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Artikel (13/03/2006)

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Price regulation in the sectors of over-the-counter medicines and old people’s homes

Price regulation has for a long time existed in a limited number of sectors in Belgium. The paper gives an overview of the legislation in this area and looks in particular at the sectors of over-the-counter medicines and old people’s homes. It describes the system and proposes a number of changes to the regulatory framework.

Market failure is a good reason for government intervention. Price regulation, on the other hand, can lead to cost inefficiencies and less competition through the formation of cartels. Optimal regulation is therefore necessary.

It is not possible to judge the appropriateness of the system for the economy as a whole because each industry is different. It is hence necessary to look at how each industry performs. If the price regulation system in a particular sector is inefficient or non-effective, alternatives to price regulation should be applied.

The market for over-the-counter (OTC) medicines (medicines that can be bought without a doctor’s prescription and that are not reimbursed) is highly regulated, and this includes price regulation, more so in Belgium than in most other European countries. The reason for price regulation is to make sure that the prices of medicines remain affordable for all consumers. The OTC market is not homogenous: different medicines are not in competition with each other because they treat different illnesses. It is unclear if sufficient price competition exists between the different medicines. However, significant price differences between the same medicines are observed between different European countries. These differences are also observed between countries that do not regulate their prices. The impact of a liberalisation of price regulation is therefore uncertain. This uncertainty is the main reason for keeping the price regulatory system in place. Moreover, prices in Belgium are among the lowest in Europe.

However, several arguments in favour of reforming the present system can be put forward. First, administrative costs for the companies and for the regulating authorities are high. Second, it is unlikely that the regulating authorities are well-placed to decide if price increases are appropriate or not. They often lack the necessary information on consumer preferences and cost structure within pharmaceutical companies. Finally, keeping prices artificially low may be dangerous in the longer term. Companies are only interested in putting medicines on the market if they are sufficiently profitable. All in all, an abolition of the price regulation system is not sufficient to guarantee price decreases or moderate price increases. Other factors, such as effective competition in the different submarkets are as significant.

Control of prices in old people’s homes is theoretically and socially well-defended. Just as for OTC-medicines, however, a danger exists that price control can lead to an insufficient supply in the sector. Given the ageing of society, a sufficient heterogeneous supply of old people’s homes needs to be guaranteed.

The price regulation system in Belgium seems efficient (prices do not increase faster than the consumer price index) and supply is sufficient, except in particular areas where waiting lists exist. Consequently, there are enough arguments for keeping the current system. The way price increases are accepted, however, could be improved. In the present system, every old people’s’ home that would like to increase its price requires the approval of the minister, resulting in a huge administrative cost. One possible improvement of the system would be to provide a dual system: one in which increases are automatically approved if the increase is a fixed percentage that is lower than CPI-inflation, and another system in which a case-by-case approval is required for higher price increases.

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