MARK-UPS, TAXES, SUPPLY-CHAIN COSTS
v1.0 researched and written by Elise Erickson, edited by Suerie Moon, last updated June 2018
The literature on pharmaceutical markups, taxes, and supply-chain costs is considerable.* However, many of the studies are related to the WHO/Health Action International Project on Medicine Prices and Availability, which developed a low-cost survey methodology to measure the price of medicines that takes price components into account. While many of the reports using this methodology focused on LMICs, there are also a handful of studies looking at HICs. The bulk of the literature and reports appeared around the time of the release of the WHO/HAI methodology (2003 and 2008), with less literature published in recent years.
Markups; tariffs; taxes; value-added tax (VAT); distribution costs; supply-chain costs
SYNTHESIS OF THE LITERATURE
The distribution chain of pharmaceuticals is fragmented and complex (Management Sciences for Health 2012) and therefore obtaining information regarding the costs added along the supply chain is difficult. The WHO/HAI Project on Medicine Prices and Availability developed an approach that attempted specifically to capture these components.
An overview of the approach can be found in the 2nd edition of the survey manual, Measuring Medicine Prices, Availability, Affordability and Price Components (World Health Organization and Health Action International 2008).
Chapter 9, “Measuring Price Components,” discusses mark-ups, tariffs, and supply-chain costs, and outlines the price components found in the medicine price chain including: manufacturer’s selling price (MSP); insurance and freight; port and inspection charges; pharmaceutical import duties; mark-ups by importers, wholesalers and retail distributors; value added tax (VAT) or goods and services tax (GST); and dispensing fees. An online repository of the reports that have used the WHO/HAI methodology can be found at http://haiweb.org/survey-related-reports/. Chapter 9 (‘Pharmaceutical Pricing Policy’) of Management Sciences for Health's MDS-3: Managing Access to Medicines and Health Technologies also provides a useful 5-stage overview of pricing throughout the supply chain from the manufacturer’s price to the dispensed selling price (Management Sciences for Health 2012).
Papers examining these price components reveal that there can be excessive markups along the pharmaceutical chain, and that various types of taxes and duties have been applied to pharmaceuticals (Ewen and Dey 2006), which have been referred to as “hidden costs” that can contribute to higher prices (Levison and Laing 2003). The four main topics of discussion include:
Mark-ups: Ball (2011) provides a thorough review of the literature on the regulation of pharmaceutical distribution mark-ups in LMICs, and finds wide-ranging cumulative mark-ups between 17-84% in the public sector, and 11-6,894% in the private sector in LMICs, and wholesale mark-ups between 2-21% and retail mark-ups between 4-50% in OECD countries. Ball concludes that there is little evidence regarding mark-up regulation in LMICs, there is no dependable information on the effect of mark-up regulation alone on prices, and that markup regulation can help to control expenditure only when part of a comprehensive plan. The review includes several useful appendices: Appendix 2: Distribution markups applied to pharmaceuticals in OECD countries; Appendix 3: Potential strategies in regulation distribution markups; Appendix 4: Summary of data on wholesale and retail markups in LMICs identified in the literature. A policy brief based on the review provides a useful overview.
Other studies focus on single countries. For instance, Babar et al. (2007) evaluated medicine prices, availability and affordability in Malaysia and found high markups applied by dispensing doctors (up to 50-76% for innovator brand drugs, and up to 316% for generics); and by retail pharmacies (25-38% for innovator brands, and 100-140% for generics). Ball and Tisocki (2008) found retailer markups of generics in the Philippines to range from 5-355%, and distributor markups ranging from 18-117%. In an analysis of 36 developing and middle-income countries, Cameron et al. found the range of private sector wholesale markups to be between 2-380%, and retail markups between 10-552%. A mapping of the distribution chain in EU Member States found that there exist significant variations between countries with regards to the type and degree of distribution margin regulation, and type and use of wholesale and pharmacy margins (P. Kanavos, Schurer, and Vogler 2011).
Taxes/VAT: Studies have also identified various taxes and duties on pharmaceuticals in LMICs. These types of taxes have been called “a tax on the sick” (Cameron et al. 2009). Ball and Tisocki (2008), for example, found that VAT (12% at the time in the Philippines) can have a significant impact on the price of medicines, especially when markups are based on a price that includes VAT. While VAT tends to be lower (even 0%) in EU countries, a study of nine European countries found that those that still applied VAT ultimately had higher medicines prices, even with comparatively lower wholesale prices (Martikainen, Kivi, and Linnosmaa 2005).
Tariffs/duties: While they may be a small proportion of a medicine’s total price, Olcay and Laing have argued that tariffs can significantly increase the price paid by consumers since many markups are based on the base price, which includes tariffs (Olcay and Laing 2005). Although tariffs can impact prices in this way, it has been suggested that other factors including the manufacturer’s price, VAT and markups are likely to have a larger impact (Olcay and Laing 2005). Nevertheless, tariffs are often described as targeting the sick, and therefore their removal is thought to increase access (Bate, Tren, and Urbach 2006), without adverse effects on the economy (Olcay and Laing 2005).
Role of manufacturer’s selling price (MSP): Part of the discussion in this issue area is what price component ultimately has the potential to contribute most to the price of a medicine. In an analysis of 36 developing countries, Cameron et al. (2009) found that although in some countries taxes or markups can add considerably to the cost of a medicine, in other countries the MSP mattered more. Similarly, Ball and Tisocki (2008) found wide-ranging markups in the Philippines, but highlighted that the MSP is the most important component (that is, a low-priced drug can still be affordable with markups). Studies examining HICd also found that the distribution chain and taxes had an impact on medicine prices (P. G. Kanavos and Vandoros 2011), but that the impact varied according to the different policies in place, and the ex-factory price level (P. Kanavos, Schurer, and Vogler 2011). On the other side of the discussion, others challenged the assumption that the MSP matters most, and stress the need to understand local markets, margins, and markups that can be just as important in contributing to the high price of a medicine in LICs (Russo and McPake 2010).
To improve medicine affordability, the following policies relevant to mark-ups, taxes, and supply chain costs have been recommended:
Use of regressive mark-ups (to incentivize dispensing of cheaper generics) (Ball and Tisocki 2008). Maximum percentage mark-ups can actually incentivize selling higher-priced medicines that yield a higher return, and therefore should be avoided (Cameron et al. 2009)
More data and analysis from different countries on the impact of increases or decreases of taxes, mark-ups, and other costs that accrue through the supply chain on the final price of a medicine
Additional research to determine what level of mark-ups can support a viable supply chain while maximizing affordability
CITED PAPERS WITH ABSTRACTS
* For the purposes of this review, we have established three categories to describe the state of the literature: thin, considerable, and rich.
- Thin: There are relatively few papers and/or there are not many recent papers and/or there are clear gaps
- Considerable: There are several papers and/or there are a handful of recent papers and/or there are some clear gaps
- Rich: There is a wealth of papers on the topic and/or papers continue to be published that address this issue area and/or there are less obvious gaps
Scope: While many of these issues can touch a variety of sectors, this review focuses on medicines. The term medicines is used to cover the category of health technologies, including drugs, biologics (including vaccines), and diagnostic devices.
Disclaimer: The research syntheses aim to provide a concise, comprehensive overview of the current state of research on a specific topic. They seek to cover the main studies in the academic and grey literature, but are not systematic reviews capturing all published studies on a topic. As with any research synthesis, they also reflect the judgments of the researchers. The length and detail vary by topic. Each synthesis will undergo open peer review, and be updated periodically based on feedback received on important missing studies and/or new research. Selected topics focus on national and international-level policies, while recognizing that other determinants of access operate at sub-national level. Work is ongoing on additional topics. We welcome suggestions on the current syntheses and/or on new topics to cover.