Pharmaceuticals and South Africa I - Distribution

Introduction

The access to healthcare is enshrined in the constitution and has been enunciated on various occasions in all the branches of government, namely: the Executive; the Parliament; and the Judiciary.

The concern seems to be that while the right is recognised, the content of the right has been subject to various interpretations. These interpretations vary when it comes to provision. At present, we have a government system that is ill equipped and an imperfectly competitive private system.

This brief considers the content of the right as it pertains to how pharmaceuticals are obtained. It will set out the findings of the HSF regarding the ownership, location and structuring of pharmaceutical outlets as they serve the public.

The HSF’s findings

The HSF report: Pharmaceuticals in South Africa - An Enquiry (“Pharmaceutical Enquiry”) considered issues of pharmacy ownership, price determination, and competition and regulation. It mapped the geographical distribution of pharmaceutical supply points and considered the implications. The Pharmaceutical enquiry began by considering the ownership models adopted abroad and compared them with those in the South African market noting that there were possible ways forward:

1. Simple maintenance of opposition to lay ownership of pharmacies by the PSSA and ICPA. The almost certain consequence of this approach will be maintenance of the present position of disagreement with the government, especially in the absence of a knock-down argument for change back to individual professional ownership only.
2. A focus on unreasonable ways in which individually owned pharmacies are placed at a competitive disadvantage. This report identified several of these, and suggested remedies for them. The remedies suggested would be in the public interest, and should be urged on that basis.
3. A search for a new policy framework to extend pharmaceutical distribution. This would be in line with the fundamental National Health insurance goal of provision of essential health needs for everyone. There is an opportunity to become pro-active by developing business proposals and pursuing them with government.”^[1]

The Pharmaceutical Enquiry deals with the interactions between corporate and individually owned pharmacies.^[2] The corporate pharmacies included Clicks, Dis-Chem, Medirite, Netcare/Medicross, Pick N Pay, Medirite and Spar.^[3] The results note that during the period of 2003 to 2015 the number of corporate owned pharmacies increased from 82 to some 710.^[4] During the same period individually owned pharmacies saw an increase from 1202 to 2475, however, when one considers that during this period 602 independently owned pharmacies closed their doors the net growth is less.^[5]

The Pharmaceutical Enquiry noted that the “objective of supplying medicine to as many people as possible at the lowest possible cost requires fair competition between pharmacies within the given framework of regulation”^[6]. It further noted that there were three important factors disadvantaging individually owned pharmacies, namely:

1. “Licensing. The law on licensing requires that the interests of existing pharmacies must be taken into account before new licenses are issued. However, there appears to be no effective or systematic processes of advertising applications for licenses, giving existing pharmacies time to prepare objections, and ensuring that these objections are carefully considered, by making possible appeals against licensing decisions. Pharmacists have complained that the first they know about licensing decisions is when new pharmacies appear.
2. Horizontal collusion, particularly between shopping mall owners and managers and corporate pharmacies. There have been cases where corporate pharmacies have exploited their position as large lessees of space in shopping malls to insist that the leases of smaller pharmacies already in the malls are terminated. This adds a twist to inadequately consulted licensing decisions. If the volume of mall custom justifies the presence of more than one pharmacy, the eviction of an existing pharmacy is counterproductive and is an abuse of competitive principles.
3. Exclusion of individually owned pharmacies from access to some pharmaceutical products as a result of exclusive dealing arrangements between manufacturers/importers, distributors and corporate pharmacies. This is promoted by vertical integration and is its key adverse outcome. In a regulated environment, one further regulation would be appropriate: a requirement that any pharmacy may require any distributor to supply medicine to it.”^[7]

The Pharmaceutical Enquiry states that the “present system underservices rural areas”.^[8] It concludes by stating that “individual pharmacies have legitimate concerns, and they have considerable unexploited opportunities”.^[9] The conclusion is that there are problems, namely:

• “Sixty nine percent of corporate pharmacies and fifty six percent of individually owned pharmacies are located in the metropolitan areas. Thirty one percent of corporate pharmacies and forty four percent are in smaller towns. People in rural areas proper, particularly the tribal areas, rely mainly on government clinics and hospitals and often have to travel to the nearest town to obtain the medicines they need.
• There are very large differences in population density across the country. The maps in the atlas shows that much of the land in the western half is very lightly populated, with densities of fewer than five persons per square kilometre and more land with densities between five and ten persons per square kilometre. Substantial distances between some pharmacies would exist under any dispensation. Assuming that a pharmacy serves 10 000 people, pharmacies in very low density areas would need to be 71 kilometres apart and in low density areas 39 kilometres apart.
• In the rest of the country, purchasing power is clearly the issue and is the key limiting factor on the formation of new privately owned pharmacies. At public hospitals and clinics, people obtain medicine at zero or low cost which they could not afford at a private pharmacy. However, they often confront substantial travel costs, congestion, taking the form long queues and waiting times, and frequent stockouts as a result of poor inventory management and logistics. This helps bifurcate the health system into a generally efficient one for the middle class and an inefficient one for everyone else, contrary to the fundamental goal of meeting everyone’s needs adequately.
• What can be done about this at the level of the distribution of pharmaceuticals? There have already been some experiments with the supply of state provided medicine through private pharmacies. These tentative beginnings should be expanded rapidly. New outlets need to be opened at many sites: people’s dispensaries, as they might be termed, which would offer the full government formulary, apart from medicines which can only be administered in hospitals. At the least, they could offer people with chronic medicine requirements a better service than having to wait long hours at government clinics and endure stockouts. They would take pressure off clinics to allow more attention to diagnosis, treatment and referral. Considerable thought needs to be given to developing business models, and making proposals to government.”^[10]

Conclusion

It is clear that distribution of pharmaceuticals in a manner that gives meaning to rights is inadequate and could be improved, particularly in less urban areas. Furthermore, the supply of products to as many as possible has been impeded by barriers to entry such as licensing, horizontal collusion and exclusion of access to products by larger participants in the market.

The next brief will consider the manufacturers and importers of pharmaceuticals.

Chris Pieters
Legal Researcher
chris@hsf.org.za

^[1] Pharmaceuticals in South Africa - An Enquiry at page 22. https://hsf.org.za/publications/special-publications/pharmaceuticals-in-south-africa/pharmaceuticals-in-south-africa-an-enquiry-2