Polithinks: Should the Government Subsidize Drugs?
By subsidizing this industry, thus controlling price, the government will increase the demand for and supply of pharmaceutical products, which are needed to keep the population healthy and more productive.
●25th January 2023
To what extent should the government go in terms of regulating the activities of businesses? The answer to this question can be answered, depending on the philosophical slant of the person answering. For those who are more liberal, the government can, and should regulate business activities, including price regulation. Conservatives may frown at any attempt at allowing the government to have economic power over producers and consumers.
In economics, price regulation can come in various forms. The most common ones are price floors, price ceilings and subsidies. Before we discuss these forms of price regulation, it is important to note that presently in Nigeria, pharmaceutical drugs and devices are not regulated. Price floors are the minimum amount a good or service can be purchased for. The government often sets price floors to protect the interest of the sellers or producers in situations where the price of a commodity may fall to the extent that it will threaten the existence of the company producing such product. In Nigeria, due to a dearth of infrastructure such as electricity; issues such as insecurity, and corruption, the pharmaceutical industry is not able to produce the amount of pharmaceutical products needed by the country, which makes only about 30 percent of drugs used locally. In such a situation it may be reasonable for the government to mandate price floors to protect the interest of producers who may be making drugs at more than necessary amounts. However, what about the interest of the consumer?
Price ceiling is the pricing strategy that the government can adopt to protect the interest of the consumer of pharmaceutical products. Why should the government protect the interest of the consumer? As at 2021, the average Nigerian was ranked number 18 in terms of per capita income on the African continent, with a per capita income of just about $2,400. Yet the per capita out-of-pocket health expenditure of that average Nigerian as at 2019 was about $114.5 (in Purchasing Power Parity terms). While this out-of-pocket expenditure is just about 5 percent of the per capita income, it is still substantial given that if conditions were better, such amount would have been channeled to other needs, in a country among those that are host to most poor people in the world.
If price floors will protect the interest of the producers of pharmaceutical companies against consumers, and price ceiling will protect the interest of consumers against producers, what can the government do?
Well, the government can come to a tie by extending subsidies to producers, this way, the government helps the producer, who in turn helps the consumer. Subsidy is the difference between the price paid by the consumer and the cost of supply. In 2022, the Federal Government of Nigeria announced a 100 billion naira loan to help indigenous pharmaceutical companies to expand their capital base and boost their production of medicines and medical consumables. While this is not subsidy in the manner of the government paying outrightly for the difference between what the consumer pays for and the supply incurred in production, it will go a distance in covering the huge cost outlay that comes in the development of new drugs, and the production of existing ones.
It may be argued in some quarters that given the experience of Nigeria in the provision of subsidies in the petroleum sector, and controlling the price, subsidy should not be attempted elsewhere. Yet, there is a difference between subsidizing consumption – which fuel subsidy represents – and subsidizing production, which a subsidy for the pharmaceutical industry will represent. By subsidizing this industry, thus controlling price, the government will increase the demand for and supply of pharmaceutical products, which are needed to keep the population healthy and more productive.