Collusion Strangles Chile’s Pharmaceutical Market

By: Malgorzata Lange - @MalgoLange - Jun 17, 2014, 11:48 am

EspañolWinter is about to begin in Chile. The sky seems to envelop us with its grayness; we are soaked with rain; and the first sneezes show up. We get colds and start queuing at pharmacies.

In Chile, about 90 percent of drug sales flow through only three pharmacy chains: Salcobrand, Cruz Verde, and Ahumada (FASA). According to a report (p.16) published last year by the Organization for Economic Cooperation and Development (OECD), Chile has the highest proportion of family expenditures on medical care of the 34 member nations, not including long-term care. Drugs are the major component of that spending.

Chile’s abysmal disadvantage in medical spending is not only in relative terms: even in the United States, a particular drug for the treatment of breast cancer costs less than a third of what it costs in Chile. These cost differences are also more or less the same for drugs necessary for treating many chronic diseases such as diabetes, epilepsy, Parkinson’s disease, hypertension, heart disease, and seasonal diseases such as the ones that appear with the arrival of winter.

Allow me to explain some of the reasons for this situation, including the rules of free and competitive enterprise, antitrust laws, and the code of good practice in the marketplace. Unfortunately, Chile’s pharmaceutical industry engages in anti-competitive practices of various kinds.

This high market concentration cannot be understood without an analysis of the close relationship between the giant commercial drug distributors and the pharmaceutical laboratories. To start with, laboratories do not have a public price list. Aiming for high sales volumes, they seek to position their brand and products by offering privileged purchase prices to select pharmacy chains. And these chains then impose a range of retail prices that harm so called “neighborhood pharmacies,” which already have been virtually excluded from the market by these maneuvers.

After brief periods of price wars between the three privileged competitors, however, they realized that collusion is a more profitable strategy than competition. The pharmacy chains began to coordinate their retail prices in 2007. Within a year, collusion premiums generated profit margins that in some cases reached 3,000 percent, when compared to the prices managed by the Supply Central of the National Health Service (CENABAST).*

In 2012, the Tribunal for the Defense of Free Competition (TDLC) fined two pharmacies, Salcobrand and Cruz Verde, with the maximum punishment allowed by the law (“the historic fine“): about US$19 million. This is a laughable figure and hardly a deterrent considering the magnitude of profits generated by collusive practices — the value of the fine represents approximately 3 percent of annual industry sales — which the press described ironically as “the tail’s hair” (el pelo de la cola, as little as the hair on a pig’s tail)

The industry’s links with the political world are also increasingly opaque. Although the TDLC and the National Economic Prosecutor (FNE) have spoken against market distortions, that hasn’t changed much, given the strong political influence of the large pharmacy chains. Lobbying is still poorly regulated, so the funding of political parties and election campaigns by representatives of large pharmacy chains is common practice. And the result of these practices is inferred from the pattern of legislative voting against projects that seek to limit the power of the pharmaceutical triumvirate.

A clear example was when the Health Commission of the Chamber of Deputies rejected the suggestion from the Ministry of Economy to allow the sale of non-prescription drugs in channels other than pharmacies (supermarkets and gas stations, for example). To this day, we have to frequent pharmacies for all our medical needs, even if it’s just for relieving a simple headache.

Given these pervasive, economically unhealthy practices in the Chilean market for medicines, it is necessary to consider their ethical implications, which are very serious. These products often not only improve one’s quality of life, but prolong it and even make it possible. Predatory pricing in an oligopolistic market — with the complicity of the legislative body — is particularly immoral and deplorable.

We can be sure that there are plenty of cases in which a vital treatment has been interrupted or delayed due to its exorbitant and distorted costs. Those who can afford it escape this perverse market, thanks to the phenomenon of medical tourism, but of course, they are a privileged minority.

Most patients are simply doomed, thanks to the vices created by a concentrated pharmaceutical market. An obvious case of the lack of moral imagination Locke talked about, and which I addressed in one of my previous articles.

Salud, dear readers.

* The CENABAST is a state agency that sells drugs to hospitals at cost or with a minimal markup for administrative expenses.

Translated by Alan Furth.

Malgorzata Lange Malgorzata Lange

Malgorzata Lange is a native of Poland who lives in Santiago de Chile. She holds degrees in political science and international Relations, and is a PhD candidate at the Pontifical Catholic University of Chile. She is also a radio panelist on international politics issues. Follow @MalgoLange.