If the Government keeps a close watch over diesel prices, air fares and even mobile phone tariffs, why doesn’t it do something about the spiralling prices of medicines? If that’s your question, it does through the Drug (Pricing Control) Order (DPCO). Recently, it was much in the news after the Government decided to roll back the guideline which could have practically brought the entire industry under price control. To ensure that vital drugs are available at affordable prices, the Government exercises control over the prices of certain drugs it defines as ‘essential’. The Drug Pricing Policy 2013 provides the framework through which ceiling prices for these essential drugs are worked out. These price limits are given effect by passing the order referred to as the DPCO.

What is it? Under the provisions of DPCO 2013, only the prices of drugs that figure in the National List of Essential Medicines (NLEM) are monitored and controlled by the regulator, the National Pharma Pricing Authority. Under the earlier avatar of the DPCO (1995), 74 drugs were subject to price control. In the 2013 version, the number of drugs under the price control was expanded five-fold to 348. The recent controversy over drug prices erupted after the NPPA decided to regulate the prices of drugs outside the NLEM; the Government has now said that it should stick to regulating essential medicines alone.

In May 2013, NPPA notified that the maximum prices for these 348 essential drug formulations cannot exceed the average price of various brands (of the same underlying formulation) with a market share of one per cent or more. This is a departure from the cost plus pricing formula used in DPCO 1995. Then, companies were allowed to make a nominal profit over manufacturing cost. While the coverage of newer drugs used to treat cardiovascular problems and diabetes under DPCO 2013 has benefited patients, the move from a cost- to a market-based pricing mechanism has been positive for drug-makers too.

Why is it important? India is a branded generic market, which means doctors prescribe the brand of each medicine to be consumed by patients, rather than the underlying formulation. Despite availability of cheaper brands, doctors in many cases prescribe leading brands which are priced at a premium. As patients are ignorant about cheaper substitutes, they seldom switch to the low-cost equivalents of the expensive drug brands recommended by their doctors. Patients have little discretion in the choice, making it necessary for the state to intervene and make essential drugs available to the needy at reasonable prices.

Why should I care? Every change in the NLEM and drug pricing policy can have a bearing on your medical bills, if the drugs prescribed by your doctor come under the essential medicines category. Also, if you have invested or intend to invest in pharma stocks which derive revenues and profits from the domestic market, you may have to keep a close watch on such moves. Any move by the Government to cut drug prices may help you as a patient but hurt you as an investor.

Bottomline The Government fixing prices of drugs isn’t exactly ‘free’ market. But then, with patients going entirely by their doctors’ prescription, one can argue that the market for essential drugs is not free and fair either.

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