Some groups of end users have tried to deal with high markups in the distribution chain by “backward integration” and creating their own captive distribution system. The distribution system for religious hospitals in Ghana is an example (Seiter and Gyansa-Lutterodt 2008, 16). This approach is easier to propose than to implement. Hospitals and clinics in low-income countries seldom have the logistical, inventory management, and purchasing skills to carry out these functions effectively. As newcomers to the marketplace, they also tend to lack relationships with and knowledge of the international suppliers. Yet it is such knowledge and relationships that allow a purchaser to obtain better terms and find more reliable partners to work with. Moreover, the working capital requirements for such a venture are substantial. Medicines being shipped into low-income countries often have to be paid for months before they arrive, and still more months elapse before they are sold and revenue is earned. All of this increases working capital requirements. The financing difficulties apparently sank the Ghana experiment (Seiter and Gyansa-Lutterodt 2008, 16), although the faith-basedNGO supply system in Uganda, Joint Medical Stores, continues to function quite effectively. We should also note that wholesalers are not the only agents active in this part of the supply chain. Manufacturers’ representatives also push their own products. They may offer sellers bonuses or concessions—such as volume-based kickbacks, or extra discounted (or even free) product to fill up their shelves—to squeeze out competitor brands. Where prescription systems function, manufacturers have every reason to direct significant sales and incentive efforts at doctors. And the experiences of even the most advanced countries indicate that those can have a significant distorting, and cost increasing, impact on a nation’s medicines expenditure.
Payments by End Users Like wholesalers, pharmaceutical retailers typically think about their prices in terms of a markup. Retail markups vary widely, ranging from 15 percent to 35 percent and sometimes even 100 percent to 500 percent (Patouillard, Hanson, and Goodman 2010). Retailers cover their costs (time, working capital, and facilities) and also make their profits out of that margin. The markup approach to pricing immediately creates an incentive to sell more expensive items because, for the same markup, they offer a larger absolute difference between the seller’s costs and the sales price. Moreover, the nonproduct costs that sellers incur vary only modestly with Paying for Pharmaceuticals
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