Article

The purpose of this article is to clarify the conditions for establishing a state distribution company, to outline its proposed content and implementation, and finally to explain the reasons for its non-implementation.

In February 2023, the Ministry of Health of the Slovak Republic (hereinafter referred to as "MoH SR") submitted a non-legislative document entitled Draft Concept for the Establishment of a State Distribution Company for the Supply of Medicines and Medical Devices for inter-ministerial consultation, based on the approved Work Plan of the Government of the Slovak Republic by Resolution No. 71 of February 2, 2021 (hereinafter referred to as the "Draft Concept"). The Draft Concept was based on the proposals of individual ministries and also on the Program Statement of the Government of the Slovak Republic for 2020-2024.

The purpose of the Draft Concept was to streamline the distribution of medicines and ensure the self-sufficiency of state healthcare facilities in the supply and distribution of medicines by establishing a state distributor under the authority of the Ministry of Health of the Slovak Republic. As part of the reform of the medicine policy, the Slovak government declared the expansion of central purchasing of the most commonly used and high-cost medicines and medical devices, and it was emphasized that the Ministry of Health, as the institution responsible for providing curative and preventive care, lacked the tools and direct influence to resolve crisis situations arising in the supply and distribution of medicines and medical devices and to control the supply of medicines and medical devices. The aim was also to prevent a dominant position on the medicine market from being held by a small circle of private companies and their disproportionate influence on medicine prices and distribution.

The draft concept also analyzed the current state of the market and the market power of the three largest companies in the field of medicines and their distribution, the impact on the market in the event of the establishment of a state distribution company, and the impact on the safety and health of the citizens of the Slovak Republic.

The draft concept stated that it would have an impact on the state budget of €15 million as a contribution to the share capital when the company was established, which was to be used to cover the expenses necessary to start up the company, to secure financial operating resources and, based on preliminary estimates, €6 million for the State Material Reserves Administration, which was to cover the purchase of medicines and medical devices for the state material reserves.

The draft concept itself contains an analysis of the current situation - an assessment of the strengths and weaknesses of the current situation in the distribution of medicines and medical devices, a concept for a state distribution company and its functioning, a proposed solution (entity, functioning of the company, comparison of financial requirements and operating costs, comparison of models, recommendations for selecting the proposed model), the proposed procedure, and also contains several tables of key economic indicators, the strengths and weaknesses of the current system, a financial comparison of the individual models, calculations of annual costs, the expected start-up time for the individual models, predictions of developments and costs, and a SWOT analysis of the proposed option. The proposal also presents interesting economic data such as the total consumption of dispensed medicines in the Slovak Republic, consumption of medicines by type of expenditure in millions of euros, patient reimbursements, and the share of reimbursements for centrally purchased medicines in total reimbursements for medicines.

The draft concept declared three main objectives for the establishment of a state distribution company, namely:

• Ensuring critical state infrastructure in the supply of medicines and medical devices,
• Saving financial resources through the use of central public procurement,
• Saving costs on medicines and medical devices.

For the sake of interest and for the purposes of this article, we also present selected factual statements from the Concept Proposal, quote:

"Currently, there are approximately twenty companies operating in the Slovak market for the distribution of medicines and medical devices, with a turnover ranging from €15 million to €682 million. The combined turnover of the five largest companies in 2019 reached €1.75 billion and rose to €1.786 billion in 2020. The three largest distributors supplying hospitals and pharmacies with a complete range of medicines and medical devices were members of the AVEL association of wholesale distributors of medicines. These are: PHOENIX Zdravotnícke zásobovanie a. s., UNIPHARMA – 1. slovenská lekárnická akciová spoločnosť and MED-ART, spol. s r. o. AVEL members account for more than 85% of supplies of medicines and medical equipment to approximately 2,000 pharmacies and all hospitals. Their product range comprises approximately 32,000 items.

"The distribution companies analyzed for 2020 achieved total revenues from publicly tendered contracts of €325 million. This proves that there is sufficient scope for the effective operation of a distribution company for state hospitals, hospital pharmacies, medical supply stores, as well as for distribution to private facilities."

The draft concept also assessed that the strengths of the current system include a fully functional, well-established system throughout the Slovak Republic, the fact that distribution companies bear the risks associated with the distribution of medicines and medical devices, such as long invoice payment terms, the need to achieve high levels of quality and safety during transport, and price regulation with a positive impact on Slovak citizens. The draft concept identified the following weaknesses in the current system the fact that private distribution companies have the primary objective of making a profit, which is reflected in their efforts to increase margins and thus the prices of medicines and medical supplies that the system does not allow for a sufficient degree of independence of the state from private distributors of medicines and medical supplies, which is essential in emergency situations, and furthermore, insufficient tools to prevent the illegal sale of medicines and threats to compliance with ethical standards in the marketing and advertising of prescription medicines.

The draft concept stated that, unlike other health insurance companies, Všeobecná zdravotná poisťovňa, a. s. (hereinafter also referred to as "VšZP") ensures central purchasing in the form of public procurement, which has strict rules that often limit the choice of medicines and the possibility of procuring several medicines within one active substance, the establishment of a separate state distribution company appears to be a sensible step towards achieving the set objectives, in particular savings resulting from central public procurement and ensuring the purchase and distribution of the commodities in question in crisis situations. In addition to the above, another decisive factor was the fact that the proposed state distribution company will become the central purchaser of medicines and medical devices, which will simplify the purchase of medicines for hospitals, as they will no longer have to go through the laborious process of public procurement. A significant benefit of centralised procurement of medicines and medical supplies will be an effective reduction in supplier prices thanks to the size of orders placed by the central procurer.

The state distribution company should thus ensure the purchase, sale, and distribution of medicines, medical devices, and medical supplies primarily for state hospitals, state pharmacies, and other state healthcare facilities. Where possible, it will also act as a supplier and distributor for private hospitals, pharmacies and healthcare facilities. The state distribution company will be a public procurer of medicines and medical devices, and will also seek and initiate the registration of generic medicines, thereby actively contributing to savings or changes in the allocation of resources from public health insurance. By ensuring the procurement and distribution of medicines in cooperation with the General Health Insurance Company, it will also move closer to its goal of increasing the volume of centrally purchased medicines, medical supplies, and medical devices.

The draft concept assumes that the Ministry of Health will establish a joint-stock company with 100% state ownership. For the sake of comprehensiveness, three alternatives for establishing a State Distribution Company were considered: a joint-stock company wholly owned by the state (alternative A), a contributory organization (alternative B), and a budgetary organization (alternative C). The draft concept compared their advantages and disadvantages.

In order to achieve the objective of optimizing the functioning and, above all, reducing the costs of medicines and medical devices, the economics and functioning of variants with a modern organizational structure and the use of partial or complete outsourcing of logistics processes were proposed and compared in a feasibility study. The facts presented in the draft concept show that the initial investment costs would range from €15 million to €54 million, depending on the option chosen. Therefore, one of the proposed options also examined the use of logistics and distribution capacities owned by external logistics companies which are capable of performing the following services in the Slovak Republic:

• transport and delivery of letters, parcels and cash shipments, including electronic mail,
• submission, transport and delivery of shipments, including cash services in international traffic,
• express and courier transport of shipments, including documents, with guaranteed delivery times, including international transport,
• and sufficient capacity to meet the needs of the state distributor of medicines and medical devices in the required scope and quality.

Slovenská pošta, a. s. was assessed for the above option, as it has spare logistics capacity for central Slovakia in Zvolen and plans to complete the expansion of its logistics capacity in the Bratislava region in 2023, plans to replace its distribution vehicle fleet, which can be adapted to the conditions of distribution of medicines and medical supplies (the estimated purchase of delivery vehicles is approximately 370 units).

The concept proposal evaluated the individual proposed models and concluded that the option with outsourcing of logistics and transport represents the lowest initial capital investment and annual operating costs, even when considering future developments. Although the model with in-house logistics could be more cost-effective in the long term (more than 10 years), the model with outsourcing of logistics and transport has the lowest initial investment costs, is the most flexible, can be implemented more quickly in practice, can achieve planned revenues faster, and the model has the lowest risk level.

The strengths of the proposed status include The draft concept includes a direct ownership link to the distribution company on the part of the Ministry of Health of the Slovak Republic, the possibility of minimizing the trade margin and thus offering better prices for healthcare facilities, the size of the state healthcare facilities' own market and savings in the procurement of medicines, medical supplies and medical devices through the use of central public procurement.

The draft concept identified the following weaknesses of the proposed system: the obligation to purchase through public procurement, the complexity of setting up the system, higher initial costs for setting up the system, lower flexibility of decision-making processes, and insufficient experience with the rapid launch of a fully functional system, which is required in the drug distribution process.

The draft concept assessed the following as opportunities of the proposed system the possibility of capturing part of the private market guarantee of stable supply of medicines and medical supplies in times of crisis and ensuring the independence of state healthcare facilities from price speculation by suppliers of medicines and medical supplies and threats to the proposed situation lack of workforce with adequate experience, market attacks by existing distributors, the possibility of supply disruptions in the start-up phase, a shortage of financial resources for stockpiling, and the need to ensure all decision-making, logistical, and control mechanisms are of a high standard.

The draft concept also outlined the basic procedure, which consists of several phases, the first of which would be notification of the application for state aid to the European Commission for the establishment of a joint-stock company with 100% state ownership, establishment of the company, the selection of premises for the company's headquarters, the determination of the company's share capital, and the obtaining of trade licenses or permits (wholesale distribution of medicines and medical devices). This would be followed by a preparatory phase - administrative and technical support for the operation (60 to 90 days), a security phase, including an application for a licence to handle medicines and medical devices – wholesale distribution of medicines (10 to 18 months) and, finally, the launch of the distribution company's operations (optimistic model: 10 months; realistic estimate: 18 months).

During the inter-ministerial consultation process, a number of minor and major comments were raised by various relevant entities (in particular, holders of licenses for wholesale distribution of medicines and health insurance companies), which can be summarized in the following areas:

• the absence of a method to ensure compliance with the obligations under Decree No. 128/2012 Coll. of the Ministry of Health of the Slovak Republic on requirements for good manufacturing practice and good wholesale distribution practice on the part of the state wholesale distribution company
• the absence of tools to help eliminate the lack of interest among drug manufacturers in offering discounts
• suspicions of distortion of competition due to the existence of a company wholly owned by the state which would cooperate with a company also owned by the state (Slovenská pošta, a. s. within the framework of outsourcing)
• doubts as to whether state institutions will be restricted in purchasing medicines from private distributors and whether the establishment of the company will put indirect pressure on healthcare and pharmacy providers to purchase medicines only from the state distribution company
• incorrectness and unacceptability of the justification for establishing the company due to extraordinary situations such as COVID-19 (there are other institutions regulated by law - the following situations are not considered unlawful handling of medicines if the Ministry of Health procures medicines and medical devices for healthcare providers during a declared state of emergency, state of emergency or extraordinary situation)
• unacceptability of outsourcing distribution to Slovenská pošta, a. s. (no previous experience, regulated segment, possible risk of incorrect distribution, storage or handling of medicines, quality control, etc.).
• in the event that the state distribution company were to carry out centralised purchases of medicines, healthcare providers have repeatedly stated that this is a risky approach, as in the case of centralised purchasing, healthcare providers are de facto forced to prescribe and administer medicines that have been procured through centralised purchasing, even in cases where there is another treatment that is more effective or safer
• the risk of secondary insolvency in the event of late payments by state healthcare providers and also the risk of reduced availability of medicines from other healthcare providers
• suspicions of circumvention of Act No. 343/2015 Z. on public procurement and amending certain acts on public procurement, lack of transparency, attempt to exclude public procurement as well as other existing mechanisms created by the state to ensure transparency in the spending of public resources
• doubts about further procedures and the legal regulation of margins for other private distributors
• the absence of guarantees that the state distribution company will be able to manage the distribution of medicines more efficiently than private companies
• doubts about the return on investment
• use of legal remedies by private distributors for their defense in the event that, for example, a state purchaser of medicines (state hospital) gives preference to paying invoices to the state distribution company as its affiliated company over paying invoices to other suppliers of medicines (whether this constitutes state aid prohibited by the state)
• the existence of incorrect factual statements in the draft concept (which could lead to failure in the notification procedure before the European Commission)
• the absence of a guarantee of equal treatment in the provision of services by the state distribution company and existing distribution companies – risk of sanctions from the EU
• failure to comply with professional requirements for good distribution practice and lack of analysis of these requirements – especially in the context of outsourcing distribution services to a state-owned company

On April 4, 2023, despite the progress made on the entire project of the state distribution company, the Ministry of Health announced that it had abandoned its plan to establish such a company. The Ministry of Health's communications department reported that several fundamental comments had not been removed from the draft concept during the inter-ministerial consultation process, mainly concerning the financing of the state distribution company so that its establishment would not place additional demands on the public administration budget.

From a legal point of view, we would like to conclude by noting that we consider the decision of the Ministry of Health of the Slovak Republic to abandon the plan to establish a state distribution company to be the right step. Apart from the fact that we consider a state distribution company to be superfluous in the field of large-scale distribution of medicines and medical devices and its establishment to be pointless and uneconomical, we also believe that its establishment and integration into the current functioning relationships existing in this strictly regulated area is unfeasible, especially if all relevant legal regulations (including the Public Procurement Act) are to be complied with. The objectives declared in the Draft Concept cannot be achieved by the proposed means of implementation. There are also reasonable doubts as to whether the Concept Proposal and the assessment of the relevant handling of medicines were based on a proper assessment and, in particular, on proper familiarization with the relevant legal regulations, as the Concept Proposal contains a number of legal inconsistencies. The draft concept uses the terms "trade" - handling of medicines and medical devices in the activity of wholesale distribution of medicines, even though in reality it concerns the handling of medicines on the basis of a license issued in accordance with Act No. 362/2011 Coll. on medicines and medical devices and amending certain laws, and even proposes obtaining a license for the manufacture of medicines (however, the reasons for this are not stated, nor is the securing of a license for the manufacture of medicines envisaged in the individual phases).

We fully agree with several comments made during the inter-ministerial consultation process – we believe that in this case there are reasonable grounds for suspecting that the establishment of a state distribution company would distort competition and that the equal treatment of the state distribution company and private holders of wholesale distribution licenses would not be guaranteed, which could also lead to legal proceedings and, ultimately, to claims for damages by other private holders of wholesale distribution licenses for medicines. We also believe that, paradoxically, the submitter of the Draft Concept himself draws conclusions that call into question the legality and justification of the Draft Concept and identifies the risks that the establishment and operation of a state distribution company would entail. Similarly, the entire Concept Proposal lacks an analysis of compliance with the strict and administratively demanding requirements arising from the Medicines Act, the Decree on Good Distribution Practice, and European legislation.

The comments raised were fundamental, and the Ministry of Health should have (and did) evaluate them correctly, concluding that the comments could not be incorporated. However, we do not consider the complexity of securing financing for a state distribution company to be the most fundamental comment and reason, but rather the inappropriateness of the project, its actual impracticability, the impossibility of ensuring compliance with the relevant national and European legislation, and a possible misunderstanding or even ignorance of the legislation governing the handling of medicines, as was also pointed out in the comments raised during the inter-ministerial consultation process.