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The current market prices are essentially over and above the actual cost of production — a difference that could run from 100 per cent to 5,600 per cent, depending upon various therapeutic categories

In a liberalised market economy, do we need price controls on drugs? Policymakers and the pharmaceutical industry do not think so. They believe that price controls are an inefficient tool that distorts resource allocation, squeezes revenue, reduces profit, and breeds corruption. However, the evidence around the world runs counter to this view. Every country imposes price controls on medicines, including the most liberalised market economies. Although the design and pattern of price controls may vary, they are an important public policy tool to make drugs affordable. Medicine price controls are critical because unlike other commodities, consumers (patients) do not exercise ‘choice’ in the market when buying drugs, but are guided by the doctors or dispensers, whose primary objective may not be guided by the factor of affordability for patients.

The origin of a comprehensive and well-designed drug price control system in India dates back to 1978, when 350 life-saving and essential drugs were brought under regulation. However, in 1986 and in 1995, the number of medicines under the Drug (Prices Control) Order (DPCO) dwindled to 186 and 76 respectively. As a result, the percentage of medicines in the market under price control declined from over 90 per cent in 1978 to nearly 10 per cent now. Currently, a free market scenario prevails in the pharma sector, and the new drug price policy only legitimizes this trend.

In 2002, a price control order sought to reduce price control by half, but after civil society took up the issue, the High Court in Karnataka struck it down. Since then the Supreme Court has directed the Government of India to bring all essential drugs under price control.

The drug price control mechanism until now is based on cost-plus based (CPB) pricing. Under this arrangement, as per DPCO 1995, a 100 per cent mark-up is allowed over and above the ex-factory price, to allow for post-manufacturing expenses including packaging cost, margins of wholesalers, retailers and so on. In bringing in all 348 life-saving and essential medicines under ‘price control’, the new drug price order of 2013, adopting sleight of hand, takes away the advantage available to the patient because it moves away from CPB to MBP (Market-Based Pricing). Under the MBP, prices of essential medicines would be determined based on average price of various brands of a medicine with one (or more) per cent market share. Thereafter, a 16 per cent margin would be added as retailer’s margin. Thus the ceiling price of drugs will now be based on prevailing market prices of various brands of a drug rather than the actual cost.

The current market prices are essentially a premium price paid over and above the actual cost of production — a difference that could run from 100 per cent to 5,600 per cent depending upon various therapeutic categories. It is strange logic that the government appears to have bought into, one that was sold solidly by the pharma companies. The drug market in India is very complex and unique. We have a scenario where, often the market leader who sets the price is also the brand leader. In several other competitive markets, market leader prices are much lower than the brand leader. Take Glibenclamide, one of the key medicines in diabetes treatment. Sanofi Aventis, which sells the medicines, is not only a market leader in terms of market share but its price is also the highest in the market, despite the presence of a dozen producers. Atorvastatin (10 mg, 10 tablets), a critical drug used in the treatment of high cholesterol, for prevention of heart attacks and strokes, is manufactured and marketed in India by over 50-plus producers. However, Ranbaxy clearly has an edge over the others and its prices are the highest. Therefore, any ceiling price based on a formula derived from market prices will tend to move towards the higher range, instead of bringing it down.

The new pricing formula will be several per cent more than the old cost-plus based pricing methods. For instance, Atorvastatin (10 tablets of 10mg) will be fixed at Rs 65.30 according to the new DPCO 2013 formula, while the same would have been sold for Rs. 5.60 if CPB method were to be used. In fact, the Tamil Nadu Medical Services Corporation currently buys it directly from the manufacturer at a cost of Rs. 2.10, for the same strength and dosages. The premium on cost of production and the ultimate prices paid by the patients are, evidently, several hundred or even thousand per cent higher. This is nothing but profiteering in the name of curing patients.
Fixed Dose Combinations left out

Moreover, the DPCO 2013 has left out Fixed Dose Combinations (FDCs) of drugs involving one or more essential drugs. By simply combining one essential medicine with another non-essential drug, a manufacturer can wriggle out of the ceiling price. Nearly half of most therapeutic categories of medicines in India now consist of FDCs, and this trend has intensified in recent years, especially in drugs used in chronic conditions. India is also the capital of many ‘me-too’ drugs, where several versions of a similar chemical substance are produced with therapeutically equivalent effect. By not bringing similar therapeutic drugs under price ceiling, a wide open escape route has been provided to the pharma manufacturer. Drug producers often find it easy to convince the medical community to move towards a particular brand and to a specific therapeutic product. In view of restrictive and narrowed definition and interpretation of the Essential Drug List and its dosages and strengths, the new DPCO 2013 is expected to cover only 18 per cent of the overall oral solid market.

The aam admi has been yet again administered a bitter pill, while the pharma companies are pleased. The government would claim to have fulfilled its commitment given to the court, of bringing all essential drugs under ‘price control’.

(The author is Senior Health Economist at Public Health Foundation of India.)