Why the new drug price controls won't impact most consumers

The popular message of the new Drug Price Control Order (DPCO) that the Union Government notified on Thursday is that it would bring down prices of essential medicines in some cases by 80 percent, and on an average by 20-25 percent.

With about three-fourth of Indians spending their own money for medical treatment, this must be great news. But in reality, it’s not; instead it’s a wasted opportunity which perhaps has been dictated by the interests of the pharma lobby.

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Along with the price control, the government has also expanded the list of essential medicines, which according to the WHO are those which satisfy the priority healthcare needs of the people, to 348 after dragging its feet for several years. Public health activists note that many essential drugs that a large number of Indians regularly use are still not in the list. The last time the government revised the list was in 2003.

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What the new pricing policy does is that it replaces the earlier regime, in which prices of drugs were calculated based on the cost of manufacture, with a regime that decides the prices based on existing market prices of top selling brands. The new regime takes the average of the three brands that have one percent of the market share.

To the uninformed, this might look fair because top one percent sounds quite reasonable. But in reality, brands with one percent market share are the highest selling and the price difference among them can be substantial - some times as high as 10-18 times. When one takes the average, the prices will still be high because of this difference.

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Instead, had it been based on the manufacturing and other transactional costs and reasonable profits, the prices would have fallen steeply. As the price-cuts of some cancer drugs by CIPLA have recently shown, the profit margins of drug companies are high or rather irrationally high compared to the cost of production.

To be fair, the DPCO will certainly bring down the prices of some drugs and it’s indeed a welcome step; but it could have done dramatically better if it had gone for the manufacturing cost as the basis for fixing the price because the difference between the manufacturing costs and retail prices, on many cases, is huge - sometimes as high as 1000 percent.

Therefore, instead of taking the top selling branded drugs as its baseline, if the new regime had gone in for generics with no marketshare criteria, the prices would have fallen steeply.

The cost-based price control is so critical in cases where companies have a monopoly. The new pricing regime, instead of making the drug cheaper, will rationalise their prices, however high it is.

“In quality-conscious bulk procurement processes (for example, those in Delhi and Tamil Nadu), the tender rates for drugs are as low as 2-20 percent of the market rate. This is unheard of in any other commodity. An example: in Tamil Nadu a company bids to supply a medicine for worms (Albendazole 400 mg tablets), at a mere 35 paise per tablet, while brands of this drug sell for Rs 12.00 in the market,” notes Dr. Anurag Bhargava and S Srinivasan in an article in The Hindu.

Secondly, the marketshare of the drug companies that the government will rely on may have been captured unfairly. It is public knowledge that drug companies push their products through incentives, gifts and commissions to doctors and hospitals because they have a massive profit margin. The fairly priced generics do not have this advantage and hence will be out of reckoning.

The government should have just expanded the essential drug list and kept the manufacturing-cost based price control method untouched. Instead, it appears to have fallen to the pressure of the pharma lobby.

“In the guise of imposing price control, what the government is actually doing is lifting price control completely and institutionalizing profit maximization. This whole exercise is designed to mislead the nation. The government must go by the 1995 order, expand the list of NLEM (national list of essential medicines) without change the pricing policy,” Livemint had quoted Colin Gonsalvez, lawyer for AIDAN, last year.

The government’s expansion of the list under pressure from civil society, and the Supreme Court, nullifies its possible benefit to people because it changed the pricing policy. Given the ever-increasing importance of universal healthcare, in which bulk procurement and supply of generics by the governments is the central piece, the UPA government’s move is a wrong step in the wrong direction.

Indian branded generic manufacturers are heroes when they take on cut-throat MNCs by copying their lifesaving, but exorbitantly priced drugs; but when it comes to the domestic market, they behave like the same MNCs that they oppose.