Published: The Hindu Business Line, September 28, 2004

By Pradeep S Mehta

WHETHER regulating pharma prices in a market-driven economy is correct or not continues to be a matter of debate around the world, including India. This is, of course, not unique to pharmaceuticals but cuts across various sectors, a process generated by the neo-liberal thought. The root of such thinking lies in the Washington Consensus which, on the other hand, has been diminishing. People around the world have now realised that everything cannot be left to the market.

Even in the US, where the Washington Consensus was conceived and promoted vigorously, the debate is moving towards regulating pharma prices. Ernst and Young, in a report released in July, suggested that drug giants take steps to moderate prices, as otherwise, federal controls could be imposed on the prices of prescription drugs in few years time.

On the contrary, in India, the National Pharmaceutical Pricing Authority has spoken of slowly eliminating controls on prices of medicines. However, the scene has changed with the new Fertiliser and Chemicals Minister, Ram Vilas Paswan, cracking the whip on the pharma trade for profiteering and changing the thinking of the pharma price regulator.

The US is the only developed country without any price regulation in the pharma sector. As a result, the average medicine prices cost about 77 per cent more compared to Canada, the UK, Germany, France, Italy, Sweden, Switzerland, and so on, says the E&Y report.

Pharma companies defend their price `gouging’ policy on the ground that regulation of price of drugs would mean end of innovation. However, various studies have found that the proportion of drugs that come from public universities in the US is 40 per cent (AAU, 2002). US pharmaceutical companies receive a 50 per cent tax write-off for their R&D expenses, and they only spend about 6 per cent of annual revenues on R&D.

One alternative is to have a social healthcare system where the government pays for majority of the prescription drugs. However, this may increase the budget deficit. Hence, the alternative is price regulation, which can be done in various ways.

In the UK, drug companies determine their own prices for individual drugs. But the pharmaceutical laws limit the maximum profit that manufacturers can earn in sales. Companies that set prices so high that they exceed maximum allowable profit rates must reimburse the government.

Allowable profits are based on several factors, including the company’s investment in the UK and the level of long-term risk. Generally, companies are allowed to earn returns of 17-21 per cent on capital. The pricing system in the UK results in brand name drug prices that are on average 31 per cent lower than prices in the US.

France allows pharma companies to sell their products at any price. However, if these firms want the national healthcare system to reimburse patients for the cost of the drug, they must agree to a lower negotiated price. These prices are reimbursement rates paid by the healthcare system, and are based on the therapeutic value of the drug and the price of the drug in other countries. The French pricing system results in the brand name drugs prices that are on average 45 per cent lower than prices in the US.

Germany has a decentralised national healthcare system. With the exception of innovative drugs that have been patented since 1996, pricing is determined by a reference system, with prices for new drugs based on that of existing ones that provide the same therapeutic benefit.

Prices for innovative drugs that were patented after 1995 are not regulated by the government. However, individual insurance companies can negotiate with pharmaceutical manufacturers on behalf of their covered patients. The German pricing system results in brand name drug prices that are on average 35 per cent lower than prices in the US.

Even Asian and developing countries are adopting price regulation methods in pharmaceutical drugs. Japan has a national healthcare system, and drug prices are generally determined by a reference system. Prices for new drugs are determined comparing them with similar ones already in the market. Prices are based on the safety and effectiveness of the drug. Medicines that are more effective or innovative than existing drugs are priced higher. If there is no comparable drug on the market, the price of the drug is determined by factors such as manufacturing cost and its prices in other countries.

China recently decided to slash the retail prices of more than 400 medicines by an average of 30 per cent after longstanding complaints of overcharging. South Africa too has woken up to the situation and has launched action on the wholesale trade which had been charging an extra over and above the margins provided by the pharma companies.

The above illustrations should be kept in mind by the policy-makers before succumbing to the pressure of removing price regulation. In India, drug prices are under the Drug Price Control Order, an order issued by the government under the Essential Commodities Act, 1955. The DPCO empowers the government to fix and regulate the prices of essential bulk drugs and their formulations. First adopted in 1970, it was revised in 1979, 1987 and 1995, progressively reducing the number of drugs under the order. At present, only 76 drugs are subject to price regulation.

It has been argued that the Indian pharmaceutical industry has benefited heavily from deregulation. It is spending more on R&D, and investments and production in the sector has increased as well.

Now there is talk of eliminating price controls. The argument is that it has resulted in companies opting out of production and sale of controlled drugs, creating the problem of availability of important, and at times, irreplaceable drugs. Representatives of the pharma industry have pointed out that price decline among products that are not under price control is around 0.5 per cent compared to a price hike of 2.1 per cent in the controlled basket. Besides, in the top 300 brands that are not under price control, the price decline is 3.5 per cent compared to 1.5 per cent in drugs under price control.

However, there is another view that medicines are essential commodities which cannot be compared to any other consumer product. Their sale is decided by physicians and retailers and not the consumer. Therefore, the government has to be realistic and extremely careful before finalising any major relaxation in the price control regime.

To tackle the problem of the high price of pharma drugs in the Indian market, especially at the retail level, the government has decided that medicines would be sold at a maximum retail price (MRP), which also includes local levies such as sales tax and octroi.

The regulation comes in response to a phenomenal price escalation in decontrolled drugs at the retail level. The Common Minimum Programme of the UPA Government also mentions the possibility of reviewing the revival of public sector units for the manufacture of critical bulk drugs to bring down and keep a check on prices.

Many suggest that free cross-border trade in pharmaceutical drugs could be one way of curbing excess pricing. However, this may not yield the desired results. A look at the infamous case of a cartel by major manufacturers of bulk vitamins in the world in the 1990s. This cartel raised the price of bulk vitamins considerably around the world.

Even after the cartel was busted in the end of the 1990s, the prices did not come down to the level they should have. India was also affected by this cartel. Even now, the import prices of bulk vitamins in India is quite high.

Therefore, the market alone cannot be trusted to protect consumers from greedy pharmaceutical companies. Government intervention is imperative. One must, however, admit that some studies have shown that in case of generic drugs, regulation is not advisable as it removes the incentive to price the drugs at less than the maximum price prescribed.

Therefore, before succumbing to the pressure of completely deregulating the Indian pharma drug market, the government should carefully study the system in other countries and requirements of the Indian people. The US is more or less an exception having no regulation on the price of pharmaceutical drugs. But the day is not far off, when even the US joins the bandwagon of regulating drug prices.