Stop taxing the sick

The debate over access to affordable medicines in emerging and developing countries frequently overlooks a critical issue: Governments in these countries routinely slap tariffs and other taxes on vitally important drugs. While these measures tend to be modest revenue generators, they make the affected medicines more expensive, which can put them out of reach for many who need them most.

Like developed countries, emerging and developing countries import some – if not all – of their medicines, the cost of which is mainly covered by the patients themselves, given these countries’ lack of health insurance. Indians, for example, pay 70% of their health-care expenses out of their own pockets. With tariffs and other taxes increasing drug costs by as much as two-thirds in some areas, even the most basic generic drugs become unaffordable for the poorest people. As one research report on Delhi’s medicine market concluded, such levies are essentially a “tax on the sick” which the government could easily remove.

The story is similar in many emerging markets. According to a 2012 study by the World Trade Organization, Argentina, Brazil, India, and Russia impose tariffs of around 10% on imported medicines, while Algeria and Rwanda, for example, maintain a 15% rate. The tariff in Djibouti is 26%. As the report noted, it is difficult to understand why small countries maintain high tariffs on health products – a move that serves only to drive up domestic prices.

But tariffs are only part of the problem. Many countries also levy hefty sales taxes. Brazil imposes a 28% rate on prescription medicines, while medicines in India are subject to 5% value-added tax and a 3% education tax, on top of state taxes that range from 5% to 16%.

Developing countries justify these taxes by claiming that they fund social spending. But, in 2011, India raised more in drug taxes than the government spent on medicines for the public. India’s health-care crisis might ease if the government stopped artificially hiking the prices of medicines that people need.

Moreover, fiscal pressures notwithstanding, it seems highly regressive, if not downright perverse, to place the greatest financial burden on those in the poorest health (and who presumably are the target of such social programs). It is also economically counterproductive. Raising medicine prices reduces usage, leading to more illness, lower productivity, and slower GDP growth.

There is a better way. Several countries, including Colombia, Ethiopia, Malaysia, Nicaragua, Pakistan, Tanzania, and Uganda, have substantially reduced or eliminated tariffs and taxes on medicines. The results have been dramatic. After Kenya removed tariffs and taxes on anti-malaria products, for example, it reported a 44% decline in infant mortality and disease between 2002 and 2009.

India and China, as major pharmaceutical exporters themselves, have a clear interest in seeing lower medicine tariffs worldwide. India, hailed as “the pharmacy to the developing world,” is one of the largest exporters of finished drugs, while China produces 70-80% of these drugs’ active ingredients.

Abolishing pharmaceutical tariffs would follow the example set by developed countries when they created the WTO two decades ago. As the World Health Organization declared: “governments should tax the things which make people ill, not the things which make them well.”

To be sure, tax cuts would not address all of the many challenges surrounding access to healthcare in emerging and developing countries, such as the lack of hospitals, clinics, doctors, and public and private insurance. But removing tariffs is something that could be implemented quickly and that would benefit the neediest people immediately.

As home to leading drug producers – and many of those most affected by these taxes – India and China should lead an international liberalization effort. The BRICS Summit, to be held on July 15-17 in Fortaleza, Brazil, might be a good place to start.

These countries have certainly demonstrated a capacity to act together. Earlier this year, China joined 13 other WTO members calling for tariffs on environmental goods to be removed. China, India, and the other BRICS should form a similar coalition to press for the elimination of pharmaceutical tariffs, thereby broadening access to health care throughout the developing world. The world’s sick and vulnerable should not have to suffer needlessly.

Rod Hunter, a senior director for international economics on the White House’s National Security Council under President George W. Bush, is a senior vice president at the Pharmaceutical Research and Manufacturers of America.