Identifying, finding and analyzing the component costs of Essential Medicines

WHO/HAI Medicine Prices Project

Definition: Price components“…in the field of pharmaceuticals

… retail prices, in particular, are often a distant relation to manufacturer’s selling price. Import duties, taxes, wholesale markups, both formal and informal, can double the price of a drug between manufacturer and consumer.” (WHO Secretariat 2001)

Retail price = manufacturer’s selling price

+ insurance & freight+ import tariffs + taxes (national, state, local)+ import markups+ port, customs, inspection charges+ wholesale markups + retail markups+ local storage and distribution charges+ VAT/GST+ dispensing fees

Why component costs?

Regularly constitute 30%-45% of retail prices

Known to range to 85% or higher Many unknowns, many variations

among products, sectors & countries

Need to know impact for planning Use information for price negotiation

Total Mark-up as a Percentage over CIF Price, with Portions Attributable to Different Component Costs

Source: Madden 2004

The Price Components Handbook Expands existing components

section in “Medicine Prices” Presents new methodology,

better guidance Approach: Identify, Find, Analyze

Identifying component costs “Price Components” provides

example components Ask participants in supply chain But: many don’t know costs exist

Be a detective! Look for large price gaps, and ask questions!

Stages of the supply chain0 manufacturer’s selling price1 + insurance & freight2 + import tariffs & taxes

+ import markups+ port, customs, inspection charges

3 + wholesale markups + distribution charges

4 + retail markups+ local taxes & distribution charges

5 + VAT/GST+ dispensing fees

Finding component costs Start at retail shop, trace the

products “up” supply chain to Supplier

Ask, ask, ask Check from both sides

But many obstacles: Observed & official markups differ Middlemen guard cost, markup info MSP as “confidential information”

Data collection tool:Stage 5

Charge basis: FeePercent

Order Type of ChargeCharge status

Charge basis

Amount of Charge

Resale price Value Fee

VAT/GST F / P

Dispensing fees F / P

Cost to patient FeeStage 5

Charge status: Not applicableNot foundUnknownValue

Stage 4

Only data collection: “Source” information is just used in tracking

Order Type of ChargeCharge status

Charge basis

Amount of Charge

Source

Order Procure price Fee

Stage 4 Transport F / P

Mark-up (observed) F / P

Local taxes F / PRetailer or public dispensary Total

Stage 3

Order Type of ChargeCharge status

Charge basis

Amount of Charge

Source

Order Procure price FeeStage 3 Transport F / P

Mark-up (observed) F / P

Regional taxes F / P

Total

Wholesale or public purchaser

Stage 2Order Type of Charge

Charge status

Charge basis

Amount of Charge

Finance/banking fees F / P

International inspection F / P

Stage 2 Port charges, clearance F / P

Import tariff F / P

Importer's markup F / P

Pharmacy Board fee F / P

Other fees F / P

Local transport F / P

National tax F / PLanded cost

Total

Stage 1

Type of ChargeShipping

termsCharge basis

Amount of Charge

Manufacturer's selling price Fee

Stage 1 Insurance and freight

B MSP and freight Value FeeProcurement cost

A

Total

CIF, DDU, EXW, FOB

Data collection

Drug 1 Drug 2 Drug 3

Public

Private

Other

Analyzing component costs

Enter data in Price Component Workbook

Automatically calculates totals

MSP51%

Stage 111%

Stage 223%

Stage 315%

Stage 50%

Stage 40%

MSP

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

Share of component costs across stages

Reports

Provides reports on: MSP vs add-on costs for each drug Contribution each stage to retail cost Comparison across drugs by stage Comparison across sector by stage Contribution MSP & add-on by stage

0

2

4

6

8

10

12

14

16

18

20

MSP Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Public

Private

Mission

Contribution of component costs by stages

International comparison Compare stages, not components When data not separable, can

still be compared A B C D

Current status Draft “Price Components

Handbook” ready for review by project team

Complete coding of Price Components Workbook

Pilot test methodology this spring

Watch for updates on HAI website:www.haiweb.org/

medicineprices