EKIP– Expert Club for Economics and Politics A Different Opinion
“Inflation is taxation without legislation” – this phrase, uttered by the American economist Milton Friedman, is universal and valid for every period of inflation from the past to the present. Another part of his thesis is that inflation is a purely monetary phenomenon, or more clearly – when too much money chases too few goods. This is how the galloping inflation in the Eurozone was caused by the many economic stimuli to the economies through the Covid-19 pandemic, but also quantitative easing, as well as negative interest rates of central banks.
Over the past two years, the situation with the supply of medicines in the European Union has undergone dynamic development. Being inseparable from the economic process at the beginning of the pandemic, there was a danger of shortages of certain substances, which was contained, but currently a process of increasing production costs is observed. There are many factors for this - the first is the reaction of the markets to the planned policies for the return (onshoring) of the production of active ingredients to the territory of the Old Continent, leading to increased costs for labor, utilities, rent and investments in new production lines. The second factor concerns the price of substances - the pandemic-induced demand for certain medicinal products increases the need to ensure quantities, as well as their even distribution.
Part of the problem is that large markets relying on generic substances are overstocking due to the risk of subsequent waves and variants of Covid-19, and on the other hand, looking to the future, due to the danger of potential new pandemics. This process naturally leads to an increase in the value of an inelastic commodity anyway, or in other words - regardless of the price, life-sustaining and life-saving drugs will always be in demand. The third factor related to the potential price increase is the transfer of production from China to India with the idea of diversification and more secure supply lines, as well as in view of China's growing influence in international trade relations, including the rise in the cost of basic ingredients and the suspension of exports.
The fourth factor is the so-called bottlenecks (note: from the neck of a bottle) or narrowing in the supply lines - the many new rules and restrictions related to the spread of Covid-19 in different countries lead to certain goods being delayed on the way to their final destination. Since the economy is globalized and the paths of the production initial cycle to the finished final drug product are many, there are potential delays that can at certain times lead to product shortages.
The nature of the regulations in the European Union, as well as in Bulgaria, does not allow for a direct increase in the price of medicinal products – for medicines from the Positive Medicines List – prices are referenced, for medicines with a prescription – marginal, and for those without – there is a certain price “ceiling”. In a non-inflationary, gradually growing economy – regulations regarding the prices of medicines perform their corrective function, not creating significant imbalances in the market in the short term. The problem comes when in one year the general inflation in the country increases from 0.1% to 7.8% (CPI December 2020 compared to CPI December 2021), and medicines continue to have highly restrictive regulated prices – the increase in the production cost and the artificial price ceiling lead precisely to a narrowing of the margins for the manufacturing companies, which are left with either selling below cost or withdrawing their products.
Another part of the supply lines are wholesalers and retailers, where the costs of salaries and utilities are set to increase as winter progresses. The law provides that the reference price of products on the Positive Medicine List will be increased by the percentage of statistically reported inflation for the period of effect of the last formed marginal or registered price, however, the case is that the average annual inflation for the previous 2021 according to NSI data is 3.3%. Therefore, it is increasingly necessary for regulated discounts (surcharges), which wholesalers can make to pharmacies, and they to patients – to serve as a buffer against the ubiquitously increasing prices.
There are several possibilities for compensating businesses and the population along the chain - on the one hand, Bulgaria has one of the highest VAT rates for pharmaceutical products - reducing it will nominally reduce the price, giving wholesalers and pharmacies breathing space - not to pass on the regulated markup of products to patients. As for the stability of the fiscal system, which the Ministry of Finance fears - the hidden tax called inflation has ensured that the treasury will be overflowing for the coming year.
On the other hand, strict regulation regarding price referencing, marginal and “ceiling” prices brings with it the dangers of missing medicines and reduced competition – naturally increasing prices as a result. Rethinking the restrictive mechanisms by the state regarding drug prices will be beneficial, especially at a time of galloping inflation that is being observed.
The article was first printed in the February 2022 issue of Sting magazine.
