The issue of trade margins will only get bigger with Ayushman Bharat’s affordable-care focus.
By Rajeev Ahuja & Keerti Bhusan Pradhan
The burning issue facing the medical device industry in India—manufacturers, importers, traders (stockists/distributors), and retailers—is a quick resolution to the issue of price capping of selected medical devices. To check rampant “profiteering” by the industry which is detrimental to the interest of patients, the government took the extreme step of capping the prices of selected devices such as cardiac stents and knee implants in 2017.
Though inefficient for its detrimental effect on innovation, price regulation was meant to send a clear signal to the industry to self-regulate or be prepared for harsh regulatory measures. It turns out that self-regulation by the industry is not feasible. Why? Because hospitals—the frontline service providers who are de facto retailers—often want the highest possible retail prices printed, for they want to profit not only for the clinical services they provide but also from the sale of devices. As a result, the medical device industry now wants the government to intervene, and suggests regulating trade margins instead of capping prices.
Trade margin is the difference between price at which the manufacturers or importers sell to trade (or price to trade) and the price to patients (maximum retail price or MRP). Regulating trade margins retains the incentive of the industry to innovate while reducing the cost burden on patients. The government seems receptive to the idea. However, no policy decision has been taken so far. The government is yet to take a stand on the criteria to adopt in calculating trade margins. NITI Aayog had prepared a concept note to bring clarity on the issue of fixing MRP based on capping of trade margins. In the concept note, it had indicated three different methods for calculating MRP.
All three methods have one thing in common—that trade margin is expressed as a mark-up over “base” price of devices. The difference among these methods is in the manner in which “base” price is defined. The first method considers using “landed cost” (price to importers) as the base price while the second method considers price at which a device is sold to stockists (“price at first point of sale”) as the “base” price. The argument given in support of the second method is that importers often have to incur certain expenditures such as on training clinicians and servicing patients that get accounted for in the price at which a device is sold to a stockist. With the capping of trade margins, such expenditures will have to be borne out of permissible trade margins. However, the argument in favour of the “landed cost” is that importers are also traders, and they could thus bear those expenditures out of permissible trade margins. The difference between these two methods boils down to (i) whether trade margins are enough to accommodate those expenditures and (ii) if a standardised method is appropriate for devices that are so heterogeneous in nature. This is where the third method scores over these two methods.
The third method is similar to the first except that it specifically allows for expenditures on training clinicians and servicing patients. Information on such expenditures could be provided by the manufacturers/ importers based on actuals. These expenditures as well as trade margins are expressed as a mark-up on the “landed” costs. This method is superior on certain counts.
First, the method not only allows separately for such expenditures but also recognises that these are specific to class of devices and thus allows for variation in such expenditures. Second, reliance on manufacturers’/importers’ provided data for determination of such expenditures brings in realism rather than using some arbitrary criteria. Finally, the government will need to specify what kind of expenditures are “permissible” and bring greater clarity and transparency on the issue of such expenditures. Any falsification of data by manufacturers’/importers’ can always be discouraged through imposition of heavy penalties.
With the market size of $10 billion, the medical device industry in India is already significant and is growing rapidly. There are already a few thousand types of medical devices, and this range is only going to widen over time as a result of innovation. Of the several thousand types of medical devices, trade margin regulation is currently being applied only to half-a-dozen devices. But this regulation could potentially be extended to other life-saving devices too. In fact, the government is thinking of bringing over 400 medical devices under this ambit, as per recent media reports. Therefore, the issue of trade margins will only grow in importance as India marches towards universal health coverage with emphasis on affordable care.
Media reports indicate that NITI Aayog had sent a proposal to the PMO, suggesting to implement the trade margin cap at around 65% from distributor onward. The proposal was rejected by the PMO, asking NITI Aayog to rework on it. If the government accepts the third method, for which there is a sound rationale, the trade margin cap will also need to be reworked.
As and when NITI Aayog develops a revised proposal, it needs to take a durable perspective on this issue and provide a medium-term guidance rather than dealing with the immediate problem at hand. Similarly, the medical device industry (including hospitals) needs to recognise that the government is committed to ease of doing business but not to ease of “profiteering” , at least, not in the healthcare sector.
Ahuja is a development economist and Pradhan is advisor and adjunct professor, Chitkara University