Capping Drug Prices Is Not the Answer to High Pvt Healthcare Costs

What is the solution to high costs in private healthcare sector?

(Photo: The Quint)

The public healthcare system in India is, to say the least, a disaster. The burden of healthcare delivery has fallen on private providers, the triumvirate consisting of hospitals, the pharmaceutical industry and doctors. All three of these sections have been under attack for concerns regarding alleged high medical costs and unethical practices, at various times.

All attempts by the National Pharmaceutical Pricing Authority (NPPA), the government agency that regulates prices, and the government to cap profits by hospitals and pharmaceutical companies have been received with much applause by patients, only to be shelved in the absence of true political will, and actual reform when it comes to real-world considerations. Also, some of them, in hindsight have proven to be against the larger interests of those they aim to protect, the patients.

What’s the Expenditure On Medicines?

To just put it all into perspective, you will need to get a general idea of the financials involved. In the year 2014-15, the Out of Pocket Expenditure on health by households was Rs 3,02,425 crores (Rs 2,394 per capita out of a total per capita health expenditure of Rs 3,826).

Since Indians believe in traditional, complementary and alternative medicine, we spend an additional Rs 72,205 crores on these drugs.(Photo: Harsh Sahani/The Quint)

Out of this, a whopping Rs 1,83,155 crores (37.9 percent of Current Health Expenditure) was the Total Pharmaceutical Expenditure and included prescribed medicines, over the counter drugs and those provided during an inpatient, outpatient or emergency care.

Since Indians believe in traditional, complementary and alternative medicine, we spend an additional Rs 72,205 crores (16 percent of Current Health Expenditure) on these drugs. Remember, this spend does not include expensive implants and stents.

Here are some of the ideas that have been floated to cut down this spending on medication.

Ban On Branded Generics

Key local pharmaceutical industries charge almost double for branded versions of off-patent drugs, compared with standard generics (costlier by 96 percent than their non-named counterpart).

In an effort to curb profits by pharmaceutical companies, in early 2017, the prime minister hinted at a law mandating that doctors to prescribe medicines by generic names only.

(Photo: The Quint)

Efforts on the part of the Indian government to scrap branded generics have since been stalled, because generic medications are not trusted by patients or doctors, since the manufacturing standards and enforcement, as well quality control, leave much to be desired.

It must also be remembered that pharma giants such as Abbott Laboratories, Sun Pharma, Cipla Ltd, Cadila Healthcare Ltd and Torrent Pharmaceuticals Ltd rely heavily on branded formulations, and are key forex earners.

In addition to this, nearly 80 percent of the medicines sold in India are branded generics, and the entire healthcare industry in India relies on these. By 2021, branded generics are projected to account for USD 300 billion in sales, one-fifth of the total pharmaceutical revenue worldwide, and India will surely want a big slice of this pie. Any curbs on the manufacturing and sale of branded generics would thus have far reaching effects on market forces driving India’s economy.

Capping Trade Margins

For scheduled drugs, the current stated margins are 8 percent and 16 percent for stockists (or wholesalers) and retailers, respectively, whereas for non-scheduled drugs, the margins are 10 percent and 20 percent.

In reality, most drugs are traded with margins of around 30 percent, which translates into the earnings of wholesalers and retailers from the sale of medicines.

Generic medications are not trusted by patients or doctors. (Photo: iStock)

The Department of Pharmaceuticals has reportedly recommended graded trade margins for various drugs: An increase in trade margins, on all drugs with maximum retail price above Rs 2 per unit, while retaining it at the current level of 30 percent for those priced below Rs 2.

While the government believes this will decrease profiteering and decrease cost of medicines, industry sources believe that the move will raise margins of trade by Rs 11,500 crores, making medicines much more expensive.

Generics will continue to remain cheap, while those branded, and consequently, trusted for quality control, will be priced much higher.

Doctors will thus continue to prescribe brands they trust, and patients will continue to choose branded medicines over generics, which will now be costlier than ever before. This is why, in the absence of regulatory reforms regarding quality control and enforcement of manufacturing standards, such a move can only be considered myopic and counter-intuitive.

Cap On Profits By Hospital Pharmacies

A committee headed by the Directorate General of Health Services (DGHS) has submitted a report to the Delhi government that suggests that the profit margin for drugs should be capped at a maximum of 50 percent above the manufacturing price or procurement cost of the drug.

While the intent of the proposed cap on pricing is commendable, its execution may not be the easiest.(Photo: iStock)

Remember that the MRP of the drug is the only available index of its manufacturing cost, together with all profit margins incorporated.

The committee’s suggestion for capping profit margins in hospital pharmacies has come in the wake of the much talked about Fortis dengue case, where the NPPA went on record saying that the hospital charged a profit of more than 1,700 percent on certain consumables. What the NPPA has not emphasised is the fact that no drug or device was charged above MRP by Fortis, which means there was no legal breach by the much-maligned hospital on profit margins.

While the intent of the proposed cap on pricing is commendable, its execution may not be the easiest.

The procurement price for any given drug is different for various pharmacies and hospitals. Also, establishing manufacturing price for any drug, and all its brands, may prove to a mammoth task for the powers that be, if not impossible.

In addition, as always, the bigger corporates will be able to procure drugs at a price much lower than the average small “mom and pop” nursing home, who will then, understandably, be forced to sell drugs at a much higher price point than corporate hospitals.

This will drive up the cost of care in the hitherto more affordable small and medium healthcare establishments, skewing the healthcare delivery system even more, and perhaps hastening the demise of the friendly neighborhood family physician.

What Then Is the Solution?

As is true for all healthcare-related issues, an increase in the public spend on healthcare with augmentation of the resources in government hospitals is the only way forward.

(Photo: iStock)

The only way to decrease out-of-pocket expenses on health by the average Indian is to hold true to the promise of universal, affordable, and accessible healthcare in a welfare state.

Without doubt, the organised private healthcare system requires a complete overhaul in terms of regulations, pricing, ethics and clinical outcomes.

So does the pharmaceutical industry, with price control of branded generics, along with stringent quality control and regulatory mechanisms for the non-nomenclature generics market.

Any kneejerk, populist measures to garner public applause will only prove detrimental to the health of the Indian economy, and indeed, that of the nation at large.

A think tank comprising all stakeholders in the healthcare ambit, including representatives of hospital administration, doctors, pharmaceutical industry and policy makers must look at the long term implications of any price control reforms, before making any capricious public announcements, in order to initiate and propagate the much needed reforms in healthcare.

(Dr Shibal Bhartiya is Senior Consultant, Ophthamology Services at Fortis Memorial Research Institute, Gurgaon.)

(The views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)