1. Introduction

Acting on the recommendation of the Pricing Committee, the Minister of Health has proposed the amendment of the Regulations Relating to the Transparent Pricing System for Medicines and Scheduled Substances ("the pricing regulations"). The Minister has invited comments.

What then are the proposed regulations all about and what does the Pricing Committee intend to achieve? Without going through a detailed analysis of the proposed revised regulations, a copy of which is attached to this note, we set out some impressions and comment.

2. Bonus systems and incentive schemes

2.1 Under Section 18A of the Medicines and Related Substances Act ("Act"), there is a general and absolute prohibition against the supply of any medicine

... according to a bonus system, rebate system or any other incentive scheme

2.2 There has been much speculation and attempted interpretation of these terms. The application in practice has possibly led to creative interpretation of the Pricing Regulations.

2.3 In an unusual approach, clarity on this provision of the Act is sought to be provided through the insertion of a new definition of this term in the Regulations. The proposed Regulations provide for 12 specific outcomes or circumstances which are defined under the term "bonus system, rebate system or any other incentive scheme". These include what appears to be a smorgasbord of outcomes, at least five of which include very subjective descriptions.

The subjective descriptions are

  • unacceptable advertising fees;
  • unacceptable credit payments;
  • unacceptable data fees;
  • unacceptable fees paid to induce and or encourage biased sale of a particular medicine or a scheduled product, and
  • unacceptable marketing fees and or co-marketing fees.

Other specified outcomes include discounts, formulary listing payments; kickbacks and perverse incentives and shelf space fees.

2.4 Through the introduction of this definition, when read with Section 18A, it becomes clear that the Department intends that a very wide range of existing "promotional" and "marketing" activities will become prohibited.

2.5 It is important to understand the distinction in this regard between prohibition of the activity under Section 18A, and an exclusion of the activity for purposes of reward under the heading of logistics services in terms of the proposed new regulations.

3. Discounts

3.1 A new definition of discounts is proposed to be substituted for the existing one. With the proposed new definition of a bonus system or incentive scheme described above and the further definition of discount, when read together with Section 18A of the Act, it becomes clear - should there have been any doubt that it is the Pricing Committee's intention to prohibit the supply of any medicine at any price other than in terms of the SEP.

3.2 Moreover, it is also clear that the SEP is not a maximum price. It is the only price. It is not permissible for a manufacturer or importer to supply a medicine to a wholesaler which is a distributor and logistics service provider at bulk discounts and then allow that wholesaler to mark up the price of the medicines and on-sell to retail. We understand that this practice has been used as an alternative providing wholesalers with remuneration for services otherwise broadly described as "logistics services".

4. The Single Exit Price

4.1 The Pricing Committee has recommended a breakdown of the SEP into the following three constituent parts:

  • Ex-manufacturer price - this is a Vat exclusive component and includes the cost of producing a medicine or scheduled substance for consumption and will include packaging, but would exclude the permitted and approved cost of distribution by wholesalers and other logistic service providers;
  • Logistics fees - which are determined by negotiation between manufacturer and importer and the logistic service provider and which are paid exclusively for the provision of logistic services incurred in the distribution from the manufacturer or importer's premises to end dispensers (pharmacists or licensed health care practitioners). The fee may also be paid by manufacturers to their in-house logistic service provider division, and
  • Vat at the applicable rate.

4.2 The SEP may only be adjusted once a year by way of independent review of the ex-manufacturer price or logistics fees components. Subject to that review, the manufacturer and/or importer may not interchange amounts between the ex-manufacturer and logistics fees components. Provision is made for adjustment of the SEP under exceptional circumstances.

5. Capping of logistics fees

5.1 Apart from the proposed regulation and prescription of a maximum logistics fee (see the proposals contained in Government Gazette 35481 of 6 July 2012) provision is made within the proposed regulations for the Director-General to determine that either an ex-manufacturer price and/or a logistics fee is unreasonable and provide an opportunity for consultation in that regard.

5.2 When read with the clear intention to limit logistics fees by way of regulation and the exclusion of a range of services which may at present be provided by wholesalers as being part of a bonus or incentive scheme, the net effect of the proposed regulations is to:

  • Allow greater ability to the Pricing Committee and Director-General to reduce the SEP and/or restrict increases in the SEP;
  • Restrict or prevent a range of practices for which remuneration is paid to wholesalers at present which are claimed to be legitimate logistic services;
  • Effectively squeeze the income and profit margins of wholesalers engaged in in the provision of marketing and logistic services which may lead to the removal of a large number of wholesalers from the present supply chain.

6. Effect on marketing and promotional services

6.1 By excluding a broad range of activities and outcomes through the definition of bonus systems and incentives schemes, the proposed amendments will effectively limit a range of so-called marketing and promotional activities.

6.2 This however will not affect the so-called legitimate marketing and promotional activities. However manufacturers will not be able to compensate wholesalers or other logistic service providers for carrying out those activities on the basis that they are logistics services. So a manufacturer would have to enter into a separate agreement with the provider of those services and clearly provide that the services do not fall with the prohibition under Section 18A of the Act as read with a new definition.

6.3 Of course these same activities may be provided by the manufacturer itself, subject to the same caveat. The cost of these services will have to be provided from the proceeds which the manufacturer or importer will receive as part of its ex-manufacturer price. This however does not appear to be adequately catered for in the definition of that ex-manufacturer price.

7. The noose gets tighter

7.1 The overwhelming indication from the proposed regulations and the proposed capping of logistics services fees is that in addition to the outright interference in market pricing of medicines by way of price regulation, which is a policy choice, there is also an interference in respect of permitted promotional and marketing activities.

7.2 With these activities being substantially restricted, either on the basis of being prohibited per se or on the basis of being effectively excluded in that the activities are not capable of being compensated, the existing roles and functions of many in the present supply chain will have to be carefully re-evaluated and justified if they are not to be excluded entirely.

7.3 Interested persons are invited to submit substantiated comments or representations on the proposed amendments in writing to the Director-General: Health by 4 September 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.