Should drug prices be regulated?

Sakthivel Selvaraj

Medicines are not commodities. Since physicians and chemists decide on behalf of the patient, the demand for drugs is often supplier-induced.

Consumer sovereignty, therefore, doesn't exist in the pharmaceutical sector.

This is well established - theoretically as well as empirically. But the Department of Pharmaceuticals (DoP) thinks otherwise.

The draft policy recommends market-based pricing that is based on the weighted average price of the three top-selling brands in each segment.

In the pharmaceutical market, however, the market leader is the price leader. To put it in plain language, the top branded drugs are the most expensive ones.

In other commodity markets, consumers prefer goods that are of good quality and available at a competitive price. With over 100 drug makers slugging it out in each therapeutic segment, there is a substantial price range offered by various players with similar quality.

The drug quality is judged not by pack but by its efficacy and safety. In terms of quality, the lowest-priced brands are always therapeutically similar to the highest-priced drugs.

The draft policy, by choosing to fix ceiling price based on top-selling brands, is legitimising the trend of high prices.

This will induce players in the currently lower-priced segment to drive up prices closer to the highest-priced drugs. This is a dangerous trend orchestrated by the government, which is supposed to be protecting the common man!

India enjoys the position of being the "pharmacy of the global south", supplying quality medicines at affordable cost, to rich and poor nations. But a sizeable section of our own citizens do not have access to essential medicines, simply due to financial barriers because drug prices are exorbitantly high.

Although our drug makers produce medicines at rather cheaper prices, the margins and mark-ups drive up retail sales price prohibitively.

An efficient procurement mechanism, as in Tamil Nadu (Tamil Nadu Medical Services Corporation), has resulted in cheaper prices. Pharmaceutical companies (including several top ones) supply quality medicines at rock-bottom prices to TNSMC and other efficiently- and reliably-run public procurement system.

Even after supplying quality medicines at throwaway prices, drug makers still make a margin of about 10 per cent over and above the production cost. The government often complains that cost-based pricing is difficult to handle since pharmaceutical companies are not mandated to declare the true cost of making a drug.

A proxy way to get around this problem is to obtain tender prices (as in Tamil Nadu or Kerala) and treat it as the true production cost (floor price). And then liberally add margins of four or five times to the production cost.

Given the unique but distorted nature of the pharmaceutical market, floor prices are the way forward. By fixing floor prices, the government can provide a signal to the industry that adequate margins are allowed, which will be above normal profit.

Contrary to dire threats by industry, such pricing will keep them engaged in the business of making drugs. Despite price controls in the past, the industry has consistently registered super-normal profits. Even if floor plus prices were to be considered, they would reap above-normal profits.

Industry estimates suggest that they are likely to suffer a revenue loss of around Rs 2,500 crore if the new policy were implemented. But the industry refuses to understand that households end up paying a significant share of their income on health care, especially on medicines.

Annually, over 40 million people are impoverished and nearly eight per cent of households in India incur catastrophic out-of-pocket payments on this account. This is in addition to a significant share of the population that ends up selling assets and borrowing money to fund their sickness.

The drug industry is not a charity organisation. They must be allowed to make normal profits and at the same time balance the interest of patients. But when it becomes greedy, society must to step in to undo the damage caused by greed.

Civil societies, patient groups, with help from courts, have the responsibility to act and to enable the government to make policies that are aligned to people's welfare rather than bowing to industry lobby. Let the industry be warned that greed is taking a beating globally!

D G Shah

Secretary General, Indian Pharmaceutical Alliance

Given that drug pricing is a very emotive subject, policy makers find it extremely difficult to satisfy all stakeholders - patients, doctors, civil society, industry, trade and the health ministry.

Many factors, prominent among them being ignorance about medicines, complexity of the industry and its challenges, and the long-term impact of policy, have contributed to this situation.

Add to this the inadequacy of health infrastructure in India and the belief among some sections of society that the industry should take care of all sick people - below or above the poverty line.

Since 1970, governments, under populist pressure, have made several attempts to regulate prices of medicines. The most critical of them was the Drugs (Prices Control) Order (DPCO), 1979.

It brought all formulations of some 347 bulk drugs under cost-based price control, which amounted to 80 per cent of the pharmaceutical market.

As the cost of production varied with the size, age and location of manufacturing facilities and the level of good manufacturing practices  (GMP) followed, the DPCO adopted an elaborate system of "normative" costing for finished dosage forms.

This system applied uniform norms of conversion costs to all manufacturers. Likewise, prices of raw and packaging materials were derived by an internal survey that lacked transparency. Bulk drug prices were notified based on a cost-cum-technical study carried out once in three years by the regulator.

All of these did not reflect the true cost of production. The system had no way of considering R&D costs, costs of obtaining marketing authorisations and market development. It offered graded levels of mark-ups (40, 55, 60 and 100 per cent) on the notional cost as worked out by the regulator for the post-manufacturing expenses.

The New Drug Policy, 1986 started moving towards a liberal regime and gradually reduced the number of drugs under price control. The current system (DPCO 1995) has 74 molecules under the cost-based system of price control. The prices of the rest of the medicines are monitored by the regulator to prevent unreasonable increases.

However, the production and availability of 74 molecules under price control has declined, giving way to the promotion of newer molecules outside price control. It has resulted in some instances of irrational use of medicines and many aberrations that are not in the interest of patients.

The 1979 experience has clearly demonstrated that in spite of all-pervasive and draconian price control, the interest of patients was not served. There were shortages and black marketing of medicines, encouraging the entry of spurious and substandard medicines that have now become a perennial problem.

Though DPCO 1995 addressed some of these issues, lack of transparency and the use of discretionary powers led to a situation in which the production of almost half the drugs under price control was curtailed or discontinued.

India, which once took pride in being self-sufficient in bulk drugs, has lost its medicine security because 70 per cent of its intermediates and bulk drugs are imported from China. 

The National Pharmaceutical Pricing Policy, 2011 is an attempt to address some of these ills. The policy proposes to exempt bulk drugs from price control to encourage domestic investment and production to reduce dependence on imports.

It recognises the need to provide opportunities for innovation and competition. It proposes to move away from an archaic, opaque, corruption-prone system to a transparent and more objective method of price regulation. It attempts to incentivise adoption of GMP standards and encourage quality.

And, above all, it ensures sustainable supply of essential medicines. However, the policy proposes to add about 2,800 formulations to 654 of the National List of Essential Medicines (NLEM) 2011. This will enlarge the scope of price regulation by over four times the current volume to about 35,000 packs making the task unwieldy and ineffective. 

These additions are without scientific or medical rationale. The NLEM 2011 is designed to meet the objectives of promoting rational use of medicines, ensuring availability of quality medicines and satisfying the priority health care needs of a majority of the population.

The proposed additions ignore these principles and merely expand the span of control.  It could, thus, defeat the very objectives of NLEM 2011.

The author is also CEO of Vision Consulting Group