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Drug price control in India

“The government is all set to expand drug price control. The union ministry of chemicals and fertilizers is set to invoke the ‘public interest’ clause under the drug price control order…” That’s a recent announcement. The public are waiting with bated breath to know if it is a fact or just another one of the gimmicks by the government to fool the public. The experience so far, has shown that the government is concerned less about the ‘public interest’ and more about the ‘corporate interests’. The SCI (Supreme Court of India) had set aside the National Pharmaceuticals Policy in 2003 and directed the government to formulate appropriate criteria to bring all essential and life-saving medicines under price control. However, the government, under pressure from the pharmaceutical industry, has managed to delay it by several years.

Dr Surinder Kumar Joshi

On June 30, 2011 the government announced a revised list of 348 essential bulk drugs (the key chemical in a medicine) and 654 medicines (with specified dosages) made by using these drugs. The revised list added 43 new drugs, including cancer and chronic drugs, while leaving out 47 drugs from the old list of 354 essential bulk drugs prepared in 2003. Now, the department of pharmaceuticals intends to leave out 59 items such as devices and diagnostic kits from the list of 348 essential bulk drugs. This means about 574 formulations with specified dosages made from 289 bulk drugs will be under price control. The proposed move to control the price of drugs will cover a market size of about Rs 7,000 crore. The price-controlled drugs will be listed under the National List of Essential Medicines (NLEM).

The control of drug prices would depend a lot upon the level of commitment, which the government has lacked so far. The policy of the government, right since the beginning, has been to appease the pharmaceutical companies rather than regulating them. The mission of the Central Drug Standards Control Organization (CDSCO), the apex drug standards control authority in India, as per its status report is, “to meet the aspirations… demands and requirements of the pharmaceutical industry”. Unlike the authorities in US, UK and Australia, the authority in India appears to be totally oriented towards promoting the interests of drug firms rather than the patients/public. Under the influence of these drug firms, the number of drugs under price control has been steadily decreased from 347 (in 1979), to 142 (in 1987), 76 (in 1995) to just 74 currently. It would have further dropped to 34 vide the Pharmaceutical Policy 2002, had the Karnataka High Court had not granted the stay order.

There are many factors that play a role in adding up to (and inflating) the price that the consumer (the patient) pays for the drugs.

1. The price of bulk drugs (basic salts) is fixed by the National Pharmaceutical Pricing Authority (NPPA) as per the Drug Price Control Order (DPCO), 1995.

2. The price of sale to dealers is based on the ex-factory expenses, which include material cost, conversion cost, packaging material cost, packing charges and 100 per cent maximum allowable post-manufacturing expenses on ex-factory cost (including the taxes, marketing costs and manufacturer’s profits). This sale price is decided by the manufacturer except in respect of the scheduled drugs (under Price Control) where the price is controlled by the NPPA.

3. The maximum retail price (MRP) of the drug is also decided by the manufacturer, except in case of those drugs falling in the scheduled drugs category. It is calculated on the basis of ex-factory price of the drug plus the excise duty, sales tax / value-added tax (VAT) and other local taxes. Manufacturers have the habit of printing MRP, several times higher than the real cost (as per their whims) on the labels, especially in the case of non-scheduled generic drugs. They print a highly inflated MRP but sell the items at a price on par with that of the price controlled branded counterparts.

4. Profit margin for the retailers is decided by the drug companies, except in the case of some scheduled drugs where (Para 19 of the DPCO, 1995) the retailer is supposed to get the stocks at a cost that is 16 per cent less than the retail sale price. The drug firms are generally very liberal in this regard and the greedy retailers make huge profits. They get the stock at a price as low as the controlled price, but sell at the highly inflated MRP printed on the labels. Take the case of Nimesulide (generic) tablet that costs 9 paise each but is sold at Rs 3.50 each or Cetirizine (generic) tablet costing 24 paise each but sold at Rs 3.10 each, or Nimesulide plus Paracetamol (generic) tablet costing 36 paise each and sold at Rs 3 each. VAT is paid at the manufacturers’ point on the real cost where as recovered on the blown up cost, thus cheating the government.

The scope of controlling the manufacturing costs and overheads is relatively less. However, the cost of aggressive marketing for brand promotion and the manufacturer’s profit margin are open-ended and entirely controllable. The difference of costs between generic and branded drugs is largely due to these components apart from the additional cost of better packaging in the case of branded drugs.

Similarly, the highly inflated MRP to provide maximum profits to the chemists / hospital pharmacies is the single most important factor responsible for high drug prices. Knowing that the retail chemist will promote the sales of those drugs, which give him the maximum profit, the MRP is fixed so as to provide maximum margin to the dealer. Because of this huge profit margin, pharmacy is a major source of revenue in the hospitals and that is a major reason, inter alia, that the hospitals don’t allow the patients to bring medicines from outside. Capping on the MRP can reduce the costs to a large extent.

Measures For Effective Drug Price Control:

1. Drugs should be placed under the Ministry of Health and Family Welfare instead of the Ministry of Chemicals and Fertilizers. Drugs are too vital to be clubbed with other chemicals. For any effective initiative in improvement of health care, all essential inputs, including drugs — the most crucial tool for treatment, have to be considered in an integrated manner.

2. The policy should, for a change, be guided by the interests of the poor common man rather than the greed of the rich, unscrupulous drug firms and traders.

3. The Department of Pharmaceuticals should make the ‘Uniform Code of Pharmaceutical Marketing Practices’ mandatory for an effective check on the huge promotional/marketing costs and the resultant add-on costs on the medicine prices. There should be an effective system of capping on the permissible marketing expenditure.

4. The price ceiling methodology should be made simple, transparent and fair. It may be:

•          The cost-plus pricing system, or

•          Basing the price on the average price of the three cheapest brands or

•          On the basis of the government’s bulk procurement prices.

The market based pricing (MBP) which involves the pricing of drugs on the basis of top three brands in each segment should never be allowed in case of essential life saving items such as drugs.

The recommendation of free pricing of all drugs as long as they remain within the cap of Rs 3 per tablet, too, may not be appropriate as it would lead to unnecessary increase in prices of dozens of essential medicines such as pain killers or anti-inflammatory drugs, which are currently available at prices far below Rs 3 per unit.

5. The MRP for various drugs, chemicals of medicinal use should be rationalized and regulated to prevent undue inflation of the cost. For wholesale dealers a net margin of 10 per cent and for retail dealers a net margin of 15 per cent of the purchase price should be the upper limit. The MRP (inclusive of all taxes) should never be allowed to be more than the sum of taxes. Those dealers located in distant/difficult areas may be allowed an additional margin of 5-10 per cent.

6. Similarly

•          Disallowing/discouraging any irrational fixed dose combinations of these single ingredient drugs or applying on them the same ceiling price as the bulk drugs used. Or

•          Restriction on the approval of dosages (by the Drug Controller General of India) other than those specified in the list. Or,

•          If such unspecified dosages are already in market, bringing them under the price control by NPPA using section 10 (b) of the Drug Pricing Control Order, 1995, in public interest.

7. Since medicines are a crucial tool for saving the human lives every effort should be made to reduce the cost to the consumer — the patient. Any cost that does not add value for the consumer must be eliminated/minimized. If taxes are the factor inflating the costs (excise duty alone is 16% of the ex-factory cost), then the taxes should be reduced to keep the costs at the desired level. In fact, there is a strong case for separating the drugs from other consumer products and abolishing the sales tax / VAT / import duty / excise duty altogether in the case of drugs.

8. Making it mandatory that the manufacturer of a branded drug will also manufacture and market the generic version of the same item in equal volume.

These are some of the measures that can bring about reduction in the cost of drugs and relief to the public. However, these are possible only if the government frees itself from the influence of the manufacturers and, for a change, develops some genuine empathy for the sick and suffering citizens. So far the governments, regardless of the party, have never betrayed such tendency or concern for the public.

Dr S K Joshi is a hospital administrator, author of professional books and visiting faculty for postgraduate courses in healthcare management.

2 Comments

  1. ANIL ANIL Tuesday, November 27, 2012

    Mebhydrolin napadisylate B.P.C.’68 which is not manufactured in India by any company is under price control.It is only antihistamine having 20 yrs. old price though all Rms cost is 4 times.
    Any reason?

  2. Dr Surinder Kumar Joshi Dr Surinder Kumar Joshi Wednesday, October 24, 2012

    Thank you Param Hans

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