The NHI and the single exit price: Will State procurement rules change?
There has been much debate around the Bill, with questions raised as to its constitutionality and how long it will take for the programme to become financially and logistically viable (and indeed whether it ever will).
One aspect of the Bill about which little has been written and discussed to date, is the effect that the National Health Insurance Act contemplated by the Bill (“the NHI Act”), if enacted, will have on the State’s procurement of medicines and health-related products.
The Medicines and Related Substances Act, 101 of 1965 (“the Medicines Act”) defines a medicine as “Any substance or mixture of substances used or purporting to be suitable for use or manufactured or sold for use in the diagnosis, treatment, mitigation, modification or prevention of disease, abnormal physical or mental state, or the symptoms thereof in humans; or restoring, correcting or modifying any somatic or psychic function in humans”.
Certain medicines have been designated by the Minister of Health as “Scheduled substances” in terms of section 22A of the Medicines Act. In relation to these, section 22G of the Medicines Act, which was inserted by an amendment in 2002, requires the Minister to make regulations on the introduction of a “transparent pricing system” which must include “a single exit price [which] … shall be the only price at which manufacturers shall sell medicines and Scheduled substances to any person other than the State”.
The Minister of Health published the regulations required in terms of section 22G (“the pricing regulations”), in 2005. The pricing regulations laid down the methodology for the determination of the single exit price (“SEP”) in respect of medicines and Scheduled substances. Regulation 6 reinforced section 22A of the Medicines Act, by providing that “a manufacturer, importer, distributor or wholesaler may not charge any fee amount other than the single exit price in respect of the sale of the medicine or scheduled substance to any person other than the State”.
The effect of section 22G and regulation 6 is that, while any sale of a medicine or Scheduled substance to a purchaser in the private sector must be at the SEP, the price at which the product is sold to the State is not regulated, and is open to negotiation, subject to the laws relating to procurement of supplies by the State.
The Constitution of the Republic of South Africa, 1996 (“the Constitution”) lays down principles governing procurement by the State. Section 217 of the constitution provides that “when an organ of state, or any other institution identified in national legislation, contracts for goods and services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”. Section 217(2) allows organs of state or institutions affected by the section to implement policies providing for categories of preference in the allocation of contracts and for the protection or advancement of persons or categories of persons disadvantaged by unfair discrimination. Section 217(3) provides that national legislation must prescribe a framework within which the policy referred to in sub-section (2) must be implemented.
Various pieces of legislation have been enacted to give effect to Section 217. The primary ones amongst these are:
The Public Finance Management Act, 1999 (“PFMA”)
The object of the PFMA, as set out in section 2, is “to secure transparency, accountability, and sound management of the revenue, expenditure, assets and liabilities” of the institutions to which [the PFMA] applies”. This includes, inter alia, the public entities listed in Schedules 2 and 3 to the PFMA. Section 76(4) of the PFMA authorises the National Treasury to make regulations and issue instructions applicable to all institutions to which the PFMA applies concerning, inter alia, “the determination of a framework for an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective”.
The Treasury Regulations for departments, trading entities, constitutional institutions and public entities issued in terms of the PFMA (“Treasury Regulations”)
Regulation 16 of the Treasury Regulations requires the accounting officer or authority of an institution to which the regulations apply to develop and implement an effective and efficient supply chain management system in the institution for the acquisition of goods and services. The supply chain management system must be “fair, equitable, transparent, competitive and cost effective” and must be consistent with both the Preferential Procurement Policy Framework Act 2000 and the Broad Based Black Economic Empowerment Act 2003.
The Preferential Procurement Policy Framework Act, 2000 (“PPPFA”)
Section 2 requires an organ of state to determine its preferential procurement policy and implement within it a preference point system. In terms of the points system, for contracts with a Rand value above a prescribed amount, 90 points must be allocated to the tender amongst those received that is at the lowest price, and a score out of 10 points for the extent to which the tender will allow the organ of state concerned to achieve specific goals, including contracting with persons, or categories of persons, historically disadvantaged by unfair discrimination.
The Preferential Procurement Regulations, 2017 (“Procurement Regulations”)
These regulations require that, in evaluating any tender in respect of a contract for the supply of goods and services to a value in excess of R50 million, the organ of state concerned must calculate points out of 90 for price (with the lowest bid scoring 90 points), and points out of 10 to the Broad-based Black Economic Empowerment (“B-BBEE”) status of the would-be supplier. In the case of contracts to a value of less than R50 million, the allocations are apportioned in the ratio of 80:20 respectively. If two or more tenderers score an equal number of points, the contract must be awarded to the tenderer who scored the highest points for B-BBEE. Only thereafter may tenders be assessed in regard to compliance with technical specifications (or “functionality”).
The NHI Act will provide for the establishment of the National Health Insurance Fund (“the Fund”) which, according to the NHI Act, is to be an autonomous public entity, as contained in Schedule 3A to the PFMA. The Fund will aim to achieve sustainable and affordable universal access to quality health care services by, inter alia, “providing for equity and efficiency in funding by pooling of funds and strategic purchasing of … medicines …” As a public entity in terms of Schedule 3A to the PFMA, the Fund’s procurement of goods and services (including medicines), will be governed by section 217 of the Constitution, the PFMA and the PPFA, and the regulations promulgated under them, referred to above.
Against that background, the NHI Act will bring about two amendments to section 22G(3) of the Medicines Act, which will fundamentally change the way in which medicines are purchased by the public sector. Firstly, the SEP at which medicines are to be sold will be prescribed by the Office of Health Product Procurement, a body within the Fund, to be established in terms of Section 38 of the NHI Act. More significantly, in terms of the amended section 22G(3) of the Medicines Act, the SEP will be the only price at which manufacturers may sell medicines and schedules substances to the Fund or any other person. In other words, the prices of medicines sold to the State, which were previously exempted from the application of the SEP, will now be included, and fixed at the SEP as determined, in the same way as sales to private sector purchasers and end users.
Further, section 3(3) of the NHI Act will provide that if any conflict, relating to the matters dealt with in the NHI Act, arises between the NHI Act and the provisions of any other law, the provisions of the NHI Act will prevail. However, this will not apply where the conflict is between the NHI Act and the Constitution, the PFMA or any Act expressly amending the NHI Act. In addition, section 10(2) of the NHI act will require the Fund to perform its functions “in the most cost-effective and efficient manner possible and in accordance with the values and principles mentioned in section 195 of the Constitution and the provisions of the Public Finance Management Act”.
The NHI Act will not bring about any amendments to the PFMA, the PPPFA or any of the regulations promulgated in terms of either of those Acts. However, no indication has been given as to whether the Legislature, when drafting the Bill, and in particular section 3(3) of the NHI Act and the amendments to section 22G(3) of the Medicines Act, considered how effect would be given to the PFMA, section 217 of the Constitution, and in particular the Procurement Regulations, where the price of the products is fixed at the SEP, and will not be open to negotiation or a competitive bidding process. Will the price component in the evaluation of tenders simply fall away? Or will the procurement of medicines by the Fund not be subject to tenders at all? If that is to be the case, a further amendment to the Medicines Act, providing that the provisions of the amended section 22G(3) will prevail over the provisions of the procurement legislation (the PFMA, PPFA and the regulations under them) will probably be necessary. And it will need to be very carefully drafted in order to fall within the criteria laid down by the Constitution regarding procurement by the State. If it is not, a challenge to the constitutionality of the amendment to Section 22G of the Medicines Act may well be on the cards.