Determining a viable dispensing fee

Government recently announced its new dispensing fee for pharmacists. It’€™s a highly contentious topic with pharmacists claiming that they will not be able to survive if they stick to the numbers put forward by government. University of Cape Town professor Di Mc Intyre, one of the top health economists on the continent, had the sticky task of chairing the government’€™s Pricing Committee which recommended the new dispensing fees and has been tasked with devising a number of measures to reduce the cost of medicine.

In the latest development pharmacists have asked government to postpone the implementation of the new fee on January 1.  McIntyre spoke exclusively to Health-e News Service.


Q: How did you get to the dispensing fee structure that is now on the table? What did you include in your calculations?


A: We wanted to find out how much it costs to run the dispensary component of a pharmacy, excluding the front shop. We got information from a range of sources around the rent, salaries of pharmacists and so on. The health department conducted a survey among pharmacists, we got information from the organizations representing pharmacists and we even phoned suppliers asking them for example how much it costs to install the shelving where the medicine is stored.

We included recurrent and capital costs. We knew that a lot of these costs would be incurred even if there was no front shop for example air conditioning, refrigeration, employing a pharmacy assistant, a pharmacist and so on. One hundred percent of these costs were included. But then there are costs that are shared with the front shop such as rent, and electricity and those were apportioned. So in the end we included all costs related to dispensing plus we included a return on investment or profit component.

We then calculated an average dispensing fee per item. We even conducted time and motion studies to see the average time it takes to dispense an item and spoke to pharmacists to get their input on the time they took. So, we definitely also looked at what currently exists in terms of how long it takes to dispense an item and how many items can be dispensed by a pharmacist working with a pharmacy assistant.


Q: What impact are you hoping this will all have on the man in the street?


A: When we made our first recommendations around the dispensing fee of R26/26 percent, it was never fully implemented because of the court case. Some pharmacists charged the R26/26 percent while others just continued to operate in the way they have been doing.   Many, many pharmacies continued charging whatever they liked using old mark-ups of anything between 35 and 50 percent plus. For consumers who have been using these pharmacies the cost of their medication will come down. Those who have been using the pharmacies that have been charging the R26/26 percent may end up paying a bit more. But we are expecting many pharmacies not to charge the maximum dispensing fee, even though they are entitled to. We are aware of medical schemes that have established contracts with pharmacies to levy a 26 percent/R26 fee so shopping around may produce additional savings.


Q: The pharmacists are claiming that more than 60% will go out of business.   What is your response to these claims?


A: These estimates are based on the status quo, what pharmacists are currently getting.   So what they have done is estimate the income pharmacists will get under the new fee, and subtract from that everything that pharmacists are currently claiming as expenses and their current profit levels ‘€“ any pharmacy where this income won’€™t cover what they currently have as expenses and profits is taken to mean the pharmacy will go out of business.   The assumption is that it doesn’€™t matter if the pharmacy has been operating inefficiently ‘€“ such as employing 3 pharmacists when the volume of items dispensed only warrants 1, or been renting large, expensive premises when there are two other pharmacies within a few hundred metres away from you ‘€“ or if the profit levels of the pharmacist have been 30% or even more. It is simply assumed they will go out of business.   This does not need to be the case ‘€“ there is lots of space for reducing expenses and we believe that the return on investment built into the fee is a fair one.



Q: The dispensing fee you have recommended is a complex structure, how are people going to calculate what they should be charged?


A: It is complex, but we had to make sure we safeguard pharmacists’€™ income. We have requested pharmacies to put up notices with the maximum fees and we will also be putting the information on the Department of Health website. From now on, pharmacists will be expected to provide clients with an invoice which separately states the single exit price (manufaturer’€™s price and distribution fee) and the dispensing fee.


Q: What recourse do consumers have if they do not agree with the pharmacy calculations?


A: They should contact the Department of Health (Directorate of Pharmaceutical Economic Evaluation) who will be able to check if the correct amount has been charged.   They can check that no more than the single exit price and maximum dispensing fee has been charged.


Q: When will all of this be implemented?

We have requested pharmacists to implement it as quickly as possible, but we also realize they need to change their software. So, we have given them until January 1, latest, to implement the changes.


Q: Could you explain the thinking behind the separation in the Single Exit Price and the dispensing fee?


A: In terms of the regulations, they have to be separately stated, and this is to ensure that any other costs cannot be concealed. The consumer will not need to pay for anything else such as sending the claim to the medical scheme or administration fees. It is the same fee whether an item is on prescription or being purchased over the counter (schedule 1 and 2 medicine). For Schedule 0 medicine there will be no dispensing fee. So, consumers are entitled to ask advice on what medicine to take for a particular health problem, how it should be taken and so on, without being charged an extra fee for the consultation. The only separate fee that is allowed to be charged is a delivery fee, but pharmacists are of course entitled to not charge for this service.


Q: There are claims that many pharmacies will go out of business. What is your view?


A: The fee was explicitly designed to cover the standard expenses. The fee itself will not put pharmacies out of business. Inefficiency may result in some pharmacies going out of business. For example, if they have abnormally high expenses they may need to look at how to adjust their expenditure, and the biggest factor is the cost of the professional staff, the pharmacists and pharmacy assistants. This may be the first place they need to look and ask themselves the question ‘€“ Are we employing the right number of people and right mix given the amount of work we have? It is more efficient to have a pharmacist and a pharmacist assistant rather than two pharmacists.

In terms of volume, they may need to look at whether there is an abnormally low volume of scripts being processed.

We found from the survey that the pharmacies that have the lowest numbers of items dispensed are those in the large metro areas where there are more than five pharmacies in a three kilometer radius.

Pharmacies may also need to look at their business practices ‘€“ Are they making the right decisions in terms of the space they are renting, of the staff they are employing.

If their volumes are unsustainably low they may consider:

–                 Relocating from an area where there are many pharmacies and making their services more available in areas where there is a need, and these do exist;

–                 Looking at offering other services such a primary health care services where clients can have their blood pressure taken and so on;

–                 In some of the provinces the health department has formed partnerships with private pharmacies dispensing chronic medicines to public sector patients, particularly in the rural areas.


Q: But still, pharmacists will claim that the dispensing fee has a big enough impact to put them out of business?


A: Then they are measuring themselves against the status quo ‘€“ I have heard some pharmacists saying ‘€˜we are going to make a loss’€™ when what they mean is we are going to be getting less than we currently do. For pharmacists the status quo is no longer an option. Pharmacists need to look at how to cut their cloth. When Tito Mboweni announces an increase in the interest rate there are always mumblings that some people could lose their houses because their bond repayments are going to increase. But many people look at their budgets and see where they can cut expenses to make sure they are able to pay for their house. Only in exceptional circumstances ‘€“ where a family cannot cover basic living expenses plus increased repayments – are cars and houses repossessed. Pharmacists need to find a way of preventing that from happening and we are saying that there are ways to do that.

The public needs to ask pharmacists and their representative organizations what they have been doing to prepare for the changes that were coming – it has been clear since January 2004 when the first draft regulations were published that the status quo will not remain. What have people been trying to do to accommodate these changes when they knew it was coming? Well, the moment has now arrived and they have had two full years to look at their business practices and what can be changed.


Q: As we know the Constitutional Court sent the Pricing Committee back to the drawing board and told it to formulate and appropriate dispensing fee. Have you got it right?


A: It is important to note that the Constitutional Court supports the regulations of medicine prices and the dispensing fee. We believe this fee is appropriate and I am convinced that the Pricing Committee has done its homework very well. We have gathered data from every possible source and I believe this is a workable fee.


Q: Why a four tier system for the dispensing fee?


A: Because this was the only way to stop the gaming of the system. With the R26/26 percentfee we found that there were incentives to dispense as close to R100 as possible in order to get the highest gain. We believe this system smoothes out any perverse incentives.


Q: Is there a prospect of the dispensing fee increasing?


A: Pharmacists will be gaining more than what the model shows now due to the single exit price increase. At the same time as announcing the dispensing fee, manufacturers were permitted to take a price increase. Once international benchmarking is implemented then we will re-evaluate and revise the dispensing fee. We want to make sure that pharmacists are able to get the income they should be getting.


Q: Are you convinced the fee is viable and what is your understanding of the term?


A: Basically they must be able to cover the expenses of an efficiently operating dispensary and get a return on investment. There must also be an acceptable level of expenses and an acceptable level of dispensing. Viability may in the end require a change in business practices. We ran the dispensing fee on the data from the 161 pharmacies (out of 2500 pharmacies) that took the time to give us information on income and expenses. The results suggest that the efficiently run pharmacies will be viable.


Q: Pharmacists are expressing concern that you are pushing them to dispense in high volumes, opening the way for errors to creep in.


A: The estimated number of items that needs to be dispensed is based on the current practice of a pharmacist and pharmacy assistant working together.   We have sat in pharmacies and observed how long it takes to dispense using the Pharmacy Council Standards for Good Dispensing practice.   So the number of items a pharmacist is expected to dispense is based on adherence to acceptable standards.

Many pharmacies out there are dispensing more than our model of an average of 2 300 items per month. We do give flexibility for time-out which means the pharmacist will not be working flat out the whole day.


Q: You announced a manufacturer price increase?


A: Yes, manufacturers can take an increase of up to 5,2 percent on the single exit price as it stood on October 1. This calculation is based on trends in the CPI and the foreign exchange rate. But we have asked the manufacturers not to take the increase unless they are sure that their prices are lower than the internationally benchmarked prices will be. We don’€™t want volatility where prices are going up one minute and down the next. So, we are hoping that quite a lot of them will not take the price increase immediately.



Q: What is the thinking behind international benchmarking?


A: The basic idea is that I was in Australia at the end of September and I had forgotten to get a script made out for my medication. I ended up paying one third of what I pay for the identical medication here. It seems unacceptable that in South Africa we pay more that one would pay in a developed country. We simply want to ensure that South Africans are not paying more for their medication that people in other countries that have medicine regulations.


Q: How did you decide on which countries to use as a measure?


A: We selected countries that also had a good regulatory framework in terms of quality, safety and appropriate pricing. We also had to make sure that these countries have a regulated price so that the price we use is a ‘€œtrue price’€. The four countries that   met   these criteria were Australia, New Zealand, Spain and Canada.


Q: Why not middle-income countries such as Brazil and India?


A: They did not fulfill the regulatory criteria. Also, the majority of those who use private pharmacies in South Africa have income-levels similar to those in higher income countries. It is worth remembering that SA is unique in terms of its health system and regulatory structure and there is no country that fits all of our characteristics.


Q: How will international benchmarking work?


A: We will obtain the manufacturer price in Australia, Canada, New Zealand, Spain and South Africa for each branded medicine sold in South Africa. This will be easy because it will be the same companies providing medicines to the various countries. We will get their headquarters to report this information and this price will then be converted it into South African Rand using the exchange rate. The price will be exclusive of VAT. We will then look at which of these prices is the lowest and that is the one that will be adopted in South Africa.


Q: What are you hoping to achieve with international benchmarking?


A: We are expecting considerable decreases in the price of many medicines. In some instances we find our prices comparable, but in many instances the South African price is significantly higher. The Pricing Committee is one hundred percent committed to introducing benchmarking. It would have been introduced long ago if we didn’€™t have to contend with the court challenge from pharmacists who were challenging all the regulations.


Q: How will the generic manufacturers be affected?

A: We will conduct benchmarking of the originator medicines first. In terms of generics we have proposed a draft for comment in which we recommend they charge at least forty percent less that the price of the internationally benchmarked originator drug.


Q: After all of the regulations have been implemented, do you believe the man on the street is going to see and feel a difference?


A: Yes, where they are going to pay cash for their medicines they will see a difference. Medical scheme members are less conscious of prices as their scheme pays the pharmacist, but they will find that their annual acute and chronic medicine allowance is going to last longer. Spending on medicines by medical schemes will drop, but it may not mean that medical scheme contributions will drop as we have seen increases in other expenditure items with private hospitals and specialists being the biggest beneficiaries. To date the pricing regulations have produced a 22 percent(on average) reduction in medicine prices. This does not include the benchmarking intervention which is expected to produce a further saving for the consumer.


Q: Political parties are calling for the Minister’s head, saying the dispensing fee is a disaster and pharmacies will go under. They also criticized the committee for not meeting with pharmacists. What is your response?


A: The Constitutional Court ruling made it very clear that the Pricing Committee should provide mechanisms through which stakeholders could put forward their views but that the Committee was not obliged to hold oral hearings or meet with stakeholders.   Indeed, it was the fact that in 2004 the Pricing Committee entertained oral hearings (which required over 3 weeks of daily sessions to conclude) but that not every member of the committee could attend every single presentation that landed the committee in ‘€˜hot water’€™.   To avoid any future legal challenges, the committee agreed that they would only receive written submissions from stakeholders ‘€“ this would ensure that every member of the Committee was fully informed of all stakeholder views.   Public notices were released inviting written submissions ‘€“ any person or group was free to make such submissions and no restrictions were placed on length or nature of submissions.   The committee received many such submissions.   If there were any aspects of a submission that were unclear, the stakeholder was requested to clarify and provide additional information.   A lengthy and extensive process of securing stakeholder views and inputs was undertaken by both the Committee and the Department of Health.   It should be noted that the Pricing Committee is not a negotiating forum ‘€“ members have been appointed on the basis of their technical expertise and their terms of references are purely to compile information, secure inputs from stakeholders, critically assess all of this information and make recommendations based on their expert knowledge to the Minister of Health.   They are not permitted to negotiate with stakeholders.   What is important for the public and political groups to recognise is that simply because some stakeholders disagree with the Pricing Committee recommendations does not mean that stakeholders have not been provided with ample opportunities to express their views or that the recommendations are inappropriate ‘€“ it simply reflects a difference of opinion.   We have spoken to many pharmacists in rural and peri-urban areas and while many feel that the regulations pose challenges for them, they believe they can continue to operate in the new regulated environment.   The ‘€˜actuarial studies’€™ that have been paid for by the Pharmaceutical Stakeholders’€™ Forum are fundamentally flawed ‘€“ they are assuming the ‘€˜status quo’€™ ‘€“ they do not take account of any possibility for reducing expenditure or increasing income through changing business practices.   For example, if a pharmacy currently has two full-time pharmacists, but only dispenses about 1 000 items per month, each pharmacist dispenses medicines to only nine patients a day.   This situation usually happens where there are five or more pharmacists within a three kilometre radius.   The question is should all consumers be forced to pay much more for medicines to ‘€˜protect’€™ this pharmacy or should the pharmacy consider how to change their business practices so that they can still make a good return under the new fee.   No pharmacy needs to go out of business under the regulated fee, but many pharmacies will need to carefully think about how to change their business practices.





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