Note: This Annex replicates the evidence summary prepared in October 2011, with textual and presentational modifications for publication purposes.
Topic: A mark-up represents the additional charges and costs that are applied to the price of a commodity in order to cover overhead costs, distribution charges, and profit. In the context of the pharmaceutical supply chain, policies might involve regulation of wholesale and retail mark-ups as well as pharmaceutical remuneration.
9.5.1. Overview of available evidence
Type of evidence
The WHO/HAI policy review (Ball 2010) (
4) which provides definitions and descriptions of mark-ups and supply chains; a literature search for the evidence base on regulation of mark-ups on medicines and the impact of mark-ups on medicine prices in low- and middle-income countries (LMICs); and case studies of how three countries addressed price regulation.
An additional literature search retrieved no other evaluative studies or systematic reviews.
Quality of evidence
The WHO/HAI policy review concludes that the evidence for the regulation of mark-ups in the supply chain in LMICs is sparse, not systematically collected, and often of poor quality. The available evidence is primarily descriptive, and there is no evidence comparing the use of mark-ups with other pricing policies. The country case studies are descriptive, with little evidence available on the effects of mark-ups.
Outcomes
There is no information on the impact of mark-ups on medicine prices and other rated outcomes in the evidence identified, with the exception of some description of changes in medicine prices in the country case studies.
9.5.2. Descriptive evidence: WHO/HAI policy review – literature review
The PubMed and EconLit searches returned 31 and seven relevant publications, respectively. The number of relevant articles identified by searching the Internet and the grey literature is not specified, although the review states that “a wide range of articles and papers” was found. The policy review does not describe in detail the nature of the literature found (i.e. reviews, descriptions, opinion pieces, studies) but notes that the evidence is sparse, not systematically collected, and often of poor quality.
The policy review describes options for the regulation of mark-ups; the rationale behind distribution mark-up regulatory strategies; the breadth of use of mark-up regulation; the magnitude of regulated mark-ups; public versus private sector regulation; selective mark-up regulation; other add-ons in supply chain; discounts, rebates, and trade schemes; approaches to regulating wholesale and retail mark-ups; the impact of mark-up regulations on medicine prices; enforcement of mark-up regulations; and viability of wholesalers and retailers. Conclusions drawn by the WHO/HAI policy review are listed below.
Regulation of mark-ups as part of a comprehensive price regulation strategy will probably lead to reduced medicine prices. However, regulation of mark-ups without regulation of either the manufacturer or retail selling prices is unlikely to lower medicine prices.
Regulation of mark-ups will probably have an effect on the viability of some operators in the pharmaceutical supply chain and may adversely affect operations in more remote areas or in other health services that are cross-subsidized through higher mark-ups.
Regulation of distribution mark-ups can have unintended impacts or consequences. Incentives and disincentives need to be mapped and potential unexpected effects considered.
A reliable mechanism for monitoring the prices and sales of medicines in the appropriate sector or market is essential to be able to judge the effects of pricing regulations, both intended and unintended.
It is possible to use mark-up regulation as part of a generic medicine promotion policy, for example by providing higher remuneration for generic medicines or any other group of products, but this is not commonly practised, possibly due to the complexity of implementing differential mark-ups.
Regulating mark-ups in the private sector is probably more complex than in the public sector.
Regulating mark-ups without adequate enforcement is probably not effective and adequate enforcement in low-income countries (LICs) appears to be a challenge.
Mark-ups that include a regressive component with or without fixed fees, as is practised in countries such as Lebanon, the Syrian Arab Republic, and Tunisia, probably lead to better outcomes that fixed percentage mark-ups through their influence on financial incentives. However, fixed fee mark-ups can dramatically increase the price of otherwise low-cost medicines.
While bans on discounts, rebates, and bonuses in the supply chain probably increase transparency in medicine pricing, there is insufficient evidence to say whether reduced prices result.
summarizes the wholesale and retail mark-ups in LMICs, as presented in the WHO/HAI policy review. and summarize wholesale and retail mark-up regulation strategies in HICs.
Summary of wholesale and retail mark-ups in low- and middle-income settings.
Summary of wholesale mark-up regulatory strategies in high-income countries.
Summary of retail mark-up regulatory strategies used in high-income countries.
The policy review states that there are very few examples of the impact of regulating mark-ups in LMICs and all the information retrieved is anecdote or opinion. In China, distribution mark-ups are enforced, which has created an incentive to use higher-cost medicines. In Ecuador and Panama, there is mark-up regulation with resultant uniform prices and reduced speculation. In Honduras, mark-up regulation results in higher prices and suppliers over-invoice to recover margins. In Jordan, price controls including mark-ups were removed from 50 over-the-counter medicines with a resultant increase in prices; controls were subsequently re-imposed. In Kenya, price and mark-up regulations were removed and there is an anecdotal account that prices decreased, possibly due to a return to free-market principles from a situation where perverse incentives or other factors had led to unnecessary high prices. In South Africa, introduction of a 0% mark-up on hospital medicines resulted in a drop in the price index of 1000 medicines.
9.5.3. Descriptive evidence: WHO/HAI policy review – case studies
The WHO/HAI policy review includes case studies of two upper-middle-income countries (Albania and South Africa) and one low-income country (Mali), which are summarized below.
Albania
Statutory mark-ups are used for remuneration of wholesale, distribution, and retail operations. There are no dispensing fees or other charges. The mark-ups as of 2007 are 12% for wholesalers for reimbursed medicines and 18% for non-reimbursed medicines; for retailers these mark-ups are 29% and 33%, respectively.
There is no legal basis for discounts or rebates in the medicine supply chain with fixed manufacturer prices and wholesale and retail mark-ups.
There is no evidence available on enforcements or effects of the mark-up regulations.
South Africa
The 1996 national medicines policy addresses prices to “promote the availability of safe and effective drugs at the lowest possible cost”. Measures taken include : establishment of a multidisciplinary pricing committee; total transparency in the pricing structure of medicines; use of a non-discriminatory pricing system in the private sector; replacement of wholesale and retail mark-ups with a fixed professional fee; establishment of a system to support free or subsidized provision of medicines in the public sector; development of a price monitoring system compared to international medicine prices; regulation of medicine price increases; provision of priority medicines from public sector to private sector if needed; and promotion of use of generic medicines.
There is a maximum single exit price, which is the “only price at which manufacturers shall sell medicines” in the private sector, which was set based on the average 2003 prices of medicines calculated on a unit basis. The single exit price can be increased on an annual basis to a level determined by the state, and the same price must be offered to all buyers.
The standard exit price includes a logistics fee to cover the distribution costs and it is left to importers, manufacturers, and intermediate suppliers to negotiate how the fee is split.
Retailer remuneration is based on a regressive percentage plus a fixed fee.
Discounts, rebates, and other forms of commercial incentives are not permitted. The standard exit price is set irrespective of the volume of sales or package size.
A five-year analysis of sales data demonstrated that sales of generic medicines, by volume, exceeded those of originator brands in 2007 for the first time. The policy review suggests that this is more likely the result of policies and laws promoting generic prescribing and substitution than pricing regulation.
There is no difference between medicine prices in rural and urban areas and prices of medicines have reduced by an average of 19% (25–30% for generics and 12% for originator brands).
Mali
Mali has implemented a series of national medicines policies, the latest of which, in 2006, set maximum prices for 107 essential medicines at wholesale and retails levels in the private sector.
Mark-ups are not officially regulated in the private sector. As part of drug registration, manufacturers propose a retail selling price that is agreed with the Pharmacy and Medicines Department. Wholesalers then decide the wholesale selling price, which in effect determines the retailer's mark-up.
Wholesale margins are not officially regulated for the 107 specified essential medicines. Instead, retail prices are set in consultation with manufacturers or importers. The wholesale selling prices are based on the formulae below.
Branded products
Generic products
The margin of private wholesalers is estimated to be 13–30% for branded products and 19–34% for generic products.
The margin (or possibly mark-up) of private retailers is estimated to be 25% for branded products and 28–45% for generics.
Discounts, trade schemes, and other practices are allowed and are unregulated. Wholesalers can sell to other wholesalers and may offer a discount of 10–12%.
To ensure implementation of the 2006 national policy, these actions were taken: establishment of a formal committee representing all involved parties, public and private, with the exception of consumer representatives; definition of a mechanism for identifying the medicines and their current prices; fixing of maximum selling prices; informing the public of the initiative through mass media; implementation through issuing of the required decree; and monitoring of prices at wholesale and retail levels.
The WHO/HAI policy review reports that one study demonstrated an average reduction in price of 25% was observed in 49 of the 107 essential medicines, three years after implementation of the policy.
9.5.4. Implementation requirements
The WHO/HAI policy review identified the following requirements for implementing regulation of distribution mark-ups.
Knowledge of the costs of operating the various distribution functions.
Economic expertise to analyse distribution costs and to determine appropriate remuneration of stakeholders or budgetary requirements.
Medical and pharmaceutical expertise for assessing incentives and disincentives in the supply chain and effects on supply and rational use of medicines.
Statistical expertise for analysis of commercial and/or medicine price data.
Expert legal advice for drafting appropriate and sound legislation.
Structures for consultation with concerned stakeholders.
A mechanism for monitoring medicine prices and use/sales.
A mechanism for regular review of regulated prices.
A strategy and adequate resources and structures to enforce the regulations.
A national medicines policy document providing a basis for the actions.
High-level political support.
9.5.5. Feasibility
The WHO/HAI policy review indicates that if a number of the requirements listed above are lacking, as might be the case in many LMICs, it may not be appropriate to implement a mark-up policy. There is no clear guidance available on the minimum requirements for implementation in a resource-challenged setting.
9.5.6. Gaps, research needs, and comments
Quantitative assessment of the benefits of regulation of mark-ups is needed, preferably in comparison with other price control measures. The WHO/HAI policy review also suggests the research areas below.
While mark-up regulation is aimed at reducing prices, there is a paucity of information as to whether the reduced prices lead to changes in consumption, or whether patients prefer higher-priced products because of a perceived relation between price and quality and/or efficacy. Examination of consumption patterns of low- and high-priced generic equivalents reimbursed by health insurance might produce useful data.
Some studies have shown that high mark-ups may be required for sustainability of distribution operations or to cross-subsidize other services. Further information is needed to understand whether the high mark-ups in the supply chain in some countries reflect profiteering or actual high costs in the distribution chain.
The enforcement of mark-up regulations – in terms of whether it occurs and the mechanism used – has not been well described. Information is also needed on the resources required for successful enforcement, especially in LMICs.
Methods for monitoring the prices of medicines in a country are instrumental to monitoring the impact of regulatory/policy interventions. However, there is little detail available on mechanisms, such as the level of sophistication required, range of products covered, and analysis and interpretation of the data. This are needs further elucidation and development of guidance for policy-makers.
More case studies of price regulation from LICs are needed to provide models for economies that face similar constraints in regulation and enforcement.
