Is the shift away from cost-plus drug pricing desirable? - NO

S. Srinivasan | Updated on March 12, 2018 Published on November 23, 2012


The Cabinet should have stuck to its three-decade-old policy of cost-plus pricing (CBP), instead of opting for a market-based formula.

Cost-based pricing allows for cost of raw material plus costs of conversion plus a margin of 100 per cent.

Now, under market-based price (MBP) ‘control’, averages will be taken of prices that have no relation to the cost of production. Hence, the resultant ceiling price arrived would still be high.

What is the reasoning given by the government on why CBP should be abandoned?

The retail price determination for telephone-charges, electricity, auto-taxi fare, etc, is decided on costs.

In fact, MBP is never used for any form of price regulation. MBP would result in legitimising high prices, de facto lifting of price control and de-linking ceiling prices from the cost of production.

Any price that has no relationship to the cost of production is absurd and indicates market failure. When the market fails, the logical move of an elected government ought to be to ensure how to make medicines more affordable.

The Government’s MBP motto is, however, aimed at protecting high profit margins of overpriced brands of life-saving medicines. The Government is not addressing the issue of what a legitimate profit margin should be: 100 per cent, 1,000 per cent or 4,000 per cent? High profit margins are used for unethical marketing and promotion — at the patient’s expense. So high prices legitimised by MBP are not only illogical, but unethical as well.

For atorvastatin 10 mg, used in preventing strokes, the market leader price is Rs 110 per 10 tablets whereas the price as per CBP mechanism with 100 per cent margin is Rs 5.60 and the simple average price (of brands more than 1 per cent market share) is around Rs 50 per 10, while the Tamil Nadu Government’s public procurement price is Rs 2.10 for 10 tablets

The market leader will certainly get hit by the simple average price and be forced to reduce but would most likely migrate to another drug of the same class but not in the list of 348 drugs — for example, simvastatin or even the unsafe rosuvastatin.

In the case of amlodipine 5mg — used for high BP — the simple average ceiling price of Rs 25.70 per 10 is greater than the market leader price of Rs 15.60 (calculated using 2008 IMS data) whereas the cost-based price ceiling would be Rs 1.77 per 10 tablets! Profit margins of nearly 1,000 per cent in both cases! Mercedes-like pricing when Nano level pricing would do as well.

A responsible industry would self-correct these irrational practices. We are yet to see this. Nor have we seen meaningful R&D with these super profits.

(The author is with All India Drug Action Network.)

Published on November 23, 2012

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