198 Abstract The performance of economic systems de- pends both on using resources with maximum efficiency and on society’s income redistribution. Any socio-economic decision has to ensure Pa- reto efficiency or, according to the Kaldor-Hicks principle, to provide net benefit after the compen- sation of the involved social costs. Health and education are main development vectors of all nations and funds oriented in these fields are major capital investments, for which recent utilities are ignored in favor of future ones that are much more important due to their major effects on the ostensible growth of society’s ca- pabilities. The constant insufficiency of financing the health system requires the search of new resources and their much more responsible and efficient management. The clawback tax, which theoretically withdraws a surplus part from the sales value of pharmaceutical companies, given the fact that the paying availability is estimated according to the involved opportunity costs, is a fiscal instrument practiced by many countries with beneficial consequences on the social sur- plus. The three attempts (three normative acts in three years) of the Romanian national authorities to introduce the clawback tax may be considered failures, due to the absence of studies and tests that allow the implementation of accurate, sus- tainable and non-discriminatory rules and the highlight of compensatory measures. Keywords: cost-benefit analysis, clawback, social surplus, consumer’s surplus, producer’s surplus, deadweight loss. INCONSISTENCY OF LEGAL PROVISIONS: FAILURE IN INTRODUCING THE CLAWBACK TAX ON THE ROMANIAN MEDICINES MARKET Monica PETCU Iulia DAVID SOBOLEVSCHI Ovidiu Constantin BUNGET Monica PETCU Associated Professor, Accounting, Audit and Economic Analysis Department, Faculty of Accounting and Management Information Systems, Academy of Economic Studies, Bucharest, Romania Tel.: 0040-723-435.925 E-mail: petcu_mona_a@yahoo.com Iulia DAVID SOBOLEVSCHI Associated Professor, Accounting, Audit and Economic Analysis Department, Faculty of Accounting and Management Information Systems, Academy of Economic Studies, Bucharest, Romania Tel.: 0040-0751-112.004 E-mail: iulia.david@kgaudit.ro Ovidiu Constantin BUNGET Associated Professor, Accounting and Audit Department, Faculty of Economics and Business Administration, West University of Timisoara, Timisoara, Romania Tel.: 0040-740-250.934 E-mail: ovidiu.bunget@feaa.uvt.ro Transylvanian Review of Administrative Sciences, No. 43 E/2014, pp. 198-215 199 1. Introduction The dynamic of major changes as well as the synergies of minor changes cause significant disturbances in economic systems, potentiated in a global environment by the preeminence of the mega-system which holistically wires extremely diversified components. While trying to find suitable models, interdependences and rules, in or- der to explain the changes, economists use more and more frequently concepts that are characteristic for other systems such as the social or biological one. Blaug quotes Marshal’s statement, made almost a century ago, according to which ‘the Mecca of the economist lies not in comparative statics, nor even in dynamic analysis, but rath- er in economic biology, which means that the economic system is a mechanism that develops in time’ (Blaug, 1992, p. 454). The interventions in any field propagate and may occasionally induce severe mutations with repercussions on the ensemble. In the construction of economic models, the systemic theory interferes with the chaotic systems theory and the synergies. In such a dynamic, complex and contradictory environment, economies are guided through state intervention, which has the responsibility to emphasize the goals that reach society’s unanimous consensus and to establish those economic policies that finish up in growing welfare on the whole, ‘...welfare in the sense that all members of the collectivity must have a decent, common minimum stock of economic goods ...the optimal economic system is the one that provides the maximum of what people need’ (Galbraith, 1982, p. 11). The performance of a state depends on the economic results and on the policies of income redistribution as well, on their allocation according to the development capa- bilities, the real needs and targets of a society. Society’s possibilities to provide and people’s needs are in a relation of mutual stimulation. Including the axioms of human rights and access of all society members to a decent standard of living, facilitates the examination of the field and the separation of heteronomous elements and dysfunc- tionalities in any hypothesis of undertakings with socio-economic finality. Policies should not be implemented unless a Pareto optimum is obtained, defined as ‘the point that allows the improvement of a certain individual welfare, meaning his movement to a preferred position by adjusting goods or services through production or exchange without affecting someone else’s welfare’ (Blaug, 1992, p. 626.). Hicks states that ‘a policy should be adopted if and only if those who would gain are capable of fully compensating those who would lose and yet remain better off’ (Boardman et al., 2004), which means getting a positive net benefit as the difference between nec- essary social costs and social benefits to come. Irrespective of the expression of these principles, the conclusion is that getting positive net benefits, namely the Pareto effi- ciency, is the only thing that could make possible the maximization of welfare on the whole. The argument for certain socio-economic policies that maximize welfare implies a cost-benefit analysis, which takes into consideration these principles and is based on concepts such as paying availability and opportunity costs, the main indicators for 200 measuring costs and benefits. The limits of this method refer to the difficulties of mon- etary evaluation of benefits and the compensation of utility loss of some by the utility benefits of the others. As Boardman et al. (2004) argue ‘while analysts evaluate the consequences of applying policies through the availability of the affected ones to pay and the resources necessary to its implementation through opportunity costs, the net benefit will indicate if those who pay might be adequately compensated and remain better off’. Any applied policy involves resource consumption, the opportunity cost, as a resource value in its best version, being a distinctive mark both for those who pay and for those who take measures. In general, the main beneficiaries of redistributing society’s income are the public services, given that their organization and finalities most adequately express the effi- ciency of the policies adopted by the authorities. 2. Research methodology The purpose of this article is the analysis of the clawback tax impact within the policies of growth of the resources for medicines consumption support, in terms of anticipated net benefits, seen as positive evolution of the social surplus (consumer’s surplus + producer’s surplus), evaluated through monetary and non-monetary indi- cators. The aim is to indicate dysfunctionalities, inadvertences and errors generated by the implementation of regulations, as well as certain specific details that should illustrate the decisions of authorities together with the general principles of realism, and ensure the issuance of adequate regulations. 2.1. Definition of scope and used concepts In order to avoid additional processing, useless for the purpose and objectives of this study, and to define the used terms, the following clarifications are provided: – the evaluation of the clawback tax impact is made only for the segment in which the final beneficiaries purchase medicines directly from wholesale suppliers (hos- pitals, dialysis centers); the issued arguments are also valid for the field on the whole (including pharmacies that have not been included in order to reduce cal- culations); – the producer’s margin (PM) is the result of the operating profit, which can be substantially affected by the financial and extraordinary result, as well as by the income tax; – the distributor’s margin (DM) is also the result of the operating profit, as part of the trade markup to which he is entitled under regulations, and affected by the same factors; – the consumer’s surplus (CS) is graphically defined by the area between the de- mand curve and the price curve, being determined as the difference between the gross benefit (placed on the demand line) and the effectuated payments, repre- sented by price. The fluctuation of the consumer’s surplus is calculated according to the formula: ΔCS = (ΔP)Q0 + ½(ΔQ)( ΔP), where: P = price; Q= quantity; 201 – the producer’s surplus (PS), graphically defined by the area between the price line and the supply curve, is calculated as the difference between the revenues obtained by selling a quantity of the product and the costs necessary for the mak- ing of this quantity; in this undertaking we will consider the producer’s surplus as a sum of the two components, even though the data presentation mentions the producer and the distributor separately: PS = PM + DM and ΔPS = PSF - PSI, where PSI is the surplus before the implementation of the clawback tax and PSF is the surplus after the implementation. The total producer’s surplus (TPS) is the difference between income (I) and the total expenses (E) or the sum of the results from the operating (noted PM), financial (RF) and extraordinary activities (REX): TPS = I - E = PM + [RF+ REX]; – the social surplus (SS) is the sum of the consumer’s surplus and the producer’s surplus: SS = CS + PS; – the clawback tax (CT) is generally defined as a deduction from a paid price or a market income, or from the distributed sums of money and benefits achieved in certain circumstances. The formulas used for the calculation of CT will be pre- sented in the chapter related to it, as stipulated in the regulations; – the deadweight loss (DL) is an effective cost for society or the negative net result defined as the producer’s surplus decrease without any compensatory increase for the consumer’s surplus. In this undertaking, the producer’s surplus decrease is represented by the clawback tax and this relation may be written as follows: DL = CT – ΔCS. DL results from the competitive market distortion and it may rep- resent the loss of medicines suppliers who lost their ability to act on the market or other ‘leaks’, as they are called in the trade literature; and – the conditions that the producers’ surplus should fulfil in order for them to be able to commercialize medicines on the Romanian market are: * PSF = (PSI - CT) > [Ie + Σ (eri1-eri0)VAi + NP], for eri1> eri0, Ie >0, where: Ie are the interest expenses for both (producer and distributor), eri0 and eri1 are the exchange rates at the time of the acquisitions and, respectively, of their payment, at the level of the producer and distributor, VAi is the volume of acquisitions, i is the type of medicine, NP is the net operating result; * (2) FNT1 > [FNE0+ FNF0 + FNI0], where: FNT = total cash flows, FNE = cash flows from operating activities, FNF = cash flows from financing activities, FNI, cash flows from investment activities. As a result of the lack of fulfillment of these conditions, the pharmaceutical compa- nies that provide medicines declare insolvency. These conditions are applicable for all the three versions of calculation for the clawback tax, issued by the authorities. 2.2. Research methodology The research methodology is based on the cost-benefit analysis commonly used to evaluate the costs and benefits generated by the interventions of authorities, in some countries being brought by normative acts in the quantification of consequences and 202 adoption of social decisions that ensure the realization of a Pareto optimum, meaning the increase of general welfare. Moreover, we also used methods specific to the inves- tigative process, phenomenologically oriented, comprehensively oriented (the study of normative documents, trade literature, participative observation, case study etc.), methods of intersection such as the combined quantitative and qualitative approach (document analysis), methods of data interpretation (deductive and comparative). 3. Considerations on medicines market and prices ‘Generally, the medicines and health services market is not a free competitive mar- ket given that it only happens on very limited segments. The market entry restrictions and the reduced mobility of the production factors, the heterogeneity of the services, the strong asymmetry of information, the drastic limitation of the capacity of evaluat- ing their own needs and the rational consumer behavior, the consideration of health as a worthy good, the unequal distribution of income and the inverse proportionality between these and needs lead to the market failure etc.’ (Vlădescu, 2000). The medicines market is strictly brought under regulation in that segment in which the medicines’ cost is totally or partially paid by The National Health Insurance Fund (CNASS) or by The Ministry of Health (MS). This segment refers to ‘the medicines included in the national healthcare programs, and for the medicines with or without personal contribution, used in ambulatory treatments based on medical prescription, via open circuit pharmacies, in hospital treatment and for medicines used in medical services provided in dialysis centers’ (GEO no. 110/2011). The maximum price of these medicines is stipulated in the National Catalogue of prices for medicines of human use authorized to be put on the market in Romania (CaNaMed in short; National Health Insurance House, undated) approved, revised and corrected by order of the Minister of Health. The value added tax for medicines is established at 9% by the Ro- manian Fiscal Code. In the presented examples, the producer’s expenses (Tables 1 and 2) for the medi- cines with regulated price were grouped in three categories: research expenses (with a very large weight on the original products’ price, even above 80%); direct expenses and other expenses (in which all the other indirect and management expenses were included). The price paid by the health network is based on the producer’s price, accepted at the smallest level by comparison with the ones practiced in other 10-12 European countries, to which the trade markup is added according to types of com- mercialization and tranches. The markup for distributors varies between 14% (for the medicines that cost between 0 and 50 lei), 12% (>50-100 lei) and 10% (>100-300 lei), while for the medicines that cost more than 300 lei there is a fixed markup of 30 lei. For example, Table 1 presents a medicine that has been commercialized at first as original (commercialized only by the producer that has patents for the product, sub- stance, technology etc.) and subsequently as generic (produced by several producers, when taken out from under the protection of the patents of the original). Generally, the price of medicines is decreased during biddings, the only source being the produc- er’s margin, given that the distribution markup is limited. 203 Table 1: Price structure Price structure Original price Generic price Bidding price Lei % Lei % Lei % Research expenses 200 57.14 0 0.00 0 0.00 Direct expenses 25 7.14 25 16.67 25 20.83 Other expenses 25 7.14 35 23.33 35 29.17 Total expenses 250 71.43 60 40.00 60 50.00 Producer’s margin 70 20.00 76.35 50.90 49.09 40.91 Producer’s price 320 91.43 136.35 90.90 109.09 90.91 Distribution 30 8.57 13.65 9.10 10.91 9.09 Wholesale medicine price 350 100.00 150.00 100.00 120.00 100.00 Pharmacy markup 35 18 14.4 Pharmacy medicine price 385 168.00 134.40 Source: Data gathered and processed by the authors In Table 1 we can see the increased weight of the research expenses and the rather small weight of the other types of costs. Moreover, Figure 1 shows a large producer’s margin. Figure 1: Medicine price structure Source: The authors Normally, after the recovery of the research expenses, if prices remain the same, their quantum changes into producer’s profit and they become a significant fund for a future price decrease. At the same time, the loss from this accumulation that could be reinvested in research may affect the development of the sector. The failure of the medicine market does not allow any thorough view on the subject, thus the interest discrepancies are more or less harmonized through negotiations and regulations. It should be mentioned that, for the generic medicine in other expenses category there are certain expenses related to the bioequivalence with the original studies and pro- motion in competitive conditions, which increases them. In the case of medicines, examinations and market authorizations impose very large costs. For the generic medicines with the main weight in the total sales, which are pro- duced on a large scale by many operators, the price and producer’s margin (Table 2) are much smaller, especially because of the competition. 204 Table 2: Price structure for a generic medicine Price structure 10 lei % Research expenses 0 0 Direct expenses 3 30 Other expenses 4 40 Total expenses 7 70 Producer’s margin 1.77 17.7 Producer’s price 8.77 87.7 Distribution 1.23 12.3 Medicine price 10 100 Pharmacy markup 2.4 Pharmacy price 12.4 Source: The authors It is also necessary that we mention the significant impact of the transportation expenses on the final price, since this sometimes happens under special conditions (cold, anti-break packages etc.). The constant increase of the transportation cost is an additional constraint in the evaluation of the redistribution policies of a part of the medicine producer’s surplus. The non-convergence between the authorities’ interests that have to sustain the uncovered part of the medicines demand of FNUASS1 and the state budget, and the producers’ interests on one hand and the generics market competition on the other hand, determines the search for collateral solutions, including the decrease of produc- ers’ profits which frequently surpasses the average of other sectors. The contracts between producers and distributors usually include substantial dis- counts after a certain sales limit considered as much as necessary to sustain the mar- gin loss, through additional rollovers. 4. The clawback tax Generally, the clawback tax represents the withdrawal of something distributed/ paid in excess or, more explicitly, clawback is a rule that allows the withdrawal of that part from a payment, which covers a performance that is not accurate or rightful. One of the most recent applications of the clawback tax is found in the case of the adminis- trations of banks and other financial institutions responsible with the financial crisis, in order to prevent the phenomenon’s recurrence. The motivation of introducing this type of tax is presented in the normative acts and consists in: (a) exceeding the limit settled for medicines within FNUASS and the budget of the Ministry of Health; (b) ensuring the uninterrupted access to medicines for the population, with or without 1 Short form for Fondul Național Unic al Asigurărilor Sociale de Sănătate (En: Sole national fund of social health insurance). 205 personal contribution, used in ambulatory treatments within the national health pro- grams and in the sanitary units with beds; and (c) the necessity of the implementation of a sustainable contribution system for the continuous supplementation of the financ- ing sources of the health public system, under emergency regime. In other words, without the contribution of the pharmaceutical sector, the author- ities find themselves in the impossibility of providing the necessary medicines to the population. At the same time, this contribution is solicited as recognition of the ben- efits in excess of this sector in comparison to others, but also of the fact that the state is the prevailing client, without which the whole medicine market would collapse. The increased producers’ margins, as well as the accumulations made in time, may represent significant reserves, a part from which may be withdrawn for financing the chronic deficits of resources, on condition of reasonability and compensation of these losses. The constraint of obtaining a positive net social benefit by compensating the pro- ducers’ losses, given that the consumer’s surplus obviously grows by increasing the medicine acquisition resources, implies the correlated evaluation of paying availabil- ity of the holders of marketing authorizations, with the involved opportunity costs. The paying availability is conditioned by the request of maintaining the status quo of the holders of marketing authorizations. From an economic point of view, it may be assumed that a holder of marketing authorizations is inclined to pay if the total value of the margin realized until the introduction of the clawback tax remains relatively constant through the compensatory effect of the increase of the acquired quantities. In the evaluation of the paying availability there should be taken into account the opportunity costs involved by the medicines sale on other markets: the costs of with- drawal from the Romanian market and the costs of entrance on other markets. At the same time, the lawmaker should also take into consideration the potential own losses generated by the migration of some medicine suppliers, with severe incidences on population health and subsequent additional expenses. The three attempts of instituting the clawback tax are presented in the following sections. 4.1. Government Emergency Ordinance no. 104/2009 In this first version, the clawback tax was a percentage tranche withdrawal from the sales income of the holders of marketing authorizations for medicines, according to the following table: Table 3: Clawback tax according to GEO2 no.104/2009 Quarterly receipts – thousands lei >75000 50,001-75000 25001-50000 12501-25000 6251-12500 1251-6250 < 1250 Clawback tax - % 11 10 9 8 7 6 5 Source: GEO no.104/2009 2 GEO stands for Government Emergency Ordinance. 206 An example of the application of this taxation method and its effects is presented in Table 4. In order to evaluate the impact of this tax on the producer’s surplus (PS): ΔPS = PSF - PSI, sales volumes from a single medicine were taken into consideration, framed in all the intervals mentioned in Table 3. The analysis was made for each of the prices detailed in Tables 1 and 2, keeping the producer’s margin calculated in the structure of the price. The distributor’s margin, as a result from exploitation, was set to 5% of its trade markup, being the same in all versions. Table 4: Calculation of the evolution of producer’s surplus % clawback tax 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Sales volume - thousands lei 600.0 1,251.0 6,251.0 12,501.0 25,001.0 50,001.0 75,001.0 Clawback tax - thousands lei 30.0 75.0 437.5 1,000.0 2,250.0 5,000.0 8,250.0 Acquisition price 8.77 lei, wholesale price 10 lei Quantity – thousands pieces 60.0 125.1 625.1 1,250.1 2,500.1 5,000.1 7,500.1 Acquisition value 526.2 1,097.1 5,482.1 10,963.4 21,925.9 43,850.9 65,775.9 Sales value 600.0 1,251.0 6,251.0 12,501.0 25,001.0 50,001.0 75,001.0 PM 17,7% 93.1 194.2 970.3 1,940.5 3,880.9 7,761.6 11,642.3 DM 5% 3.7 7.7 38.4 76.9 153.8 307.5 461.3 PSI – sum 96.8 201.9 1008.8 2017.4 4034.6 8069.1 12103.6 % 16.1 16.1 16.1 16.1 16.1 16.1 16.1 PSF - sum 66.8 126.8 571.2 1017.3 1784.5 3069 3853.5 % 11.1 10.1 9.1 8.1 7.1 6.1 5.1 Acquisition price 51 lei, wholesale price 57.1 lei Quantity – thousands pieces 10.5 21.9 109.4 218.8 437.7 875.4 1.313.0 Acquisition value 535.7 1,117.0 5,581.3 11,161.6 22,322.3 44,643.8 66,965.2 PM 20% 107.1 223.4 1,116.3 2,232.3 4,464.5 8,928.8 13,393.0 DM 5% 3.2 6.7 33.5 67.0 133.9 267.9 401.8 PSI – sum 110.4 230.1 1,149.7 2,299.3 4,598.4 9,196.6 13,794.8 % 18.4 18.4 18.4 18.4 18.4 18.4 18.4 PSF - sum 80.4 155.0 712.2 1,299.2 2,348.3 4,196.5 5,544.7 % 13.4 12.4 11.4 10.4 9.4 8.4 7.4 Acquisition price 109.1 lei, wholesale price 120 lei Quantity – thousands pieces 5.0 10.4 52.1 104.2 208.3 416.7 625.0 Acquisition value 545.5 1,137.3 5,682.7 11,364.5 22,728.0 45,455.1 68,182.2 PM 49,09 267.8 558.3 2,789.6 5,578.8 11,157.2 22,313.9 33,470.6 DM 5% 2.7 5.7 28.4 56.8 113.7 227.3 340.9 PSI – sum 270.5 564.0 2,818.0 5,635.6 11,270.8 22,541.2 33,811.6 % 45.1 45.1 45.1 45.1 45.1 45.1 45.1 PSF - sum 240.5 488.9 2,380.5 4,635.6 9,020.7 17,541.1 25,561.5 % 40.1 39.1 38.1 37.1 36.1 35.1 34.1 Acquisition price 320 lei, wholesale price 350 lei Quantity – thousands pieces 1.7 3.6 17.9 35.7 71.4 142.9 214.3 Acquisition value 548.6 1143.8 5715.2 11429.5 22858.1 45714.8 68572.3 PM 20% 109.7 228.8 1143.0 2285.9 4571.6 9143.0 13714.5 DM 0,05*30 lei 2.6 5.4 26.8 53.6 107.1 214.3 321.4 PSI – sum 112.3 234.1 1169.8 2339.5 4678.8 9357.3 14035.9 % 18.7 18.7 18.7 18.7 18.7 18.7 18.7 PSF - sum 82.3 159.1 732.3 1339.4 2428.7 4357.2 5785.8 % 13.7 12.7 11.7 10.7 9.7 8.7 7.7 207 Acquisition price 320 lei, wholesale price 350 lei PM 84% 460.8 960.8 4800.8 9600.8 19200.8 38400.4 57600.8 DM 0,05*30 2.6 5.4 26.8 53.6 107.1 214.3 321.4 PSI – sum 463.4 966.1 4827.6 9654.3 19307.9 38614.7 57922.2 % 77.2 77.2 77.2 77.2 77.2 77.2 77.2 PSF - sum 433.4 891.1 4390.0 8654.3 17057.8 33614.6 49672.1 % 72.2 71.2 70.2 69.2 68.2 67.2 66.2 Source: Data gathered and processed by the authors We should mention that the sales value is kept in all the used price versions in or- der to emphasize the evolutions of the surplus for different price structures, according to the legal provisions. From the analysis of the data in Table 4, it results that: – while the PSI sales rate is constant, the PSF rate decreases; the sale of increasing medicine quantities (at the same average price) becomes proportionally less prof- itable; – firms with less significant sales are encouraged, which is beneficial for maintain- ing the competition level on the market; – firms from the inferior limit of the interval are disadvantaged and they will be in the scope of a larger calculation percentage, at a level close to the previous one; if there is a limited number or just a supplier for certain medicines necessary in a volume from the interval limit, they will restrict the delivery; – the deferred reimbursement of deliveries and the abrupt purchase payment for several semesters will disadvantage most of the suppliers who will try to mini- mize their losses; – the expenses of firms that supply new state-of-the-art medicines (original and generic, in the first phase of life) are accepted, as long as they are commercialized in well-positioned volumes; and – the commercialization of generic products (almost all of which come under the first approached group) becomes forbidden because of the unobserved conditions (1) and (2), presented above: (eri1 > eri0, Ie > 0), when the firms have unfavorable exchange rate differences and significant interest expenses, therefore a common producer’s and distributor’s surplus of under 10% is not sufficient to support them. It is known that sanitary units pay their acquisitions every 200 - 300 days and even after more than a year since their reception. This phenomenon creates conditions for unfavorable exchange rate differences and significant interest ex- penses (mainly small distributors tick in order to support their activity), while the producers’ cash flow is permanently reduced. 4.2. Government Emergency Ordinance no. 77/2011 In the second version, the half-year contribution is calculated by applying a ‘P’ per- centage on the medicine consumption (sales of each holder of marketing authoriza- tions or their legal representatives) supported by FNUASS and the Ministry of Health budget. The percentage is calculated as follows: P = [(TCq-BAt)/TCq] x 100, where: TCq = total quarterly medicine consumption, Bat = ¼ of the annual approved budget. 208 We do not offer any examples as this calculation method cannot be viable. The client asks the supplier to finance all the consumption that exceeds the budget ap- proved level, given the fact that this is constantly a great deal under the needs of the population. 4.3. Government Emergency Ordinance no. 110/2011 The last version establishes the calculation of the clawback tax as a quarterly con- tribution (oqc) of the medicines suppliers, according to the following formula: [(2/3) (Siq/STq) + (1/3)(Siq-Siqr)] (STq-STqr), with the following explanations: – ‘(1) Siq = value of the quarterly individual medicine sales of each contribution payer, supported by the Sole national fund of social health insurances and the Ministry of Health budget; Siqr = value of the reference quarterly individual med- icine sales of each contribution payer, supported by the Sole national fund of social health insurances and the Ministry of Health budget; STq = value of the quarterly total medicine sales supported by the Sole national fund of social health insurances and the Ministry of Health budget; STqr = value of the reference quar- terly total medicine sales supported by the Sole national fund of social health insurances and the Ministry of Health budget. – (2) The value of the reference quarterly total medicine sales supported by the Sole national fund of social health insurances and the Ministry of Health budget is of 1.425 billion lei. This value may be increased by the annual budget laws. – (3) The value of the reference quarterly individual medicine sales of each contri- bution payer, supported by the Sole national fund of social health insurances and the Ministry of Health budget is established by the National Health Insurance Fund for each contribution payer. This value is calculated by relating the medi- cine sales of each contribution payer for the year 2011 to the total medicine sales, supported by the Sole national fund of social health insurances and the Ministry of Health budget, associated with the same year, and by multiplying the result by the value of the reference quarterly total sales of 1.425 billion lei. – (4) The value stipulated at paragraph (3) is reported by the National Health Insur- ance Fund to each contribution payer until March 15, 2012. For the contribution payers who did not have medicine sales supported by the Sole national fund of social health insurances and the Ministry of Health budget until December 31, 2011, the value of the reference quarterly individual sales is zero. – (5) According to paragraphs (1) - (3), the value of sales is, by law, the value of medicines supported by the Sole national fund of social health insurances and the Ministry of Health budget, which also includes the value added tax.’ (GEO no. 110/2011) As an example, we calculated the contribution owed by six pharmaceutical compa- nies (Table 5). Evaluating the turnovers presented in the ‘Report on the useful investi- gation regarding the study of the Romanian medicines wholesale market 2007-2009’, drawn up by the Romanian Competition Council (2010), we assessed the reference quarterly sales and chosen the cases that represent the range of possible positions. 209 Calculations were made for two levels of the producers’ margins, namely of 40% and 20%, and for three levels of distributors’ markups. In order to remove any interpreta- tions on the distributor’s margin (frequently increased by the discounts subsequently given by the medicine producers), this was considered equal to the entire trade mark- up allowed by regulations. We should mention that the obligation to pay a tax applied to another tax (accord- ing to this ordinance, the clawback tax is calculated on sales, including VAT) is not constitutional, as stated by the Constitutional Court, and that the 9% VAT institution was meant to increase the accessibility to medicines. Table 5: Examples of calculation of the contribution for a number of firms Indicators Firm 1 Firm 2 Firm 3 Firm 4 Firm 5 Firm 6 % individual annual sales within the annual total sales 0.04 0.01 0.21 0.07 0.10 Reference total quarterly sales STqr 1,425,000 1,425,000 1,425,000 1,425,000 1,425,000 0 Reference individual quarterly sales Siqr 59,375 11,875 296,875 95,000 136,563 0 Total quarterly sales STq 1,852,500 1,852,500 1,852,500 1,852,500 1,852,500 1,852,500 Individual quarterly sales Siq 83,125 10,688 237,500 190,000 136,563 5,600 Total weight of individual quarterly sales Siq/STq 0.04 0.01 0.13 0.10 0.07 0.00 Ref. total weight of ind. ref. quarterly sales Siqr/STqr 0.04 0.01 0.21 0.07 0.10 0.00 Diff. ind. quart. sales and ref. ind. quart. sales Siq-Siqr 23,750 -1,188 -59,375 95,000 0 5,600 Diff. quart. total sales and ref. total sales STq-STqr 427,500 427,500 427,500 427,500 427,500 427,500 Owed quarterly contribution Oqc 20,705 1,248 16,747 60,897 21,010 2,728 % in sales 24.91 11.68 7.05 32.05 15.38 48.72 VAT ( 9%) – sum 6,864 882 19,610 15,688 11,276 462 owed taxes % (oqc + VAT) 33.91 20.68 16.05 41.05 24.38 57.72 Average PM - % in sales 40 40 40 40 40 40 % maximal trade markup in sales case A 12.28 12.28 12.28 12.28 12.28 12.28 % average trade markup in sales case B 10.71 10.71 10.71 10.71 10.71 10.71 % minimum trade markup in sales case C 9.09 9.09 9.09 9.09 9.09 9.09 producer’s surplus - % case A 18.37 31.60 36.23 11.23 27.90 -5.44 producer’s surplus - % case B 16.80 30.03 34.66 9.66 26.33 -7.01 producer’s surplus - % case C 15.18 28.41 33.04 8.04 24.71 -8.63 average prod margin - % in sales 20.00 20.00 20.00 20.00 20.00 20.00 % maximal trade markup in sales case A 12.28 12.28 12.28 12.28 12.28 12.28 % average trade markup in sales case B 10.71 10.71 10.71 10.71 10.71 10.71 % minimum trade markup in sales case C 9.09 9.09 9.09 9.09 9.09 9.09 producer’s surplus - % case A -1.63 11.60 16.23 -8.77 7.90 -25.44 producer’s surplus - % case B -3.20 10.03 14.66 -10.34 6.33 -27.01 producer’s surplus - % case C -4.82 8.41 13.04 -11.96 4.71 -28.63 Source: Data gathered and processed by the authors As for the table data, only the largest noticeable discrepancies are mentioned, re- garding the proportionality between the sales volume and the calculated contribu- tion, according to regulations: on a sale of 237,500 thousand lei the owed contribution is 16,747 thousand lei (7.05%), while on a sale of 83,125 thousand lei the calculated contribution is 20,705 thousand lei (24.91%), which reveals an extremely large penalty for surpassing the reference limit; on a sale 20% smaller (firm 4 in relation to firm 3) 210 the contribution owed is 3.64 times larger, especially because of the sales weight in- crease; according to the law, the last one (firm 6) owes almost half of the sales volume. If we continue the analysis of the situations in which the pharmaceutical compa- nies can be found, we notice that in the case of the producer’s margin of 40% only the new firm is at loss, while in the case of the 20% margin, even though the margin is supplemented by the whole distributor’s markup, half of the firms are at loss, distrib- utors have no other markup to support their operational expenses, and producers use a negative margin. If these firms also have a negative financial result (from interest ex- penses and unfavorable exchange rate differences), the suppliers will certainly declare insolvency, given that the delivery payment is usually delayed by several months. Moreover, there is an obvious and unprofitable lack of correlation between the owed contribution and medicine sales. In order to support this affirmation the follow- ing data are presented: Table 6: Evolution of the contribution when modifying certain involved variables Siqr Siq STqr STq oqc Comment Siq=Siqr On a sale equal to the reference one, the fi rm may owe 0 lei or 22 lei or 7.41 lei owed to it, according to what happens within the sector; STq=STqr 100 100 10,000 10,000 0.00 STq>STqr 100 100 10,000 15,000 22.22 STqSiqr On a sale larger than the reference one, the fi rm may not owe anything, owe 50 lei (2.25 more than at the time of the merge) or only 5.56 lei; STq=STqr 100 150 10,000 10,000 0.00 STq>STqr 100 150 10,000 15,000 50.00 STqSTqr 100 90 10,000 15,000 16.67 STq