The DLO story

The 'DLO'

President Vladimir Putin's effort in the second part of his tenure to direct hydrocarbon windfalls to numerous aspects of state-funded social welfare has touched on state-subsidized pharmaceutical distribution as well. With monetization of healthcare benefits being extended to healthcare, in January 2005, the "Provision of Supplemental Medicines" or DLO, programme offered the eligible (14 million, mostly pensioners and war veterans) a chance to accept either Rb 350-450 per month, or state-subsidized medicines paid for by the federal government. The latter was the DLO, run as an extension of the state mandatory health insurance fund (FFOMS) within the Ministry of Health and Social Development; and Mikhail Zurabov, kindred spirit of fiscal conservatives like German Gref and Alexei Kudrin, was put in charge.

The programme was federally-funded - its first-year 2005 budget was a staggering Rb 50.9 bn, or about $2 bn - and the list of subsidized drugs was determined by the federal authority, with 70 per cent of listed drugs intended to come from domestic producers. (In reality, the domestic share remains about 9 per cent.) Reminiscent of the transition era, the regional authorities were put in charge of tenders to determine which distributors would get contracts to supply drugs to their respective region.

Analysts saw Russia's pharmaceutical market grow 35 per cent in 2005 (RMBC, DSM Group). Industry cheerleaders, calculated likewise, comparing Russia's 35 per cent growth with 28 per cent in China and 37 per cent in Brazil. In the fine print, however, was the admission that the DLO was responsible for between 15 and 20 per cent of the 35 per cent growth figure. Research indicates that the mix of drugs that participants seek through the DLO are higher-end drugs - for cardiovascular disease, diabetes, and cancer - than the mix in the commercial market, the implication being that the DLO has succeeded in bringing costly drugs to people who would not otherwise be able to afford them.

Problems of omission and commission

Unfortunately, the DLO quickly ran into trouble. A month after its inauguration, tender-winning distributors complained of a lack of information about quantities of supplies needed, just as end-users complained, in another echo of the transition period, of empty shelves. By October 2005, the number of people on the DLO programme had dropped nearly by half. In 2006, just as analysts were applauding high 2005 growth numbers, the DLO's 2006 annual budget of Rb29.09 bn (half the size of 2005's) was used up in the first half of the year; supply shortages began as reimbursements to drug producers were not forthcoming; and analysts reported a "depressing consensus" that the DLO was bankrupt. Mid-2006, in a desperate reaction Zurabov cut 600 (21 per cent) of drugs from the approved list, reduced the competing distributors to a handful, and mandated 5-14 per cent price cuts for remaining drugs. The DLO accrued a debt of Rb 40 bn in H2 2006 and headlines about oncology and diabetes patients "dying because of DLO crisis" appeared ( Noviye Izvestiye).

The scandal of mismanagement (appeased only somewhat by a supplementary Rb 16 bn in federal funding and a Zurabov subordinate thrown into the breach in March 2007) was perhaps matched by a corrupution scandal breaking in November 2006 in which seven FFOMS officials were arrested for massive bribe-taking from both regional decision-makers and distributors vying for tenders under the DLO, and the general director of a leading distributor, Protek, was arrested in connection with the case ten months later.

Dmitry Reihart of FFOMS, in a July 2007 meeting with the Association of International Pharmaceutical Manufacturers, confirmed that the stability of the DLO programme had been significantly increased because of federal law now "defining its key parameters." Mechanisms are in place to extinguish remaining 2006 debts to producers, he continued, and the DLO will survive and continue to prefer domestic producers to importers.

Discussion (in August 2007) on the reformulation of the DLO has raised the idea of a new layer of bureaucracy (a so-called "Pharmaceutical Logistics Complex") to guarantee supplies, though the role of regional tenders, local authorities, and distributors would remain unchanged.

In addition, the original 2007 budget of Rb 34.9 bn has been boosted to Rb 68.2 bn.