Pharma pricing: Trade margin rationalisation a game-changer

Imposing trade margin rationalisation involves imposing a cap on upstream margins across the entire value chain, rather than imposing caps on prices of products downstream.

Five key factors that determine the cost of a medical procedure

The ramifications of the decision taken by the National Pharmaceutical Pricing Authority (NPPA) of capping prices are unravelling slowly. As argued elsewhere, using price ceilings as an economic policy tool to correct perennial systemic problems in our healthcare system are akin to paralysing the body while treating a sore arm. A part of the challenge in conceiving solutions is to get the problem right, in the first place. There is a need to look at the overall healthcare ecosystem. Due to information asymmetry and multiple mark-ups, price ceilings do not tackle the real reasons that contribute to high prices for medical treatment faced by consumers. There is enough evidence and arguments supporting this. The World Health Organisation (WHO) and Health Action International have shown that more than 50% of the end price of medicines is contributed by components other than the manufacturer’s selling price.

AdvaMed, or the Advanced Medical Technology Association—a group comprising nearly 300 global medical technology companies—recently conducted an empirical study to understand challenges faced by the Indian government towards enhancing access to medical technology. It found that price caps on stents have neither led to better accessibility of angioplasty procedures, nor affordability for patients incurring out-of-pocket expenses. The study, instead, shows a decrease in the number of angioplasties performed in a month, and increase in out-of-pocket expenses made by patients undergoing angioplasty. Why is this happening?

There are five key factors that determine the cost of a medical procedure—cost of device/implant, doctor fees, room rent, drugs and consumables, and diagnostic/hospital charges. Being a low-hanging fruit, all factors have largely been ignored, except the first one. This is perhaps the real reason behind restricted access to angioplasty treatments in India.

There is a need to balance access and affordability by inducing more competition. We must encourage innovation along with ensuring long-term stability of the health sector. Successful licensing mechanisms, including medicine patent pool or tiered pricing models, which maximise public health benefits are reliable alternatives we have. Based on the Department of Pharmaceuticals’ Report of the Committee on High Trade Margins in Sale of Drugs, 2016, there seems to be some consensus towards adopting a solution around trade margin rationalisation (TMR).

Imposing TMR involves imposing a cap on upstream margins across the entire value chain, rather than imposing caps on prices of products downstream. This would certainly be a game-changer if implemented in the right way, and at the right time. The Department of Pharmaceuticals report observes that high trade margins enjoyed by distributors, hospitals or retailers are the main reason for cost escalation of drugs and devices. Based on this, the report suggests capping trade margins (the difference between price to distributors and retail price) at 50% for medical devices, whether produced domestically or imported.

Other than being the most nuanced approach for addressing affordability and bringing in more transparency in pricing, the TMR strategy, based on the point of the sale, would not distort incentives for innovation and serve the purpose of reducing the overall cost burden on the consumer. For the long term, the government can look at a strategy of building competency in health technology assessment (HTA), where a robust medical technology assessment programme is developed after taking into consideration evidence of safety, efficacy, patient-reported outcomes and cost-effectiveness.

It’s a known fact that India faces a growing burden of non-communicable diseases (NCDs), with cardiovascular diseases at the forefront. In this context, our reliance on any and all providers of safe, innovative and effective medical devices and treatments cannot be undermined. By 2020, India is projected to have the highest population of youth, and by 2027 we’ll have the world’s largest workforce with a billion people between the ages of 15 and 64 years. We need to ratchet up medical infrastructure and strengthen the healthcare ecosystem, so that our demographic dividend does not become a demographic disaster.

At present, only 5% of medicines used in India are said to be patent-protected. What must link medical innovation and affordable treatment is a supportive role of the state. India has over 3 million cancer patients, which means that one in every 13 of the world’s cancer patients is one of us. Why then only seven new cancer drugs have been introduced in India in the past few years, when over 50 breakthrough therapies were made available in other countries? Scholars Iain Cockburn and Ernst Berndt of MIT and Boston University have provided an answer. They examined 184 US Food and Drug Administration-approved innovative drugs sold in India and found that 50% of these drugs have encountered delays in marketing approval of more than five years, after their global launch. Even once approved for marketing, over 50% of those drugs that became newly available in India were produced and sold as generic versions by multiple follow-on Indian manufacturers, within a year of their introduction. The scholars claim that such delays combined with rapid appearance of generic versions of innovator drugs in India could be an indication of a lack of faith in the patent regime and enforcement environment. If their findings are to be believed, it is bad news not just for manufacturers facing uncertainty, but, more importantly, for our patients.

Unstable and unpredictable business environment make investment decisions tedious and risky. As R&D takes a back-seat in India, our dependence on import of medical devices hovers in the range of 75-90%. We have digressed in our thinking. Unlike profiteering, profitability that is based on legitimate, market-based methods is not a zero-sum game. Profit is a Marshallian surplus. It is the creation of wealth in the overall system based on market transactions that can benefit everyone. Policies are meant to ensure that allocation of this surplus is equitable. If the creation of market surplus is hindered because of a tilt in the efficiency-equity equilibrium, there would be no investment, no entrepreneurship, and no opportunity to enhance social welfare in the long run.

By- Ashish Bharadwaj & Shruti Bhushan, Bharadwaj is associate professor at Jindal Global Law School, and director of Jindal Initiative on Research in IP & Competition (JIRICO) at OP Jindal Global University. Bhushan is a research analyst at JIRICO

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