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Labs agree to lower cost of Covid PCR tests

The ‘R850 price…may have been a good price [when] volumes were low and everything was quite new’: James Hodge – chief economist, Competition Commission.

FIFI PETERS: If you went for a Covid-19 PCR [polymerase chain reaction] test at a Lancet or an Ampath lab today, you probably would have paid about R500  for the test, as opposed to R850 before the announcement by the Competition Commission yesterday that it had reached an agreement with these two labs to drop the prices of the Covid-19 PCR tests. The prices have fallen by around 42% as a result of this deal.

To discuss all the action by the CompCom to make Covid-19 testing cheaper and more accessible, I’m joined by James Hodge, the chief economist at the Competition Commission. James, thanks once again for your time. First of all, remind us how we arrived at R850 for a PCR test to begin with.

JAMES HODGE: Maybe before I quickly do that, Fifi, I should announce that we have reached settlement with Pathcare as well. Hopefully from tomorrow you’ll also pay R500 at Pathcare as well. That is good news.

But, going back to your question, at the beginning of the pandemic the prices for Covid testing were anywhere from R1 000 to R1 500. There the Department of Health requested that we grant an exemption to allow negotiation to bring that price down. That negotiation resulted in the R850 price. That may have been a good price at that stage. Volumes were quite low and everything was quite new. So I think the number of supplies of test kits and the like would’ve been more limited.

But over time the cost of those test kits has come down. The volumes have been exploding in terms of testing and surveys. There’ve been …….1:59 scale economies for the pathology labs, and that’s what slowly reduced the costs over time; but that price never moved. And that’s why we ended up with a big gap and the need to intervene.

FIFI PETERS: On the announcement regarding Pathcare – which until perhaps this afternoon or today was not part of the agreement to lower the prices by 42% – what finally got the deal with them over the line?

JAMES HODGE: Well, I think they are faced with the reality that their two biggest competitors have dropped to R500. The public now knows what the proper cost of testing should be, and so they were going to have to reduce anyway. The fact is if you don’t reach agreement you are exposed to potential litigation –  where they could be paying a fine up to 10% of turnover, and a definitive decision of excessive pricing against them – which the parties could use to go and claim. It  looks rather bleak when you are faced with that prospect. That’s why I think they did the sensible thing and joined and brought about an immediate reduction with a good price cut.

FIFI PETERS: From the work that you have done as the Competition Commission so far are you able to give us a breakdown of the former R850 –  in terms of how much of that was cost and how much was profit?

JAMES HODGE: Well, I think as we sort of indicated, R500 now is the right price if you had, say, last week included a R350 excess – or probably about R300 when taken on an expat basis. We would say the difference has obviously slowly increased over time, as indicated [when] prices came down.

But the price of test kits – there’s a variety of kits in the market. You’ve basically got field test kits, reagents I think they call them, and some of your swabs and PPE for taking the sample. That’s one cost. You’ve the lab cost, which is a second cost, and then last you’ve got your collection. But those costs can vary depending on what tests you’re doing and also the situation. In the hospital you’re not necessarily collecting and transporting a sample somewhere else; you’re doing it on site. So national labs that have a variety of that sort of testing look at an average cost when they look at setting a national price.

FIFI PETERS: But at this R500 are these labs still making profit?

JAMES HODGE: Yeah. In our estimation they are. We obviously want to ensure the testing continues, so it’s important that they are allowed to make some profit. Obviously in the settlement discussion they were able to dig deeper, but their costs should continue to fall. That’s why we’ve also built in a provision to examine their costs and have them report on their costs every quarter.

FIFI PETERS: Usually, when you have more time and you’ve conducted all the research, what ends up happening, if you find that companies are charging excessively for their product I believe there’s a fine that is laid on these companies as a result of their excessive pricing and the benefit that has accrued to them over a period of time. In this case no fines are involved. Can you explain to us why?

JAMES HODGE: Sure. From the time the complaint was made it’s taken two months to reach a settlement. Now, if we were to litigate, we’d probably be looking at at least another year to get it through the court; through appeals could take even longer. Because a fine of up to 10% of turnover is on the line, the respondents are going to litigate hard, so  you are faced with this trade off. Whenever you look at a settlement there are uncertainties as to how long it will take, how big the cut will be, [and] whether you’ll be successful versus getting an immediate cut. In our judgement getting the immediate cut now is important given the fourth wave, given the high transmissibility of this Omicron variant – even the fact that we are probably going to go to a fifth and six wave and testing is going to be an important part of the travel industry – which we’re trying to evaluate.

It’s not necessarily a decision everyone will agree with. We don’t mind saying that. It’s a pragmatic decision which we think is ultimately in the best interest of consumers and the economy.

FIFI PETERS: I know you are working on the prices of other tests. When can we expect a pronouncement from the Competition Commission on the agreement reached there?

JAMES HODGE: Well, we haven’t actually formally initiated [that]. We’ve had talks with the Department of Health because they’ve expressed some concern over the antigen test. So that may be something we look at – that we would still have to initiate a complaint or have a formal complaint laid.

FIFI PETERS: Is that the test for R350 at most places?

JAMES HODGE: Yes. I think people are starting to say it should be much lower than that, but it does give you a result in 15 minutes. As I understand, it is clearly accurate with a high sort of transmissibility or phase of your infection. That we also think should be used more anyway. One way to bring pressure on PCR tests is to present alternative tests. I think if those become more frequent, as they have in other countries, we need to make sure the price point is low enough. They’re not being used extensively at the moment but certainly, if there are concerns by the Department of Health and complaint instructions, we will obviously look at that in much more detail.

FIFI PETERS: All right, James, thanks so much for that update. We’ll leave it there. James Hodge is the chief economist at the Competition Commission.

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