A free-floating exchange rate regime is implemented in Türkiye. In other words, the value of foreign currencies against the Turkish Lira is determined according to the balance between buyers and sellers in the market. However, Türkiye was subject to a strictly controlled fixed exchange rate regime until the early 1990s. At the time, foreign exchange prices were determined by the Central Bank of the Republic of Türkiye (CBRT), but there was also a real exchange rate in the market, commonly known as "the Tahtakale Rate." While making transactions, nobody was looking at the official rate, but to the actual market rate.

However, this exchange rate regime was abolished as it did not meet the needs of globally integrating Türkiye, whose foreign trade was growing rapidly, and entered the EU Customs Union. Thus, an important hindrance to foreign trade and industry was resolved, as a matter of fact, after that date, Türkiye's industrial production, foreign trade and exports increased rapidly. Those who initially feared that switching to a floating exchange rate regime would lead to bankruptcy later realized their error. The liberalization of the economy did not harm Türkiye; on the contrary, it facilitated its growth.

Although this floating exchange rate regime is still implemented today, there is one area where the state still maintains a fixed exchange rate regime: in determining the prices of medicines whose imports are made in foreign currency. Public decisions have a great impact on drug price determination, especially due to the monopsony/single buyer position of the public sector. The Ministry of Health and the Social Security Institution (SGK) are making 76% of total pharma expenditures in Türkiye.

In this system, no matter how much exchange rates float during the year, the fixed reference euro rate, determined at the beginning of the year in February by the Ministry of Health, the Turkish Medicines and Medical Devices Agency and the SGK, in consultation with the Ministry of Treasury and Finance, is applied throughout the year.

This annual fixed pharmaceuticals euro rate regulation continues for the year 2024 as well. With Provisional Article 11 added to the Decision on the Pricing of Human Medicinal Products published in the Turkish Official Gazette dated Feb. 23, it is decided that a euro value in Turkish Lira used in the pricing of human medicinal products and pharmaceuticals determined at the end of 2023 will continue to be applied for 2024.

In addition to the fixed exchange rate regime, there is another element as important as the euro exchange rate in determining drug prices in Türkiye: the Reference Price System, which has been implemented since 2004. Accordingly, drug prices are determined by accepting the cheapest price of the product sold to warehouses in France, Italy, Spain, Portugal and Greece as the reference price. Likewise, within the scope of this system, the price of that drug is determined by selecting those with the lowest prices among 15 "indirectly taken into account countries," in addition to five countries in the eurozone and nine countries that do not use the euro as a currency. If the countries where the relevant product is manufactured or imported are outside the reference countries and there is a sales price to the warehouse in these countries below the reference country prices, this lower sales price is accepted as the reference.

There is one more layer in the Turkish medical and pharma reimbursement policies: the determined profit rates for warehouses and pharmacies. The profit of the pharmaceutical warehouse and the pharmacist is added to the amount determined as a result of both the fixed euro exchange rate and the reference price system, and the box barcode prices are finalized. In this third layer, the public is determining and restricting the profit margins of warehouses and pharmacies. Currently, the determined profit rate for the cheapest medicine with a price up to TL 100 ($3.09) is 8% for the pharma warehouses. The warehouse profit rate declines to 6% for medicine with a price between TL 100-200 and declines even further to 3% for medicine with a price exceeding TL 200. On the other hand, the pharmacists’ fixed-profit rate is 28% for drugs up to TL 327, 18% for medicine with a price between TL 326-657 and declines to 13% for medicine with a price more than TL 657.

These three layers; the fixed-currency rate, the reference price system and determined profit rates are working hand in hand as a trivet within the Turkish pharma reimbursement system. For understanding the problems in the pharma reimbursement system in Türkiye, understanding the calculation method and logic of these three layers is critical.

Exchange gap is widening

The trivet is a protectionist mechanism introduced to prevent the sale of excessive numbers of medical drugs in the Turkish market more expensive than countries in its own league. Specifically, the fixed-current rate is the main determinant.

In this fixed-rate system, the prices of medicals and medicines, and the exchange rate of 2009 are taken as reference for drug prices, and an annual update is made according to the average exchange rate increase. The last update on the pharmaceutical euro exchange rate was made in December 2023. With the decision published in the Official Gazette dated Dec. 16, the euro value was increased by 25% and determined as TL 17.54. However, the real euro exchange rate has exceeded TL 35 as of the date of this article. Thus, currently, the reference rate has a 100% difference from the real rate. As can be seen from the table below, the gap between the reference rate and the real exchange rate has extremely widened over the years and has reached 100%:

(* As of the writing date of this article.)

(** Updated three times in 2022, the amount determined in February, TL 6.2925, was redetermined as TL 10.75 in December.)

Calculation method recently changed

The reason why the pharmaceutical euro exchange rate makes such a difference from the real exchange rate is that the calculation method that is the basis for drug prices was changed three years ago, in 2021. With the change in question, the calculation of the exchange rate used in pharmaceutical pricing is limited to the amount increased by 20% of the previous year's euro exchange rate.

In the previous version of the application, a euro value in the Turkish lira to be used in pricing medicinal products for human use was determined by multiplying the annual average euro value, which would be calculated based on the daily euro selling rate realizations of the Turkish central bank, by the adjustment coefficient determined as 60%. Before that, it was applied at 70% since 2019. In other words, the spread between the real exchange rate and the pharma exchange rate was deliberately increased.

Of course, we should point out that 10% VAT is added to these prices. As noted, the Turkish VAT rate is also criticized to be higher than peer countries.

Finally, in addition to the fixed exchange rate and "cheapest country price" criteria, an additional discount is provided as a "public discount" for drugs financed by the SGK within the General Health Care Insurance System, thus attempting to reduce SGK's medical expenses.

Exceptions to pricing policy

However, it should be specifically noted that, price-protected products with a sales price to the warehouse up to TL 60.5, all medicines with a sales price to the warehouses up to TL 31.6, non-prescription drugs, blood products, medical formulas, radiopharmaceutical products, biosimilar products, hospital products, serums, drugs not included in the list of drugs to be paid for by the public, vaccines determined by the Price Evaluation Commission, and products of critical importance for public health can be priced separately, regardless of the provisions of the Decision on Pricing of Medicinal Products for Human Use.

Upon all, there is another aspect of Türkiye’s pharma and medical pricing policy. In pricing, it is also important whether the drug in question has an equivalent in Türkiye. Non-equivalent reference drugs are priced with the formula reference price + warehouse/pharmacist profit rate + 10% VAT. Finally, equivalent reference drugs and generic drugs are priced by adding profit and VAT at 60% of the reference price above TL 31.6, and price-protected drugs are priced by adding profit and VAT at 80% of the reference price above TL 60.5.

In sum, the pricing system of pharmaceuticals in Türkiye is determined by multilayered and complex policies of public bodies strictly under control, and there is market intervention by several curbing mechanisms.

What’s wrong with Turkish system?

Above is an overly simplified summary of the Turkish pharma reimbursement system. Obviously, the system is quite illiberal compared to the developed pharma markets, specifically compared to North America. The government has the upper hand and a rigid policy attitude with the aim of budget control. Upon this, consider that selling medicines is exclusive for licensed pharmacies, and selling in any other mediums, such as in drugstores, malls and online, as we see in other countries, is strictly prohibited in Türkiye which is punishable by prison time.

Thus, the Turkish system is far different, so to say an old-style system, compared to developed U.S. and EU markets. One can say that the Turkish pharma system is almost like a Soviet-style control market. Some researchers are labeling the Turkish system as a way to establish a balance between populism and neoliberalism. I label it as a search for market control to cope with the overly expanded health care coverage within the Justice and Development Party's (AK Party) governments in the last two decades.

This system has become critically problematic in the current high-inflationary economic environment. The depreciation of the Turkish lira, on the one hand, affects public health care expenditures and the resources that individuals must allocate for health care, and on the other hand, it closely concerns the market values of drugs and the profitability and functioning of the pharmaceutical industry.

This pharma reimbursement strategy of Türkiye aims to prevent citizens from buying overly expensive medicines, to pay the most advantageous global prices, and to limit the profit rates of the sector. Research shows that this system has worked greatly in favor of the public sector so far. Estimates are that the Turkish government has saved tens of billions of euros, thanks to this system, in the last decade.

However, there is a current crisis in the Turkish pharma market. The crisis is not just related to the pricing strategy that is choking the pharma sector but also related to the public welfare budget’s sustainability and patients’ accessibility to affordable medicine. Due to limited space, I have to leave the discussion here. To discuss the current crisis in the Turkish system and to analyze how to liberalize and infuse investment into the pharmaceutical sector in Türkiye, I will delve into further analysis in my next commentary.