Pharmaceutical policy draft — Must go beyond price control

Published: Business Line, August 31, 2006
By Pradeep S Mehta

The draft pharmaceutical policy that proposes to bring 354 drugs under price control has expectedly raised raging debates in the country. Such a measure was deemed necessary in view of the Supreme Court order though it was expected that there would be resistance from the pharmaceutical lobby.

Indeed, India had a similar drug price control regime before as well. However, with decontrol over years, prices of some medicines soared, so much so that today for some drugs prices are not only higher compared to neighbouring countries such as Sri Lanka and Bangladesh, but even vis-à-vis developed countries such as Canada and the UK. However, this is not universal. Some medicines continue to be available at reasonable prices.

More medicines under control

The policy proposes to bring more medicines under price control but at the same time increase the Maximum Allowable Post-Manufacturing Expenses (MAPE) to 150 per cent from the current level of 100 per cent.

This is too high and cannot be justified. This also contradicts the policy of trade margin of 50 per cent (15 per cent for wholesalers and 35 per cent for retailers) for generic medicines proposed in the same policy draft.

Obviously, many firms should be able sell at lower prices than the controlled level. The question thus arises: Is the Government allowing firms to fix prices at a higher level in the name of price control?

The Indian experience is that, by and large, the suggested maximum price invariably becomes the actual selling price. Hence, for many medicines, there is a risk that the price control will lead to higher prices.

No wonder, there is strong opposition on the proposed price control regime not only from the Department of Industry, that tends to protect the interests of the business, but also from the Departments of Health as well as Consumer Affairs, which seek to protect the interests of consumers.

No imposition please

Recently, the President of the Organisation of Pharmaceutical Producers of India, had criticised the proposal arguing that competition should be encouraged with appropriate monitoring of prices.

One may not fully agree with this, and regulation might be necessary. However, regulation should try to simulate the "effects of competition" and price control should not be imposed on drugs where the "effects of competition" already exist.

It would be a better idea to put fewer number of drugs under price control while retaining the existing level of MAPE of 100 per cent and put others on the watch list and adopt a threat-based policy by reserving the right to bring them under price control any time their prices cross certain levels. Regulation of drug prices is necessary not only because it is a different kind of product that involves issues of life and death for people, but also because normal market forces do not operate as consumers do not make the choice.

In the case of a normal product, consumers make the choice based on their perception and experiences of quality and prices.

However, for medicines, doctors and retailers play an important role in the purchase decision. As a result, medicines of same quality and effectiveness could be sold at higher prices by providing "incentives" to doctors and pharmacists.

Generics vs. inventor co prices

In fact, the proposed policy has indirectly recognised this by allowing R&D oriented firms to have higher MAPE. This means, for the same medicine, some firms will have 150 per cent margin while others will have 200 per cent. Incidentally, such problems occur for all medicines, essential and non-essential.

Nevertheless, the proposed policy has not spelt out any effective measures to deal with such problems. True, the measure of fixing trade margins can deal with such problems. However, it has been proposed only for generic medicines, though the problems are there with all medicines. The issue of trade margin deserves more attention as it can check the anti-competitive practices of the retailers who are cartelised and often force the manufacturers to offer higher margins. In any case, such cartelised behaviour must be stopped, as otherwise consumers will be forced to pay higher prices even if the pharmaceutical manufacturers are willing to provide them at reasonable prices.

De-branding
It is also not clear why the Government has not considered de-branding some generic medicines, one of the recommendations of the task force headed by Dr Pronab Sen, Advisor, Perspective Planning, Planning Commission, though the policy speaks of promoting generic medicines.

The proposed Drugs (Price Management and Distribution) Act is a step in the right direction. It will also be necessary to promote generic medicines and competition in the market as the consumers will be able to buy any brand of medicine without bothering about the quality and looking at the prices.

Others too to be blamed

It is true that the drug market is not perfectly competitive due to the peculiarities of the sector.

However, it is not just the pharmaceutical companies that are responsible for this. All the other actors of the health services delivery system, including doctors, pharmacists, hospitals and diagnostic clinics, are equally responsible. The Government thus needs to take a holistic look at the issue of healthcare and availability of affordable medicine is only a part of it.

Healthcare service

For many people living in the rural areas and for the poor in the urban areas, the primary issue is the availability of affordable and "honest" healthcare services rather than the prices of medicines. This would require measures other than price control.

As for price control, it would be advisable to maintain the status quo in view of the Supreme Court order. If more medicines are to be brought under price control, they should be restricted to a few that might have seen excessive price increase rather than all essential drugs.

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Strengthening the competition culture

Published: Business Line, August 11, 2006
By Pradeep S Mehta

The Government has acknowledged the recent fuel price hike to be the main reason for the spiralling prices of essential commodities. Alas, little has been done to address the root cause. For instance, taxes and levies form a chunky component of petro-product prices. So, the Government is actually fuelling inflation and stunting overall economic growth, by such imposts.

Now, the Government has realised the need to adopt a Competition Policy framework to rationalise its role vis-à-vis market forces (for a discussion on why India requires a Competition Policy, refer "How to enhance growth and competitiveness," Business Line, April 12).

CCI advisory committee

On the Government's advice, the Competition Commission of India (CCI) has constituted an Advisory Committee to prepare a consultation paper for a National Competition Policy. In addition, the Planning Commission recently set up a Working Group on Competition Policy.

The Working Group is required to recommend a set of comprehensive policy instruments and strategic interventions to effectively generate a culture of competition in the domestic market with all the stakeholders' involvement. The Group would also recommend ways to enhance the role of competition in government policy making and suggest ways to harmonise relations between the competition authority and sectoral regulators.

Possible recommendations

In terms of policy instruments, the Working Group could recommend the Government to adopt a National Competition Policy statement to provide a declared intent to Government's resolve of promoting competition in the market place. This would help introduce competition principles in government's policies and practices (refer "Reforms need a competition policy framework," Business Line, June 6). The Working Group could also recommend a periodic competition audit of all existing and proposed government policies and laws. This exercise would help identify policies and laws that distort the market process, and will form the basis for drawing up a reform framework.

Policy implementation

How will the policy be implemented and who will do it? Considering the CCI as the appropriate agency will not be the right approach. One, the CCI is primarily an enforcement agency and not a policy-vetting agency and this distinction should be clearly understood. Through its `competition advocacy' function, the CCI can suggest precise measures, when a matter is referred to it, such as in the case of privatisation or concessions.

To carry out a regular ex-ante assessment of government policies and practices, this task should be performed at the highest level to ensure that the measures suggested are acceptable and binding. Accordingly, the Working Group could recommend the establishment of an apex National Competition Policy Council with the Prime Minister (or his nominee) as its chairperson, Chief Ministers or their nominees and representatives from business, consumers, media and academia so that competition issues receive highest consideration in every area of governance.

Premier policy think-tank

As the premier policy think-tank, the Planning Commission could be made the nodal agency and entrusted with the task of carrying out competition audit of policies and laws and competition assessment of markets. It should also assist the National Competition Policy Council in monitoring the implementation of competition principles across all government agencies. The proposed National Competition Policy Council can then consider the recommendations that emerge from these exercises.

The Planning Commission could consider formalising the Working Group and consult it in performing the assigned tasks. Government departments, on their part, should be asked to state competition implications of major policy submissions, which can be reviewed by the Competition Policy Council.

Empowering State bodies

To guide the implementation of the National Competition Policy at the State-level, State governments should be empowered to establish State Competition Policy Councils with Chief Ministers as chairpersons, Chief Secretaries and business, consumer, media and academia representatives as members.

The Planning Commission could consider providing incentives to State governments in the form of competition payments linked to the extent of reforms that States take up in their policies and practices.

Clear working relationship

The Planning Commission should also deliberate on defining a clear working relationship between various agencies to ensure coherence and consistency in its functioning.

To strengthen the competition culture in the country, the Working Group could recommend the government to support public awareness and advocacy campaigns and training programmes on competition issues targeting all stakeholders. This would make the entire exercise an `inclusive' process.

By nurturing a competitive environment, the Centre and State governments can ensure efficient spending, additional revenue generation and provide a boost to overall economic development. The road ahead is long and this requires a 'can do' approach, as the Prime Minister, Dr Manmohan Singh, has articulated on several occasions.

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http://www.thehindubusinessline.com/2006/08/11/stories/2006081100171100.htm