Romanian clawback - between over taxation and sales expropriation

What is clawback in Europe and why is it applied on some European pharmaceutical markets?

Most of the western economies are facing year by year important budget pressure generated by the increased demand coming from the healthcare systems. Due to the social, economic and medical developments people are living more, are living healthier and, consequently, are consuming more resources after retiring.


Medicines represent almost a quarter of the European public health budgets annually, increasing up to an amount of 228 billion EUR in 2011. The pharmaceutical industry is leading the top of the investments in research and development all over the world - only in Europe the investments reached 27.5 billion EUR last year. The outputs of this research are translated into more efficient medicines which enter the markets, most of them being covered by the social reimbursement systems.


The healthcare expenses grow faster than the growth of the economies. The budget allocation for health has constantly increased in Europe as percentage of GDP from 3,5% in the sixties up to 9,6% in the present and from 5.1% in US up to 17,4% nowadays. Romania is still the last country in Europe as far as budget allocation is concerned. Less than 4% of GDP is allocated to health. Despite the objectives of most Governments to increase it at least to 6% they did not find the political resources to do it.


This is why some states have invented the clawback tax: to share with the pharmaceutical industry the expenditures generated by the annually growth of medicines consumption. Fair enough. The states use a “claw” to reverse “back” some of the money spent for medicines. As an example: last year the amount a country consumed on medicine sums up to 100. This year the projection is 110. Whatever exceeds 110 will be partially covered by the pharmaceutical industry which is “guilty” to create products that make people live better.


How the Romanian Governments have implemented this tax?


They allocated much less than the real consumption and imposed the industry to cover both the deficit and the growth. In real figures the situation is as follows Romania spent 6,8 billion RON from public funds for reimbursed medicines in 2011 and allocated 5,7 billion RON for 2012. The consumption for this year is estimated to be 7,5 billion RON (10% increase). The state says: “We have “overspent” 1,8 billion RON for the treatments of the Romanian insured citizens. The producers should pay this amount.”


How fair is the tax?


The end-user price contains the producers’ price, which is fixed by law at the minimum European level plus the distributors’ margins, the pharmacies margins (also regulated by law) and VAT. The health funds reimburse the medicines directly at pharmacies at the retail price. Despite the fact that the producers price represents just 70% of the retail price the base for the tax is calculated at the end-user level.


This is unacceptable because the producers are forced to pay a tax for the incomes of other economic entities and a tax per tax (VAT). After two years of negotiations the actual Government has decided to eliminate the VAT from the base of calculation starting from October 1st.



How sustainable is the tax?


Going back to the real figures, the reality shows that out of 7.5 billion RON reimbursed sales in 2012 the producers will cash only 5.25 billion RON (70%) and will pay a tax of 1.8 billion for these sales: 34% of reimbursed sales. No economic sector could survive with a tax of 34% on turnover, considering also all of the usual taxes. And, more than that, the tax should be paid almost one year before the money on sold reimbursed medicine are collected from the market.


The payment terms are huge on the pharmaceutical market -the State pays the pharmacies 300 days after the invoices are received but imposes by law for producers to pay the clawback tax no later than two months after each quarter of operating sales.


How predictable is the tax?


To answer this question we should know the level of consumption generated by patients’ needs and the level of frauds not being controlled by the ineffective electronic systems. Is the industry controlling the prescriptions of the physicians? No. Is the industry fixing the correctness of the reimbursement? No.


Is this Romanian clawback an over taxation or a method to partially expropriate the sales? The lack of sustainability, the lack of predictability and the lack of fairness could bring us closer to the answer.


Most of the business men I have described this tax to, did not believe that it is true. Most of them agreed in the end that it shuts down the new investments and could also shut down the actual businesses in the pharmaceutical sector. None of them thought that such a tax could, at some point, be applied their businesses.


I invite them to reflect twice and foresee how their sectors would develop when the state will say: if next year you want to receive the 100 RON for the products you already delivered to me, you have to pay to the state budget 34 RON right now.