(Bloomberg) — In Chile, a country where free enterprise is almost sacrosanct, a communist mayor is shaking up the system by inspiring local governments to jump into the drugstore business and offer cut-rate prices to a populace that’s grown weary of the big chain pharmacies.
Fifty-eight municipal governments have opened so-called “popular” drugstores in the past year and dozens more will follow suit in the next few months, according to the mayor, Daniel Jadue. Recoleta, the working-class neighborhood in Santiago that Jadue oversees, was the first to open one. Its discounts — reaching as high as 78 percent when compared with the medicines sold by pharmacies controlled by the likes of Walgreens Boots Alliance Inc. and Fomento Economico Mexicano SAB — proved an immediate success. Even local councils in wealthy areas that typically frown upon any state intervention now are adopting the model.
“Drugstores have put their own economic benefits before people’s well-being,” Jadue said. “Our municipal pharmacies are starting to change Chile’s drugstore model.”
Much like the outrage over soaring medicine prices in the U.S., U.K. and China, Chileans have been fuming for years over the perceived abuses of a commercial-drugstore industry dominated by just three companies. A court ruling in 1995 and another in 2012 found that Farmacias Ahumada SA, Farmacias Cruz Verde SA and Salcobrand SA colluded to raise pharmaceutical prices. That price fixing added a heavy burden to families who already face high costs for health care.
Chileans cover 53 percent of their health expenses with insurance contributions and direct payments, according to a report by the Organization for Economic Cooperation and Development, the highest percentage in the 35-member group. The government pays the rest.
The municipal drugstores are a break with tradition in Chile, where free-market economics was enshrined by the so-called Chicago Boys during the dictatorship of Augusto Pinochet. The stores are able to undercut the commercial competition by buying both generic and brand-name pharmaceuticals cheaply from the state health care system and by negotiating directly with pharmaceutical companies. Sales are restricted to people with prescriptions lasting at least six months.
“The system is a success and has triggered a debate about local government solving problems that the state sometimes can’t,” Jadue said.
For now, the stores represent little threat to the big three chains. Farmacias Ahumada is owned by Walgreens, which has global annual sales of $118 billion, while Femsa bought Cruz Verde last year. Salcobrand belongs to the Yarur family of banking magnates. There were a total of 2,955 drugstores in Chile as of December 2014.
Still, the municipal pharmacies could become a thorn in their side, with a third of Chile’s 346 local councils planning to have their own within a year. Ahumada and Salcobrand declined to comment about the impact on their sales.
Level playing field