`Mark-ups' in the prices of essential drugs?

theSundaily PETALING JAYA (July 17, 2012): Is the government paying more for medication due to escalating costs of pharmaceuticals, or are there hidden "mark-ups" by middlemen in the prices of essential drugs?

Sources have told theSun that procurement of pharmaceuticals to the ministry is done through local tendering agents – at an average mark-up of 3% of the drug cost.

A reliable source familiar with the drugs procurement process in the ministry recently told theSun that hundreds of millions of ringgit have been given to local tendering agents, whose only role is to hand out government tenders for medication to manufacturers as "pass-through commissions".

The source, who spoke on condition of anonymity, said the agents will procure the required drugs from various manufacturers and bill it back to the hospital or Health Ministry at a mark-up of between 2% and 5%.

"When a hospital requires a particular drug, it will issue a local purchasing order (LPO) to a tendering agent.

"The agent will then source the drug from various manufacturers, be it from a multi-national pharmaceutical company or a local manufacturer. The agent will then receive a 3% 'pass-through commission' from the government or the hospital," the source explained.

Based on data provided by the ministry, a total of RM12.34 billion was spent on pharmaceuticals between 2001 and 2011. Roughly half this sum is spent via LPO.

The source said the 3% is also "clean profit" for the agent, since the cost of distributing the medicines to the respective hospitals is borne by the manufacturer or supplier.

"This practice has been going on for many years. All procurements are done this way," the source claimed.

Another source within the pharmaceutical industry told theSun that the use of "agents" to procure medication for hospitals is not necessary.

"The agents are used mainly in LPOs because a majority of products bought under them are patented drugs which are by multinational companies," explained the source.

Agents become the go-between for companies which are not registered with the Finance Ministry and the government. Only companies that are majority-owned by Malaysians can be registered with the Finance Ministry and bid for tenders.

"The use of agents have little value-add to the procurement process," said the pharmaceutical source.

The "mark ups" were once as high as 10% but have since come down.

However, he does not believe it has a significant cost impact on Health Ministry expenditure.

"While I do not think there is a need for tendering agents, it has minimal impact on the price of drugs because only around half of government procurements are done through LPOs," the source said.

When approached, Health Minister Datuk Seri Liow Tiong Lai denied that there are middlemen in the ministry's procurement process.

"It's not true. Any company can supply to the government as long as they register with the Finance Ministry. It's all tendering (process)... the best price will win," he told theSun.

He stressed that the Health Ministry is transparent in its work and all procurements are done through open tenders. However, the ministry is not involved if the company has its own agents and distributors, Liow said.

"But they are not considered middlemen as they are providing a service to the company," he added.

On July 10, Penang Chief Minister Lim Guan Eng brought up the issue of middlemen in the purchasing of medicines for public hospitals, and asked Liow why they could not buy them direct from manufacturers.

He also claimed that pharmaceutical manufacturers based in the country were not happy with having to go through a third party to sell their products to the public sector.