Trade Margin Rationalization
The domestic medical device industry hails the government’s move to rationalize and cap trade margins in medical devices to achieve the overall goal of affordable healthcare for all by making all critical and lifesaving medical devices available at affordable prices. However, we suggest that the government should tread the fine line carefully between affordability and boosting domestic manufacturing or suffocating the domestic medical device industry and allowing importers to create artificial inflation.
The trade margin is the difference between the price at which the manufacturers (indigenous /overseas) sell to trade and the price to patients (maximum retail price). The issue of unreasonably high trade margins in medical devices has been adversely affecting both the industry as well as consumer interest and creating distrust for the medical profession. AIMED has been asking for trade margin rationalization and capping for last 2-3 years.
Medical devices usually go through 4–7 change of hands along the supply chain from a distributor to a wholeseller to a retailer and a hospital before they reach a consumer in a distant village and each point in the supply chain incurs various costs such as freight, inventory carrying, rental, salaries, marketing and sales overheads, and service and statutory expenses of compliance and then there is also the need of net profit by a reseller.
The main aim of rationalization of trade margins in medical devices should be to help consumers, allow rationalized profits for traders and retailers, create a level playing field for domestic industry vis-à-vis foreign manufacturers. There should be clear objectives for any policy intervention so as to avoid distress (to consumers), distrust (in industry), and disruption (to market).
For trade margin rationalization, the first point of sale by overseas and Indian manufacturers should be defined as the price by the manufacturer, whether overseas or Indian, on which GST is initially paid. In contrast, importers who are also traders cunningly want first point of sale to be from their end to the distributors and not from overseas manufacturers to them to avoid coming into the trade margin regulation ambit.
So if we talk about rationalization of trade margins it has to include imports. You cannot have importers having an over 200 percent irrational margin as was indicated in the NPPA report on catheters and guidewires and the rest of supply chain having only 35–50 percent trade margin.
Everyone in a supply chain has intermediate costs and value addition. It needs to be ascertained what value addition, if any, importers do and what is a rational margin for them? The reason the importers state intermediate costs like R&D and clinical evaluation are not part of the Import landed price is basically to avoid custom duties. They cannot avoid customs duty by lowering transfer prices and then seek to induce hospitals with higher MRP and higher trade margins. This tactical marketing warfare has cost the consumers dearly and harmed ethical marketing. Thus, importers should be brought under the purview of trade margins.
The government can consider to cap trade margins of devices to 85 percent. This will help in reducing MRP of medical devices to less than half of current prices while not being unreasonably detrimental to traders and hospitals. Additionally, manufacturers will be encouraged to attract clients on competitive features and hospitals will start buying on evaluating cost of purchase and quality, instead of margins to be made on higher MRP thus resulting in a level playing field between imports and domestic products.
A pro-active policy formulation to regulate medical devices differently from drugs should permit free market dynamics to succeed and keep regulations simple, protecting consumers and incentivizing Make in India.
