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With ‘Price Control’ Falling Flat On Its Face; Time to Adopt A Wiser Alternative

Another aspect which the industry is worried about is that, if the government continues to fix price based on landed cost, irrespective of product differentiation, then this will be the norm for price fixing in the countries where India export drugs and device

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NPPA’s ‘one price to rule them all’ policy for medical devices is too simple, to tackle convoluted heart disorders, and a new epoch with Trade Margin Rationalization is the right way ahead.

Filibustering with innovation and advancement does more damage than good. Time and again, this statement has been validated in almost all genres of life. Not unexpectedly though, the Indian healthcare setup has become yet another victim to a somewhat vague stance on price controls of cardiac stents and knee implants – a move that will undoubtedly play mischief with bringing world innovation to India. Thereby, it has made the patient, the most visible casualty of the squabble.

Before deciding the solutions, it’s important to understand the cause well – why patients are paying higher prices…as pointed out in the NPPA analysis of hospital bills, it is because of inflated distribution margins, which is especially skewed to the hospitals. All the documents and pricing data released by NPPA thus far indicates that the cost escalation of Medical Devices has happened due to higher trade margin. The most recent illustration of the same was the Pricing document of Fortis Gurgaon released by NPPA. while investigating the overcharging cost to a young patient suffering from Dengue (document 1) - who died. The trend of high hospital margins for medical devices is seen for both domestically produced devices, as well as imported devices.  The DOP-NPPA has prepared a report called Report of the committee of High Trade Margins in The Sale of Drugs in 2016. The report also observes that high Trade Margin – that is, the margins enjoyed by distributors-hospital and retailers are the primary reason for cost escalation of drugs including medical devices.

Therefore, the solution lies in adopting a more nuanced approach to bring in affordability. Since, companies cannot fix the margins of the trade channel on their own, due to anti-competition laws, if the government mandates the Trade Margin at 50 % as per the DOP report, they are willing to accept it - ushering in affordability.  Estimates show this single move of margin rationalization can reduce the MRP of regulated medical devices by 73 %.

Another critical aspect, which we need to consider is product/ technology differentiation in Medical Devices. Technology in medical devices is fast emerging with newer and better products. Every cardiac stent differs in make, with a significant part of the population needing sleeker and more trackable stents or stents with higher burst pressure. However, NPPA’s ‘one price to rule them all’ policy for a cardiac stent is too simple, to tackle convoluted heart disorders. Putting medical devices under a single roof is certainly not a great way to include world innovation and increase access to proper healthcare in a country grappling with a host of diseases. Amidst the dispute, doctors and healthcare professionals have backed differential pricing, as they believe that ‘next-generation’ stents deserve to be treated preferentially, owing to the incessant innovation.

In my view, keeping the same pricing for diverse stents necessarily will not have an overwhelming effect on people who can travel abroad to get access to latest innovation and medical technology. Regrettably, a significant chunk of the community doesn’t share that privilege. Even NPPA, in its meeting on price fixation of Stents held on 5th February and continued on 8th and 12th February 2018 ,noted the same and called upon Department of Pharmaceuticals to consider “ modification of Para 11 (3 ) and 11 (4 ) or incorporate a new para, if it deems fit, to meet out the incremental innovation based differential price requirements in case of not only stents but other medical devices as well”  (see attachment 1, page 13 point d ). After that, 6 months has elapsed, there is no movement from DOP or NPPA to change Schedule 1 of  DPCO or NLEM 2015 as recommended by NPPA.   Thus, the element of choice takes a hit, and this aspect becomes compounded when personalized stents need to be developed based on disorders such as obesity or diabetes, or other factors like age.

In simple words, the time for stop-gaps like price capping is over. Policy makers should now put into place a far more effective model – trade margin rationalization (TMR), whereby companies can still differentiate their products with a differential price, and at the same time, the affordability of the products are ensured due to rationalized trade margin preventing excessive mark up of profits by the trade channel.

Our country’s present healthcare scenario warrants increased affordability and accessibility to medical devices to a larger population, especially considering the increased burden of cardiovascular diseases and other lifestyle disorders. Therefore, TMR will prove to be the most distinctive approach to attain the said objective. Such a path will address government’s fears about excessive profiteering and affordability, and at the same time, allow the companies to continue to innovate.

The healthcare industry has broadly hailed government’s commitment to analyzing trade margin as an alternative to price control. Nevertheless, concerns over the pattern of calculation for the landed cost of research-based foreign medical devices firms, have gone up. Recently a concept note of Niti Aayog is circulated seeking opinion, whereby, the option of Landed cost plus some fixed margin proposal is also considered simultaneously, along with trade margin rationalization from price to distributors, escalates this concern.

Industry insiders welcome the move for considering DOP report of Price to Trade (distributors) + trade margins,  as they feel this will bring in more transparency in the pricing matrix. Affordability of products will increase leading to more patients using the devices. The industry can continue to focus on skill development and in-clinic support of the clinicians and still launch their newer technologies in the market.

But the mention of landed cost-based price capping, in the concept note, installs the fear because the same methodology was used in price capping for a stent and knee implants, whereby average manufacturing cost/landed cost of various companies are taken, and a margin is added. This is discriminatory, as different companies have a different methodology of deciding landing cost. Besides, landing cost does not include the cost of running the local subsidiary or providing local market development efforts. Surprisingly, the methodology of landing cost-based price control is long discarded as a policy by the Government, in National Pharmaceutical Pricing Policy  2012, citing the facts that-  cost-based price capping reduces innovation, investment in capability building and no new entrants enters the sector.  Also, NPPP 2012 takes a note how bulk drug industry vanished from Indian market because of previous policies.  Going back to cost-based price capping will be catastrophic for medical device industry as it was for bulk drugs in mid-nineties.

Another aspect which the industry is worried about is that, if the government continues to fix price based on landed cost, irrespective of product differentiation, then this will be the norm for price fixing in the countries where India export drugs and devices. Incidentally, India has more than 10 billion dollars of drug export in the USA alone and another 6 billion USD worth of export in rest of the world. If the foreign countries follow the methodology of fixing the selling price of these drugs based on landed cost + margins, Indian Pharmaceutical/ device exports will collapse.

If the primary objective for any bold move is towards the greater good of patients in terms of affordability, quality and innovative technologies choices such as trade margin rationalization based on first point of sale to the distributor,  should be adopted, rather than making a bureaucratic decision of cost-based price control a practice long discarded both in India and abroad.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Trade Margin medical devices medical devices makers

Dr Amir Ullah Khan

The author is faculty Health economics at the Manipal Institute of Technology

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