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Indian Pharma: Think Beyond Mere Price Control

In the run up to the 2019 Lok Sabha elections, healthcare is high on Prime Minister Narendra Modi’s electoral agenda. On March 25, during his popular Sunday address to the nation, Modi outlined his government’s various efforts to ensure accessible and affordable healthcare for Indians. He specifically gave examples of how the price of heart stents has been reduced to 85 percent, and those of knee implants reduced from 50 percent to 70 percent. Affordable healthcare for a developing country like India is indeed a laudable government priority; however, India’s regulatory means to achieve this objective remain myopic and the benefits fail to reach the ultimate patients. India has traditionally adopted ‘price control’ as a regulatory strategy to ensure access to drugs, extending the same to medical devices. Price control over drugs (referred to as Drug Price Control Orders, or DPCO) was originally introduced during the wartime conditions of Chinese aggression under the Drugs (Display of Prices) Order, 1962, and the Drugs (Control of Prices) Order, 1963. For more than half a century, India has believed upon this erroneous regulatory principle that effecting control over prices leads to greater accessibility of drugs and promotes growth of indigenous pharmaceutical industry.

This is fundamentally wrong for two reasons. One, the price of drugs or medical devices is only a single component of a patient’s healthcare bill. In spite of Indian drug prices being one of the lowest in the world, out-of-pocket expenditure of Indians on healthcare is as high as 65 percent. A study by the Institute for Health Metrics and Evaluation at the University of Washington found that almost two-thirds of healthcare spending in India is out-of-pocket. At 65.6 percent, the study places India sixth among 25 countries where out-of-pocket personal spending on healthcare is 50 percent or higher. This is why price control of drugs or medical devices is a lazy, populist, farcical measure. It is not surprising that as per the 2018 Global Healthcare Access and Quality index, India ranks 145 among 190 nations, lower than even Bangladesh, Sudan and Equatorial Guinea. Two, advances in medical research are of inestimable value to human society, where high-quality drugs and interventions are a key factor in improving the quality and longevity of human life. Striking the right balance between rewarding innovation in medical science research and catering to the needs of a nation’s healthcare system is not an easy task. The answer should definitely not be a one-size-fits-all price-control mechanism.

To put things in perspective, developments in medical television technologies (have dramatically influenced the success of laparoscopic surgery through HD/3D camera imaging) and monitors or technology breakthroughs (Bluetooth-enabled medical devices for better and cheaper diagnosis and monitoring) have occurred in the last 20 years, and India intends to regulate such industries through a regulatory regime devised 50 years ago. The fact that the leadership of India’s drug price regulator—the National Pharmaceutical Pricing Authority (NPPA)—is almost entirely composed of bureaucratic officers, often without any background in medicine, entrenches the inability of NPPA to adopt a dynamic approach to drug pricing, while still enabling competition and promoting innovation in Indian pharma markets. The current chairman, Rakesh Kumar Vats, is the first to have a medicine background. This capacity deficit ensures NPPA routinely uses non-scientific approaches and classical arithmetic measures (like over-the-top price cuts), without meaningful stakeholder consultation, or usage of epidemiological health data or those on drug/device efficacy. But it is heartening to see that viable policy alternatives to price control of drugs and devices are being discussed among India’s policy circles.

The Department of Pharmaceuticals’ report titled Report of the Committee in High Trade Margins in the Sale of Drugs, 2016 observes that high trade margin enjoyed by distributors-hospital/retailers are the main reason for cost escalation of drugs and medical devices. Recent media reports suggest that trade margin rationalization (TMR), if implemented, based on a fair and mutually agreeable calculation, has the potential of reducing MRP to the extent of 73 percent. Trade margin is the difference between the price at which manufacturers/ importers sell to trade (price to distributor) and the price to patients (MRP). This TMR approach effectively imposes a cap on the upstream margins across the entire value chain, rather than capping the price of the downstream products. This retains the incentive of the industry to innovate new technologies and train healthcare professionals and simultaneously create therapy awareness, while reducing the cost burden on patients, besides encouraging ease-of-doing business in the Indian medical device market. On June 8, the NITI Aayog released a consultation paper on Rationalization of Trade Margins in Medical Devices, suggesting methodologies for calculating TMR margins for imported and domestically-manufactured medical devices.

The methodology of landing cost/manufacturing cost-based price capping is a futile methodology as the same disincentivizes industry to invest in capacity building, creating a situation where no new entrepreneurs or technologies enter the market, which is harmful for both patients and industry—a fact cemented in the National Pharmaceutical Pricing Policy, 2012. Industry stakeholders have suggested that TMR for foreign and domestic manufacturers must be comparable and non-discriminatory, without disincentivizing against global research-based companies that import their innovative medical devices into India and do a lot of value addition in the channel. Implementing the Department of Pharmaceuticals’ report of TMR 2016, the government can look forward to taking full credit of ushering in cost benefit for the patient without hampering innovation, capacity-building or skill-building activities and therapy awareness, where global companies have a major role to play. This PPP between MedTech industry and the government is essential for successful implementation of Ayushman Bharat also. – Financial Express

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