Subsidies should not be used to maintain the price of medications
On February 12, 2015, the Minister of Labour, Health and Social Affairs of Georgia, Davit Sergeenko announced that if the prices of essential medicines continue to rise, the government will provide subsidies in order to maintain or lower current prices.
It is clear that the continuing rise in medicine prices is a particularly heavy burden for socially vulnerable populations, although, we believe that the government should not use subsidies to lighten this burden. We think that it is important to understand what kind of intervention the Ministry plans to make on the pharmaceutical market, because this could have long-term, negative results on the pharmaceutical market as well as on other sectors of the economy. Transparency International Georgia contacted the Ministry of Health for more information, although the Ministry informed us that currently, there are no plans for subsidies.
What will be subsidized?
If the government decides to maintain the price of medications through subsidies, we think, this will be an extremely dangerous precedent, which could have unfavorable consequences.
1. If the prices of the group of essential medicines which are most frequently used rises higher, according to our calculations, subsidies could cost the state tens of millions of Lari.
According to the Ministry of Labour, Health and Social Affairs, “Currently, of more than 15,000 medications, only around 100 have increased in price, and the price increases have been, on average, between 7% and 10%.”
According to National Statistics Office of Georgia data, in January, the price of medications rose by 7.3%. Compared with the same period in 2014, the price of vasodilators rose by 12.2%, painkillers by 17%, antibiotics by 14.89%, vitamins by 14.6%, digestive system medications by 20.31%, and anti-inflammatory medications by 18.31%.
The Ministry announced that they have a short list of such medications, which includes up to 100 medications and a long list which includes approximately 300 medications. To maintain or lower the price of even 100 medications – not to speak of 300 medications –represents a completely irrational and an entirely fiscally unsustainable approach because:
- The six most frequently used groups of medicines are included on the list. The Ministry of Labour, Health and Social Affairs has not specified to what point prices must rise for subsidies to begin, although, it is clear that it must be more than the 7.3% increase, which occurred in January, resulting from the depreciation of the Lari against the US Dollar, which began in November of 2014.
2. Pharmacies will be incentivized to raise prices again, because the government will still cover those price increases through subsidies. This will be very profitable for the pharmacies and detrimental to the budget. When the state interferes in buying and selling relations in this manner, it will inevitably cause market distortions. When the state does not interfere with the relationship between buyers and sellers, the price is determined according to market demand, and the seller knows that there is a limit, above which increasing the price will impact sales. Thus, the seller will not increase the price. However, if the state interferes with the relationship between pharmacies and consumers through subsidies, this limit will increase to a very high threshold. Simply put, pharmacies will never raise the price of medications for consumers while they will keep raising prices for the government as long as the latter intervenes with subsidies to pay for increases.
3. This will create the expectation and demand among the population for a variety of subsidies. This will in turn increase quasi-fiscal losses caused by the prices of goods and services provided by government falling below market prices.
It is notable that the previous government had a variety of initiatives which lowered the price of goods and services below market prices. In contrast, after the 2012 Parliamentary Elections, there was a distinct trend towards decreasing quasi-fiscal losses, through limiting the scale of the state’s provision of goods and services below market prices. The state budget no longer finances the costs of a number of programs such as the small agricultural loans program (today the Agriculture Fund is financed by Kartu Bank) which, of course, is the correct approach.
If the Ministry of Labour, Health, and Social Affairs maintains or lowers the prices of the most frequently used medications, through subsidies, the government will not only lapse into the ways of the previous government (when the GoG provided of goods and services below market prices), but also add an entirely new dimension to the issue.
If the government decides to provide discounts on medications to the socially vulnerable population below a certain threshold of ranking points, on the one hand, this will potentially solve the social problem, while on the other hand, will not produce the negative tendencies discussed above within the pharmaceutical sector, as well as among the population. In this situation, budgetary resources will be directed towards the population in the greatest need of aid.
Transparency International Georgia believes that:
- To protect the socially vulnerable population from the negative effects of medication price increases, it will be better if the government defines a specific threshold of ranking points below which the socially vulnerable population will benefit from discounts on specific groups of drugs within the auspices of the universal healthcare program. Notably, a significant share of Georgia’s population can afford the price increases without aid – as our 2013 survey demonstrated, half of the population is ready to finance their own health care costs. As such, it is irrational to spend scant budgetary resources on those who are not in need of assistance.
- It will be easiest to provide benefits to the socially vulnerable population through the universal healthcare program. This will not require additional administrative resources as the government insurance programs (Government ordinances 218 and 165), which have now been replaced by the universal healthcare program, provided discounts on medication. The universal healthcare program can build on this experience.
- Before deciding to preserve the price of medications through subsidies, the Government of Georgia and the Ministry of Health should consider every potential cost and begin consultations with knowledgeable organizations to discuss what could result from such a decision.