One of the big topics I have yet to get into relating to the Hungarian situation is the demography. This will come a bit at a time as I ease myself in. But two factors evidently stand out here, the health care and the pensions system.
On the health front one of the factors which indicates the importance of demographic processes in the Hungarian situation is the relative importance of the big pharmaceutical companies (Richter Gedeon, Egis etc) in the economy and in payments to these companies in the general government finances picture. Many have spoken about the ‘demographics’ (as opposed to the demography) of ageing in terms of the ‘product mix’ that will be a feature of the consumption process, and here pharmaceutical products loom large (and this despite the fact that life expectancy in Hungary at 72.66 is still comparatively young by European standards, a detail which means that there is plenty of scope - as we have seen in East Germany - for extending life expectancy by intensifying medical care, but this of course, again as we are seeing in Germany, is expensive, very expensive). What many fail to note about the situation is the structural aspect, ie that there is s shift in consumption away from those who are able to pay towards those who need others to pay (either the state or children). This will have important macro economic consequences.
Some measure of the situation can be found in this Portfolio Hungary article from the end of October:
Hungary’s drug subsidy budget will be 364 billion forints in 2007, below the expected 2006 spending of HUF 380 billion, Finance Ministry spokesman Ferenc Pichler told Portfolio.hu on Monday, confirming earlier press reports.
The HUF 364 bn figure is well above the HUF 320 bn most analysts and drug sector experts had expected for next year, and is obviously positive for producers. However, it is yet to be seen on Tuesday what gross budget, which excludes producers’ contributions, the ministry expects for 2007. This information is to be of huge importance for pharmaceutical companies.
The higher-than-expected figure, or a lower-than-expected gap of the drug subsidy budget, is likely to reduce the expected contribution of the biggest listed producers, Richter and Egis, to the subsidy budget.
According to earlier press reports, the drugs budget was to be HUF 320 billion and the effective subsidy would have been HUF 440 bn in 2007. In this case, the contribution of producers would have been substantial, given that the National Health Insurance Fund (OEP) and the producers will jointly pay for an overshoot of the budget up to 9%, while any excess budget overspending above 9% will be solely covered by drug makers.
A budget of HUF 364 bn means that producers will not have to cover the overshoot fully up to HUF 467 bn worth of subsidies. As this year’s effective subsidies are to reach HUF 380-400 bn, an overshoot larger than 9% is highly unlikely for 2007. (In other words, we do not believe next year’s gross deficit will be over HUF 467 bn.)
Now at this point I am still really informing myself, and am not yet clear what the final details of the health budget for 2007 actually are (we won’t know this till the final vote on Nov 20 it seems), but one thing is for sure, the cost of these subsidies is an important part of the public finance picture, and that reducing the subsidies significantly will hit the pharma sector hard, and by a knock-on effect the economy generally.
There is more news on this today:
Yet another amendment was made to Hungary’s healthcare bill that may force pharmaceuticals to pay more into the drug budget in 2007 than planned in an earlier legislation, according to a Tuesday report by news agency Bloomberg.
Portfolio Hungary comments:
Unfortunately we find it impossible to determine which of the above proposals the committee wants to submit to Parliament. However, we would not be surprised if further modifications were made until the final vote on 20 November. Based on the current proposal, producers would have an easy job cutting their clawback - they would simply need to reduce the number of pills in boxes.
At the moment, it is also impossible to quantify the impact on the profits of either Egis or Richter.
The current uncertainties will not simply evaporate even after the bill is passed, since the size of clawback will depend on actual consumption, which cannot be assessed accurately as it hinges on different future measures that impact demand.
So the situation is a very uncertain one, but do not miss this point:
However, we would not be surprised if the act in the end would not contain a clawback obligation based on subsidy brackets. In this case, drug producers would simply need to lower the content of boxes to curb their payments into the National Health Insurance Fund (OEP).
So you can sell less for the same price. This seems to be yet another round of the ’stumbling and mumbling’ which seems to have characterized the main approach to this crisis to date. Of course there must be many cases of ‘inefficiency’ in drug provision, with people getting more medicine than they need, but there must also be many cases of people actually needing the medicines they are prescribed, and in these cases if each box contains less then they will simply need to have more boxes, and especially in the critical non-generic sector, which is why, I suppose, there is so much uncertainty about the final costs and savings involved in the exercise. The whole approach smacks more of ‘robbing Peter to pay Paul’ than of anything else. And, I repeat, all of this seems set to have important and ongoing macroeconomic consequences.