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How to make the new pharma price index a healthy model

S Srinivasan | Updated on June 22, 2018

The proposed index should map real-time industry fluctuations and benefit patients

A new pharmaceutical price index for medicines is expected to be out by the end of the month and all medicine prices will apparently be linked to this new index. This is a welcome move if the index genuinely helps in ensuring affordability and availability of essential and life-saving medicines, and is related to the real hikes in all input costs.

But, whether the current ceiling price/MRP of medicines will be linked to the index or whether the index will be linked to the cost of the API (Active Pharmaceutical Ingredient) component is not clear. Will the index take into account year-on-year inflation of other inputs? We do not know. The worst model will be some weighted aggregate of a basket of medicines: a cure worse than the disease.

At present less than 11 per cent of the total domestic pharma market of ₹1.2 lakh crore is under price control, make that 15 per cent if you include price caps under the Para 19 provision of the DPCO (Drugs Prices Control Order). Under DPCO 2013, ceiling prices are fixed by the so-called simple average mechanism (based on MRP), as against the more commonsensical cost of production-plus mechanism.

The simple average mechanism of price control has many flaws — chief of which is that by taking average of already high prices, the ceiling price arrived thereby is still high, and has no relation to the ex-factory cost price. Also, the DPCO 2013, by confining itself to the National List of Essential Medicines 2015, misses out on other strengths and presentations of the NLEM drugs, not to speak of chemical equivalents and others of the same therapeutic class. Also missed out are many other life-saving drugs not in NLEM and, of course, patented medicines.

Presently, the ceiling prices of NLEM medicines are allowed an increase every April as per WPI (Wholesale Price Index). All other medicines not under price control are allowed an annual increase of 10 per cent. The disinformation sought to be propagated is that the pharma industry is strangled by price control. How can that be if more than 85 per cent of the domestic pharma market is out of price control? And if share prices of pharma companies continue to show a steady increase?

A major problem with the ceiling prices of medicines arrived at by the simple average mechanism of DPCO 2013 is that it is not related to the increase of API and other inputs. Useful medicines like cotrimoxazole, for instance, have practically vanished from the market. In other words, the ceiling prices of those medicines that, for historical reasons have very little margin, tend to become scarce when their API prices shoot up even slightly. As we write, the API price of the crucial anti-TB drug Rifampicin has shot up from ₹4,000 per kg to ₹16,000 kg — no slight increase. Rifampicin will become scarce and our TB programme will get hit.

The new pharma price index should reflect real time increase/decrease of ceiling prices by factoring in real costs — particularly, API costs and real increase in costs of wages, power, packing and excipients — ensuring, thereby, constant availability of essential drugs. It also would imply that the proposed index would de-link ceiling prices of medicines under price control from the WPI Index. That will be a real service to patients.

The WPI for last year is supposed to be negative (a commentary on WPI calculation) and therefore ceiling prices have decreased, whereas the experience of most Indians is that costs have increased. Our response to this fiction is that the salaries of policymakers, political and executive, also be linked to WPI. This year, they would have experienced a decrease, which is what happened to 80 per cent of the population — real incomes have decreased.

For starters, the drug price index could confine itself to NLEM and life saving drugs in all their presentations and dosages. For all others, the 10 per cent year-on-year increase can continue.

The writer is with LOCOST and All India Drug Action Network. Views are personal

Published on June 22, 2018

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