Article

The purpose of this article is to provide a clearer explanation of the conditions for establishing a state-owned distribution company, to outline its proposed structure and implementation, and, ultimately, to explain the reasons why it was not implemented.

The Ministry of Health of the Slovak Republic (hereinafter also referred to as “MoH SR”) submitted for inter-ministerial review in February 2023, as a non-legislative document, a draft concept for the establishment of a state-owned distribution company for the supply of medicines and medical devices, based on the approved Work Plan of the Government of the Slovak Republic adopted by Resolution No. 71 of February 2, 2021 (hereinafter the “Draft Concept”). The Draft Concept was based on the proposed tasks of individual ministries as well as on the Program Statement of the Government of the Slovak Republic for the years 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 area of medicine supply and distribution by establishing a state distributor under the authority of the Ministry of Health of the Slovak Republic. As part of the pharmaceutical policy reform, the Slovak government declared an expansion of central procurement 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 address emerging crisis situations in the supply and distribution of medicines and medical devices, as well as oversight in the supply of medicines and medical devices. The aim was also to prevent a dominant position in the pharmaceutical market from being held by a small circle of private companies and their disproportionate influence on drug 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-owned distribution company, and the impact on the safety and health protection of citizens of the Slovak Republic.

The draft concept stated that it would have an impact on the state budget in the amount of €15 million as a contribution to the company’s initial capital upon its establishment, which was intended to cover the expenses necessary to launch the company, to secure financial operating resources, and, based on preliminary estimates, a planned €6 million for the State Material Reserves Administration, which was intended to cover the purchase of medicines and medical devices for the state material reserves system.

The Concept Proposal itself contains an analysis of the current situation—an assessment of the strengths and weaknesses of the current state of affairs in the distribution of medicines and medical devices, a concept for a state distribution company and its operation, the proposed solution (entity, company operations, comparison of financial requirements and operating costs,

comparison of models, recommendations for selecting the proposed model), the proposed procedure, and also includes several tables of key economic indicators, the strengths and weaknesses of the current system, a financial comparison of individual models, calculations of annual costs, the estimated ramp-up time for individual models, predictions of development and costs, as well as a SWOT analysis of the proposed option. The proposal also presents interesting economic data points such as total consumption of dispensed medicines in the Slovak Republic, medicine consumption by type of expenditure in millions of euros—patient payments and the share of payments for centrally purchased medicines in total medicine payments.

The Concept Proposal declared three main objectives for establishing a state distribution company, namely:

• Securing the state’s critical infrastructure in the area of supplying medicines and medical devices,
• Saving financial resources through the use of central public procurement,
• Reducing costs for 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, approximately twenty companies operate in the Slovak market for the distribution of medicines and medical devices, with turnovers ranging from €15 million to €682 million. The combined turnover of the five largest companies for 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 Association of Large-Scale Medicine Distributors (AVEL). These companies 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 medicine and medical supply deliveries to approximately 2,000 pharmacies and all hospitals. Their product range comprises approximately 32,000 items.”

“The analyzed distribution companies achieved total revenue from publicly tendered contracts amounting to €325 million in 2020, which demonstrates that there is sufficient scope for the effective operation of a distribution company serving state hospitals, hospital pharmacies, medical supply dispensaries, as well as for distribution to private facilities.”

Furthermore, the Concept Proposal assessed that the strengths of the current system include a fully functional, well-established system covering the entire territory of 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 a high level of quality and safety during transport, and price regulation with a positive impact on citizens of the Slovak Republic. Among the weaknesses of the current system, the draft concept identified the fact that private distribution companies have profit as their primary goal, which corresponds to efforts to increase margins and thus the prices of medicines and medical supplies, that the system does not allow for a sufficient degree of state independence 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 the threat to compliance with ethical standards in the marketing and advertising of prescription-only medicines.

The Draft Concept stated that, unlike other health insurance companies, Všeobecná zdravotná poisťovňa, a. s. (hereinafter also “VšZP”) handles central procurement through public tenders, which have strict rules that often limit the selection of medicines and the ability to procure multiple medicines containing the same active ingredient, the establishment of a separate state-owned distribution company appears to be a sensible step toward achieving the set objectives, namely savings resulting from centralized public procurement and ensuring the procurement and distribution of the relevant commodities in crisis situations. In light of the above, another decisive factor was the fact that the proposed state distribution company would become the central procurer of medicines and medical devices, thereby simplifying the purchase of medicines for hospitals, as they would no longer have to laboriously procure them through the public procurement process. A key benefit of central procurement of medicines and medical supplies will be an effective reduction in supplier prices due to the volume 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. To the extent possible, it will also act as a supplier and distributor for the private sector, including hospitals, pharmacies, and healthcare facilities. The state distribution company will be a public procurer of medicines and medical devices; furthermore, it will seek out and initiate the registration of generic medicines, thereby actively contributing to savings and the reallocation of resources derived from public health insurance.

By ensuring the procurement and distribution of medicines in cooperation with the General Health Insurance Company (VšZP), it will also move closer to the goal of increasing the volume of centrally purchased medicines, medical supplies, and medical devices.

The draft concept proposes that the Ministry of Health of the Slovak Republic establish a joint-stock company with 100% state ownership. To ensure comprehensiveness, three alternatives for establishing the State Distribution Company were considered: a joint-stock company with 100% state ownership (Alternative A), a subsidized organization (Alternative B), and a budgetary organization (Alternative C). The draft concept compared their advantages and disadvantages.

To achieve the goal of optimizing operations and, above all, reducing the costs of medicines and medical devices, the feasibility study proposed and compared the economics and operations of variants featuring a modern organizational structure and the use of partial or full outsourcing of logistics processes. The facts presented in the Concept Proposal indicate that the initial investment costs would range from €15 million to €54 million depending on the specific variant, and therefore, in one of the proposed variants, the use of logistics and distribution capacities owned by external logistics companies was also examined; these companies are capable of providing services within the territory of the Slovak Republic in the following scope:

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

Slovenská pošta, a. s., as it has spare logistics capacity for central Slovakia in Zvolen and plans to complete the development of logistics capacities in the Bratislava Region by 2023, as well as to renew its distribution fleet, which can be adapted to the conditions of medicine and medical supply distribution (the estimated purchase of delivery vehicles is approximately 370 units).

The concept proposal concluded, upon comparing the individual proposed models, that the option involving outsourcing of both logistics and transportation represents the lowest requirement for initial capital and annual operating costs, even when considering future development projections. Although the in-house logistics model could be more cost-effective in the long term (more than 10 years),

the model with outsourced logistics and transportation has the lowest initial investment costs, is the most flexible, can be implemented more quickly, can achieve planned revenues faster, and carries the lowest level of risk.

Among the strengths of the proposed model, the Concept Proposal listed the direct ownership link to the distribution company by the Ministry of Health of the Slovak Republic, the possibility of minimizing the sales margin and thus offering better prices to healthcare facilities, the size of the market for state healthcare facilities, and cost savings on the procurement of medicines, medical supplies, and medical devices through the use of centralized public procurement.

The Concept Proposal listed the following as weaknesses of the proposed system: the obligation to purchase through public procurement, the complexity of building the system, higher initial costs for system development, lower flexibility in decision-making processes, and insufficient experience with the rapid rollout of a fully functional system, which is required in the drug distribution process.

As opportunities of the proposed system, the Concept Proposal identified the possibility of capturing a portion of the private market, a guarantee of stable supply of medicines and medical supplies during crises, and ensuring the independence of state healthcare facilities from price speculation by suppliers of medicines and medical supplies. Threats to the proposed system include a shortage of labor with adequate experience, market attacks by existing distributors, the possibility of supply disruptions during the start-up phase, a shortage of financial resources for stockpiling, and the need to ensure all decision-making, logistical, and control mechanisms operate at a high level.

The concept proposal also outlined a basic procedure consisting of several phases, the initial steps of which would be notifying the European Commission of a request for state aid to establish a joint-stock company with 100% state ownership, establishing the company, selection of premises for the company’s headquarters, determination of the company’s share capital, and obtaining business licenses or permits (wholesale distribution of medicines and medical devices). This would be followed by a preparatory phase—administrative and technical arrangements for operational functioning (60 to 90 days), the licensing phase, including the application for a license to handle medicines and medical devices – wholesale distribution of medicines (10–18 months), and finally the launch of the distribution company’s operations (optimistic model: 10 months; realistic estimate: 18 months).

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

• the absence of a mechanism 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 by the state-owned wholesale distribution company
• the absence of tools designed to address the lack of willingness among drug manufacturers to offer discounts
• suspicions of a violation of competition rules due to the existence of a company wholly owned by the state that would cooperate with another state-owned company (Slovenská pošta, a. s., as part of an outsourcing arrangement)
• doubts as to whether state facilities will be restricted in their ability to purchase medicines from private distributors and whether the establishment of the company will exert indirect pressure on healthcare and pharmacy providers to purchase medicines only from the state-owned distribution company
• the inaccuracy and unacceptability of justifying the establishment of the company with extraordinary situations, such as COVID-19 (there are other legally established mechanisms—situations where the Ministry of Health procures medicines and medical devices for healthcare providers during a declared state of emergency, state of emergency, or extraordinary situation are not considered unlawful handling of medicines)
• the unacceptability of outsourcing distribution to Slovenská pošta, a. s. (no prior experience, a regulated sector, potential risk of improper distribution, storage, or handling of medicines, quality control, etc.).
• in the event that a state-owned distribution company were to carry out centralized procurement of medicines, healthcare providers have repeatedly stated that this is a risky approach, as in the case of central procurement, healthcare providers are de facto forced to prescribe and administer medicines procured through central procurement, 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, as well as the risk of reduced drug availability among other healthcare providers
• suspicions of circumventing Act No. 343/2015 Coll. on Public Procurement and on Amendments to Certain Acts on Public Procurement, lack of transparency, attempts to exclude public procurement as well as other existing mechanisms created by the state to ensure transparency in the expenditure of public funds
• doubts regarding further procedures and the legal regulation of margins for other private distributors
• the absence of a guarantee that the state-owned distribution company will be able to manage the distribution of medicines more effectively than private companies
• doubts regarding the return on investment
• the use of legal remedies by private distributors to defend themselves in the event that, for example, a state purchaser of medicines (a state hospital) prioritizes paying invoices to the state-owned distribution company—with which it has an ownership relationship—over paying invoices to other medicine suppliers (whether this would constitute state aid prohibited by the EU)
• the presence of incorrect factual claims 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-owned distribution company and existing distribution companies—risk of sanctions from the EU
• the failure to comply with professional requirements for good distribution practice and the absence of an analysis of these requirements—especially in the context of outsourcing the state-owned company’s distribution services

On April 4, 2023, despite the advanced stage of the entire state distribution company project, the Ministry of Health of the Slovak Republic announced that it had abandoned its plan to establish such a company. The Ministry of Health’s communications department reported that, during the inter-ministerial comment procedure, several fundamental comments regarding the Draft Concept could not be resolved; these comments primarily concerned the financing of the state distribution company in a manner that would ensure its establishment did not impose additional demands on the public administration budget.

From a legal perspective, we would like to conclude by noting that we consider the Ministry of Health’s decision to abandon the plan to establish a state-owned distribution company to be the right step. Apart from the fact that we consider a state-owned distribution company to be superfluous in the field of wholesale distribution of medicines and medical devices, and its establishment to be impractical and uneconomical, we also believe that its establishment and integration into the current operational relationships existing in this strictly regulated sector is unfeasible, particularly given the requirement to comply with all applicable legal regulations (including the Public Procurement Act). The objectives declared in the Concept Proposal cannot be achieved through the proposed implementation methods. Similarly, there are reasonable doubts as to whether the Draft Concept and the assessment of the relevant handling of medicines were based on a proper assessment and, in particular, a proper understanding of the relevant legal regulations, as there are also several legal inconsistencies in the Draft Concept. The Draft Concept uses the terms “trade—handling of medicines and medical devices” in the context of wholesale distribution of medicines, even though in reality this involves the handling of medicines based on a license issued in accordance with Act No. 362/2011 Coll. on Medicines and Medical Devices and on Amendments to Certain Acts, and it even proposes obtaining a license for the manufacture of medicines (however, the reasons for this are not specified, and obtaining a license for the manufacture of medicines is not anticipated 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 to suspect that the establishment of a state-owned distribution company would distort competition and that equal treatment between the state-owned distribution company and private holders of licenses for the wholesale distribution of medicines would not be guaranteed, which could also lead to legal proceedings and, ultimately, to claims for damages by other private holders of licenses for the wholesale distribution of medicines. We also believe that, paradoxically, the proposer himself drew conclusions in the Concept Proposal that call into question the legality and justification of the Concept Proposal and also identifies the risks that the establishment and operation of a state-owned distribution company would entail. Furthermore, the entire Draft Concept 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 of the Slovak Republic should have (and did) properly evaluate them to the extent that the comments could not be incorporated. However, we do not consider the complexity of securing financing for a state-owned distribution company to be the most fundamental comment or reason, but rather the ineffectiveness of the project, its de facto unfeasibility, the inability to ensure compliance with applicable national and European legislation, and a possible misunderstanding or even ignorance of the legislation governing the handling of medicines, as was also noted in the comments raised during the inter-ministerial comment procedure.