Published: Business Line, August 31, 2006

By Pradeep S Mehta

The proposed pharmaceutical policy allows R&D oriented firms to have higher MAPE, meaning that for the same medicine, some firms will have 150 per cent margin while others will have 200 per cent margin.

The draft pharmaceutical policy that proposes to bring 354 drugs under price control has expectedly raised raging debates in the country. Such a measure was deemed necessary in view of the Supreme Court order though it was expected that there would be resistance from the pharmaceutical lobby.

Indeed, India had a similar drug price control regime before as well. However, with decontrol over years, prices of some medicines soared, so much so that today for some drugs prices are not only higher compared to neighbouring countries such as Sri Lanka and Bangladesh, but even vis-Ć -vis developed countries such as Canada and the UK. However, this is not universal. Some medicines continue to be available at reasonable prices.

More medicines under control
The policy proposes to bring more medicines under price control but at the same time increase the Maximum Allowable Post-Manufacturing Expenses (MAPE) to 150 per cent from the current level of 100 per cent.

This is too high and cannot be justified. This also contradicts the policy of trade margin of 50 per cent (15 per cent for wholesalers and 35 per cent for retailers) for generic medicines proposed in the same policy draft.

Obviously, many firms should be able sell at lower prices than the controlled level. The question thus arises: Is the Government allowing firms to fix prices at a higher level in the name of price control?

The Indian experience is that, by and large, the suggested maximum price invariably becomes the actual selling price. Hence, for many medicines, there is a risk that the price control will lead to higher prices.

No wonder, there is strong opposition on the proposed price control regime not only from the Department of Industry, that tends to protect the interests of the business, but also from the Departments of Health as well as Consumer Affairs, which seek to protect the interests of consumers.

No imposition please
Recently, the President of the Organisation of Pharmaceutical Producers of India, had criticised the proposal arguing that competition should be encouraged with appropriate monitoring of prices.

One may not fully agree with this, and regulation might be necessary. However, regulation should try to simulate the “effects of competition” and price control should not be imposed on drugs where the “effects of competition” already exist.

It would be a better idea to put fewer number of drugs under price control while retaining the existing level of MAPE of 100 per cent and put others on the watch list and adopt a threat-based policy by reserving the right to bring them under price control any time their prices cross certain levels. Regulation of drug prices is necessary not only because it is a different kind of product that involves issues of life and death for people, but also because normal market forces do not operate as consumers do not make the choice.

In the case of a normal product, consumers make the choice based on their perception and experiences of quality and prices.

However, for medicines, doctors and retailers play an important role in the purchase decision. As a result, medicines of same quality and effectiveness could be sold at higher prices by providing “incentives” to doctors and pharmacists.

Generics vs. inventor co prices
In fact, the proposed policy has indirectly recognised this by allowing R&D oriented firms to have higher MAPE. This means, for the same medicine, some firms will have 150 per cent margin while others will have 200 per cent. Incidentally, such problems occur for all medicines, essential and non-essential.

Nevertheless, the proposed policy has not spelt out any effective measures to deal with such problems. True, the measure of fixing trade margins can deal with such problems. However, it has been proposed only for generic medicines, though the problems are there with all medicines. The issue of trade margin deserves more attention as it can check the anti-competitive practices of the retailers who are cartelised and often force the manufacturers to offer higher margins. In any case, such cartelised behaviour must be stopped, as otherwise consumers will be forced to pay higher prices even if the pharmaceutical manufacturers are willing to provide them at reasonable prices.

It is also not clear why the Government has not considered de-branding some generic medicines, one of the recommendations of the task force headed by Dr Pronab Sen, Advisor, Perspective Planning, Planning Commission, though the policy speaks of promoting generic medicines.

The proposed Drugs (Price Management and Distribution) Act is a step in the right direction. It will also be necessary to promote generic medicines and competition in the market as the consumers will be able to buy any brand of medicine without bothering about the quality and looking at the prices.

Others too to be blamed
It is true that the drug market is not perfectly competitive due to the peculiarities of the sector.

However, it is not just the pharmaceutical companies that are responsible for this. All the other actors of the health services delivery system, including doctors, pharmacists, hospitals and diagnostic clinics, are equally responsible. The Government thus needs to take a holistic look at the issue of healthcare and availability of affordable medicine is only a part of it.

Healthcare service
For many people living in the rural areas and for the poor in the urban areas, the primary issue is the availability of affordable and “honest” healthcare services rather than the prices of medicines. This would require measures other than price control.

As for price control, it would be advisable to maintain the status quo in view of the Supreme Court order. If more medicines are to be brought under price control, they should be restricted to a few that might have seen excessive price increase rather than all essential drugs.

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