On 25 November 2019, the Latvian Competition Council (Council) published a report on “Medicines: Price formation and possible restrictions on competition affecting their financial availability”. The aim of the study was to consider the factors affecting prices and financial availability of medicines in Latvia. The study compared the regulatory frameworks of Latvia, Lithuania and Estonia for non-reimbursable and reimbursable medicines, assessing their impact on the price of medicines and the level of markup.

The Council found that markups for medicines in Latvia are often high and not objectively justified. This mainly refers to medicines with high producer prices and is primarily caused by ineffective limiting of the markup. That is, Latvia ‒ unlike Lithuania and Estonia ‒ does not have a fixed limit for the amount of markup applicable, but only a limit set in terms of the percentage of the value of a medicine. With that in mind, the Council suggests that the Ministry of Health should develop a new regulation to improve the process for setting medicine markups.

Prices of non-reimbursable medicines in Latvia

The Council concludes that the markup mechanism for non-reimbursable non-prescription medicines encourages resellers to sell the most expensive medicines among medicines of the same type or effect. Prescription medicines are prescribed by indicating the generic name of the medicine in the prescription, which results in the pharmacy issuing medicines with the lowest price. For non-prescription medicines, such a procedure does not exist. Currently in Latvia some 8‒26% of a medicine’s final price consists of the producer’s and pharmacy’s markups. According to the Council the non-reimbursable non-prescription medicine segment is considered to be the most sensitive as it allows market participants the widest discretion.

The Council has observed that producers, wholesalers and pharmacies apply discounts on trades between them. These are mostly related to the purchased volume and also discipline in making payments. However, these discounts may not affect the financial availability of medicines to patients, as they will not always be included in the final price.

In general, the Council has recognized that markups on medicines are high and in most cases may not be objectively justified.

Comparison with the other Baltic States

In its report the Council emphasizes that ‒ unlike in Estonia and Lithuania ‒ the regulatory framework in Latvia does not set a maximum fixed markup. In Latvia, the trader’s markup is determined proportionally to the producer’s price, which leads ‒ in the case of expensive medicines ‒ to exceeding the levels found in Lithuania and Estonia for identical medicines. For example, the pharmacy markup in Latvia is not the highest in the medicines segment with a producer price below EUR 2. However, if the producer’s price reaches EUR 25, the markup is already 2.7 times higher than in Lithuania and 4.5 times higher than in Estonia. The regulatory differences mentioned above create more opportunities for Latvian medicine wholesalers and pharmacies to make profits. At the same time, the Council has not identified differences in profit-influencing factors in the Baltic States that would justify applying a proportionality mechanism in Latvia.

Prices and markups of reimbursable medicines

As for items on the list of reimbursable medicines, the Council points out the different procedure by which markups for wholesalers and pharmacies are created. While the wholesaler’s markup is always created in proportion to the producer’s price, the pharmacy’s markup becomes fixed as the producer’s price reaches EUR 100. Moreover, in the most expensive medicines segment, as the producer’s price rises, the pharmacy markup is significantly lower than that of the wholesaler. For example, if the producer’s price is EUR 500, the wholesaler’s markup is EUR 15, while the pharmacy’s markup is EUR 6.05. As a result the Council considers that the pricing mechanism currently motivates wholesalers to offer and sell more expensive medicines, while pharmacies could be interested in selling medicines with a producer price under EUR 100 per package. However, the Council points out that a positive effect is brought about by the requirement ‒ introduced in 2019 ‒ to indicate the generic name of the medicine in the prescription. That way, medicines with higher costs are prescribed only in certain clinically justified cases. This motivates producers to maintain low prices and increases the pressure of competition among them. In the Council’s opinion, parallel imports do not in all cases lead to the expected results of price lowering due to the high costs of administrative procedures.

The Council emphasized that the ratio of revenue at the level of wholesalers and pharmacies in Latvia is disproportionate because the regulation provides significantly higher revenues specifically for wholesalers in the segment of expensive medicines.

Comparison with the other Baltic States

The Council concluded that the largest markups for pharmacies are currently provided by the mechanism in Lithuania. Regarding wholesaler markups for low-price medicines, Latvia does not stand out against the background of the other Baltic States. A different conclusion applies for medicines where the producer’s price exceeds EUR 100. Similarly to non-reimbursable medicines, the markup on reimbursable medicines in Lithuania and Estonia is subject to a fixed limit. In Lithuania the markup cannot exceed EUR 14.48, while the limit in Estonia is EUR 6.39 and is the same for both reimbursable and non-reimbursable medicines. Therefore, in the segment of the most expensive medicines, the price of reimbursable medicines, as well as Latvian wholesalers’ revenues, is almost always higher than those of the neighbouring countries.

Overall market trends

The Council concludes that medicine producers in Latvia usually set lower prices for medicines than those in Lithuania and Estonia. Meanwhile, medicine prices in pharmacies are generally higher in Latvia, indicating a high markup during the course of medicine distribution. Although in around 40% of cases medicine prices in pharmacies are lower in Latvia than they are in Lithuania and Estonia, this generally applies to low-priced medicines. It can be concluded that the main cause of high medicine markups in Latvia is the absence of a fixed limit for markups on medicines with a high producer’s price.

Proposals by the Competition Council

The Council points out the need for the Ministry of Health, in cooperation with the other authorities responsible for the industry, to review the mechanisms for setting the price of medicines, making comparisons with the other Baltic States. When creating the new pricing model, the options for reducing final prices should be assessed, the dependency of pharmacies on wholesalers should be reduced, and patient co-payment limits should be assessed. Particular attention should be drawn to medicines in the price segment of up to EUR 50, as these have the highest sales volume. It is also necessary to carry out an assessment of the effectiveness of and need for parallel imports and to improve the transparency and monitoring mechanisms of discount application systems.

The Ministry of Health in cooperation with the Council has begun work on developing a project for the amendments. The topic has also been brought up in a recent meeting of the Social and Employment Matters Committee of the Saeima.

A full version of the Competition Council’s report in Latvian is available here.