Pricing Out Welfare: The Effects of Government Regulations on Pakistan’s Pharmaceutical Market

At present the global pharmaceutical industry is worth more than a trillion dollars and offers a huge potential for further growth. However out of this trillion dollar industry Pakistan’s share is a meager 0.1 percent. According to PRIME institute’s latest study titled ‘Pricing out welfare: the effects of government regulations on Pakistan’s pharmaceutical market’ Pakistan’s current freeze on increase in drug prices is acting as a disincentive to producers and is costing over Rs 100 billion to both producers and consumers.

The study argues that the freeze has failed to achieve its objective of providing welfare to consumers as in the absence of raising prices, the pharmaceuticals resort to other illicit measures. These illicit measures include providing inferior drugs that fail to cure the set diseases and selling the drugs in black market and charging exorbitant prices. As a result of these practices Pakistani consumer ends up spending much more than they would have if the price of drugs had been determined by the market. This can also be seen from the fact that in terms of total expenditure, expenditure on medicine accounted for 43 percent of total household expenditure in 2011-12, of which about 65 percent were borne by households through Out of pocket (OOP) expenditures. This percentage was 24.37 in 2004, which clearly indicate a general rise in medicine prices despite government’s efforts to regulate it. Furthermore from the producers as a result of this price freeze which restricts them from increasing price of drug despite the mammoth increase in the cost of production ultimately forgo research and development and continue selling generic drugs.

The study proposes that the government should end the freeze on price increases and allow the market to determine prices by adopting either of the two practices of cost plus or reference pricing. Under cost plus method pricing takes into account the cost of production whereas under reference pricing drugs are priced according to comparative reference price of selected drugs in neighboring countries. The change in pricing would result in better quality drugs and in some cases even at a lower price.

For media inquiries:

Ali Salman, Executive Director, PRIME (Cell: 0301 845 1179)

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