India must rationalise trade margins on medical devices

Published: November 15, 2019 1:21:56 AM

Importers have been lobbying to be kept outside the purview of trade margin rationalisation. By accepting their demand, the government would be doing a great disservice to the domestic device manufacturing industry.

There is a need to counter attempts to spread mis-information vis-à-vis any kind of government policy to control prices of medical devices

By Rajiv Nath

India is ranked 145 among 190 nations, lower than even Bangladesh, Sudan and Equatorial Guinea by the 2018 Global Healthcare Access and Quality Index. To change this landscape, we need to provide quality and affordable healthcare and reasonably priced medical devices. In recent times, exorbitantly priced medical devices and medical treatment has caused distrust in the healthcare industry, adversely impacting healthcare business environment. In this context, the government needs to protect consumers’ interest as well as allow domestic industry to flourish, while also creating a level -playing field with multinationals. Excessive pricing is stifling India’s manufacturing growth story. In the absence of fair competition, reasonable price controls are desirable. One possible solution for ensuring reasonable MRP (maximum retail price) is keeping trade margin at a rational level along the supply chain.

The trade margin is the difference between the price at which the manufacturers (indigenous /overseas) sell to trade and the final price to patients.

The main aim of rationalisation of trade margins in medical devices should be not only to help consumers, but also allow rationalised and reasonable profits for traders, importers, distributors, and wholesalers & retailers, and create a level-playing field for domestic industry vis-à-vis foreign manufacturers. There should be clear objectives for any policy intervention to provide quality and affordability and avoid distress (to consumers), distrust (in industry) and disruption (to market). The market place is, unfortunately, skewed where suppliers induce hospitals to buy and push their brands based on profit margins and not on basis of cost savings on the procurement cost by a hospital, thus, spiraling prices of medical devices leads to an artificial inflation.

Importers have been lobbying to be kept outside the purview of trade margin rationalisation. By accepting their demand, the government would be doing a great disservice to the domestic device manufacturing industry. There is a need to tread the line carefully between boosting domestic manufacturing and promoting ‘Make in India’ or encouraging more imports and promoting ‘Make Outside India’. Unless, the anomaly between importers and domestic manufactures is corrected, Indian manufacturing will remain at a strategic disadvantage and India will remain dominantly import dependent.

When it comes to trade margin rationalisation, importers of medical devices should also be included. Aren’t MNC importers traders too? How can we have importers having irrational 200% margin as was indicated in NPPA report analysing trade margins on catheters and guide wires, while the rest of supply chain have only 35-50% margin as was being recommended by MNC importers’ lobby?

Medical devices usually go through 4-7 change of hands along the supply chain from a distributor to a wholesaler to a retailer and a hospital before they reach a consumer. Each point in supply chain incurs various costs such as freight, inventory carrying costs, rental, salaries, marketing and sales overheads and service and statutory expenses of compliance, and then there is also a need of net profit by a reseller. Everyone in a supply chain has intermediate costs and value addition. It needs to be ascertained what value addition, if any, importers do and what’s a rational margin for them. Importers in order to avoid customs duty, argue that intermediate costs like R&D and clinical evaluation are not part of the import-landed price. However they also induce hospitals with higher MRP and higher trade margins. This tactical marketing warfare is highly unethical and has cost the consumers dearly as well as adversely impacted domestic manufacturers.

For sake of parity and level playing field, the policy needs to equate an overseas manufacturers’ first point of sale at which their goods enter the Indian Union on CIF (Cost, Insurance & Freight) import price basis with the ex-factory price of the Indian Manufacturers. GST is applied for the first time on the first point of sale for both India and overseas manufacturers.

The Government may consider to cap trade margins along entire supply chain of specific devices to a maximum of 85%. This will help in reducing MRP of many medical devices to less than half of current prices while not being unreasonably detrimental to traders and hospitals. Additionally, manufacturers will be encouraged to attract clients on competitive features, and hospitals will start buying on evaluating cost of purchase & quality, instead of considering margins to be made on higher MRP.

Based on evidence of successful price caps of stents, the Government must pro-actively make cohesive, industry-friendly policy giving at least a level playing field, if not a strategic advantage to domestic manufacturers while safeguarding consumers. Devices are not Drugs though both are medical products but differ in approach in marketing – any move to bring in Trade Margin Rationalization that’s based on PTS (Price to Stockist) instead of first point of sales (when goods enter India), may not meet objectives “to boost domestic manufacturing, end exploitative MRP & unethical Marketing”.

Government should define following:

  1. First Point of sale for Manufacturer is Price on which GST is charged first time. On an overseas manufacturer GST is charged on Import CIF landed price in bill of entry, whereas on an indigenous manufacturer GST is levied on the ex-factory price post discounts
  2. Indigenous manufacturer should be equated with overseas Manufacturer and not with importers.

Price controls can be done in a calibrated manner through,

  • 0.5 – 1% GST Cess on MRP as a tax- based disincentive;
  • Capping trade margins; &
  • Price caps on few priority devices.

There is an urgent need for the government to move towards ending over 80% import dependence, expedite steps for patients’ protection, stronger quality & safety regulations, judicious price controls to make medical devices and quality treatment accessible and affordable and promote indigenous manufacturing.

Also, there is a need to counter attempts to spread mis-information vis-à-vis any kind of government policy to control prices of medical devices. When MRP prices or trade margins are capped the manufacturers margins are not impacted, so fear mongering regarding detrimental impact on quality and innovations in medical devices on account of price control policy stipulations will not be in the interest of consumers or domestic manufacturers. Such misinformation by any particular lobby should be discouraged and countered effectively.

(The author is Forum coordinator, Association of Indian Medical Device Industry (AIMED)

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