Tokenish Regulation of Medicine Prices in India
We often hear the grumbling about high prices of medicines in India, as these high prices are something which the majority of people simply can’t afford. In this article, let us see how despite the cost of production of the overwhelming majority of medicines in India being quite modest, patients get these at a very high rate because the government has allowed the pharma industry and pharma traders to indulge in huge, unrestricted profiteering.
Ideally, medicines should be available free of charge at the point of care. In India, this is supposed to be the case for citizens accessing health care in government run health care centres. But only about 20% of outpatient care and 44% of inpatient care is provided through the public healthcare system. Secondly, during the last three decades, because of the government’s policy of privatization, the government health centres have been neglected, under-funded and hence the supply of medicines to these centres has been deficient. Hence in India, many times patients have to spend money for medicines even while accessing health care in these government centres. Only three states are an exception – Tamil Nadu, Kerala, Rajasthan where a very laudable model for procurement and supply of medicines for Govt health centres has been adopted.
Overall, medicines alone account for 29.1 percent of inpatient and 60.3 percent of outpatient Out of Pocket (OOP) expenses respectively and medicine expenses push more than 3 per cent Indians into poverty every year. In contrast, in developed countries, the overall OOP expenditure itself is low, as a large part is covered by public-funded provisioning, including insurance mechanisms.
There are two reasons for high prices of medicines in India. First, the virtual absence of regulation of medicine prices by the Indian government. Second, permission given by the Indian government for brand names, irrational Fixed Dose Combinations, ‘me too medicines’ etc. This first part of the article deals with the first reason – the virtual absence of regulation of medicines prices in India.
Why prices of medicines need to be regulated
Medicines are a unique commodity. The prescriber, the doctor, is not the payer, and the buyer, the patient, is not the decision-maker about the choice of medicine. Patients have to buy medicines prescribed, at whatever prices they are available. There is no option to delay or negotiate because the patient is under pressure because of pain or such distress, which is sometimes life threatening. Freedom of choice as a buyer is either non-existent or extremely constricted. In addition to these, information asymmetries in knowledge of the prescribed medicine, about its alternatives/substitutes, as well as technical complexities surrounding medicines, and fear of adverse outcomes confound healthcare consumers more than those in other sectors. This unique vulnerability of patients, coupled with widespread poverty, underscores the urgent need for price control over this essential commodity.
However, in India, due to ineffective regulation, the Indian pharmaceutical industry has been indulging in unrestricted profiteering. Pharma companies are structured either as monopolies or oligopolies, thereby giving them an advantage in price-setting. In addition to the patients’ special vulnerability, profiteering is fuelled further by weak market competition. In many cases, about half of the market share is dominated by the top 3-4 leading brands. Moreover, doctors are often swayed into prescribing high-priced brands marketed by large pharmaceutical companies. All this has resulted in unnecessarily high, unaffordable prices of medicines in India. Let us see how.
Tokenish regulation of medicines prices in India
The cost-plus formula, which is widely used to fix rates for essential services (such as telephone/cell phone charges, electricity, rickshaw, taxi etc), should apply to medicines also. Indeed, this was the practice from 1979 when a cost-plus approach was used for regulating the prices of a large number of medicines. The Ceiling Price was set at the manufacturer’s cost of production plus a margin of 100 percent. However, pharmaceutical companies lobbied with the government so that the number of medicines under price-control was reduced from 347 in 1979 to only 74 by 1995. Under pressure from the Supreme Court order in a PIL, in 2013, the government was forced to include all essential medicines under price-control. (According to the WHO, “essential medicines are those that satisfy the priority health care needs of a population”). In 2013, the prices of all 348 essential medicines listed in the NLEM-2011 were brought under price control through the “Drug Price Control Order 2013”. This marked a significant increase in the number of medicines under price control compared with the DPCO-1995, According to the Drug Price Control Order- 2013 (DPCO-2013), the ceiling prices for all medicines listed in the National List of Essential Medicines-2011 would be the simple average of the prices of all brands which have a market share of 1 per cent or more. The market share would be calculated on the basis of moving annual turnover.
The MBP regime effectively legitimized the already exorbitantly high prices of essential medicines that were prevalent at the time. If Cost-Based Pricing (CBP) of DPCO-1995, with a 100 percent margin over the cost of production, had been continued for these essential medicines the drug-prices would have become reasonable. But since the new, Market Based Pricing (MBP) was adopted, prices of these medicines under price control continued to be high. For example, in the case of diclofenac 50 mg tablet, which are used to reduce inflammation and pain, the revised price under DPCO 2013 should have been Rs. 2.81 per 10 tablets if cost-based method of price-control was adopted. (see col. 4, row 1, Table1). However, the Maximum Retail Price (MRP) under DPCO-2013, worked to be Rs.19.50 for 10 tablets (see col. 5 row 1, Table 1) as it was based on the average of the prices of all brands with a market share of 1 percent or more plus a 16 percent retailer’s margin. This price decided by MBP as per DPCO-2013, reflects brand value rather than the actual cost of production. This meant an unnecessary burden on the consumers ranging from 290 per cent to 1,729 per cent in case of some commonly used medicines.
The DPCO-2013 was structured in such a way that although it did reduce the highest prices, it did not affect the prices of the majority of brands that were already below the ceiling price. As a result, it failed to lower average prices. From the viewpoint of the common people, price reduction should not be limited to the maximum price alone, but there should be a reduction in the prices of all excessively priced brands. Available data showed that the total sales for a sample of 370 medicines included in the DPCO-2013, was Rs. 11,233 crores. Due to DPCO-2013, the sales proceeds of these 370 medicines decreased by Rs 1,280 crores, about 11 per cent. This decrease was a tokenish reduction in prices of these medicines. This decrease could be more than made up in a year due to the usual annual increase in sales year on year.
That DPCO-2013 allows huge profits for pharma companies is also seen by the fact that the prices set by DPCO-2013 are much higher than the prices of medicines in the Jan Aushadhi stores. The Manmohan Singh government started the Jan Aushadhi Scheme in 2008, under which the Union government provides retail pharmacists an incentive of up to Rs. 2 lakhs for furniture and other initial establishment expenses. Additionally, there is an incentive of 15 percent of monthly sales, capped at Rs. 15,000 per month, to run the Jan Aushadhi pharmacies, with the condition that they sell medicines only under generic names and at prices fixed by the government. Generic medicines with assured quality are supplied to these outlets at controlled, much cheaper rates by the government, leaving a 20 per cent margin for owners. (For retailers in India, pharmaceutical companies typically leave a margin of up to 16 per cent.). Even though the budget for this scheme was too little and this scheme remained a tokenish one, it shows that the medicines can be sold at much cheaper rates in the retail stores than what is generally done today. This is seen from table number 2.
In conclusion, compared to the cost of production of medicines, the prices of medicines are very high because the Drug Price Control Order 2013 has led to tokenish price-regulation, leaving pharma companies to indulge into huge profiteering. It is no wonder that medicine prices are very high in India compared to their cost of production.
