Why purchase subsidy is the solution to Nigeria’s high cost of medicines (Part 1)
Beyond economic growth, one of the indicators of a well-developed economy is its Human Development Index (HDI). The HDI is a composite measurement of development across three aspects of a country; healthcare, education, and the standard of living. In 2022, Nigeria was ranked as one of the least developed countries with respect to human resources with an HDI of 0.534; placing it in the 164th position globally and 28th in Africa.
Of the three entities that make up the HDI calculation, healthcare has always been regarded as the most difficult to optimize due to the direct influence it has on the lives of people.
Nigerian healthcare is bedeviled with a lack of basic infrastructures and modern facilities. For a country that is regarded as one of the fastest-growing nations in the world with 5.5 live births per woman and a 3.2% annual population growth rate, the country’s healthcare system is entirely despicable.
The ability to access and afford medicines is one of the foundational measurement indices for a thriving healthcare industry. Especially for emerging and nascent economies such as Nigeria. In Nigeria, there is accessibility but most citizens are unable to afford them. There are currently about 25,000 drug dispensaries in Nigeria, either as pharmacies or chemists. The disaggregated form of these dispensaries makes it extremely difficult to develop scalable solutions targeted at medicine affordability.
Although these dispensaries are prevalent, they are extremely costly to manage. Over the years, they have always shifted extra costs to their consumers/patients. This increases the final cost of medicines, making the cost of basic healthcare unaffordable for lower-income Nigerians. The current costs of medicines in Nigeria are erroneous.
Average drug prices in Nigeria are up to 38 times more than the international threshold for the cost of medicines. Generic drugs are known to be cheaper than branded drugs globally. Unfortunately, generic drugs in Nigeria are about 825% more expensive than in some other countries across the world.
The simple explanation for these high costs is that the Nigerian pharmaceutical supply chain is very expensive, making the final consumers the most disadvantaged. For example, the composite CPI for healthcare reached a high of 17.02% in November 2022. The markup for medicines by distributors and retailers in Nigeria was found to be as high as 900%. That is unfairly high.
When these prices are compared with the income level of most Nigerians and the ever-increasing inflation rate, it becomes obvious that unless there is an immediate intervention, most Nigerians will be completely shunned from access to healthcare. More than 50% of Nigerians currently live below the poverty line.
Several factors contribute to this high cost of medicines. Although specific fees due to the government by various stakeholders are major factors, there are also some other factors that are without the control of the government institutions. There have been several attempts to reduce final costs by exempting healthcare businesses from certain fees and taxes, but the cost savings are insignificant to the total cost books of the supply chain actors.
It is therefore important for the government, in close partnership with other non-governmental organizations, to develop a sustainable solution that will reduce the supply chain costs for the distribution of medicines across the country.
Considering the decentralized format of the Nigerian drug dispensary landscape, the best form of intervention should first impact the concentrated players within the supply chain; manufacturers and major importers. Once the cost of sale from these players reduces, other lower-end supply chain actors such as retailers and distributors can also buy and sell at reduced prices for the same margin of profit.
The best model for such intervention is a purchase subsidy. The government alongside other healthcare non-profits will create a structure that allows them to pay for some percentage of the total selling price of the inventories of manufacturers and importers. Assuming a 50% is fair enough. This means the government alongside other financing stakeholders are indirectly providing a 50% pricing discount for the retailers and final consumers.
This mode of intervention is important because there are only two sources for all the drugs distributed across the country. They are either manufactured in Nigeria or imported. It will be easier to deal with the various associations in charge of these two units; that is the Pharmaceutical Manufacturers Group of Manufacturers Association of Nigeria (PMG-MAN) and the Association of Pharmaceutical Importers of Nigeria. Supply chain interventions that require access to distribution and retail units will be almost impossible due to the decentralized and unstructured form of the industry.
By implementing this form of supply chain subsidy, the exorbitantly high prices of medicines in Nigeria can be driven down. This will make primary healthcare more affordable and accessible to lower-income Nigerians. This will also have a ripple effect across the country, increasing life expectancy, and improving the overall productivity of the economy.
Due to the complexity of Nigeria’s economic and political environment, there are certain guardrails that need to be put in place to ensure the successful implementation of such innovations and ideologies. That will be described in detail in another article.
