Price control in developed countries
PhRMA, an USA based drug industry association, lamented that, "In most European Countries and Japan the government is the largest purchaser of pharmaceuticals. Governments use their power to negotiate or set up prices on pharmaceutical products. Research based pharmaceutical companies are prohibited from charging a free market price for their products. The resulting price control distorts the market for pharmaceuticals and undermines the vitality of the European and Japanese pharmaceutical industries.¹
However, in that very country, health insurers negotiate and finalize drug prices with manufacturers and companies that manage prescription drug benefits of the health plan, known as Pharma Benefits Managers (PBMs). These PBMs in turn control profit limit of the insurers' network of pharmacists (retailers). Government health care responsibility and reimbursement to the retailers of prescription drugs oblige the manufacturers to negotiate prices. There are several instances where the US government has influenced price recovery from the manufacturers. "During the first 5 months of 1996, the total amount that the retail pharmacists were paid for the prescriptions they dispensed to enrollees affected by the benefit change decreased by about 36%, or about $95 million, from the amount paid during the same period in 1995".² Now, the Clinton administration is trying to substitute indirect control by direct control of drug prices of prescription drugs by 'unitary pricing'. This would eliminate the free market system and would establish a regulatory environment in which drug companies would be required to sell to all purchasers at the same price.
Twelve out of the 16 West European countries control prices of individual drugs directly. All 16 have schemes for reimbursing health care cost, thus indirectly helping price control. The proposed price of a new drug is compared with its available alternatives and decisions made accordingly. Many countries also control prices by putting a limit to the profits a company can make. The government in most of these countries is responsible for caring for the health of the people directly. The manufactures are forced to keep price low so that the drug is kept on a high reimbursement list and thus prescribed more frequently. Moreover price changes are heavily regulated and reviewed. The government is also empowered to lower prices. In UK, the Department of Health's Pharmaceuticals Price Regulation Scheme determines target profit levels individually for each company based on its contribution to the UK economy. Excessive profit gain is corrected either by a reduction in prices or by directly reimbursing the excess profit to the Department of Health.

Drug price control in India - bulk drugs
In India successive DPCOs reflect a declining trend in the control basket. The process started with control of all drugs in 1970. It was reduced to 347 drugs in 1978, further to 163 drugs in 1987 and finally to 73 drugs in 1994. Through regulatory control on post tax return on net worth was imposed on bulk drugs, most companies flouted it and submitted tailored data to the Bureau of Industrial Costs and Pricing (BICP). Immediately after the 1986 policy, through public interest litigation, it was revealed that Hoechst, Glaxo, Pfizer, etc. had highly overcharged some of their bulk drugs. Thereafter, a large number of companies were found to be overcharging for both bulk drugs and formulations. The Supreme Court directed the governmental to recover this excess profit from the drug companies, amounting to Rs. 20 million in 1987, and deposit the same to a Drug Prices Equalizing Account (DPEA). Some of the drug companies started paying partly to Government, others simply killed time and then refused to pay. Pfizer, in their balance sheet of 1993, had earmarked nearly Rs. 50 million to pay back the government and managed tax relief but never paid anything to the government thereafter.
Complaints and cases poured in continuously on the violation of the order. In 1994 the government announced: "A three member committee has been appointed under the chairmanship of Justice R. L. Gupta, a sitting Judge of the Delhi High Court, vide the resolution of the government published in the official gazette on 21/3/1994, to review the entire matter of recoveries from drug companies in DPEA".³ But since then nothing has been done in recovering this excess illegal profit which the government terms as "unintended profit".
Recent reporting in the newspapers on this issue states that "the tenure of Drug Prices Review Committee has been extended up to June, 1998 for settling the Rs. 220 crores (Rs. 2.2 billion) unpaid dues by the pharmaceutical industry under Drug Prices Equalization Account (DPEA). The pharmaceutical industry has challenged the government's claim under DPCO. However, the Supreme Court in a case between Department of Chemicals & Fertilizers and Cyanamid company had upheld the validity of provisions under DPCO. Notwithstanding the Supreme Court verdict and appointment of DPRC, the government could not obtain much result in realization from the industry. According to an official release, till date only Rs. 22 crores (Rs. 0.22 billion) has been deposited by the industry." ⁴
When the drug companies were found distinctively overcharging certain drugs and the Supreme Court had ordered recovery of the excess profit, the Government could have at least asked for reduction of prices of these drugs. Instead steady rise of prices was allowed. This has set up a runaway reaction in flouting price control orders.

Drug price control in India - formulations
The industry has repeatedly made petitions that the formula for price control in DPCO has been faulty and companies have incurred loss due to this process of calculation. The formula for retail price (RP) can be examined in the following manner:

RP = (RM + PM + PC + CC) (1 + MAPE/100)

where
RM = Raw material cost
PM = Packing material cost
PC = Packing cost
CC = Conversion cost

Maximum allowable profit exemption (MAPE) now being 100

RP = (RM + PM + PC + CC) (1+ 100/100)
i.e. RP = (RM + PM + PC + CC) X 2

The above calculation shows that in the event of increase of RM, PM, PC or CC, by a single unit, the drug companies are allowed to charge twice to that.
In each drug policy large concessions have been given to the drug industry by knocking out more drugs from the price control basket. Following the 1994 DPCO announcement nearly all drugs released from the basket underwent immediate price rise and the hikes in many cases were phenomenally high - sometimes as much as 200% to 300%. The Government's statement in this respect is as follows "During the five months period of September 1995 to February 1996 the increase of wholesale prices (1981-82 base) shows an increase of 0.4% for the price of drugs and medicines against an increase of 4.0% of all commodities."⁵ The stated 0.4% rise in index does in no way reflect the real increase. A study of over 820 brands in different therapeutic categories was made and the results have been captured in a CDMU Documentation Centre database. Prices here were compared to pre-DPCO, February, 1994 and post-DPCO, February, 1995, which approximately tallies with the period used by the government. Prices were found to have increased anywhere from 1% to 300%. The same analysis updated to March, 1998 shows further hike in prices.
Therefore, barring a few antibiotics, non-steroidal anti inflammatory drugs (NSAIDs) and some gastrointestinal drugs, prices of almost all drugs from most therapeutic categories have increased. The price control mechanism of the government has been an utter failure. This fact was corroborated by the government in a note circulated by the Department of Chemicals and Fertilizers in November, 1997, stating that, "Experience has shown that product wise price control has led to stagnation in terms of newer products and to proliferation of existing products in numerous different strengths and pack sizes, creating confusion in the minds of consumers as also rendering price control system impractical ...... there is inadequate machinery for administering price control with the existing set up. The government is able to fix prices of about 2000 to 2500 packs per year against the 25,000 packs estimated to be under price control." It clearly shows that the government can monitor only 10% of the drugs for which price revisions are sought. In fact, no cost data is now analyzed for price revision applications but an automatic approval comes if the government does not respond within 3 months of application. There is, in essence, no price control system existing now.

Myth of least prices
The Indian national sector industry has always claimed that prices of drugs are lowest here. Though it is a fact that the prices of drugs in India is low in comparison to many countries it is certainly not the lowest. The Indian drug industry deserves credit for producing almost all essential drugs but prices are not cheaper than those of our neighboring countries like Bangladesh, Sri Lanka, etc. Even if we compare prices of drugs which are procured by international agencies like UNICEF and some international distributing housed, we will observe that in dollar terms their prices are cheaper than any brands available in India. Some examples are given in Table 1.

Table 1: Comparison of international and Indian prices of some drugs in 1996

US$ 1.00 was taken as Rs. 35.00 (1996 rates)
Date source: International Drug Price Indicator Guide: Management Sciences for Health; 1997.

Table 2: Cost of therapy with some recently introduced drugs

Abbreviations are standard; PFS = Pre-filled syringe
Cost of therapy excludes local taxes and is only approximate since the dose and duration of treatment may vary.
Date Source: Current Index of Medical Specialities (CIMS), No. 62, July-Sep, 1998

If import restrictions are lifted, it will not take much time for traders to import by global tender and take away large sections of the Indian market. Already the World Bank has directed the State Governments to buy drugs under global tender with international quotations from at least three countries.

Post-GATT situation
Following the WTO agreement which aimed to impose Intellectual Property Rights (IPR) regimes in the pharmaceuticals sector, it was universally acknowledged that the prices of all new and patented drugs will be very high. It is pertinent to mention here that nearly all new and patented drugs are imported where the role of Government is only to impose duty and no domestic laws would be applicable to them. Most recently introduced new drugs are found to be highly priced. Cost of therapy with some of the newly introduced drugs are depicted in Table 2.
World over concern has been expressed regarding the sharp rise in cost of therapy with new drugs. Strong IPR regime has been pursued by international organizations for a long time and now the WTO agreement will serve their purpose. Therefore, by the very beginning of the new century, when a good number of drugs will replace the ones now in the World Health Organization (WHO) Model List of Essential Drugs, the high price question has to be considered seriously. WHO has alerted member nations in this regard and suggested certain remedies:
"there is concern that accessibility of new and more effective drugs might be affected. Governments are obliged to amend their national patent legislation to meet their commitments under the TRIPS agreement. If empirical data should provide that new legislation on patent was causing pharmaceutical prices to rise, then WHO would aim at advising the countries on ways to minimize adverse effects. Countries could consider making use of certain provisions of the agreement for the purpose of avoiding monopolistic practices and encouraging competition among products that are essential for public health." ⁶
The use of compulsory licensing has been suggested which may allow certain scope for bargaining and pressure. The other suggestion is exclusiveness to patentability which may allow non-granting of patents to a drug if it poses concern to public health. However, scope of these processes are highly limited and there will be chance of patent infringement disputes that may drag a country to the WTO or into international litigation. India has survived three years by not changing its patents law and by not introducing exclusive marketing rights. It can also endure further pressure and not meekly change the most useful Indian Patents Act of 1970. This requires a strong political will.

Present scenario
All-round pressure from the industry to withdraw the current three types of price control - control on bulk drug prices, some control on formulation and control on rate of return, has intensified. Government, industry and consumers are at least of uniform opinion, though from different perspectives, that price regulation system in India has become ineffective. The drug industry has again tempted the Government that if the controls are withdrawn they would offer incentives to the Government. "The domestic pharmaceutical industry has offered to provide all essential drugs at cost price to government."⁷ A similar offer was made by the industry to the government in the wake of the 1987 DPCO that they would supply drugs at 33% less to government if price control on a number of drugs were substantially reduced. The Government conceded this demand but the industry did not keep its commitment.
With much reluctance, the Government has formed the National Pharmaceutical Pricing Authority (NPPA). The authority started screening drug prices and initially revised prices of 49 essential drugs. For instance, it reduced prices of Ibuprofen and Ranitidine but hiked prices of Insulin from 4.77% to 12.55%. This was objected to by the industry which decided to go to Court against the price revisions.⁸
Some multinational drug companies and Bulk Drug Manufacturers' Association took the government to Court for violating the guidelines of DPCO in reducing the prices of eight bulk drugs - cefadroxil, ciprofloxacin, cloxacillin, theophylline, trimethoprim, norfloxacin, ranitidine and sulfamethoxazole. Court granted stay.⁹ Similarly Glaxo obtained stay from Mumbai High Court against the reduction of prices of Ranitidine 150 mg to 24% and of 300 mg to 26%.¹⁰
Thus the quasi-legal body NPPA can not discharge any function if Courts keep staying its decisions and cases take years to decide. Surprisingly, attack on NPPA has also come on directly from the parent ministry itself. The Minister of Chemicals & Fertilizers did not allow the recommendation of NPPA to reduce price of Rifampicin, a vital antitubercular drug. The Minister said that BICP had not taken into account the cost of production of the Ciba-CKD plant. Weighted average cost of all three companies - Lupin, Gujarat Biosin and Ciba CKD - should be taken into account. However, It was the lapse of the Ciba-CKD, a 100% multinational subsidiary, that it did not submit cost data in time. Both the Secretary and Joint Secretary wrote protest notes against the stay by the Minister. Later the Joint Secretary was shifted out of the department.¹¹ Though the NPPA has issued notices to a number of companies for cost data of different products, no one would now bother to comply.

Effective control is a must
From the ineffective control system, if the government genuinely wants cost control to serve its social purpose, some important policy decisions will have to be taken urgently.

1. There should be price control on all Essential Drugs - the Government has a list now.
2. Prices of all drugs are to be calculated and scheduled under weighted average process.
3. Dumping of bulk drugs must be stopped and compulsion on bulk drug production should be reintroduced.
4. All dues from the industry in the DPEA account (an estimated Rs. 5 billion outstanding now) must be recovered. The same amount may be invested in research.
5. Actual cost data of bulk drug production by the companies must be publicly available.
6. International import price of all new drugs to be verified before fixing the selling price.
7. Committee should be formed to evolve methods to save Indian Patents Act of 1970 considering the price and availability of new drugs.
8. Last but not the least, use of generic drugs must be promoted at all levels.

Amitava Guha

References:

1. Industry Profile 1997. PhRMA Publication; 1997.
2. Jagger SF. Prescription drug pricing - Implications for retail pharmacies [Testimony]. US General Accounting Office.
3. Answer to question No. 341 dated Jun 28, 1994 in the Rajya Sabha.
4. The Hindustan Times dated Sep 23,1997.
5. Answer to question No. 1733 dated Mar 24, 1995 in Rajya Sabha.
6. Otten A. The TRIPS agreement and pharmaceutical policies [Seminar paper]. WHO Secretariat.
7. Business Standard dated Nov 18, 1997.
8. The Hindustan Times dated Dec 20, 1997.
9. Financial Express dated Jan 2, 1998.
10. Business Standard dated Jan 7, 1998.
11. Financial Express dated Jan 22, 1998.

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