market, however, these supply challenges may mean that fewer options are available under the NHI. The NHI system will need to establish security of supply, without disruptions (Wouters, n.d.).


The Essential Medicines Stakeholder Forum, comprising industry players, industry associations and healthcare professionals, including non-governmental organisations, is hosted by the Health Ministry. The forum provides guidance to health ministry officials. It encourages them to monitor the impact of tendering on medicine prices and to look for solutions to mitigate issues that arise therefrom. The National and Provincial Departments of Health should entrench a practice to work at improving the accuracy of forecasting methods. Unfortunately, past tenders were characterised by large discrepancies between the estimated quantities and procured quantities for medicines. Policy review regarding tendering needs to be addressed from an NHI perspective to consider issues that affect prices and supply security, namely the weighting of value parameters, fair contract management and the removal of barriers to generic competition (Wouters, n.d.).


Medicine shortages and stock-outs, which are already a concern, could worsen. This may be compounded by potential foreign investment declining as multinationals withdraw from the market. Shortages and supply chain breakdowns could result in outbreaks of disease. In mitigating this, government must expand tax rebates for pharmaceutical companies. This will not only allow more clients to have access to affordable medication, it will also promote the sustainability of the South African pharmaceutical manufacturing sector.


B-BBEE and economic and industrial development, including price, are competing criteria that the Department of Trade Industry and Competition (DTIC) and the Department of Health consider when awarding tenders. The Department of Health is always motivated by increases in both cost-saving and access to medicines, while the DTIC favours suppliers that procure greater local content and increase local industry designations to support economic growth.


Under the NHI, manufacturers will have to strategically affiliate themselves with the NHI Fund. They may have to consider forming public-private partnerships (PPPs) to supply medicine at negotiated prices and in a manner that produces a win-win situation. Under this policy framework, drug manufacturers may either negotiate or bid, depending on the supply and demand. Prices of generics are expected to be determined based on market forces and will drop to an optimal level. Branded and originator products may be less elastic, with prices remaining stable, and will continue to be used across the pharmaceutical product range.


Public-private partnerships


The Pharmaceutical Task Group (PTG) argued that a well-functioning NHI system will be dependent on a robust supply chain and procurement process (PTG, 2016). The NHI Bill (RSA, 2019) articulated that the purchasing of medicines and medical devices from accredited suppliers should take place in line with (a) principles of evidence-based medicine; (b) applicable treatment guidelines and formularies; (c) the needs of the users that are serviced; (d) volume uptake; (e) demographic and geographic data; (f) outcomes of health technology assessments (HTAs); (g) health outcomes; (h) contractual obligations between the NHI Fund and the service provider; and (i) the availability of trained professionals to administer, use and monitor the medicine or device.


Public sector issues


The public sector procurement process has challenges that include the non-payment of suppliers, poor supplier performance, unhealthy supplier relationships, a lengthy buyout process, and a shortage of active pharmaceutical ingredients, among others. This is exacerbated by the shortage of raw materials. These are common themes when addressing the shortages of essential medicines, and are a challenge faced by many countries. It is now compelling governments to work together and to coordinate efforts to find global solutions. Suppliers being paid late is contrary to the Public Finance Management Act of 1999, which states that suppliers should be paid within 30 days from receipt of a valid invoice. Unfortunately, the reality is that suppliers are not always paid on time and, as a result, the supply of medicines to hospitals is reduced. Administrative collections of proof of delivery of medicines and invoice processing are ineffectively reconciled in the provinces (Modisakeng et al., 2020).


The management of supplier contracts after the tender is awarded is crucial in ensuring supplier compliance and improving essential medicine availability. The National Department of Health and National Treasury should institutionalise contract management to improve medicine availability in public sector hospitals and other health facilities. It is important for public sector tenders to be awarded timeously, with the net result being a reduction in the number of buyouts, easing the burden associated with buyouts at an institutional level and improving medicine availability. These are all considerations for the implementation of the NHI.


Implementing public-private partnerships for healthcare delivery


The NHI is an opportunity to fully explore the supply chain of medicines in the context of PPPs. The 2019 Health Market Inquiry report of the Competition Commission found that nothing stops the state from using PPPs to address the delivery of healthcare services in the public sector. South Africa has a rich and well-developed legal and policy framework for PPPs, under the auspices of the National Treasury.


With regard to policy choices, PPPs could practically enable and empower the healthcare system to feature elements such as client education, client medicine compliance and self-care, and setting up registries as part of health outcomes research initiatives. These could even be done in the period preceding the full NHI implementation.


The Office of Health Standards and Compliance (OHSC) was established by an act of parliament, and is aimed at monitoring public health services and addressing complaints of non-compliance, while setting guidelines and providing information on the implementation of agreed health service standards. The OHSC would be a solid foundation for the rollout of the NHI and can support government decision-making when establishing PPPs (Sithole, 2015). The OHSC is focused on driving much-needed improvement in health service quality, changing public health care management and creating core health standards for public and private service providers. The OHSC can assess health facilities in both the private and public sectors.


Undoubtedly, the skills and experience of the healthcare industry in relation to supply chain management, regulatory processes and health research could be harnessed in the establishment of PPPs. The policy and regulatory framework should empower the NHI Fund to formalise any PPPs, and those partnerships will assist in achieving the objectives, duties and functions of the NHI Fund.


Additional private sector contributions


The private sector needs to commit skills and other assets to the NHI infrastructure. Private sector participation could enrich the development of the NHI process. Private sector expertise should be harnessed, especially in the areas of benefit design, clinical risk management, contract management, data collection and management, data analytics, forecasting, risk factor analysis, costing of the benefit package and actuarial expertise.


Conclusion


UHC is a global priority and more countries are adopting an NHI-type approach. Virtually all of Europe has either publicly sponsored and regulated universal healthcare or publicly provided universal healthcare. It is important to note that universal healthcare does not imply government-only healthcare, since many countries continue to have both public and private insurance and medical providers. No flawless model exists, however, South Africa must attempt to enhance its existing health system to accommodate all its citizens by ensuring accessible and affordable quality care, while buoying the healthcare industry as a whole.


The impact of NHI on the pharmaceutical pricing of medicines and on the pharmaceutical sector itself remains uncertain, and can only be adequately assessed after the NHI is fully implemented. This paper described the healthcare landscape and international lessons in how healthcare spend and pharmaceutical prices can be reduced despite constrained public sector national budgets. The creation of the NHI scheme, as a single purchaser of pharmaceutical products and supplier of health services, has the potential to increase the buying and supply power of the NHI Fund with the potential to drive pharmaceutical product prices down by at least 15%.


Currently, logistics and dispensing fees amount to 15%, on average, given that the dispensing fee is 30% on medicines with an SEP of less than R128.00, and for those greater than or equal to R128.00, a dispensing fee not exceeding R38.40 (excluding VAT) is allowed. However, the NHI Fund will have to pay for its own logistics and distribution costs, which may be included as an operational line item. Funders of the NHI (taxpayers) will still be funding the transport of medication, in a potentially less transparent way. Ultimately, lower prices are not the only consideration for an efficient pharmaceutical market: there also needs to be choices and a variety of products and providers.


The NHI system will still need to involve the participation of wholesalers, pharmacies and private service providers, who will be paid using the NHI Fund. Therefore, prices set by medicine manufacturers are anticipated to drop. Based on the descriptive analysis and the contextual healthcare sector landscape, there is no direct or indirect evidence that the NHI will cause a collapse in pharmaceutical business, but further investigation will be required.


There are factors other than price that may impact the healthcare sector more broadly, and to suggest that the drop-in medicine prices as a result of the NHI system may result in the collapse and closure of the pharmaceutical industry would be an exaggeration. Economically, drug prices are defined largely by the manufacturer rather than by the market, and in this case, the public sector will enter into negotiations with the suppliers. The pricing structure does take the manufacturing and development cost of the medicine brands into consideration and has less to do with the features of the public sector market to which these brands will be sold (Zg, 2019). Innovator medicines would naturally not be covered in reference pricing systems because of the lack of a comparative product. Therefore, the NHI Bill’s Health Care Benefits Pricing Committee will have to consider actuarial factors, pharmaceutical factors, epidemiologic factors, health management, health economics, health financing, labour rights and rights of clients in order to recommend pricing of healthcare services.


Strengthening the co-ordination of tender publishing and the registration of healthcare products (which could lead to some brands being excluded from tenders) might further weaken competition in the pharmaceutical market. However, the government could play a role in sustaining competition by using the NHI purchasing power to influence and facilitate a larger mix of brands through tendering (Wouters, n.d.). Government’s obligation to provide universal healthcare must be complemented by leveraging the expertise of the private sector and optimising business models to bring in more clients and reduce relative overall system costs. There is a great need for medicine availability, skilled medical human resources and quality care in a comprehensive manner.


This could possibly affect the industry as a whole. With all the challenges faced by the South African healthcare system, it is incumbent on the pharmaceutical industry to work together with government and other social partners to make the NHI system work. Additionally, the pharmaceutical industry ought to consider the social responsibility expected by its stakeholders. The overall advantage of corporate social responsibility could guarantee the sustained economic existence of companies (Valverde, 2013).


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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.


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