The impact of the implementation of

single exit pricing for

pharmaceuticals in South Africa

Daleen Pretorius

A research report submitted to the Faculty of Commerce, Law and

Management, University of the Witwatersrand, in partial fulfilment of the

requirements for the degree of Master of Business Administration

Johannesburg, 2011

ii

ABSTRACT

Pricing regulations have been implemented within the pharmaceutical industry

in South Africa to ensure improved access to healthcare.

The implementation of the Single Exit Price (SEP) effectively meant that the

private pharmaceutical sector had to adjust from a free to a regulated market,

where prices had to be cut and discounts discarded. The pricing structure

changed to a transparent structure. These price ceilings resulted into a

decrease in gross profit margins within independent, group and hospital

pharmacies in the private healthcare sector.

The aim of this research was to explore the impact of the implementation of

SEP for pharmaceuticals in the private sector in South Africa through

considering consistent pricing benefits to the patients as well as the changes in

the business environment for retail pharmacies.

A mixed methodology approach was pursued, using both quantitative and

qualitative data analysis. A specific and actual price was obtained for certain

medicines from 50 pharmacies to determine if consistent pricing benefits were

experienced by patients through the introduction of SEP. This construed the

quantitative data. In addition to this, 22 semi-structured interviews were

conducted with pharmacy managers from independent, group and hospital

pharmacies to determine the changes in the business environment following the

introduction of SEP. The qualitative data obtained was analysed from a

thematic perspective.

Key findings from the research were that consistent pricing benefits were not

realised to patients following the introduction of pricing regulations, and

specifically SEP. Changes in the business environment of private retail

pharmacies, following the introduction of SEP included: strategic changes,

survival tactics and day to day changes as well as restructuring.

Pricing regulation may initially seem to only have a positive impact on all

stakeholders involved. However upon closer investigation the true impact of

interference may be more harmful to all stakeholders in the long run.

iii

DECLARATION

I, Johanna Magdalena Pretorius, declare that this research report is my own

work except as indicated in the references and acknowledgements. It is

submitted in partial fulfilment of the requirements for the degree of Master of

Business Administration in the University of the Witwatersrand, Johannesburg.

It has not been submitted before for any degree or examination in this or any

other university.

-------------------------------------------------------------

Johanna Magdalena Pretorius

Signed at Centurion

On the …………………………….. day of ………………………… 2011

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DEDICATION

A dream sets out as an idea and becomes a reality through action. The

process and completion of the MBA degree proved to be a life changing event

for me. This was a confirmation that absolutely anything can be done through

setting the goal, creating a solid support system and daily deliberate action.

I would like to make this dedication with respect to some incredible individuals

who were instrumental to realising the goals in my life:

My incredible and supportive mother, who taught me that absolutely anything

can be done providing that you believe in yourself. I am eternally grateful for

your incredible love and support, Mom.

Sunél, for your continuous support and belief, even when the emotions ran high.

You are an amazing solid person. I am honoured to have you in my life.

Dr. Jeanette Lotter for the motivation, guidance, encouragement and support

regarding this research.

Prof. Bick for your direction, time and continuous support as supervisor and

lecturer.

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ACKNOWLEDGEMENTS

MBA Class of 2008 / 2011 for showing me that the impossible can be done,

over and over again. You guys are amazing.

Sudier Ramparsad for the initial motivation to start with this degree. You will

always be a mentor and significant influence in my life.

Nevi Letcher for your continuous support as friend and mentor. I am blessed

with such an outstanding and talented friend.

vi

TABLE OF CONTENTS

ABSTRACT ..................................................................................... II

DECLARATION .............................................................................. III

DEDICATION ................................................................................ IV

ACKNOWLEDGEMENTS ............................................................... V

LIST OF TABLES ........................................................................... X

LIST OF FIGURES ...................................................................... XII

CHAPTER 1: INTRODUCTION ..................................................... 1

1.1 PURPOSE OF THE STUDY ............................................................................ 1

1.2 CONTEXT OF THE STUDY ............................................................................. 1

1.3 PROBLEM STATEMENT ................................................................................ 4

1.3.1 MAIN PROBLEM ...................................................................................................... 4

1.4 SIGNIFICANCE OF THE STUDY ...................................................................... 4

1.5 DELIMITATIONS OF THE STUDY..................................................................... 4

1.6 DEFINITION OF TERMS AND ABBREVIATIONS ................................................. 5

1.7 ASSUMPTIONS ........................................................................................... 6

CHAPTER 2: LITERATURE REVIEW ........................................ 7

2.1 INTRODUCTION .......................................................................................... 7

2.2 GENERAL PRICING METHODS ...................................................................... 7

MARKUP PRICING ............................................................................................................... 9 TARGET-RETURN PRICING ................................................................................................... 9 PERCEIVED-VALUE PRICING ................................................................................................ 9 VALUE PRICING .................................................................................................................. 9 GOING-RATE PRICING ...................................................................................................... 10 AUCTION-TYPE PRICING ................................................................................................... 10

2.3 PRICING IN THE PHARMACEUTICAL INDUSTRY .............................................. 10

2.4 THE IMPACT OF THE IMPLEMENTATION OF SINGLE EXIT PRICE (SEP) FOR PHARMACEUTICALS IN THE PRIVATE SECTOR IN SOUTH AFRICA .................... 13

2.4.1 PRICING REGULATION OR CONTROL IN DEVELOPED COUNTRIES ............................... 15 2.4.2 PRICING REGULATION / CONTROL IN DEVELOPING COUNTRIES ................................. 18 2.4.3 PRICING REGULATION / CONTROL IN SOUTH AFRICA ............................................... 23

2.5 CONCLUSION ........................................................................................... 25

2.6 RESEARCH QUESTIONS ............................................................................ 25

2.6.1 RESEARCH QUESTION 1 ....................................................................................... 25

vii

2.6.2 RESEARCH QUESTION 2 ....................................................................................... 25

CHAPTER 3: RESEARCH METHODOLOGY ............................. 26

3.1 RESEARCH METHODOLOGY /PARADIGM ...................................................... 26

3.2 RESEARCH DESIGN .................................................................................. 27

3.3 POPULATION AND SAMPLE......................................................................... 28

3.3.1 POPULATION ........................................................................................................ 28 3.3.2 SAMPLE AND SAMPLING METHOD ........................................................................... 28

3.4 THE RESEARCH INSTRUMENT .................................................................... 28

3.5 PROCEDURE FOR DATA COLLECTION .......................................................... 29

3.6 DATA ANALYSIS AND INTERPRETATION ....................................................... 29

3.7 LIMITATIONS OF THE STUDY ....................................................................... 30

3.8 VALIDITY AND RELIABILITY ......................................................................... 30

3.8.1 EXTERNAL VALIDITY .............................................................................................. 31 3.8.2 INTERNAL VALIDITY ............................................................................................... 31 3.8.3 RELIABILITY ......................................................................................................... 31

CHAPTER 4: PRESENTATION OF RESULTS ........................... 32

4.1 INTRODUCTION ........................................................................................ 32

4.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 32

4.3 RESULTS PERTAINING TO RESEARCH QUESTION 1 ...................................... 36 4.3.1 RESEARCH QUESTION 1 ...................................................................................... 36 4.3.2 RESULTS RESEARCH QUESTION 1 ....................................................................... 36 4.3.3 CONCLUSION – RESEARCH QUESTION 1 .................................................................. 40

4.4 RESULTS PERTAINING TO RESEARCH QUESTION 2 ...................................... 40

4.4.1 RESEARCH QUESTION 2 ...................................................................................... 40 4.4.2 RESULTS RESEARCH QUESTION 2 ....................................................................... 40 4.4.2.1 RESEARCH INSTRUMENT 2 – QUESTION B1 ....................................................... 43 4.4.2.2 RESEARCH INSTRUMENT 2 – QUESTION B2 ....................................................... 45 4.4.2.3 RESEARCH INSTRUMENT 2 – QUESTION B3 ....................................................... 49 4.4.2.4 RESEARCH INSTRUMENT 2 – QUESTION B4 ....................................................... 51 4.4.3 CONCLUSION RESEARCH QUESTION 2 ............................................................... 54

4.4 SUMMARY OF THE RESULTS ...................................................................... 54

CHAPTER 5: DISCUSSION OF THE RESULTS ......................... 55

5.1 INTRODUCTION ........................................................................................ 55

5.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................ 55

5.3 DISCUSSION PERTAINING TO RESEARCH QUESTION 1 ................................. 56

5.3.1 DISCUSSION PERTAINING TO RESEARCH QUESTION 1 ............................ 56 5.3.1.1 THE IMPACT OF THE IMPLEMENTATION OF SINGLE EXIT PRICE (SEP) FOR

PHARMACEUTICALS IN THE PRIVATE SECTOR IN SOUTH AFRICA ............................... 56

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5.3.2 CONCLUSION – RESEARCH QUESTION 1 ..................................................... 57

5.4 DISCUSSION PERTAINING TO RESEARCH QUESTION 2 ................................. 58 5.4.1 RESEARCH QUESTION 2................................................................................. 58 5.4.2 DISCUSSION PERTAINING TO RESEARCH QUESTION 2 ............................ 58 5.4.2.1 THE INFLUENCE OF THE INTRODUCTION OF SEP IN THE BUSINESS STRATEGY OF THE

PHARMACY .......................................................................................................... 59 5.4.2.2 THE CHANGES IMPLEMENTED IN ORDER TO SURVIVE AS A RESULT OF THE

INTRODUCTION OF SEP ........................................................................................ 60 5.4.2.3 THE DAY-TO-DAY CHANGES BROUGHT ABOUT WITH THE INTRODUCTION OF SEP ...... 61 5.4.2.4 RESTRUCTURING WITHIN THE PHARMACY AS A RESULT OF THE INTRODUCTION OF SEP

........................................................................................................................... 62 5.4.3 CONCLUSION - TO RESEARCH QUESTION 2 ................................................ 63

5.5 CONCLUSION ........................................................................................... 63

CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS ....... 65

6.1 INTRODUCTION ........................................................................................ 65

6.2 CONCLUSIONS OF THE STUDY ................................................................... 65 6.2.1 RESPONSE TO RESEARCH QUESTION 1 ................................................................. 66 6.2.2 RESPONSE TO RESEARCH QUESTION 2 ................................................................. 67

6.3 RECOMMENDATIONS ................................................................................ 68

6.4 SUGGESTIONS FOR FURTHER RESEARCH ................................................... 70

REFERENCES .............................................................................. 71

APPENDIX A QUANTITATIVE DATA (SCRIPT PRICING) ........... 77

INTERVIEWER ADMINISTERED QUESTIONNAIRE ...................................................... 78

APPENDIX B QUALITATIVE DATA ............................................. 79

SEMI-STRUCTURED INTERVIEW .................................................................. 80

APPENDIX C ADDITIONAL TABLES .......................................... 82

TABLE 12: THE INFLUENCE OF SEP ON THE BUSINESS STRATEGY OF INDEPENDENT

PHARMACIES .......................................................................................... 82

TABLE 13: THE INFLUENCE OF SEP ON THE BUSINESS STRATEGY OF GROUP PHARMACIES .......................................................................................... 83

TABLE 14: THE INFLUENCE OF SEP ON THE BUSINESS STRATEGY OF HOSPITAL

PHARMACIES .......................................................................................... 84

TABLE 15: SURVIVAL TACTICS FOLLOWING THE INTRODUCTION OF SEP FOR INDEPENDENT PHARMACIES ...................................................................... 85

TABLE 16: SURVIVAL TACTICS FOLLOWING THE INTRODUCTION OF SEP FOR GROUP PHARMACIES .......................................................................................... 86

TABLE 17: SURVIVAL TACTICS FOLLOWING THE INTRODUCTION OF SEP FOR HOSPITAL

PHARMACIES ........................................................................................... 87

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TABLE 18: THE INFLUENCE OF THE IMPLEMENTATION OF SEP REGARDING DAY TO DAY BUSINESS FOR INDEPENDENT PHARMACIES ............................................... 88

TABLE 19: THE INFLUENCE OF THE IMPLEMENTATION OF SEP REGARDING DAY TO DAY BUSINESS FOR GROUP PHARMACIES ......................................................... 88

TABLE 20: THE INFLUENCE OF THE IMPLEMENTATION OF SEP REGARDING DAY TO DAY

BUSINESS FOR HOSPITAL PHARMACIES ..................................................... 89

TABLE 21: THE INFLUENCE OF THE IMPLEMENTATION OF SEP ON THE RESTRUCTURING WITHIN INDEPENDENT PHARMACIES ........................................................... 90

TABLE 22: THE INFLUENCE OF THE IMPLEMENTATION OF SEP ON THE RESTRUCTURING WITHIN GROUP PHARMACIES .................................................................... 90

TABLE 23: THE INFLUENCE OF THE IMPLEMENTATION OF SEP ON THE RESTRUCTURING

WITHIN HOSPITAL PHARMACIES ................................................................. 91

TABLE 24: ACTUAL SCRIPTS PRICED AT FIFTY PHARMACIES (QUANTITATIVE DATA) . 92

x

LIST OF TABLES

Table1: Regulated Dispensing Fees for Pharmacies in the Private Health

Care Sector (Motsoaledi 2010).........................................................14

Table 2: Quantitative, Mixed and Qualitative Methods (Creswell 2009) .......26

Table 3: Demographic Data Including Functional Roles Reported by

Respondents ....................................................................................34

Table 4: Descriptive Statistics for Independent, Group and Hospital

Pharmacies.......................................................................................36

Table 5: ANOVA and Means...........................................................................37

Table 6: Kruskal-Wallis ANOVA......................................................................38

Table 7: Business Strategy Themes in Relation to SEP for Independent,

Group and Hospital Pharmacies.......................................................43

Table 8: Survival Tactics in Relation to SEP for Independent, Group and

Hospital Pharmacies.........................................................................48

Table 9: Day to Day Changes Implemented in Relation to SEP for

Independent, Group and Hospital Pharmacies.................................51

Table 10: Restructuring as a result of the Implementation of SEP for

Independent, Group and Hospital Pharmacies.................................53

Table 11: Comparison of the findings from the literature review and this study

regarding the impact of pricing regulations on the business

environment......................................................................................67

Table 12: The Influence of SEP on the Business Strategy of Independent

Pharmacies.......................................................................................83

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Table 13: The Influence of SEP on the Business Strategy of Group

Pharmacies.......................................................................................84

Table 14: The Influence of SEP on the Business Strategy of Hospital

Pharmacies.......................................................................................84

Table 15: Survival Tactics Following the Introduction of SEP for Independent

Pharmacies.......................................................................................85

Table 16: Survival Tactics Following the Introduction of SEP for Group

Pharmacies.......................................................................................86

Table 17: Survival Tactics Following the Introduction of SEP for Hospital

Pharmacies.......................................................................................87

Table 18: The Influence of the Implementation of SEP Regarding Day to Day

Business for Independent Pharmacies.............................................88

Table 19: The Influence of the Implementation of SEP Regarding Day to Day

Business for Group Pharmacies.......................................................88

Table 20: The Influence of the Implementation of SEP Regarding Day to Day

Business for Hospital Pharmacies....................................................89

Table 21: The Influence of the Implementation of SEP on the Restructuring

within Independent Pharmacies........................................................90

Table 22: The Influence of the Implementation of SEP on the Restructuring

within Hospital Pharmacies...............................................................90

Table 23: The Influence of the Implementation of SEP on the Restructuring

within Hospital Pharmacies...............................................................91

Table 24: Actual Scripts Priced at Fifty Pharmacies..........................................92

xii

LIST OF FIGURES

Figure 1: Price Regulations and Dynamics in the Pharmaceutical Industry in

South Africa (Economist Intelligence Unit 2005, 2009d; Gray 2009)

......................................................................................... ................14

Figure 2: Histogram of the Distribution of the Quantitative Data........................38

Figure 3: Box Plot of the Independent, Group and Hospital Pharmacy

Quantitative Data..............................................................................39

Figure 4: The Influence of SEP on the Business Strategy of the Independent

Pharmacy..........................................................................................41

Figure 5: The Influence of SEP on the Business Strategy of the Group

Pharmacy..........................................................................................41

Figure 6: The Influence of the SEP on the Business Strategy of the Hospital

Pharmacy..........................................................................................42

Figure 7: Survival Tactics Following the Introduction of SEP for Independent

Pharmacies ......................................................................................46

Figure 8: Survival Tactics Following the Introduction of SEP for Group

Pharmacies.......................................................................................46

Figure 9: Survival Tactics Following the Introduction of SEP for Hospital

Pharmacies.......................................................................................47

Figure 10: The Influence of the Implementation of SEP Regarding Day to Day

Business for Independent Pharmacies.............................................50

Figure 11: The Influence of the Implementation of SEP Regarding Day to Day

Business for Group Pharmacies.......................................................50

Figure 12: The Influence of the Implementation of SEP Regarding Day to Day

Business for Hospital Pharmacies....................................................50

xiii

Figure 13: The Influence of the Implementation of SEP on the Restructuring

within Independent Pharmacies........................................................52

Figure 14: The Influence of the Implementation of SEP on the Restructuring

within Group Pharmacies..................................................................52

Figure 15: The Influence of the Implementation of SEP on the Restructuring

within Hospital Pharmacies...............................................................53

1

CHAPTER 1: INTRODUCTION

1.1 Purpose of the study

The purpose of this research is to analyse the impact of the implementation of

the Single Exit Price (SEP) for pharmaceuticals (medicines and scheduled

substances) in South Africa. The research ascertains whether the

implementation of the legislated SEP results in a consistent cost saving benefit

for the general public in the private healthcare sector in South Africa. Further to

this the research established the perceived impact of SEP on retail pharmacies

in South Africa in terms of changes in the business environment.

1.2 Context of the study

The healthcare system in South Africa consists of a large public sector,

considered to include 82% of the population and a growing but smaller private

sector (Brand South Africa 2009). The private sector, with an estimated 18% of

the population is responsible for approximately 80% of the drug expenditure for

South Africa. The public sector however, servicing 82% of the population is

responsible for only 24% of the approximate R8.5 billion in total annual drug

expenditure (Department of Health 1996; Brand South Africa 2009). Public

sector facilities are used primarily by low income residents while high income

and medically insured residents make use of private doctors and healthcare

facilities (Gilson and McIntyre 2007). The per capita spending on drugs in the

private sector is estimated to be 10 times that of the public sector and therefore

diminishes chances of patients in the public sector to afford these costs and

receive improved treatment (Gray and Matsebula 2000).

Globally the economics of the pharmaceutical industry has been investigated for

more than 40 years (Scherer 2004; Gray 2009). The objective for further and

intensive investigation in post-apartheid South Africa, was to improve access to

healthcare services for previously disadvantaged citizens (Gray 2009). To

improve access to healthcare for these citizens in South Africa, a National Drug

2

Policy (NDP) was developed, approved by the Cabinet and published in 1996

(Department of Health 1996). Following the publication of this document, the

NDP was tasked to develop a pricing plan for medication used in South Africa,

for both the private and the public sector (Gray 2009). Following this, the

amended Medicines and Related Substances Act was introduced to legislate

the process with two inter-related sections – (Section 18A banning bonusing)

(preventing pharmaceutical manufacturers from offering discounts and/or

rebates to patients or healthcare providers) and Section 22G which created a

Pricing Committee (Gray 2009).

The SEP mechanism was then introduced for all medicines in the private

healthcare sector in South Africa, stipulating regulated maximum annual price

increases (Bodhania 2007). The implementation of SEP effectively meant that

the private sector had to adjust from a free market, to a regulated market where

prices had to be cut and all discounts discarded, ensuring transparent pricing

practices for the industry (Advanstar Communications 2009). The SEP became

a fixed maximum price at which manufacturer and importers had to sell

medicine, without an opportunity for offering discounts. This process resulted in

a decrease of gross profit margins within independent, group and hospital

pharmacies in the private healthcare sector. However, pharmaceutical

wholesalers and distributers were entitled to a logistics fee, included in the SEP,

for their service (Gilson and McIntyre 2007). The introduction of SEP in 2004,

lead to an immediate net pricing impact of 19% in that year and there were no

allowances for price increases within the private sector between 2003 – 2006

(Bodhania 2007). It appears that the introduction of SEP was beneficial to the

patient in terms of the drastically reduced costs of medication. However Calfee

(2001) notes that price controls for pharmaceuticals (like SEP in South Africa),

could tend towards complexity and the creation of vested interests, which could

become permanent and eventually lead to a negative impact on the patients.

Despite the implementation of SEP, medicine expenditure at a private

healthcare insurance level is still rising. According to Mediscor, an

administrator for certain medical insurance companies in South Africa, there is

still a marked increase in year on year medicine expenditure (Bester 2009).

3

Factors influencing the increase in medicine expenditure include an increase in

the utilisation of member benefits, changes in medicine mix used by the

population as well as more expensive therapies (Bester 2009). It could be

concluded that, despite the positive net impact of SEP, the rise of medicine

expenditure has a countering and negative impact on the cost of medicine in the

private sector for patients. However, the Council for Medical Schemes’ Annual

Report for 2008 – 2009 clearly shows that, although total medicines expenditure

is on the increase, the actual expenditure (“benefits paid”) per beneficiary per

month has remained near consistent since the introduction of SEP (Council for

Medical Schemes 2009). This clearly indicates that the increase in expenditure

per annum may well be due to an increase in the number of beneficiaries (i.e.

patients using the private medical insurance), rather than increased utilisation

(more medicines per patient), or increase in actual medicines costs (Lotter

2010a).

A more pertinent question is whether the benefits of the SEP effectively benefits

all private patients to an equal extent, i.e. whether the actual medicine prices

charged in the private sector are consistent across the broad range of

providers. In simple terms, the question has become whether the same

medicine would cost the same amount of money, irrespective of where it is

acquired in the private sector (from an independent, group owned pharmacy or

private hospital pharmacy) despite the Government’s strict medicine pricing

policies. Independent pharmacies refer to pharmacies owned either by an

individual or several partners, where the pharmacy does not form part of a

group owned pharmacy or a hospital pharmacy.

An analysis of the impact of the implementation of the SEP for medicines and

scheduled substances in South Africa aimed to establish the impact of the

implementation of the legislated SEP.

4

1.3 Problem statement

1.3.1 Main problem

Analyse the impact of the implementation of Single Exit Price (SEP) for

pharmaceuticals in the private sector in South Africa.

1.4 Significance of the study

The study investigates whether the cost benefits of SEP has in fact filtered

down in a consistent and predictable manner to a patient level in the private

healthcare sector in South Africa.

Various reports investigate the implementation of pharmaceutical price controls

as well as global pricing regulations for the pharmaceutical industry (Calfee

2001; Anon 2006; Pharmaceutical Executive 2006; Gilson and McIntyre 2007;

Gray 2009). However there is no current publication available to determine,

firstly, if the benefit of SEP is in fact consistently drawn by patients in the private

healthcare sector through consistency in price in South Africa and secondly

what the influence and changes were in the business environment of

pharmacies in the private healthcare sector in South Africa .

The study provided insight into the effectiveness of the drug pricing policy in

South Africa to both patients and pharmacies, and identified potential additional

areas for further legislation to be implemented, ultimately resulting in improved

regulation and benefits to the patient.

1.5 Delimitations of the study

This study only focuses on the private healthcare sector in South

Africa because SEP is only applicable to the private sector.

5

1.6 Definition of terms and Abbreviations

• Single Exit Price (SEP) – refers to a transparent pricing system

pertaining to all medicines and scheduled substances sold to any other

person except for the state in South Africa (Tshabalala-Msimang 2004).

SEP includes a logistics fee from pharmaceutical wholesalers and

distributors for their service (Gilson and McIntyre 2007). This price is

printed onto the container of the particular medicine or scheduled

substance and is deemed the fixed maximum selling price of medicine,

excluding the dispensing fee issued by a pharmacy (Tshabalala-

Msimang 2004).

• Market Access – the ability of a pharmaceutical manufacturer to sell its

medicines to patients often determined or restricted by procurement

policies (in South Africa; the tender system in the public sector and

medical scheme formularies in the private sector).

• Prescribed Minimum Benefit (PMB) – is a set of defined benefits to

ensure that all medical scheme members have access to certain

minimum health services, regardless of the benefit option they have

selected. The aim is to provide people with continuous care to improve

their health and well-being and to make healthcare more affordable

(Council for Medical Schemes 2010).

• Chronic Disease List (CDL) – specifies medication and treatment for the

25 chronic conditions that are covered in this section of the PMB’s

(Council for Medical Schemes 2010).

• National Drug Policy (NDP)

• Medicare Modernization Act (MMA)

• Drug Price Control Order (DPCO)

• Health Maintenance Organisations (HMO’s)

• Pharmacy Benefit Managers (PBM’s)

6

• Patented Medicines Prices Review Board (PMPRB)

• Preferred Provider Organisations (PPO’s)

• The National Health Service (NHS)

• Trade Related Aspects of Intellectual Property Rights (TRIPS)

1.7 Assumptions

The following assumptions have been made regarding the study:

a) Data were obtained from pharmacies in the private sector in South Africa

and the pharmacist had the correct information regarding the specific

price of the medication to be paid by the patient.

b) The pharmacist or pharmacist assistant was able to share information

regarding the price of the specific drug included in the study.

c) Pricing information was conveyed honestly and truthfully by the

respondents.

7

CHAPTER 2: LITERATURE REVIEW

Carnwell and Daly (2001) explain that the rationale behind a literature review is

to evaluate and combine or create a total picture of the currently available

information relating to the topic that is being researched.

Further to this, the purpose of the literature review is to identify gaps in the

available literature that will be addressed by new research. One of the most

important focal points of a review of high standard is to strategise well around

the literature search and selection of references (Carnwell and Daly 2001). The

literature review should assist in defining and perfecting the research question

and focus on designing future research.

2.1. Introduction

The focus point of the literature review for this research topic is on relevant

points to the study regarding the impact of the implementation of regulated

pricing within the pharmaceutical environment. The first section of the literature

review is focuses on pricing regulation or control in developed countries, while

the second section focuses on pricing regulation or control in developing

countries. Finally, pricing regulation or control in South Africa is investigated.

2.2. General Pricing Methods

The marketing mix comprises of product, price, promotion and place. The only

element of the marketing mix that produces profits is price (Marn and Rosiello

1992b, 1992a; Kotler and Keller 2006). Product, promotion and place all

produce costs. Price also communicates a company’s value positioning in

terms of a brand (Kotler and Keller 2006). Price might be the easiest

component to adjust in terms of the marketing mix.

One of the benefits of the introduction of price regulation through price caps is

the reduction in excess profits (Gilmore, Branston and Sweanor 2010). This

implies that consumers should benefit from this reduction in the event that the

8

full benefit is passed on to them. However, according to Philibert, (2009),

strict targets in terms of price caps and price floors may cause great economic

risk without a comparative advantage. The impact of pricing regulation may

entail risk and not necessarily result in an advantage for the consumer.

The available literature further explains that the existence of price caps

determine productivity trends (Lowry and Getachew 2009). Businesses would

seek to be more productive, particularly following the introduction of price caps.

Pricing regulation in the form of price caps leads to more efficient capital

replacement decisions (Biglaiser and Riordan 2000). The effect of pricing

regulations will therefore influence decision making within a business in terms of

more efficient management of funds.

Price regulation and specifically the introduction of price ceilings, may result in

perverse effects (Knittel and Stango 2003). Business may therefore resolve to

perverse actions in order to make up the lost profit, due to price regulation.

Reduction in overheads and overall business costs is a direct reaction to price

cap regulation. Price cap regulations create an incentive for businesses to

reduce service quality (Currier 2006).

Pricing methods are selected based on the following (Kotler and Keller 2006):

• costs as a setting for a floor price

• competitor and substitute prices as an orientation point

• customer assessments of the unique features as a price ceiling

A variety of pricing methods exist. The same pricing methods are not best

suited for all customers. It is therefore important to match the usage of a

pricing method to targeted consumer profiles to realise the most positive results

(Munnukka 2006). Various pricing methods are considered below e.g. mark-up

pricing, target-return pricing, perceived-value pricing, value pricing, going-rate

pricing and auction type pricing (Kotler and Keller 2006).

9

Mark-up Pricing

This is the most elementary method of pricing, where a standard cost as mark-

up is added to the product’s cost (Kotler and Keller 2006). For this reason a

firm does not have to forecast or predict the future (Naish 1990). However this

pricing method disregards current demand, perceived value and competition.

Lawyers and accountants utilise this pricing method (Kotler and Keller 2006).

Target-return Pricing

A price is determined by considering what is needed to yield the rate of return

on investment (Lavoie 1996). This method is dependent on a certain number of

unit sales to ensure arriving at a breakeven point. This method ignores price

elasticity and competitor pricing (Lavoie 1996; Kotler and Keller 2006). For

example, this method is used by i.e. General Motors and public utilities that

need to make a fair rate on return (Kotler and Keller 2006).

Perceived-Value Pricing

This pricing method is becoming increasingly popular among companies,

pricing products at the perceived value according to the customer, delivering the

value promised through the value proposition (Kortge and Okonkwo 1993;

Kotler and Keller 2006). Caterpillar utilizes this price method. Customers pay a

premium price, but collect more than the value of the premium price throughout

the year (Kotler and Keller 2006).

Value Pricing

Value pricing is a product of adjusting the supply chain to realise better value at

every point resulting in a lower price offering to consumers. Value pricing is

based on charging constant low prices with little or no promotion thus

rewarding loyal customers (Ailawadi, Lehmann and Neslin 2001). Company

operations are re-evaluated when utilising value pricing to ensure that they

become a low-cost producer without sacrificing quality, attracting many value

10

conscious customers (Kotler and Keller 2006). This pricing method is used by

IKEA, Wallmart and Southwest Airlnes.

Going-Rate Pricing

Prices are mostly based on competitor pricing by charging more, less or the

same as the competitor (Mochtar and Arditi 2000). In oligopolistic industries the

same price is normally charged in relation to the competitor considering

markets such as, the steel industry, paper industry or the fertilizer industry.

The leader companies are generally followed in terms of pricing. The method

is popular when competitor response is uncertain (Kotler and Keller 2006).

Auction-Type Pricing

The major purpose of auctions is to sell excess inventories or goods. This

pricing method has increased in popularity with the growth of the internet

(Kotler and Keller 2006; Design and Marketing Dictionary 2011).

This section explores the effect of pricing regulation as well as various pricing

methods, including examples of the industries or major corporations utilising

specific methods for pricing. The pharmaceutical market is unique in terms of

the industry dynamics. The following section explores pricing regulation within

the pharmaceutical industry.

2.3. Pricing in the pharmaceutical industry

“Medicines are priceless and therefore pharmaceutical companies should be left

to charge market prices” (Maitland 2002:451). This is quite a controversial

statement in light of the fact that the pharmaceutical industry is under

continuous pressure globally to decrease medicine prices. However, a closer

look at the principles of the pharmaceutical market is crucial for clear

understanding.

11

The majority of markets including food, appliances, clothing, homes and

electronics, function within the basic principle that a transaction is finalised,

once the seller agrees to sell an item for the amount offered by the buyer. The

pharmaceutical market does not function according to these principles and is a

unique market in the sense that patients / buyers do not select their medication;

which is rather prescribed by a physician. The consumer / patient in this case

does not have any knowledge regarding competitors in terms of effectiveness

and comparative pricing (Gray 2009). Pharmaceutical demand is relatively

inelastic (Docteur, Paris and Moise 2008a). Manufacturers of ethical, patented

medicine will have a monopoly in a specific market where they have a unique

product. The potential to take advantage of this monopoly was previously

recognised by global governments, leading to pricing regulations within the

pharmaceutical industry (Docteur et al. 2008a).

Various policy options exist for governments globally to regulate prices within

the pharmaceutical industry (Gray 2009). These include:

• Producer price control measures including direct price and profit controls,

reference pricing systems and therapeutic reference pricing, equity

pricing, international benchmark pricing and generic friendly policies

• Distribution chain cost controls including controls over mark-up, fixed

professional fees, removal or limits on tax

• Bulk purchase measures or tender and negotiation strategies and

regional activities

• International trade agreement relief measures including parallel importing

and compulsory licensing

• Demand side measures including measures to guarantee sensible

medicine use i.e. setting up formularies to utilise medicines and

medicinal budgets for doctors

The method of internal price referencing compares new product prices to prices

already paid by others for similar medication or medication of the same

12

therapeutic class. External price referencing involves a comparison for prices of

new medicines to prices already paid by other payers in other countries

(Docteur, Paris and Moïse 2008b).

Pharmaco-economic assessment has been incorporated in the pricing and

reimbursement practices of an evaluation method to determine the benefits of a

product relative to its costs (Docteur et al. 2008b). Pharmaco-economic

assessment ranges from information requests to pharmaceutical companies

regarding relative cost effectiveness in support of reimbursement applications to

conducting original assessments regarding the benefits that would be derived

from use of a product and expected costs to payers or society in general

(Docteur et al. 2008b).

Price regulation can affect cost and quality indirectly or directly.

The direct effect of price regulation would focus on affecting the prices and use

of existing medication. The indirect effect would amend or change the incentive

for pharmaceutical firms to engage in research and development (R & D) of new

drugs (Calfee 2001; Kessler 2004). Empirical research has found that price

regulation has adverse effects on the cost and quality of healthcare (Kessler

2004). It is evident in the literature that there is a stifling impact on investment,

regarding research and development for innovative lifesaving drugs with the

introduction of price regulation in the pharmaceutical industry (Oriola 2009).

Globally different countries implement various pricing regulation procedures.

There is no universal agreed practice for pricing regulations within the

pharmaceutical industry, therefore one needs to analyse each country situation

individually.

In order to view the various pricing regulation procedures, developed countries

and developing countries will be grouped together. From the literature it is

evident that South Africa is unique in terms of the pricing regulation procedures

and for this reason pricing regulations in South Africa will be viewed individually

13

2.4. The impact of the implementation of Single Exit Price

(SEP) for pharmaceuticals in the private sector in South

Africa

Various price control mechanisms have been introduced to regulate prices of

medicines in the South African pharmaceutical market for example price

ceilings or SEP, capped annual price increases as well as mandatory generic

substitution pertaining to medicines with expired patents. The combination of

the introduction of SEP and capped annual price increases lead to an overall

decrease of 22 % in medicine prices in South Africa in the first year after the

introduction of SEP (McIntyre and Thiede 2007; Lotter 2010b). This reduction

pertains to medicine selling prices for pharmacies in South Africa.

The SEP in South Africa is also considered as the selling price to wholesalers in

the South African pharmaceutical market as medicines are sold at this price to

wholesalers. Logistics fees paid by the various pharmaceutical companies are

included in this selling price and the process is not regulated. Previously

logistics fees were added on top of the wholesaler selling price.

Medicines are sold into retail pharmacies in South Africa at the SEP. A

regulated dispensing fee is then added to the SEP to determine the selling price

to patients, as indicated in Figure 1. The dispensing fee regulation was

published on the 19th of November 2010 (Motsoaledi 2010). A maximum

percentage dispensing fee may be levied on top of the SEP based on a four

tiered regulation, set out in Table 1.

14

Figure 1: Price Regulations and Dynamics in the Pharmaceutical Industry

in South Africa (Economist Intelligence Unit 2005, 2009d; Gray 2009;

Lotter 2010b)

Table: 1 Regulated Dispensing Fees for Pharmacies in the Private Health

Care Sector (Motsoaledi 2010)

To fully understand the impact of existing pricing regulation in SA there is a

need to view this within the global context. A brief discussion of existing pricing

regulation / control in different countries (developed or developing) is provided

below.

Pharmaceutical Industry

Price Control for Medicines in the Private Sector in South Africa – Regulated by Department of Health

• SEP / Price Ceilings – 22 % Price Decrease

• Capped Annual Price Increases

• Mandatory Generic Substitution with Patent Expiry

Wholesaler

Logistics Fee Included in SEP – Not Caped at Specific % (not regulated)

Pharmacist

Sell at SEP + Dispensing Fee (Regulated since Nov 2011)

Patient / Consumer

Price of Scripted Medicine

15

2.4.1 Pricing regulation / control in developed countries

The pricing regulation / control mechanism varies from country to country.

Extensive research from the literature reveals the differences and similarities for

each country below.

Germany was the first country to roll out reference pricing (Docteur et al.

2008b). Reimbursement prices of pharmaceutical products are controlled

indirectly through limits on reimbursement within social insurance schemes and

doctors are allocated with drug budgets (Danzon 1999; Vernon 2002).

Substitution of generic branded equivalents is allowed in Germany and it is

believed that this executes further downward pressure on medicines prices

(Danzon 1999).

The United States of America (USA) is home to the world’s most competitive

pharmaceutical market (Oriola 2009). Prices of prescription medication are

largely unregulated in the USA due to the belief that price controls would

negatively impact on the investment in research and development for new

innovator medicines (Oriola 2009). Medicine prices in America are reported to

be 72 % higher than Canada and 102 % higher than in Mexico (Danzon 1999).

A strong argument exists that medicines prices are excessive in the USA and

that price controls would ensure affordable health care for all Americans. The

opposing argument creates fear regarding the incentive for pharmaceutical

companies to continuously invest in research and development of new

medicines (Vernon 2002). Although minimal price regulations exist in the USA,

Health Maintenance Organisations (HMO’s) and Pharmacy Benefit Managers

(PBM’s) create a list of preferred drugs to be used, known as formularies to

encourage physicians and patients to use these preferred drugs via price

incentives (Atella, Bhattacharya and Carbonari 2008). The purpose of the

introduction of the Medicare Modernization Act (MMA) in 2003, with a focus on

private health care plans, was to bridge divide between prescription medicine

for rich and poor recipients in America (Bakk 2009; Oriola 2009). The MMA

provided enhanced payments and financial incentives to health maintenance

organisations (HMO’s), established a network of preferred provider

organisations (PPO’s) as well as private fee-for-service plans (PFFS) (Bakk

16

2009). Generic medicines account for 46 % of prescriptions in the USA (Danzon

1999).

Price regulations for patented medicines in Canada aligned Canadian

pharmaceutical prices with European prices. Prices for off-patent and generic

pharmaceutical medicines are not regulated in Canada. Patented medicines

prices have been regulated since 1987 by the Patented Medicines Prices

Review Board (PMPRB), and price regulations are limited to the patent lifetime

only.

The proposed Canadian price for a newly registered medication is compared to

prices of existing medicines in Canada, or to prices in seven markets

designated in the regulations. These markets are: France, Germany, Italy,

Sweden, Switzerland, the United Kingdom and the United States (Paris and

Docteur 2009). All Canadians have access to medication provided in hospital

through a publically financed scheme, addressing hospital and physician

services at no cost. Medication dispensed outside of the hospital is not

considered under the insured benefits guaranteed by the Canadian Health Act.

For this reason, 66% of the Canadian population realises this coverage through

private health insurance, often accompanied by co-payments (Paris and

Docteur 2009).

Pharmaco-economic assessment has been incorporated in the pricing and

reimbursement practices in Canada (Docteur et al. 2008b). Substitution of

generic branded equivalents is allowed in Canada (Danzon 1999). The Federal

Government in Canada controls prices of new products and post launch prices

may not rise faster than the consumer price index (Danzon 1999).

Private health insurance accounted for 25 % of pharmaceutical expenditure in

2005. Approximately 61% of the pharmaceutical expenditure was derived from

the private sector (Docteur et al. 2008b). Private health insurance is the leading

source for of coverage for medicines and covers approximately 66 % of the

population (Docteur et al. 2008b; Paris and Docteur 2009).

Pharmaco-economic assessment is incorporated in the pricing and

reimbursement practices in Australia (Docteur et al. 2008b). The

17

Pharmaceutical Benefits Scheme (PBS) offers Australians government

subsidised prescription medicines at a cost that individuals in the community

can afford. This forms the central mechanism in Australia for supply of

prescription medication. Cost effective analysis, comparing existing products

and therapies to new products, determine PBS prices. Through this system, the

Australian government ensures strong market power to ensure relatively low

prescription medicine prices (Gray 2009). Generic prescription medicine prices

historically mimicked the prices of originator medicines as additional pressure

was evident on generic medicines due to extensions on patent expiry.

Patent extensions are believed to be one of the main reasons for the under-

penetration of generics in the Australian market. Generics cannot be produced

in Australia for export purposes whilst such a patent has not expired, therefore

global generic companies are selecting non-Australian facilities for

manufacturing purposes (Gray 2009).

The United Kingdom (UK) has utilised pharmaco-economic analysis or

economic evaluations to determine what the national healthcare system should

pay for therapeutic drug classes (Appasamy 2007).

The National Health Service (NHS) in the United Kingdom (UK), controls 95% of

the prescription drug market (Appasamy 2007). Indirect price controls feature in

the United Kingdom (UK). This is enforced by controlling profits (Danzon 1999;

Vernon 2002; Williams 2007). Companies with capital in the UK negotiate

around a reasonable rate of return on capital employed. Companies without

capital in the UK negotiate on the basis of reasonable rate of return on sales

(Williams 2007). Further downward pressure on medicines prices is established

by enforcing generic branded substitution at pharmacy level (Danzon 1999).

New Zealand utilises indirect price regulation through informal benchmarking

for medicines prices versus specifically identified countries, i.e. Austria, Canada

and the United Kingdom (Williams 2007; Docteur et al. 2008b). New Zealand

also incorporated pharmaco-economic assessments when deciding on

reimbursement applications.

The lowest generic prices are found in New Zealand (Docteur et al. 2008b).

18

In Belgium, pharmaceutical prices are regulated through controlling launch

prices of newly introduced medicines as well as the control of reimbursement

prices (Vernon 2002). External price benchmarking is utilised through a focus

on countries including, Austria, Finland, Greece, Hungary, Iceland, Netherlands,

Norway, Spain and the UK (Docteur et al. 2008b; Siva 2009). Pharmaco-

economic assessments are also utilized to evaluate reimbursement applications

for newly registered medicines, adding therapeutic value compared to existing

therapeutic alternatives (Docteur et al. 2008b).

Comparative European Union (EU) prices are considered in Belgium as

guideline for pricing (Mrazek 2002). Fixed pricing is utilized as a price

regulation mechanism in Belgium, i.e. a set price is allocated to a particular

medicine (Mrazek 2002).

Generic medicines have less than 10% volume and value share in Belgium

(Docteur et al. 2008b).

The following price controls are executed in the Netherlands (Mrazek 2002;

Vernon 2002; Atella et al. 2008; Siva 2009):

• Controlled launch prices (fixed pricing through price ceilings, the

Maximum Price Law introduction in 1996)

• Controlled Reimbursement prices (fixed pricing)

• Reference pricing (based on prices of a basket of countries including the

UK)

• Positive and negative listing

2.4.2 Pricing regulation / control in developing countries

Consumer access to essential medicines in developing countries is mainly

driven or blocked by price (Nóbrega, Marques, de Araújo, Karnikowski, de

Oliveira Silva Naves and Silver 2007). The pricing regulations and controls for

developing countries, excluding South Africa, where researched in the literature

and are stated below.

19

India is the country with the second largest population in the world, however

India only accounts for 1 % of global pharmaceutical sales (Bernstein Global

Wealth Management 2009b).

India is one of the countries with the lowest medicines prices and this is mainly

attributed to price controls introduced in 1970 with the drug price control order

(DPCO). Outpatient drug expenditure is practically not reimbursed (Bernstein

Global Wealth Management 2009b). The government in India set retail prices

for medicines through the DPCO as a profit control mechanism (Joshi 2003;

Gray 2009). A maximum allowable post manufacturing expense (MAPE) is set

by the DPCO (Joshi 2003). The DPCO regulates medicines prices in three tiers

(Bernstein Global Wealth Management 2009b):

• Bulk drugs

• Formulations

• Overall profitability

The DPCO is suggesting wider use of price controls through tighter monitoring

of non-DPCO products, obligatory controls on launch prices which are currently

not controlled as well as a reduction in purchase prices for the government.

The amount of medicines under price controls increased from 79, prior to the

introduction of the 2006 Pharmaceutical Policy to nearly 354 (Bernstein Global

Wealth Management 2009b).

The Brazilian economy poses a good example of a developing country intent

on to reforming its healthcare system through an increased focus on

preventative and primary care medicines as well as a drive behind increased

market penetration of generic medicines without driving increased costs

(Economist Intelligence Unit 2005). Brazil was reasonably free from price

regulations due to a high prevalence of cash paying customers prior to 2006.

The Brazilian government is likely to exercise pressure on pricing of medicines

because many wealthy patients are willing to pay cash for the latest specialized

medicines and are being unfairly charged by excessive drug prices and

20

unfortunately a strong influx of low cost generic and counterfeit medicines

entering Brazil from neighbouring countries (Bernstein Global Wealth

Management 2009a).

The pricing policy of Brazil is being implemented by the Cámara de Regulacão

do Mercado de Medicamentos (CMED), a non-transparent body. The

introduction of the outpatient reimbursement program in Brazil led to stretched

government healthcare budgets. Strict price control is used to control costs, i.e.

combined internal and external reference pricing focused on nine identified

markets, where a price could be higher than the lowest price. Extended

downward price pressure exist by utilizing the difference between the gross

domestic product (GDP) per capita between Brazil and the specific reference

country. The Brazilian government also regulates the annual medicines price

increase.

Higher prices have been established in the launch phase of new and improved

medicine formulations, although this is not common practice. Where competitor

products exist and another medicine is introduced within an existing therapeutic

class, the price is referenced to the class of existing products within the market.

The first generic entry within a therapeutic class is priced as being 35 % more

cost effective compared to the originator branded medicine, being an example

of a price ceiling. With the introduction of additional generics for a specific

therapeutic class, natural downward pressure drives prices down below the

initial ceiling price.

Sufficient availability of essential medicines, i.e. hypertension, infant asthma,

diabetes and some oral contraceptives are provided to the public through the

introduction of a program called, Farmácia Popular in 2006. Private registered

pharmacies provide these medicines at a discount of up to 90 % compared to

everyday retail prices (Bernstein Global Wealth Management 2009a).

Russia experienced a sharp increase in medicine prices in the past years as

the pharmaceutical market size grew from 3.6 Bil US$ in 2003 to10 bil US$ in

2008. This resulted in the introduction of pricing regulations focused on

essential medicines (Economist Intelligence Unit 2009c). The Russian

21

government is concerned about artificially inflated medicines retail prices and

the newly introduced law will tighten price control through limiting mark up on

medicines through wholesale and retail channels. The Russian government is

also increasing their focus on monitoring of pharmaceutical prices.

Egypt occupies the number one position in the Middle East and North Africa in

terms of pharmaceutical consumption and production. To provide medicines to

poor Egyptians, profit margins are controlled and set by the Egyptian

government and is kept between 8 – 10 %. Unfortunately this does not result in

sufficient availability of medicines to poor Egyptians and has a negative impact

on the profitability of pharmaceutical companies in Egypt (Economist

Intelligence Unit 2010). For this reason the Egyptian government introduced

reference pricing, targeting 22 comparator countries. Egypt has however not

introduced the World Trade Organisation’s Trade Related Aspects of Intellectual

Property Rights (TRIPS) agreement, focusing on increased protection of

intellectual property rights (Economist Intelligence Unit 2005). The main reason

for this is the direct implication of a rise in medicines prices in Egypt. The

Pharmaceutical Research and Manufacturers of America (PhRMA) complained

to the US administration in 2005, that the Egyptian government was directly

opposing the TRIPS agreement by granting licenses for hundreds of patented

medicines in Egypt. For this reason Egypt has been on the intellectual property

rights (IPRs) priority watch list since 2005 (Economist Intelligence Unit 2010).

The introduction of the TRIPS agreement is strongly opposed by the Egyptian

generic pharmaceutical industry, because this would directly constrain

manufacturing of generic medicines in the country. However, as the US is

home to a large number of manufacturers of originator (branded) medicines, the

US will not secure a free trade agreement with Egypt prior to the introduction of

the TRIPS agreement pressuring on the government of Egypt (Economist

Intelligence Unit 2010). Currently this dispute is unresolved.

Multinational pharmaceutical companies account for 30 % of local sales through

domestic manufacturing and 35 % through licensing agreements, the remainder

of the market is represented by local generic companies (Economist Intelligence

Unit 2005). To stimulate research and development of new innovative

22

medicines the Egyptian government suggested that prices for all

pharmaceuticals should be set based on benchmarking versus 22 countries.

This recommendation has strongly been opposed by pharmacists, claiming an

increase of 700 % on generic prices due to this suggested price regulation

(Economist Intelligence Unit 2010).

The healthcare system in Israel, is mainly insurance based, covering 95 % of

the population (Economist Intelligence Unit 2005). The Israeli government is

responsible for the finance and access to provision of medical care; however

four non-governmental, non-profit healthcare organisations provide the care by

collecting health care premiums through the National Insurance Institute (NII)

and managing these funds for the provision of a standardised healthcare

package. Competition is encouraged between the four insurers in Israel, by

providing switching options for members, once they have been with the insurer

for a period of a year (Economist Intelligence Unit 2009b). As the healthcare

funds are managed by the four healthcare organisations, doctors effectively

have certain budgets for the provision of healthcare and therefore Israel is

managing healthcare through demand side measures, providing budgets for

medicines and the delivery of healthcare services.

Medicine expenditure accounts for 10 % of total healthcare expenditure in Israel

and the bulk of the expenses is allocated to personnel; however an increase in

medicines expenditure is expected with the rise of the ageing population

(Economist Intelligence Unit 2005).

Due to the low per capita income, medicines prices in Mexico are considerably

lower comparative to the USA and European countries. It is documented that

the prices for medicines in Mexico are lower than most industrialised countries.

Medicine prices are regulated by the Mexican Government. Patent protection

for pharmaceuticals was only introduced in 1991 and medicines already in the

market were not affected by this law. Any newly introduced medication had to

compete with low cost imported generic medicines made as copies to non-

licensed medication. Prescription medicines are widely available in practice, in

Mexico without prescription. Anecdotal evidence suggests that retail

23

pharmacists compete by offering products at prices, below those set by

government (Danzon 1999).

Greece has the largest number of pharmacies per person ratio of any European

Union (EU) country (Economist Intelligence Unit 2009a). The improvement of

the healthcare systems is of major importance for the Greek government

(Economist Intelligence Unit 2009a). Pharmaceutical prices in Greece are

considered to be amongst the lowest in Europe (Economist Intelligence Unit

2009a).

All pharmaceutical prices are controlled through set retail prices this includes

fixed margins for wholesalers and retailers (Economist Intelligence Unit 2005,

2009a). International benchmarking was introduced as further price control

mechanism in 2005, by comparing the proposed price for a launch brand in

Greece to three of the lowest prices in Europe (Economist Intelligence Unit

2009a).

2.4.3 Pricing regulation / control in South Africa

The total healthcare expenditure for South Africa in 2002 totalled 7.3 % of GDP

(Economist Intelligence Unit 2005). The revenue in 2001 regarding

pharmaceuticals for the private sector was R6,9 billion. The wide differences in

income groups (with the largest part of the population being in the lower Living

Standards Measure (LSM) groups), means that the private healthcare sector

only provides service to 20 % of the population (Economist Intelligence Unit

2005). The market for generic medicines is growing in South Africa. The largest

generic manufacturer in South Africa is Aspen Phamacare.

The South African government introduced contentious pricing regulations in

2004, resulting in South Africa, being one of a few countries with price ceilings

for all prescription medicines in the private sector. The introduction of these

price ceilings resulted in an overall decrease in gross profit margins for

pharmacies in South Africa. A Single Exit Price (SEP) is set for all prescription

medicines by government (at ex-factory level) regardless of the channel of

purchase. The South African government has also introduced capped price

24

increases. These price increases were proposed on an annual basis.

However, since the introduction of the regulations in 2006, only one such

increase was realized and this effectively resulted in a price freeze within the

pharmaceutical market (Economist Intelligence Unit 2009d).

A policy for mandatory generic substitution has been implemented successfully

in the private sector. One of the greatest current pricing challenges for the

South African market is to realise a reasonable and enforceable dispensing fee

for pharmacists as these costs had not been regulated by law until November

2010 (Gray 2009; Motsoaledi 2010).

The above stated factors, render a unique situation for the South African

pharmaceutical market.

The interested reader can also refer to the following dissertations from the Wits

Business School Library for further information

• An Economic Assessment of Single Exit Pricing in The Pharmaceutical

Industry – L.M. Adams (1994)

• The Sensitivity in the Pharmaceutical Industry – S.T. Mthethwa (1996)

• Compatibility of Generic Medicine Policy and a Local Pharmaceutical

Industry – J.L. Carapinha (2005)

2.5. Conclusion

The literature clarifies that various pricing and control mechanisms are utilized

by governments globally to exert downward pressure on medicines and render

this essential commodity to more people. It is evident that developed countries

and developing countries utilise similar mechanisms for price controls, although

access to medicine is mainly driven by price in developing countries. The South

African pricing regulation environment ensures a unique situation within a

developing country with some contentious current issues, for example the

proposed National Health Insurance (NHI) scheme. The potential impact of NHI

in South Africa should be researched as a single focus area and will not be

covered within this research report.

25

2.6. Research Questions

2.6.1 Research Question 1

The following research questions emerge from the literature review.

What are the perceived pricing benefits for consumers through the

implementation of SEP in the private pharmaceutical market in South

Africa?

Significantly lower prices are realized through the implementation of price

regulations in the pharmaceutical market in developing countries compared to

markets such as the US with minimal regulations. However, over-regulation

could lead to a negative impact in terms of availability of medicines due to non-

viable business conditions for pharmaceutical companies, as seen in Egypt.

2.6.2 Research Question 2

What is the perceived impact of SEP on retail pharmacies in South Africa

in terms of changes in the business environment?

The introduction of the SEP as a price control mechanism in South Africa,

immediately cut prices of medicine by 19 % (which due to the influence of

normal market forces, became 22 % at the end of the first year) significantly

influencing the pharmaceutical industry (McIntyre and Thiede 2007; Lotter

2010b). Gross profit margins within the private sector including independent

pharmacies, group pharmacies and hospital pharmacies decreased as a result

of SEP. Profit margins were further impacted by the regulated dispensing fee

serving as a price ceiling in combination with the SEP in terms of scheduled

medicines in the private healthcare sector. These price control mechanisms

changed the dynamics within retail pharmacies as the profit on medicines is

now regulated.

26

CHAPTER 3: RESEARCH METHODOLOGY

This section introduces the plan and procedure followed to address the

research questions, including a literature review detailing the appropriate

research method and an explanation of the population and sampling for this

research. The final part of this section addresses the limitations and validity of

the research and data as well as the reliability of the results.

3.1 Research methodology /paradigm

The first part of this section looks at the specific design utilised to answer the

research questions. According to Creswell (2009), research designs can be

grouped into three major groups i.e. quantitative, mixed and qualitative

methods. These designs have specific characteristics listed in Table 2.

Table 2: Quantitative, Mixed and Qualitative Methods (Creswell 2009)

Quantitative Methods Mixed Methods Qualitative Methods

• Pre-determined

• Instrument based

• Performance data and

census data

• Statistical analysis

• Statistical interpretation

• Both pre-determined and

emerging methods

• Both open- and closed-

ended questions

• Multiple forms of data

drawing on all possibilities

• Statistical and text

analysis

• Across databases

interpretation

• Emerging methods

• Open-ended questions

• Interview data,

observation data,

document data and

audio-visual data

• Text and image analysis

• Themes, patterns

interpretation

The mixed approach method best suits this research as both qualitative and

quantitative data were collected. The mixed method approach was used to

27

gather comprehensive data for optimal understanding of the research questions

(Creswell 2009). The quantitative analysis was utilised to measure the

implementation of the pricing regulation on specific scheduled medicines in the

private pharmaceutical industry related to patient pricing benefit. The

Qualitative analysis explored the impact of the implementation of price

regulations on the business environment, strategy and survival of the retail

pharmacy in South Africa.

3.2 Research Design

A mixed method approach was followed as shown in Table 2. The mixed

method approach provided comprehensive understanding of the research

questions through diverse data collection as an advantage (Creswell 2009).

This approach resulted in an in depth understanding of the impact of the

introduction of the SEP in South Africa.

A potential disadvantage of this approach was that the researcher is

representing a pharmaceutical company that may introduce a bias to the

respondents and the researcher (Willig 2008).

The quantitative analysis research design used an interviewer administrated,

structured questionnaire, gathering numerical data for descriptive and inferential

statistics. Given that the sample of pharmacies can be considered

representative of the population of pharmacies in Gauteng, this analysis could

provide a general explanation of trends of a sample from which the researcher

could draw conclusions about a population (Creswell 2009). However, this

research cannot make this claim as a probability random sample was not

drawn. The reader is referred to section 3.3.2

The qualitative analysis research design involved data collection through semi-

structured interviews. The data were analysed through qualitative content

analysis. Content analysis played a supporting role in differentiating the levels

of the content into themes and main ideas resulting in a replicable and valid

method for making specific inferences from the interviews (Mayring 2000).

28

As almost half of the respondents formed part of both the qualitative and

quantitative data collection, the research design allowed for collaboration

between the qualitative and quantitative data. This resulted in further richness

in the interpretation of the research findings.

3.3 Population and sample

3.3.1 Population

The population for both the quantitative and qualitative analysis were all retail

pharmacies in the private sector in Gauteng, South Africa.

3.3.2 Sample and sampling method

The sample of pharmacies for the quantitative analysis was a non-probability

convenience sample, selected from a list of registered pharmacies in Gauteng.

The sample included pharmacies from all large pharmacy groups, i.e. Dischem,

Clicks, Link Group Pharmacies, Private Hospital Pharmacies, as well as

independent retail pharmacies. The sample size of 50 pharmacies is presented

in Table 24 in the appendix.

The sample for the qualitative analysis was a non-probability convenience

sample of pharmacy managers for the various pharmacy groups as well as

managers of independent retail pharmacies and hospital pharmacies. The

sample represented managers in retail pharmacies from all large pharmacy

groups, private hospital pharmacies as well as independent retail pharmacies

and the interviews were conducted in person to extract content, perceptions and

attitudes.

3.4 The research instrument

The research instrument utilised for the quantitative section was a questionnaire

(Appendix A). The quantitative questionnaire gathered data regarding the

selling price of selected prescribed ethical medicines.

29

The research instrument for the qualitative analysis was a semi-structured

interview schedule (Appendix B).

The interview proposed semi-structured questions to managers from the various

private pharmacy groups as well as independent retail pharmacies and hospital

pharmacies.

This instrument provided a tool for content analysis as an advantage relating to

the past and present impact of the introduction of SEP within the

pharmaceutical industry in South Africa.

3.5 Procedure for data collection

The researcher physically met with respondents and asked face-to-face

questions to either a pharmacist or pharmacy assistant to price a script and

determine a selling price for the quantitative data collection.

The qualitative content analysis was initiated telephonically or via e-mail

through invitations to set up semi-structured interviews. The interview location

was determined by the person being interviewed, provided that the location was

in Gauteng. The interviews were recorded through a process of active note

taking and the content was extracted for the interviewer to record the data.

The semi-structured interviews enabled the respondents to share their industry

perspectives by gather necessary data for content analysis, to address the

second research question.

3.6 Data analysis and interpretation

Both parametric and non-parametric data analysis techniques were applied to

the quantitative data of the questionnaire. Specifically, the variable analysed

was Rand value, measured on a ratio scale. The distribution of this variable

was graphed and assessed for Normality, using the Shapiro-Wilk Test as well

as the Kolmugorov-Smirnov and Lillifors tests. In addition the distributions of the

30

Rand values were plotted with Box plots, showing the medians, quartiles,

outliers and extreme values.

Both parametric and non-parametric analyses were computed as the data

displayed significant deviations from normality.

One-way Analysis of Variance (ANOVA) was used to compare the differences

in the mean Rand values of pharmacies in the 3 groups, with the Scheffe and

Tukey post hoc tests for pairwise comparisons in the case of a significant

difference. Furthermore the partial eta-squared was used to estimate the effect

size of the significant difference. The non-parametric equivalent, the KrusKal-

Wallis ANOVA was used on the ranked data in view of the non-normality of the

data (Creswell 2009).

Content analysis was used for the qualitative data to make inferences by

extracting themes from the research through objective and systematic

identification (Neuendorf 2002). The common themes derived from the

interviews were used to determine the perceived impact of the SEP on retail

pharmacies in South Africa in terms of changes in the business environment.

3.7 Limitations of the study

Only a small sample of individuals was used for both the qualitative and

quantitative research components of this dissertation. Secured responses from

the selected sample were imperative to reduce sampling bias.

The data was collected in Gauteng, posing a limitation from a geographical

point of view.

3.8 Validity and reliability

Reliability revolves around finding consistent results with repeated application of

specific research (Kalof, Dan and Diet 2008). Validity is concerned with

similarity or comparison within the details of the research, evidence and

conclusions (Kalof et al. 2008).

31

3.8.1 External validity

External validity enabled the researcher to generalize from a study or sample to

represent a population (Kalof et al. 2008).

Maximum external validity was assured for the questionnaire by selecting a

sample of pharmacies across pharmacy groups, independent pharmacies as

well as hospital pharmacies in Gauteng, no exclusion of a particular group.

A sample of pharmacy managers were selected for the interviews to ensure

representation of all pharmacy groups, independent pharmacies and hospital

pharmacies in Gauteng.

3.8.2 Internal validity

Internal validity refers to suitable conclusions being depicted by the data at

hand (Kalof et al. 2008). The questionnaires and interviews were consistent

and standardised throughout the process of data collection to maximize internal

validity.

3.8.3 Reliability

Consistent results with repeated application of specific research, defines

reliability (Kalof et al. 2008). The simple questionnaire and interview schedule

removed ambiguity in the response. Consistency was ensured by follow up

discussion with selected respondents after the data collection.

32

CHAPTER 4: PRESENTATION OF RESULTS

4.1 Introduction

A mixed methodology was followed in collecting the data for this report. Firstly

quantitative data was collected using a questionnaire developed to obtain

information regarding actual prices of specific medicines within independent

pharmacies, group pharmacies and hospital pharmacies. The actual script

prices were recorded and reported back using descriptive and inferential

statistics.

A second research instrument was designed, in the form of semi-structured

interviews to produce qualitative data by posing open ended questions to

respondents. The qualitative data were reported through content analysis and

through categorisation of the information into thematic groups as primary

themes. The secondary themes were utilised to examine the relation between

the quantitative data and these themes to provide a holistic interpretation of the

results. The qualitative data provided information regarding business strategy,

survival tactics and fundamental changes in day to day business as well as the

need for restructuring within each pharmacy. This information was considered

confidential and sensitive. For this reason transcripts of the actual interviews

have not been compiled. A number has been allocated to each respondent to

facilitate with the data reporting, see Table 3 below.

The population and sample for both the quantitative and qualitative data was

collected via non-probability convenience sampling as described in section 3.3

population and sample.

4.2 Demographic profile of respondents

The sample size for the quantitative data, in terms of actual prices for medicines

was set at fifty pharmacies within the private healthcare sector, including

independent, group and hospital pharmacies. This criterion was met and a total

of 50 scripts were priced at pharmacies in Gauteng. Scripts were obtained

33

from 12 independently owned pharmacies, 21 group pharmacies and 17

hospital pharmacies.

A sample size of between 20 and 30 respondents was initially set for the

qualitative semi-structured interviews in Gauteng. This criterion was met by

conducting 22 interviews among independent, group as well as hospital

pharmacies.

Table 3 below summarises the demographic data as well as the functional roles

reported by each pharmacy manager as per each individual semi-structured

interview.

34

Table 3: Demographic Data Including Functional Roles Reported by Respondents

Number Category (G, H, I) Rand Value

Years of Expe-rience

Number of personnel

Pharmacy Manager

Stock Control

Staff Manage-ment

Dispen-sary Service Roster

Locum Arrange-ments

Patient Consul-tation

Problem Solving Dispensing

Follow Unpaid Levies

Doctor Meetings

Accoun-tant

G1 Group R 1,193.47 7 45 � - � - - - � - - - �

G2 Group R 1,193.47 3.5 23 - � � � � - � � - - -

G3 Group R 1,419.10 20 6 - - � - � � � � - - -

G4 Group R 1,475.51 20 5 � � - - - � - � - - �

G5 Group R 1,193.46 17 8 - � � � � � � � - - -

G6 Group R 1,193.72 2 3 - � - � - � � � � - -

G7 Group R 1,295.55 3 4 - � � - - � - � - - -

G8 Group R 1,193.47 7 18 - � � � � � � � - - - Total Group Pharmacy 79.5 112 2 6 6 4 4 6 6 7 1 0 2

Group Pharmacy % N/A N/A 25% 75% 75% 50% 50% 75% 75% 88% 13% 0% 25%

Number Category (G, H, I) Rand Value

Years of Expe-rience

Number of personnel

Pharmacy Manager

Stock Control

Staff Manage-ment

Dispen-sary Service Roster

Locum Arrange-ments

Patient Consul-tation

Problem Solving Dispensing

Follow Unpaid Levies

Doctor Meetings

Accoun-tant

I1 Independent No Data 7 2 � � � - - � - � - - -

I2 Independent No Data 6.5 4 � � � - � � - � - - �

I3 Independent No Data 3 20 � � � - � � � � - - -

I4 Independent R 1,475.51 23 8 � � � - � � � � - - �

I5 Independent R 1,475.51 5.5 6 � � � - - � � � - - -

I6 Independent R 1,451.99 16 22 � � � � � � � � � - �

Total Independent Pharmacy 61 62 6 6 6 1 4 6 4 6 1 0 3

Independent Pharmacy % N/A N/A 100% 100% 100% 17% 67% 100% 67% 100% 17% 0% 50%

35

Number Category (G, H, I) Rand Value

Years of Expe-rience

Number of personnel

Pharmacy Manager

Stock Control

Staff Manage-ment

Dispen-sary Service Roster

Locum Arrange-ments

Patient Consul-tation

Problem Solving Dispensing

Follow Unpaid Levies

Doctor Meetings

Accoun-tant

H1 Hospital R 1,444.98 20 20 � � � � � � � � - - �

H2 Hospital R 1,475.75 8 40 � � � � � � � � - � �

H3 Hospital R 1,514.66 4 36 � � � � � � � - - � �

H4 Hospital No Data 12 17 � � � � � - � - - � -

H5 Hospital No Data 5 37 � � � � � � � � - � �

H6 Hospital No Data 10 56 � � � � � � � � - � �

H7 Hospital R 1,475.75 4 16 � � � � � � � � - � �

H8 Hospital R 1,329.44 14 25 � � � - � - � � - � �

Total Hospital Pharmacy 77 247 8 8 8 7 8 6 8 6 0 7 7

Hospital Pharmacy % N/A N/A 100% 100% 100% 88% 100% 75% 100% 75% 0% 88% 88%

36

4.3 Results pertaining to Research Question 1

4.3.1 Research Question 1

What are the perceived pricing benefits for consumers through the

implementation of SEP in the private pharmaceutical market in South

Africa?

4.3.2 Results – Research Question 1

The literature review in Chapter Two refers to Research Question One and the

reader is referred to the applicable paragraph in section 2.4.

The questionnaire in Appendix A, tests whether the introduction of SEP and

subsequent 22% overall medicines price reduction is experienced as a

consistent cost saving benefit by consumers in the private healthcare sector in

South Africa.

Table 4: Descriptive Statistics for Independent, Group and Hospital

Pharmacies

N Mean Median Minimum Maximum Std.Dev. Skewness

Group 21 R 1 255.02 R 1 193.72 R 1 191.23 R 1 494.09 R 109.94 1.50

Hospital 17 R 1 464.17 R 1 475.50 R 1 254.66 R 1 711.79 R 89.75 0.357059

Independent 12 R 1 405.55 R 1 462.44 R 1 183.46 R 1 612.37 R 135.13 -0.48281

Descriptive statistics are provided for the Rand values of each group in Table 4.

The mean pricing for group pharmacies was higher than the median (R1,255.02

and R1,193.72 respectively), in line with the positive skewness of 1.5. The

mean and median values for hospital pricing were similar at R1,464.17 and

R1,475.50, respectively, while for the independent pharmacies the mean Rand

value was substantially lower than the median at R1,405.55 and R1,462.44

respectively. The percentage within group price variation in the 3 groups was

25 % for group pharmacies, 36 % for hospital pharmacies and 36 % for

independent pharmacies respectively.

37

One way Analysis of Variance (ANOVA) was used to compare the differences in

the mean Rand values of group, independent and hospital pharmacies (referred

to as the 3 groups or levels of the independent variable, pharmacies), with the

assumption of ANOVA that the data are normally distributed. However,

according to the Shapiro-Wilk Test the data were significantly non-normally

distributed (W = 0.83, p < 0.001). In addition to the parametric ANOVA, the

non-parametric equivalent, the KrusKal-Wallis ANOVA was used on the ranked

data.

Both the parametric ANOVA and its non-parametric equivalent Kruskal-Wallis

ANOVA revealed consistent and significant differences between the means and

the ranks of the Rand values respectively.

The parametric ANOVA revealed an overall significant difference in the mean

prices of scripts within the 3 groups F (2,47) = 18.116, p< 0.001. Both the

Scheffe and the Tukey post-hoc test results revealed that independent and

hospital pharmacy mean prices are significantly higher than the mean price of

group pharmacies (p < 0.01 and p < 0.001 respectively). The mean price for

the independent pharmacies were R1,405.55, and the mean price for the

hospital pharmacies were R1,464.17, compared to the mean price for the group

pharmacies at R1,255.02. However, the difference between the independent

and hospital pharmacy prices was not significant as shown in Table 5 by the

Sheffe Test.

Table 5: ANOVA and Means

{1} - M=1255.0

{2} - M=1405.5

{3} - M=1464.2

Group {1} 0.001997 0.000003 Indepen-dent {2} 0.001997 0.377759

Hospital {3} 0.000003 0.377759

Scheffe Test; Variable: R Value (Data.sta) Marked differences are significant at p < .05000\

38

Table 6: Kruskal-Wallis ANOVA

Code Valid – N Sum of - Ranks

Group 101 21 319.5

Independent 103 12 349.5

Hospital 104 17 606

Kruskal-Wallis ANOVA by Ranks; R Value (Data.sta) Independent (grouping) variable:

Independent / Group / Hospital Kruskal-Wallis test: H ( 2, N= 50) =19.62171 p =.0001

Figure 2: Histogram of the Distribution of the Quantitative Data

Similarly, the Kruskal-Wallis ANOVA revealed significant differences between

the ranks (H (2) = 19.622, p < 0.001), with the sum of the ranks lowest for group

pharmacies followed by independent pharmacies and highest for hospital

pharmacies.

Furthermore when the Mann-Whitney U Test was applied to the ranked data to

examine pair wise differences, results consistent with the parametric post hoc

Sheffe Test were found with significant differences between the group and

hospital (Z = 4.24, p < 0.001) and the group and independent pharmacies (Z = -

Histogram: R Value

K-S d=.21757, p<.05 ; Li l liefors p<.01

Shapiro-Wilk W=.82954, p=.00000

1100 1200 1300 1400 1500 1600 1700 1800

X <= Category Boundary

0

5

10

15

20

25

30

No

. o

f o

bs.

39

2.724, p < 0.01). Once again, no significant difference was found between the

hospital and independent pharmacies (Z = 1.271, p > 0.05).

Partial eta-squared is the percentage of the total sum of squares or variation

accounted for by the main effect of pharmacy grouping as only 44 % of the

variation was accounted for by the pharmacy grouping, more than half of the

variation was not accounted for at all in the one way design. Thus there may be

other systematic variables, e.g. size of the pharmacy size of the pharmacy

group it, socio-economic location within the groups that could account for the

unexplained variation. The large variability within the data is evident in the Box

Plots of the 3 groups (see Figure 3). The clear lack of homogeneity of variance

of prices within the three groups once again supports the application of the

Kruskal-Wallis ANOVA nonparametric test.

Figure 3: Box Plot of the Independent, Group and Hospital Pharmacy

Quantitative Data

The retail price of the specified medicines incorporated in the questionnaire is

inconsistent across independent, group and hospital pharmacies. The minimum

price was R1,183.46 and the maximum was R1,711.79. A clear price difference

of R528.33 was therefore documented in the research.

40

4.3.3 Conclusion – Research Question 1

It can be concluded that consistent pricing benefits were not realised and

experienced by consumers in the private healthcare sector with the introduction

of SEP.

4.4 Results pertaining to Research Question 2

4.4.1 Research Question 2

What is the perceived impact of SEP on retail pharmacies in South Africa

in terms of changes in the business environment?

4.4.2 Results – Research Question 2

The reader is referred to section 2.4.3 of the literature review, Chapter 2, where

Research Question 2 originated.

In order to obtain data regarding this research question, the research instrument

in Appendix B was developed.

The questions in sections A and B of the research instrument were posed to the

respondents. Section A of the research instrument collected demographic data

and this information was included in Table 3.

The analysis of questions 1 – 4 from section B of the research instrument was

conducted from a thematic perspective. The responses to each question have

been listed in a response analysis, which was listed into common themes as

primary and secondary themes as the researcher aimed to examine the relation

between the quantitative data and these themes to provide a holistic

interpretation.

Figure 4, 5 and 6 below, reveal the responses of the participants regarding

question 1 of section B of the research instrument.

41

Figure 4: The Influence of SEP on the Business Strategy of the Independent Pharmacy

Figure 5: The Influence of SEP on the Business Strategy of the Group Pharmacy

42

Figure 6: The Influence of SEP on the Business Strategy of Hospital Pharmacies

43

The common themes were reported in a question by question format through

separate headings and follows below. Since the data was collected from

independent pharmacies, group pharmacies and hospital pharmacies, the

responses are reported in this structure.

4.4.2.1 Research instrument 2 – Question B1

Describe the influence of SEP on the business strategy of the pharmacy i.e.

additional products or services you are offering following the introduction of SEP

Question B1 focused on the changes that occurred in the pharmacy strategy

due to the decrease in gross profit with the implementation of the SEP.

Thematic analysis was conducted on the data obtained by the respondents. The

following themes were identified in relation to the influence of SEP on the

business strategy of the pharmacy. The reader is referred to Figure 4, 5 and 6

section 4.4.2.

The common business strategy themes in relation to SEP are reported in Table

7 Below.

Table 7: Business Strategy Themes in Relation to SEP for Independent,

Group and Hospital Pharmacies

Theme Independent Pharmacy (Refer to Figure 4)

Group Pharmacy (Refer to Figure 5)

Hospital Pharmacy (Refer to Figure 6)

Customer Retention Strategy

83% Crucial for survival

88 % Crucial for survival

25 % Extract majority of customer base from individuals in hospital or visitors of patients and therefore customer retention strategy is not a major focus point

Focus on alternative medicines for sales of non-scheduled medicines (not governed by SEP)

67% Gap identified as high profit opportunity

75 % Gap identified as high profit opportunity

75 % Gap identified as high profit opportunity

Increased focus on front shop sales

67 % Gap identified as high profit opportunity

75 % Gap identified as high profit opportunity

75 % Gap identified as high profit opportunity

44

Layout changes 0 % Often restricted in terms of space

38 % Naturally focused on layout from outset

25 % Not major focus

Focus on logistics and warehousing

0 % No buying power to drive this theme

75 % Buying power to negotiate increased logistics or warehousing cost to be absorbed by pharmacy group

63 % Buying power to negotiate increased logistics or warehousing cost to be absorbed by hospital pharmacy group

Joined a group pharmacy 0 % 38 % Utilised this opportunity to survive

0 %

Increasing profits by increasing volumes of sales on lower cost items

50 % Identified as a gap to realise increased profit

63 % Identified as a gap to realise increased profit

88 % Identified as a gap to realise increased profit

Increased focus on cash flow

50 % Due to general decrease in profit

50 % Due to general decrease in profit

63 % Due to general decrease in profit

Improved productivity 33 % Considered high standard prior to introduction of SEP

63 % To decrease costs indirectly

63 % To decrease costs indirectly

Improved service delivery 33 % Considered high standard prior to introduction of SEP

63 % To increase customer satisfaction

63 % To increase customer satisfaction

Additional service 33 % Added one additional service Constrained due to space restriction

38 % Added 3 additional services 25 % Added one or two additional services

38 % Added 2 additional services 13 % Added 1 additional service

Change in focus from profit to cost centre

0 % 0 % 100 % Only incorporated by Hospital Pharmacies – pharmacy is considered an additional service provided by the hospital

45

4.4.2.2 Research instrument 2 – Question B2

What changes occurred in the business of this pharmacy in order to survive the

implementation of SEP?

Question B2 determined the focus areas addressed for the pharmacy to survive

due to the decrease in gross profit margins with the implementation of SEP.

The evolving themes from this question is listed and discussed below.

Figure 7, 8 and 9 reveals the responses of the participants regarding question 2

of section B of the research instrument.

The survival tactics in relation to SEP are reported in Table 8 on page 49.

46

Figure 7: Survival Tactics Following the Introduction of SEP for Independent Pharmacies

Figure 8: Survival Tactics Following the Introduction of SEP for Group Pharmacies

47

Figure 9: Survival Tactics Following the Introduction of SEP for Hospital Pharmacies

48

Table 8: Survival Tactics in Relation to SEP for Independent, Group and

Hospital Pharmacies

Theme Independent Pharmacy (Refer to Figure 7)

Group Pharmacy (Refer to Figure 8)

Hospital Pharmacy (Refer to Figure 9)

Decrease general overheads

100 % 50 % Focus from smaller group pharmacies predominantly

Increase in working hours for pharmacy mangers / pharmacists

83 % Increased cost to employ locum pharmacists

38 % Only reported by smaller group pharmacies constrained by staff members

Increase Pharmacy Assistants

50 % In relation to the number of pharmacists to decrease expenses on salaries as salaries for pharmacy assistants are substantially less compared to salaries for pharmacists

75 % Most prevalent survival tactic for group pharmacies. This allowed for more scripts to be dispensed as pharmacists controlled the quality of dispensing by ensuring correct dispensing of medicines only prior to being received by the patients.

Increase Generic Substitution

33 % To offer lower cost medicines to patients to retain customers and increase unit sales

0 % Not reported as survival tactic

100 % Incorporated to show perceived cost advantage over other pharmacies and increase customer retention

Decrease Staff 0 % Could not function with less personnel

13 % Smaller group pharmacies – high need to cut overheads

Specialised Manager – Overheads Manage

0 % No additional manager employed to manage overheads as this would increase overall overheads

38 % Group pharmacies who did not have these managers in place from the outset and who were not constrained due to their size

Accurate Billing (Pertaining to each item

0 % This has been part

0 % Not reported as

88 % Decreased losses in

49

dispensed from the pharmacy)

of independent pharmacies prior to the introduction of SEP

survival tactic general

Calculate personnel to cut overheads

0 % 63 % To save costs

88 % Decreased overheads in general

Advertising 17 % Only in local papers – low cost

63 % Television advertising and newspaper advertising to increase customer base

13 % Pharmacy is an additional service offered by the hospital

Focus on per diem accounts (Approved daily allowance for Medical Aid expenses relating to a specific procedure)

0 % N/A

0 % N/A

88 % Manage daily expenses for these patients accurately whilst providing appropriate health care Overall cost saving realised

4.4.2.3 Research instrument 2 – Question B3

How did the implementation of SEP influence your day to day business?

The introduction of SEP with the accompanying changes in business strategy

and areas addressed for survival impacted on the day to day business of the

pharmacy was addressed through question B3. The thematic responses that

emerged through this question are listed and discussed below. The reader is

referred to Figure 10, 11 and 12. Table 9 reports the day to day changes

realised by all pharmacies as a result of the introduction of SEP.

50

Figure 10: The Influence of the Implementation of SEP Regarding Day to

Day Business for Independent Pharmacies

Figure 11: The Influence of the Implementation of SEP Regarding Day to

Day Business for Group Pharmacies

Figure 12: The Influence of the Implementation of SEP Regarding Day to

Day Business for Hospital Pharmacies

51

Table 9: Day to Day Changes Implemented in Relation to SEP for

Independent, Group and Hospital Pharmacies

Theme Independent Pharmacy (Refer to Figure 10)

Group Pharmacy (Refer to Figure 11)

Hospital Pharmacy (Refer to Figure 12)

Reduction in stock days 100 % Primary focus to reduce working capital

75 % Focus to reduce working capital

100 % Pharmacy operating as cost centre – all opportunities utilised to decrease general costs (less stock on shelves result less working capital tied up in the pharmacy)

Increased working hours 100 % Pharmacies operating with minimal personnel – increased involvement of pharmacy manager or pharmacist to reduce locum costs and further salary costs

63 % Attributed to some smaller group pharmacies (refer to Table 3, number of personnel)

63 % Mainly due to general working hours of the pharmacy increasing. To increase competitiveness towards other hospital pharmacies in the visitnity

Increased pressure to decrease overheads

0 % This was part of the survival strategy tactics for all independent pharmacies – therefore no additional focus on this as it was already implemented

0 % Not reported as daily change by any group pharmacy

63 % Due to hospital pharmacies operating as cost centres following the introduction of SEP

4.4.2.4 Research instrument 2 – Question B4

Was there any restructuring involved within this pharmacy following the

introduction of SEP and how did the restructuring affect your business?

Question B4 focused on direct and indirect restructuring and the effect of this on

the pharmacy as a result of the introduction of SEP. Direct restructuring refers

to actual restructuring and a decrease in personnel of the pharmacy. Indirect

restructuring refers to a lack of increase of personnel in the pharmacy with an

52

increase in workload / number of scripts dispensed or number of patients

admitted to the hospital as well as an increase in the hospital capacity.

Table 10 reports the day to day changes realised by all pharmacies as a result

of the introduction of SEP.

Figure 13: The Influence of the Implementation of SEP on Restructuring

within Independent Pharmacies

Figure 14: The Influence of the Implementation of SEP on Restructuring

within Group Pharmacies

53

Figure 15: The Influence of the Implementation of SEP on Restructuring

within Hospital Pharmacies

Table 10: Restructuring as a result of the Implementation of SEP for

Independent, Group and Hospital Pharmacies

Theme Independent Pharmacy (Refer to Figure 13)

Group Pharmacy (Refer to Figure 14)

Hospital Pharmacy (Refer to Figure 15)

Direct Restructuring 33 % Two of the independent pharmacies had to resolve to direct restructuring following the introduction of SEP One of these pharmacies had to close their doors due to the introduction of SEP and all employees lost their work

0 % N/A

0 % N/A

Indirect Restructuring (Positions not filled when employees resigned)

50 % 38 % 38 %

54

4.4.3 Conclusion – Research Question 2

The changes in the business environment, in particular business strategy and

survival, as well as changes in day-to-day business and ultimately business

restructuring were depicted in the preceding section. With this a description

was obtained showing the impact of SEP on retail pharmacy regarding changes

realised in the business environment.

It is evident from the research that the introduction of SEP in retail pharmacies

resulted in changes within the business environment. These changes were

mostly evident through a focus on improved service offering, optimisation of the

business environment, a drive to reduce overheads and focus on precision in

terms of stock management and billing.

4.5 Summary of the results

It is evident from the data obtained that consistent price benefits are not

realised by patients through the implementation of the SEP. The regulated

dispensing fee has also not been fully adhered to by all pharmacies investigated

in this research. The actual selling price of the medicines included in the

questionnaire was higher in selected cases than the maximum allowed price as

per the SEP and dispensing fees regulated by law.

Independent, group pharmacies as well as hospital pharmacies saw changes in

their business environment due to the impact of SEP. Pharmacies had to

incorporate additional services and adhere to stringent cost cutting or finding

alternative streams of income to survive as a result of the introduction of SEP.

Improved service offering and optimisation of the business environment through

a drive to be more productive also occurred following the introduction of SEP.

55

CHAPTER 5: DISCUSSION OF THE RESULTS

5.1 Introduction

The objective of this chapter is to focus on the discussion and explanation of the

results enclosed in Chapter 4. The structure reflects the composition of Chapter

4 four and the format was laid out in a comparable order.

5.2 Demographic profile of respondents

Retail pharmacies in the private healthcare sector were subdivided into three

groups independent, group and hospital pharmacies. The quantitative data or

actual script prices were obtained either from a pharmacist or pharmacy

assistant, as only these individuals could provide the correct information relating

to the prices of the actual medicines referred to in Research Instrument One in

the appendix. The reader is referred to section 4.2 in Chapter 4 for the

demographic profile of the respondents regarding the quantitative data.

Independent pharmacies represented 24 % of the quantitative data sample size,

whilst group pharmacies represented 42 % and hospital pharmacies 34 %.

The demographic profile of the respondents relating to the qualitative data was

reported in Table 3 on page 35. Differences exist in terms of the business

environment within these three groups. This is particularly evident in terms of

the number of personnel. Respondents from all three groups were interviewed

to ensure a holistic opinion for the analysis. Six respondents were included

from independent pharmacies, eight from group pharmacies and eight from

hospital pharmacies.

Only pharmacy / dispensary managers were interviewed as part of the research

to ensure accurate representation of all the information relating to pricing

regulation in the retail pharmacy following the introduction of SEP.

Regarding other demographic data the average number of years experience as

managers for the independent pharmacies was 10.1 years, 9.93 for group

56

pharmacies and 9.62 for hospital pharmacies. The independent pharmacies

employed 10.1 people on average, group pharmacies 14 employees on

average and the hospital pharmacies employed 30.8 people on average.

In terms of functional roles reported by the pharmacy managers, independent

pharmacies predominantly focused on stock control, staff management, patient

consultation and dispensing. The pharmacy managers from group pharmacies

focused mainly on dispensing, followed by problem solving, patient consultation,

staff management and stock control. The functional role focus of the hospital

pharmacy managers was centred on problem solving, arranging for locums,

staff management and stock control.

5.3 Discussion pertaining to Research Question 1

What are the perceived pricing benefits for consumers through the

implementation of SEP in the private pharmaceutical market in South Africa?

5.3.1 Discussion pertaining to Research Question 1

5.3.1.1 The impact of the implementation of Single Exit Price (SEP)

for pharmaceuticals in the private sector in South Africa

The introduction of SEP, coupled with capped annual price increases for

medicines in the private pharmaceutical industry resulted in an overall price

decrease of 22 % in medicine prices in South Africa, after the first year,

following introduction of the new legislation (McIntyre and Thiede 2007; Lotter

2010b). These results appear positive and due to the pricing regulation

consistent pricing benefits are therefore expected when considering medicine

prices for patients in the private healthcare sector in South Africa.

According to the literature, the introduction of price ceilings to medicines pricing

regulations in South Africa has led to an overall decrease in gross profit margins

for pharmacies in South Africa (Economist Intelligence Unit 2009d). It was

evident from the literature review that regulation of medicine prices can have a

negative effect on the availability of medicines, as experienced in Egypt

57

(Economist Intelligence Unit 2010). The research confirmed this argument as

stock control was confirmed as a functional role to all pharmacy managers from

the group and hospital pharmacies as well as 75 % of the independent

pharmacies interviewed.

According to additional empirical research price regulation has adverse effects

on the cost and quality of healthcare (Kessler 2004). This statement was

confirmed through the quantitative research, as it was evident from the

parametric ANOVA that a significant difference exists in the mean prices of

scripts within the three groups. The reader is referred to section 4.3.1 in

Chapter 4. The retail price of the combined medicines included in the

questionnaire (Appendix B), was not consistent across independent, group and

hospital pharmacies. In addition it was evident from the research questionnaire

results obtained that the recent introduction of the dispensing fee regulation in

2010 was not adhered to by all pharmacies included in this research as the

maximum price quoted for the medicines included in the questionnaire was

higher than the allowed regulated price. A total price difference of R528.33 was

documented in the research when the minimum and maximum prices were

considered.

5.3.2 Conclusion - Research Question 1

It is evident from the information discussed above, as well as actual prices of

medicines obtained through the research that consistent pricing benefits were

not realised by patients following the introduction of SEP in South Africa.

58

5.4 Discussion - Research Question 2

5.4.1 Research Question 2

What is the perceived impact of SEP on retail pharmacies in South Africa

in terms of changes in the business environment?

5.4.2 Discussion pertaining to Research Question 2

The second research instrument (Appendix B), was developed to obtain an

understanding for Research Question 2. The design of this research instrument

focused on demographic data in section A (as reported in Table 3 on page 34

and also referred to in Chapter 5, section 5.2). Section B of the semi structured

interview focused on eliciting a response to provide insight into Research

Question 2.

Changes in the business environment of retail pharmacies in South Africa, post

the introduction of SEP were evaluated using four questions. These four

questions addressed the following concepts through questions 1 - 4:

1. The influence of the introduction of SEP on the business strategy of the

pharmacy

2. The changes implemented in order to survive as a result of the

introduction of SEP

3. The day to day changes brought about with the introduction of SEP

4. Restructuring within the pharmacy as a result of the introduction of SEP

Common themes were derived from each of the four questions and the data

were tabulated (Appendix C, Table 12 – 23). A tick was assigned to a positive

response pertaining to a specific theme from the feedback obtained through the

question. The results were then visually displayed and the reader is referred to

Figure 4 – 15 in Chapter 4, section 4.4.2.

59

A discussion and an explanation follows as obtained from the field research

through the 22 semi-structured interviews.

5.4.2.1 The influence of the introduction of SEP in the

business strategy of the pharmacy

According to the literature, the introduction of price ceilings, through

SEP resulted a decrease in gross profit margins for pharmacies in

South Africa (Economist Intelligence Unit 2009d). This was reported

during the research as a driving factor to adapt or change the

business strategy. The reader is referred to Table 12 - 14 in

Appendix C. Various strategies were explored to offer additional

services or alternatively create income through ways previously

unexplored. Possible opportunities were identified to increase profit,

improve the overall productivity of the pharmacy, improve the cash

flow of the pharmacy improve service delivery and focus on customer

retention, resulting in a clear change in the business environment.

The reader is referred to Figures 4, 5 and 6. The main strategic

change reported for independent and group pharmacies was to focus

on customer retention, whilst the top strategic focus for hospital

pharmacies was to change their management focus from a profit

centre to a cost centre focus. According to all respondents from the

hospital pharmacies, the introduction of the SEP resulted in hospital

pharmacies to break even or operate at as loss. For this reason,

hospital pharmacies are managed as cost centres and no longer

profit centres.

A strategic drive to improve gross profit in retail pharmacies was

recorded through a prominent focus on the front shop. This was

reported by 73 % of all respondents. The only factors, preventing this

focus were space as well as personnel constraints, as was the case

for some independent pharmacies.

60

Prices of homeopathic medicines and vitamins are not regulated

through SEP. This gap was strategically identified by 73 % of all

respondents and an increased focus on the recommendation and

sales followed as a result.

The reader is referred to Figure 1, Chapter 2, section 2.4. The SEP

in South Africa is the selling price to wholesalers in the

pharmaceutical market. Medicines are sold at this price to

wholesalers and logistics fees paid by the various pharmaceutical

companies are included in this selling price. This process is not

regulated. As a direct result of this, 50 % of the interviewed

respondents focused on warehousing and generation of logistic fees,

following the introduction of SEP.

5.4.2.2 The changes implemented in order to survive as a

result of the introduction of SEP

All respondents from the independent pharmacies reported a focus

for survival based on reducing overheads. Secondary to this the

working hours for pharmacy managers increased due to the fact that

locums could not be afforded (see Figure 7, Chapter 4, section

4.4.2.2).

The main survival tactic of group pharmacies was to increase the

number of pharmacy assistants (Figure 8, Chapter 4, section 4.4.2).

The decreased gross profit generated in retail pharmacies due to the

introduction of SEP, led to a decrease in the supply or intake of

pharmacy students at tertiary institutions, training pharmacists in

South Africa. Currently a shortage of pharmacists, particularly newly

qualified pharmacists are experienced in South Africa. Due to the

increased demand for pharmacists, the salary expectancy increased

for private retail pharmacists. To increase the output of a pharmacy

or the number of scripts dispensed additional dispensers are

required. An increased number of pharmacy assistants are currently

appointed as salaries for these individuals are substantially less

61

compared to pharmacists. However, pharmacists need to conduct a

final quality check prior to handing over the dispensed scripts from

pharmacy assistants.

According to the literature review, a policy for mandatory generic

substitution has been implemented successfully in the private health

sector (Gray 2009). Hospital pharmacies utilised this policy to their

advantage as increased generic substitution was identified as

survival tactic by all respondents from hospital pharmacy

respondents in the research Figure 9, Chapter 4, section 4.4.2). This

implied that generic medicines could be offered at a lower price

compared to ethical or original medicines, drawing more patients to

hospital pharmacies from neighbouring communities effectively

driving customers into the hospital pharmacies as “one stop

pharmacies”. A secondary survival tactic evident from the research

for hospital pharmacies, now operating as cost centres, was to

ensure an optimal number of employees in relation to the pharmacy’s

needs as well as a focus to decrease overheads. These survival

tactics were identified by 88 % of the hospital pharmacy respondents.

The main survival tactic implemented by all respondents, across the

groups was, to decrease overheads. This is a logical survival tactic

due to the overall reduction in gross profit with the introduction of

SEP. The reader is referred to Table 17 in the Appendix C.

5.4.2.3 The day to day changes brought about with the

introduction of SEP

Three common themes were identified as a day to day change

following the introduction of SEP: reduced stock days on hand,

increased working hours for pharmacy managers and increased

pressure on pharmacy managers to reduce overheads. The reader

is referred to Table 20 in Appendix C (day – to - day).

62

Ninety one percent of the respondents reported a reduction in stock

days and 73 % reported increased working hours and therefore

increased pressure on pharmacy mangers.

All respondents from the independent pharmacies reported a

reduction in stock days and increased working hours for pharmacy

managers as part of the day to day activities following the

introduction of SEP. The reader is referred to Figure 10, Chapter 4,

section 4.4.2.3. The group pharmacies have an advantage in terms

of available capital to purchase stock and therefore not all

respondents reported on a daily focus to reduce stock days (Figure

11, Chapter 4, section 4.4.2.3).

It is also evident from the respondents in the research (Table 3,

Chapter 4, section 4.2) that the independent pharmacies employed

10 people on average in comparison to 14 employees working for

group pharmacies and 31 individuals employed by hospital

pharmacies. This might explain why 100 % of the respondents from

independent pharmacies and only 63 % of the respondents from the

group and hospital pharmacies reported increased working hours for

pharmacy managers as a result of the introduction of SEP.

Increased pressure to decrease overheads was reported by 63 % of

the hospital pharmacies and none of the other respondents. This

might be attributed to the focal change of hospital pharmacies being

managed as cost centres and not profit centres, following the

introduction of SEP as reported before. The reader is referred to

Figure 12, Chapter 4, section 4.4.2.3.

5.4.2.4 Restructuring within the pharmacy as a result of the

introduction of SEP

Two of the twenty one respondents reported direct restructuring as a

result of the introduction of SEP whilst seven reported indirect

restructuring Table 23 in Appendix C. Indirect restructuring is

63

referred to as not filling a position when an employee terminates their

service at a pharmacy or not increasing the number of employees

employed by a pharmacy whilst the need for more employees exist

due to growth experienced in the total size of the pharmacy. Direct

restructuring refers to termination of service of employment of an

individual due to the fact that the services of the individual can no

longer be afforded by the pharmacy.

Half of the independent pharmacies involved in the research reported

indirect restructuring, whilst 38 % of the group and hospital

pharmacies reported indirect restructuring as a result of the

introduction of SEP (Figure 13, 14 and 15, Chapter 4, section

4.4.2.4). Direct restructuring was only reported by 33 % of the

respondents of independent pharmacies. This might be due to the

fact that the utilisation of resources for independent pharmacies is

under more pressure compared to those of group and hospital

pharmacies, primarily due to the sheer size of the various groups.

5.4.3 Conclusion - Research Question 2

It is evident from the discussion above that strategic changes, survival tactics,

day to day changes as well as restructuring within retail pharmacies in South

Africa is a reality as a result of the introduction of SEP. The business

environment has therefore changed and the impact of the introduction of SEP is

evident.

5.5 Conclusion

The literature review in Chapter 2 highlighted that the introduction of SEP

immediately lead to a total price reduction of 22 % for medicines in South Africa.

The research report highlighted the fact that consistent pricing benefits were not

experienced by consumers in retail pharmacies in South Africa. The literature

warns that price controls for pharmaceuticals, like SEP in South Africa, could

lead towards complexity and the creation of vested interests, leading to an

64

ultimate negative effect on patients (Calfee 2001). The research indicated that

a consistent pricing benefit is not realised by the patients and that there is a

substantial difference in the price of medication pertaining to the maximum and

minimum price range as per the collected quantitative data.

It was also evident that the impact of pricing regulation in the form of SEP

resulted in changes in the business environment for retail pharmacies in the

private sector in South Africa. The research allowed the implementation of

pricing regulation to be studied and explained.

The literature as well as the research suggested that the introduction of price

ceilings such as SEP results in an overall reduction of gross profit margins for

pharmacies in South Africa.

The research found that the business environment for retail pharmacies in the

private sector in South Africa has changed as a result of the introduction of

SEP. The strategy of pharmacies was adapted, survival tactics were

implemented, day to day changes were realised and direct or indirect

restructuring in retail pharmacies was implemented.

65

CHAPTER 6: CONCLUSIONS AND

RECOMMENDATIONS

6.1 Introduction

This chapter concludes the thesis. Conclusions made in previous chapters

were combined to devise a shared conclusion to the research. In addition to

this, topics or concerns deemed relevant by the researcher are highlighted as

recommendations. The closing section to this chapter relates to propositions or

suggestions for future research.

6.2 Conclusions of the study

The research was introduced through Chapter 1 with particular focus on the

purpose, context, problem statement, significance, delimitations, definitions and

assumptions.

Improved access to healthcare services has been a focal point in South Africa

in the post-apartheid era. For this reason the NDP was developed and a pricing

plan for medicines followed for both the private and public sectors. A pricing

committee was created and SEP along with regulated price increases was

introduced in the private sector. Effectively the private sector had to adjust from

a free to a regulated market. A total pricing impact of 22 % was immediately

realised on medicine prices. It therefore appears that the introduction of SEP

lead to a direct pricing benefit to patients. However, the literature also states

that pricing controls for pharmaceuticals could lead to overall negative impact

on patients along with a creation of vested interest.

It was questioned if patients receive a consistent pricing benefit regarding the

cost of medicines in the private sector, following the introduction of SEP.

Subsequently the business environment within retail pharmacies in the private

sector in South Africa was adjusted through the introduction of price ceilings or

66

SEP. Further to this the changing business environment as a result of pricing

interference was evaluated.

6.2.1 Response to Research Question 1

What are the perceived pricing benefits for consumers through the

implementation of SEP in the private pharmaceutical market in South

Africa?

According to the literature review, one of the benefits of the introduction of price

regulation through price caps is the reduction in excess profits (Gilmore et al.

2010). A pricing benefit is therefore expected, provided that the full benefit of

the price cap is passed on to the patient or consumer.

The contentious pharmaceutical pricing regulations and in particular the

introduction of price caps by the South African government resulted in an

overall decrease in gross profit margins for pharmacies in South Africa.

Capped, regulated price increases along with regulated dispensing fees,

significantly changed the business environment where retail pharmacies

operate currently. A total reduction of 22 % of medicines prices was realised

through the introduction of SEP in South Africa.

According to Philibert, (2009), strict targets in terms of price caps and price

floors may cause great economic risk without a comparative advantage. Prices

beyond the regulated SEP and dispensing fees were reported throughout the

research. It can be inferred that the impact of pricing regulation may entail risk

and not necessarily result in an advantage for the patient or consumer. The

research confirmed that a consistent pricing benefit was not realised by

consumers, due to the significant and clear price difference documented

through the quantitative data in the research.

6.2.2 Response to Research Question 2

What is the perceived impact of SEP on retail pharmacies in South Africa

in terms of changes in the business environment?

67

The introduction of SEP is an uncontrollable macroeconomic factor that has

impacted businesses and needs to be taken into account in the way businesses

operate, to counter the impact.

The introduction of a price ceiling on medicines prices through SEP resulted in

clear changes in the business environment for retail pharmacies in South Africa.

Retail pharmacies had to implement strategic changes and survival tactics to

stay in business. This naturally resulted in changes in the way that pharmacies

were managed daily, i.e. reduced stock on hand and an increase in order

frequency of medicines, increased pressure on pharmacists to work longer

hours and a focus to decrease overheads in general.

With a reduction in overall gross profit generated by pharmacies, the pressure

in the business environment was evident.

The overall responses of all the pharmacists who were interviewed were

investigated in terms of the common themes identified. A particular theme was

reported in the table below as a finding from this study when it was reported by

more than 60 % of the interviewed pharmacists. The findings of the literature

were also reported in the table below.

Table 11: Comparison of the findings from the literature review and this

study regarding the impact of pricing regulations on the business

environment

Literature This Study

Price caps determine productivity trends (Lowry and Getachew 2009)

Due to the introduction of a price cap, through SEP, 55 % of the pharmacy managers who were interviewed confirmed a deliberate change in strategy to focus on improved productivity.

Increased working hours was reported by 73 % of the interviewed respondents and is aligned with the concept of improved productivity. New staff was not appointed, the current staff was working more productively.

68

Reduction in overheads and overall business costs is a direct reaction to price cap regulation (Currier 2006).

Seventy seven percent of the interviewed pharmacists in this study confirmed that part of the survival tactics following the introduction of SEP included an overall reduction in overheads.

Not reported in the literature review A shift in focus on identification of alternative opportunities where prices are not regulated through SEP was introduced by 73 % of the interviewed respondents

Not reported in the literature review Ninety one percent of the interviewed pharmacists reported a reduction in stock days and this therefore implies a reduction in working capital.

6.3 Recommendations

The benefits drawn from the implementation of the SEP appears clear at first

glance. An overall 22 % reduction in the price of medicines in the private sector

was realised.

The literature clearly highlights that the only element in the marketing mix that

produces profits, is price and of the four elements, price is the easiest to

influence. However, interference with price can lead to an overall negative

effect in terms of availability and overall quality of healthcare in the long run.

The following are recommendations made to the stakeholders that were

identified in Chapter 1, section 1.4.

The Pricing Committee within the Government:

A consistent pricing benefit to patients was not realised through the introduction

of SEP.

It is recommended that the enforcement of the new dispensing fee regulation is

closely monitored to ensure a consistent pricing benefit to all patients,

purchasing medicines from independent, group or hospital pharmacies.

69

The current demand for pharmacists in South Africa is outweighing the supply

and increasing the pressure on salaries for pharmacists. A recommendation is

to therefore increase the numbers of pharmacy students for intake at

universities and increase bursaries to assist in the filling of this need.

To view the introduction of pricing regulations in the private pharmaceutical

sector such as SEP as a learning curve for future introductions of new programs

such as the national health program. To think through the practical implication

and roll out of such a program along with the overall implication as part of

indirect influences due to such a new regulation.

The Retail Pharmacies:

Various strategic changes, survival tactics and day to day changes were

implemented across independent pharmacies, group pharmacies and hospital

pharmacies to adjust to the new business environment following the introduction

of SEP.

However, these concepts were not introduced into all pharmacies to improve

strive to improved overall profitability. It is recommended that pharmacists

specifically implement improved productivity, service delivery, accurate billing

and a drive to decrease overheads within pharmacies. The organisational

structure of the group pharmacies may have lent itself to best practice sharing

and improved implementation of these concepts already.

The Patients:

The introduction of the dispensing fee law as a sliding scale leads to continuous

pricing differences among pharmacies. Although strict enforcement of this

regulation should decrease the variance in prices from pharmacy to pharmacy,

price differences will still exist between various pharmacies. Patients should

prioritise their needs in terms of the services of their pharmacy, i.e. patient

consultation, price, service delivery, additional services such as free delivery.

Based on the offering of various pharmacies, a suitable pharmacy should be

selected, not only on the benefit it offers in terms of price. In this sense the

70

public would assist to rectify dignity within the pharmacy profession and we

might see an increase in the supply of pharmacists in South Africa.

6.4 Suggestions for further research

Suggestions for future research are as follows:

To conduct the same research on a national level in South Africa in order to

compare the findings of both these studies.

Researching the influence of pricing regulation across various industries in

South Africa and draw an overall conclusion of the benefits and negative

impacts of such regulations. This would assist in future decision making

regarding pricing regulation across industries.

Determine the influence of the pricing regulation, regulation against bonussing

and generic substitution on pharmaceutical companies in South Africa.

Establish the effect of further pricing regulation such as benchmarking on the

pharmaceutical industry in South Africa.

Develop and understanding of the true benefits to patients and concerns to

health care professionals, as well as the economy regarding the proposed

national health insurance in South Africa.

71

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APPENDIX A – QUANTITATIVE DATA (SCRIPT PRICING)

Letter to Respondents

Dear Respondent,

I am completing an MBA at Wits Business School, in Johannesburg. My MBA

dissertation is based on the following topic: The Impact of the implementation of

single exit pricing for pharmaceuticals in South Africa. The aim of the research

is to investigate the impact of SEP implementation on retail pharmacies as well

as patients in the private sector. I would be grateful if you could complete the

attached questionnaire for this purpose.

Confidentiality will be observed throughout the conveyance of the research and

the final report will be for academic purposes only. If you request that the

information you provide should not be attributed to you, this will be respected.

Should you wish to receive a copy of the final research, you may request it by

contacting me directly, as per my contact details below.

Your contribution to academia and agreement to arrange this interview is

greatly appreciated.

Yours sincerely,

Daleen Pretorius

Student No: 332082

WBS MBA Part Time April 2008 Intake

Email daleen.breedt@gmail.com

Cellphone 082 447 789 4

WBS Tel: 011 717 3600

78

Interviewer Administered Questionnaire

Cash sales price of the following medicines

Cipramil 20mg 28 pack R______________________

Lanzor 30mg 28 pack R______________________

Norvasc 10mg 30 pack R______________________

Augmentin 1g BD 5 days R______________________

79

APPENDIX B – QUALITATIVE DATA (SEMI-

STRUCTURED INTERVIEW)

Letter to Respondents

Dear Respondent,

I am completing an MBA at Wits Business School, in Johannesburg. My MBA

dissertation is based on the following topic: The Impact of the implementation of

single exit pricing for pharmaceuticals in South Africa. The aim of the research

is to investigate the impact of SEP implementation on retail pharmacies in the

private sector. I would be grateful if I could arrange an hour interview with you

to understand your perspective on the subject as a senior manager of a

pharmacy group / as an owner of a retail pharmacy / as a manager of a hospital

pharmacy.

Confidentiality will be observed throughout the conduction of the research and

the final report will be for academic purposes only. Notes of the discussion will

be made during the interview and this information will be utilised as part of the

research report. If you request that the information you provide should not be

attributed to you, this will be respected. Should you wish to receive a copy of

the final research, you may request it by contacting me directly, as per my

contact details below.

Your contribution to academia and agreement to arrange this interview is

greatly appreciated.

Yours sincerely,

Daleen Pretorius

Student No: 332082

WBS MBA Part Time April 2008 Intake

Email daleen.breedt@gmail.com

80

Cellphone 082 447 789 4

WBS Tel: 011 717 3600

Research Instrument: Interview Schedule

The Impact of the implementation of single exit price for pharmaceuticals in South Africa

Thank you for participating in this research as a pharmacy manager or owner.

Be assured that any information provided will be held in the strictest confidence.

The interview will be recorded with your permission and notes will be taken

throughout the interview. Should you request that the information provided by

you is not to be attributed to you, this will be respected. The data collected for

the purpose of research will not be used for any other purpose without obtaining

your permission for any alternative or additional use.

The following research focused on the impact of the implementation of

single exit price for pharmaceuticals in South Africa. The research

investigates the impact of the implementation of Single Exit Price (SEP) on

retail pharmacies in the private medical sector in South Africa.

For this purpose the following questionnaire is posed to you and will address

the impact of the implementation of pricing regulations within the private

pharmaceutical retail pharmacy setting in South Africa.

Virtually no research is available to analyse the impact of SEP on retail

pharmacies in the private sector. For this reason, your input is highly important

to advance the body of knowledge regarding the topic of price ceilings in the

private retail pharmacy setting in South Africa.

Thank you,

Daleen Pretorius

81

Section A : Demographic

1. Summarise your own background and experience in retail pharmacy

business and management by focusing on your current as well as

previous positions / experience. Please include the following:

a) Job description / title

b) Functional roles

c) Number of years experience as pharmacy manager / owner

d) Number of employees working in the pharmacy

2. Describe the type of your retail pharmacy that are affiliated with including

the amount of personally working at the pharmacy / group i.e.

a) Independent retail pharmacy

b) Pharmacy as part of a pharmacy group

c) Hospital pharmacy (independent / part of a pharmacy group)

Section B : The Impact of SEP

1. Describe the influence of SEP on the business strategy of the pharmacy

i.e. additional products or services you are offering following the

introduction of SEP

2. What changes occurred in the business of this pharmacy in order to

survive the implementation of SEP?

3. How did the implementation of SEP influence your day to day business?

4. Was there any restructuring involved within this pharmacy following the

introduction of SEP and how did the restructuring affect your business?

Thank You.

Daleen Pretorius

82

APPENDIX C

Table 12: The Influence of SEP on the Business Strategy of Independent Pharmacies

Pharmacy

Number

Front

Shop

Focus

Warehousing

and Logistics

Focus

Additional

Services

Focus on

Alternative

Medicines

Improved

Productivity

Cash

Flow

Focus

Improved

Service

Delivery

Joined a

Group

Pharmacy Layout

Customer

Retention

Strategy

Profit

to

Cost

Centre

Increase

Volume

Sales

Independent Pharmacies

I1 � - � � - � - - - � - -

I2 - - - - - - - - - � - �

I3 - - � - � - � - - - - �

I4 � - � � � - � - - � - �

I5 � - � � - � - - - � - -

I6 � - � � - � - - - � - -

Independent

Total 4 0 5 4 2 3 2 0 0 5 0 3

% Total

Independent 67% 0% 83% 67% 33% 50% 33% 0% 0% 83% 0% 50%

83

Table 13: The Influence of SEP on the Business Strategy of Group Pharmacies

Pharmacy

Number

Front

Shop

Focus

Warehousing

and Logistics

Focus

Additional

Services

Focus on

Alternative

Medicines

Improved

Productivity

Cash

Flow

Focus

Improved

Service

Delivery

Joined a

Group

Pharmacy Layout

Customer

Retention

Strategy

Profit

to

Cost

Centre

Increase

Volume

Sales

Group Pharmacies

G1 � � � � � � � - - � - �

G2 � � � � � � � - - � - �

G3 � � � - - - - � � - - -

G4 - � - � - � - � - � - -

G5 - � � - � - - � - � - �

G6 � - � � � � � - � � - �

G7 � - � � - - � - � � - -

G8 � � � � � - � - - � - �

Total Group 6 6 7 6 5 4 5 3 3 7 0 5

% Total

Group 75% 75% 88% 75% 63% 50% 63% 38% 38% 88% 0% 63%

84

Table 14: The Influence of SEP on the Business Strategy of Hospital Pharmacies

Pharmacy

Number

Front

Shop

Focus

Warehousing

and Logistics

Focus

Additional

Services

Focus on

Alternative

Medicines

Improved

Productivity

Cash

Flow

Focus

Improved

Service

Delivery

Joined a

Group

Pharmacy Layout

Customer

Retention

Strategy

Profit

to

Cost

Centre

Increase

Volume

Sales

Hospital Pharmacies

H1 � - - - - - - - � - � -

H2 � � � � - - - - - - � �

H3 � - - � � � � - - - � �

H4 - � - � - � - - - - � �

H5 � � � � � � � - � � � �

H6 � � � � � � � - - - � �

H7 � � � � � - � - - � � �

H8 - - - - � � � - - - � �

Hospital

Total 6 5 4 6 5 5 5 0 2 2 8 7

Total

Hospital

Pharmay 75% 63% 50% 75% 63% 63% 63% 0% 25% 25% 100% 88%

Total All

Pharmacies 16 11 16 16 12 12 12 3 5 14 8 15

Total % All

Pharmacies 73% 50% 73% 73% 55% 55% 55% 14% 23% 64% 36% 68%

85

Table 15: Survival Tactics Following the Introduction of SEP for Independent Pharmacies

Pharmacy

Number

Calculation

Personell -

Cut

Overheads

Specialised

Manager -

Manage

Overheads

Increase

Pharmacy

Assistants

Pharmacist

Working

Hours

Increase

Decrease

Overheads

Decreased

Staff Advertising

Increase

Generic

Substitution

Accurate

Billing

Per

Diem

Accounts

Independent Pharmacies

I1 - - - � � - - � - -

I2 - - - � � - - - - -

I3 - - � � � - - - - -

I4 - - � - � - - - - -

I5 - - - � � - � - - -

I6 - - � � � - - � - -

Independent

Total 0 0 3 5 6 0 1 2 0 0

% Total

Independent 0% 0% 50% 83% 100% 0% 17% 33% 0% 0%

86

Table 16: Survival Tactics Following the Introduction of SEP for Group Pharmacies

Pharmacy

Number

Calculation

Personnel -

Cut

Overheads

Specialised

Manager -

Manage

Overheads

Increase

Pharmacy

Assistants

Pharmacist

Working

Hours

Increase

Decrease

Overheads

Decreased

Staff Advertising

Increase

Generic

Substitution

Accurate

Billing

Per

Diem

Accounts

Group Pharmacies

G1 � � � - - - � - - -

G2 � � � - - - � - - -

G3 - - � � � - - - - -

G4 - - - - � - - - - -

G5 � - - � � � - - - -

G6 � - � - - - � - - -

G7 - - � � � - � - - -

G8 � � � - - - � - - -

Total

Group 5 3 6 3 4 1 5 0 0 0

% Total

Group 63% 38% 75% 38% 50% 13% 63% 0% 0% 0%

87

Table 17: Survival Tactics Following the Introduction of SEP for Hospital Pharmacies

Pharmacy

Number

Calculation

Personnel -

Cut

Overheads

Specialised

Manager -

Manage

Overheads

Increase

Pharmacy

Assistants

Pharmacist

Working

Hours

Increase

Decrease

Overheads

Decreased

Staff Advertising

Increase

Generic

Substitution

Accurate

Billing

Per

Diem

Accounts

Hospital Pharmacies

H1 - - � - � - - � � �

H2 � - - - � - - � � �

H3 � � � - - - � � � �

H4 � � - - � - - � � �

H5 � � � - � - - � � �

H6 � � - - � - - � � �

H7 � - - � � - - � - -

H8 � � � - � - - � � �

Hospital

Total 7 5 4 1 7 0 1 8 7 7

Total

Hospital

Pharmacies 88% 63% 50% 13% 88% 0% 13% 100% 88% 88%

Total All

Pharmacies 12 8 13 9 17 1 7 10 7 7

Total % All

Pharmacies 55% 36% 59% 41% 77% 5% 32% 45% 32% 32%

88

Table 18: The Influence of the Implementation of SEP Regarding Day to

Day Business for Independent Pharmacies

Pharmacy

Number

Reduction in

Stock Days

Increased

Working Hours

Increased Pressure to

Decrease Overheads

Independent Pharmacies

I1 � � -

I2 � � -

I3 � � -

I4 � � -

I5 � � -

I6 � � -

Independent

Total 6 6 0

% Total

Independent 100% 100% 0%

Table 19: The Influence of the Implementation of SEP Regarding Day to

Day Business for Group Pharmacies

Pharmacy

Number

Reduction in

Stock Days

Increased

Working Hours

Increased Pressure to

Decrease Overheads

Group Pharmacies

G1 - - -

G2 � - -

G3 - � -

G4 � - -

G5 � � -

G6 � � -

G7 � � -

G8 � � -

Total Group 6 5 0

% Total

Group 75% 63% 0%

89

Table 20: The Influence of the Implementation of SEP Regarding Day to

Day Business for Hospital Pharmacies

Pharmacy

Number

Reduction in

Stock Days

Increased

Working Hours

Increased Pressure to

Decrease Overheads

Hospital Pharmacies

H1 � � �

H2 � � �

H3 � - -

H4 � � �

H5 � - -

H6 � - -

H7 � � �

H8 � � �

Hospital

Total 8 5 5

Total

Hospital

Pharmay 100% 63% 63%

Total All

Pharmacies 20 16 5

Total % All

Pharmacies 91% 73% 23%

90

Table 21: The Influence of the Implementation of SEP on the Restructuring

within Independent Pharmacies

Pharmacy

Number

Direct

Restructuring Indirect Restructuring

Independent Pharmacies

I1 - �

I2 � -

I3 - �

I4 - -

I5 � -

I6 - �

Independent

Total 2 3

% Total

Independent 33% 50%

Table 22: The Influence of the Implementation of SEP on the Restructuring

within Group Pharmacies

Pharmacy

Number

Direct

Restructuring Indirect Restructuring

Group Pharmacies

G1 - -

G2 - -

G3 - �

G4 - -

G5 - �

G6 - �

G7 - -

G8 - -

Total Group 0 3

% Total

Group 0% 38%

91

Table 23: The Influence of the Implementation of SEP on the Restructuring

within Hospital Pharmacies

Pharmacy

Number

Direct

Restructuring Indirect Restructuring

Hospital Pharmacies

H1 - -

H2 - -

H3 - -

H4 - �

H5 - -

H6 - -

H7 - -

H8 - -

Hospital

Total 0 1

Total

Hospital

Pharmay 0% 13%

Total All

Pharmacies 2 7

Total % All

Pharmacies 9% 32%

92

Table 24: Actual Scripts Priced at Fifty Pharmacies (Quantitative Data)

Priced

Script

Number

Pharmacy

Number

Independent

/ Group /

Hospital R Value

1 IA Independent R 1,270.60

2 IB Independent R 1,475.51

3 IC Independent R 1,475.51

4 ID Independent R 1,516.04

5 IE Independent R 1,456.83

6 IF Independent R 1,451.99

7 IG Independent R 1,183.46

8 IH Independent R 1,475.50

9 II Independent R 1,468.04

10 IJ Independent R 1,226.28

11 IK Independent R 1,254.44

12 IL Independent R 1,612.37

13 GA Group R 1,494.09

14 GB Group R 1,295.55

15 GC Group R 1,193.72

16 GD Group R 1,193.72

17 GE Group R 1,193.72

18 GF Group R 1,295.81

19 GG Group R 1,193.72

20 GH Group R 1,193.46

21 GI Group R 1,419.10

22 GJ Group R 1,475.51

23 GK Group R 1,475.50

24 GL Group R 1,193.47

25 GM Group R 1,193.72

26 GN Grop R 1,193.72

27 GO Group R 1,193.47

28 GP Group R 1,193.72

29 GQ Group R 1,193.72

30 GR Group R 1,191.23

31 GS Group R 1,193.47

32 GT Group R 1,193.72

33 GU Group R 1,191.23

34 HA Hospital R 1,475.75

35 HB Hospital R 1,475.75

36 HC Hospital R1475.75

37 HD Hospital R 1,514.66

38 HE Hospital R 1,475.50

93

Priced

Script

Number

Pharmacy

Number

Independent

/ Group /

Hospital R Value

39 HF Hospital R 1,444.98

40 HG Hospital R 1,329.44

41 HH Hospital R 1,475.50

42 HI Hospital R 1,475.75

43 HJ Hospital R 1,475.50

44 HK Hospital R 1,711.79

45 HL Hospital R 1,444.98

46 HM Hospital R 1,475.50

47 HN Hospital R 1,254.66

48 HO Hospital R 1,475.75

49 HP Hospital R 1,475.75

50 HQ Hospital R 1,433.80