A/HRC/23/42 margin that sustains the industry. However, accounting manipulations, use of transfer pricing by companies, and corruption in government agencies pose additional challenges to ensuring a transparent system of cost-based pricing. 28. In contrast to cost-based pricing, market-based pricing fixes the maximum retail price through an “average” formula for all brands in a therapeutic category that have a specific market share. Market-based pricing therefore tends to cap the price of medicines at the middle range between the highest and lowest price, making medicines more expensive in comparison to cost-based pricing.38 29. In some States, the use of health insurance schemes to reimburse patients the cost of essential medicines is common and vital to ensuring access to affordable medicines for people. This is done through the subsidizing of prescription medicines, usually from a preferred list of medicines, with patients making a co-payment for the medicines and the State bearing the remaining cost. The Special Rapporteur notes that the trade policies of some countries are pushing trade partners to establish judicial or administrative forums to determine when a reimbursement price unlawfully restricts the “value” of a patent on a medicine, thereby restraining the listing of such a medicine on the reimbursement schemes. At best, compelling governments to establish such forums is a waste of crucial administrative resources that could be spent delivering health goods and services. The Special Rapporteur therefore advises States to guard against trade interests prevailing over primary and immediate obligations to ensure access to affordable medicines. 2. Mark-ups 30. Prices of medicines are also affected by high add-on costs. Distribution mark-ups can represent over 40 per cent of the price ultimately paid on medicines by consumers.39 States tend to regulate mark-ups in the distribution chain through varied incentives or disincentives for wholesalers, retailers, public sector, private sector and suppliers in general to ensure continuity of the supply chain and access for consumers. Most developing countries use fixed percentages to regulate mark-ups throughout the distribution chain. While this method can reduce the price of specific medicines, it may also encourage the sale of higher-priced medicines rather than low-cost generic ones. To address this shortcoming, some developing and many developed countries use regressive mark-ups: the higher the cost of the product, the lower the mark-up it attracts. Some States do not apply mark-ups to medicines on the essential medicines list, or reimbursable lists, or if they do, they apply mark-ups differentially based on whether it is a branded medicine or a generic.40 31. States which responded to the Special Rapporteur’s survey also recommended, as a good practice in reducing medicine prices, the regulation of the price at which manufacturers can sell medicines to intermediaries along with the regulation of distribution mark-ups in the supply chain. In this context, the Special Rapporteur urges States to assess the impact of distribution mark-up regulations on medicine prices while maintaining the viability of different actors in the supply chain to ensure security of the medicines supply chain. 38 39 40 10 Selvaraj and Farooqui, “India: Draft Drug Policy 2011: Legitimising Unaffordable Medicine Prices?” (see Note 40 above), p. 1. A. H. Rietveld and F. M. Haaijer-Ruskamp, “Policy options for cost-containment of pharmaceuticals”, International Journal of Risk and Safety in Medicine, vol. 15 (2002), pp. 29-54. Douglas Ball, “The Regulation of Mark-ups in the Pharmaceutical Supply Chain”, Working Paper 3, Review Series on Pharmaceutical Pricing Policies and Interventions, WHO/HAI Project on Medicine Prices and Availability (2011), pp. 11, 13, 14 and 21.