India has often been referred to as the pharmacy of the world for the range of medicines available at affordable prices in India and the dominance it has achieved in the global markets. All credit for this achievement goes to the Indian private sector which, despite the license raj, built a globally relevant business, arguably more important and significant than the more celebrated information technology sector.
Over the last year, there hasn't been a week when a pharma company hasn't been in the news and usually for all the wrong reasons. Even with Obamacare being widely acknowledged as revolutionising access to healthcare for Americans, healthcare was a key issue in the United States elections. Lack of transparency in the cost and profit margins of pharmaceutical and other healthcare companies has become a key point in every political conversation across the world, and India has not been far behind.
Even though India has had a system of drug price control for over two decades, 2013 was a landmark year. A new system was brought in for drugs listed in the National List of Essential Medicines (NLEM). This was based on a new methodology - that of capped price which is a market average rather than input based pricing. The NLEM is a list compiled by the World Health Organisation and has been subject to a fair amount of criticism. The list excludes many patented drugs like Sofosbuvir, the only known cure for Hepatitis C, a deadly disease affecting over a hundred million people globally.
The inclusion by the government of cardiac stents in the NLEM and subjecting them to price control is seen by healthcare activists as a positive move, and by manufacturers as regressive. The government is dogmatic in its belief, albeit not backed up by data, that price control will make healthcare more accessible. Drug and other healthcare companies refer to studies that demonstrate that price control forces the market to shrink and concentrate, eventually harming access.
Health activists have, for many years now, been vocal advocates for price caps for stents. They believe that it is only price control that will address;
- the patient and/or payer lacking information about the need for a stent, the fair price for it and the extent of profit that the doctor or hospital makes on each stent;
- the lack of ethical standards by hospitals and doctors who have been prescribing stents indiscriminately with little or no evidence of efficacy; and
- the lack of competition in the Indian market with products being sold at exorbitant prices.
Given recent research and ‘confessions’ by cardiologists that stents are mostly unnecessary and ineffective in over 90 percent of the 4,20,00 cases annually in India where they have been prescribed - the only use for stents is in an emergency procedure immediately after a heart attack, the health activists seem to be on firm ground, almost shaming the government into action.
Price Control Is A Barrier To Supply
My own view is that the government should encourage the development of a market with vibrant competition rather than create barriers to competition using price controls. A competitive market will develop a number of competing products and naturally find different price segments where manufacturers can distinguish their products from those in segments below and above them. This, however, assumes that the consumer is able to make an informed choice. There are too many recent cases of mis-selling by pharmaceutical companies, in collusion with doctors, that makes this assumption unsustainable, thus allowing governments to fall back on price control as a counterbalancing regulatory measure.
Price controls were always meant to be temporary measures to address supply disruptions, initially during war time and then during periods of drought, famine or the oil crisis. To consider price control to be a long-term policy weapon is an acknowledgement by the government that it has failed to address long-term market issues but will use brute force to achieve short term goals. Device manufacturers claim that not all stents are the same and even if there is price control, there must be differential pricing to address the different types of stents. This is likely to be one of the grounds for a legal challenge to a price cap. Similarly, if the precedent for price control is to be followed;
- one should expect a differential pricing formula for imported stents
- patented stents will be excluded from the price cap
Both these exceptions to the price cap are precedents without any economic basis – in fact, they undermine the very idea of a price cap.
Instead of price control, the government should perhaps study the barriers to competition in cardio stents.
Why is it that there are just a handful of manufacturers and of those, a very insignificant number are Indian owned? Is there a need for a significant domestic production given that therapeutic efficacy of stents has not been established by empirical data? The government’s policy is based on a flawed theory that if products are cheap, everyone can, and should, be able to buy them.
This is best exemplified by the indiscriminate use of fixed-dose combinations and antibiotics which are easily available at an affordable price. While this theory of forcing the production of cheap products addresses the demand side, it fails to address supply side issues. The key among them being the incentive on manufacturers.
Unless increased production and widespread distribution of stents is achieved, an oligopoly of manufacturers and distributors will result in scarcity, making products inaccessible.
Price Control Subsidises The Rich
With the government fixing the retail price of a stent for patients covered by the Central Government Health Scheme (CGHS) to be about Rs 23,000, domestic manufacturers - who until last year were selling stents at twice or even four times this price - will perhaps reduce production, cut distribution margins, and even transport costs so that their products are only sold in markets close to their production facilities.
In a similar vein, stents which are priced at twice the CGHS price will not be imported. While we do not yet know the price cap for stents outside the CGHS system, it is unlikely that the price will be significantly higher. While this may seem like an inclusive welfare measure, it seems inequitable that those who can afford higher prices are being subsidised. While the lower price to the CGHS can be justified on the basis of higher numbers - potentially millions of patients every year - and the CGHS being a ‘market’ in itself, it would seem fair to allow manufacturers to compete in the private healthcare sector as a separate market.
Our experience of Nexavar (sorafineb) and Gleevec (imatinib) suggests that the creation of a new segment of the market at a significantly lower price than the ‘market leading monopoly brand’, leads to an increase in supply of the product and as a consequence, increased availability and access to patients at an affordable price.
Domestic Supply Imbalances
Unless fundamental structural issues are addressed by the government, medical device manufacturers may choose to focus on exports rather than the domestic market. There have been reports that Indian stent manufacturers - who have a competitive advantage over imported stents in the CGHS - are focusing on exports given the high profit margins. If Indian stent manufacturers are compelled to sell in the domestic market, like pharmaceutical companies are, there is a significant risk that Indian hospitals and patients will have a limited choice of products. With price control, imported stents may not have a market, leaving India manufacturers an oligopoly here.
Even if patients are willing to pay a higher price, there will be several areas in India where products are not available if it is economically unviable for Indian manufacturers to sell products there. Why would a manufacturer in Surat try to sell products in Sikkim or the north east when it is likely to have a competitive advantage in the south Indian markets over other manufacturers located in north India? Why bother focusing on the domestic market when export markets are more lucrative? If these two scenarios occur, the consequence will be:
- a number of small-scale local manufacturers who may not adhere to global standards;
- an opportunity for counterfeiters to enter the market.
The economic theory of the market tells us that demand will be supplied and the above two market players will address the markets not served by the global players. This is clearly a foreseeable outcome of price control and definitely undesirable. It is perhaps true of many government policies, but definitely of price control, that the road to hell is paved with good intentions. In the words of the great poet and musician Leonard Cohen, who left us last year:
I’ve seen the future, brother: it is murder. Things are going to slide, slide in all directions. Won’t be nothing. Nothing you can measure anymore.
Murali Neelakantan is Principal at amicus and the former Global General Counsel of Cipla.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.