What keeps drug prices high

January 14, 2019 0 By FM

Information asymmetry and supplier-induced demand are significantly restricting consumer choice in Indian healthcare, according to a recent policy note issued by Competition Commision of India (CCI).

CCI was established in 2003 under the Competition (Amendment) Act, 2007 to eliminate practices having an adverse effect on competition and protect the interests of consumers in the markets of India.

Over the nine years, the CCI has received 52 cases pertaining to the pharmaceutical and healthcare sector.

Consumer choice is a condition necessary for well-functioning markets. In the absence of an agency with the consumer, Various industry practices flourish which have the effect of choking competition and are detrimental to consumer interest, the commission observes in the policy paper titled `Making Markets Work for Affordable Healthcare’.

The paper identifies unreasonably high trade margins, premium-priced branded generics and incentive-based referral system by doctors are some of the key factors contributing to the high drug prices in India.

The CCI note discusses the issues and recommendations for policy/regulatory reform suggested by stakeholders in the abstract of the presentation:

Role of intermediaries in drug price build-up
The Indian pharmaceutical industry currently produces around US $ 33 billion worth of drugs, over 40 percent of which are supplied to other countries. However, 50 to 65 percent of its people do not have regular access to essential medicines. Also, the majority of the healthcare expenditure is out-of-pocket, a significant proportion of which is spent only on medicines. Thus, ensuring affordable drugs is a necessary pre-requisite for bringing down the overall healthcare expenses and to achieve the overall goal of affordable healthcare for all, states the report.

One major factor that contributes to high drug prices in India is the unreasonably high trade margins. The extent to which trade margins contribute to the price-build up is discernible from the enormous differences between market prices of drugs and the price points at which states such as Tamil Nadu and Rajasthan provide the same drugs procured directly from the manufacturers under their public procurement and distribution systems.

Pecuniary motivation in terms of margin influences which drug is dispensed by traders. The high margins are a form of incentive and an indirect marketing tool employed by drug companies. Further, self-regulation by trade associations also contributes towards high margins as these trade associations control the entire drug distribution system in a manner that mutes competition.

The CCI policy note recommends public procurement and e-pharmacy to limit the intermediary involvement in drug pricing. Public procurement of drugs can be an important means of making essential drugs available to consumers at affordable prices. Efficient and wider public procurement of essential drugs can circumvent the challenges arising from the long distribution chain, supplant sub-optimal regulatory instruments such as price control and allow for access to essential medicines at lower prices. Electronic trading of medicines via online platforms, with appropriate regulatory safeguards, can bring in transparency and spur price competition among platforms and among retailers, as has been witnessed in other product segments.

The health ministry has taken a positive step in this direction by releasing draft rules on Drugs (Sale and Distribution) Rules, 2017 which aims at removing ambiguity on regulations to facilitate sales of drugs
Competition Commission of India online. It is required that a level playing field is created between online and offline platforms for the sale of drugs.

Quality perceptions behind proliferation of ‘branded’ generics
Worldwide, low-cost generic drugs are seen as a key competitive force against the patent-expired brand name drugs marketed at monopoly prices, but in India pharmaceutical market is dominated by “branded” generics. Competition between these ‘branded generic’ versions of drugs is largely based on brand and not on price, thus limiting the effect of generic-induced competition in the market, the paper points out. Although there exists little or no difference in the quality and efficacy of branded and unbranded generics given the same regulatory rigour applied to them, still the branded generics are marketed and prescribed based on the perceived higher efficacy and therapeutic advantage associated with them.

Further, both the doctors and pharmacists prescribe and sell these drugs in order to gain incentives and higher margins. It is very well possible that quality consideration may be a reason behind the prescription of branded generics by doctors.

But it is also equally possible this brand proliferation is to introduce artificial product differentiation in the market offering no therapeutic difference but allowing firms to extract rents.

To stem the proliferation of `branded’ generics, effective and uniform quality control of drugs and One company-one drug-one brand name-one price policy are recommended.

The root cause of brand proliferation is the trust-deficit in the regulatory apparatus for licensing and inspection, which needs to be addressed through consistent application of statutory quality control measures across states and better regulatory compliance.

Unless the quality of drugs sold in markets can be taken to be in conformance of the statutory standards regardless of their brand names, generic competition in the true sense of the term cannot take off. Furthermore, the practice of creating artificial product differentiation needs to be addressed through a one-company-one drug-one brand name one price policy.

Vertical arrangements in healthcare services and lack of transparency
The presence of information asymmetry and lack of agency does not allow consumers to make informed choice of service providers and also that of various services such as diagnostics, procedures etc. provided by the hospitals. Hospitals often have exclusive arrangements with in-house pharmacies, diagnostic labs etc. and may provide multiple services in a bundle or a package. Such arrangements driven purely by efficiencies are reasonable but when guided by the private interests of the healthcare providers, result in vitiating the market dynamics. In the absence of well-implemented regulations ensuring transparency and ethical practice, competition between hospitals on the parameters of price, quality or choice is almost non-existent in India, observes the policy paper.

There are instances where the patient is forced to purchase consumables such as medicines, syringes etc. at printed MRP from the in-house pharmacy of the hospital when the same is available at significantly lower prices outside the hospital premises. It has also been observed that hospitals commonly reject even recent reports of diagnostic tests conducted outside the hospital and mandates repeat tests from their in-house diagnostic labs. Further with no regulatory framework that ensures and governs portability of patient data, the switching cost for a patient becomes high.

In this case, the CCI paper recommends Recommendation strong regulatory framework ensuring transparency, data portability and standardisation of diagnostic labs.

The note says that to help the consumers in making an informed choice about their healthcare services, there should be a mandatory declaration of vital data such as mortality rate, infection rate etc. by the hospitals. Further, it is necessary to ensure that the same degree of reliability and accuracy of test results are applicable across labs. There is also a need of a strong regulatory framework to ensure that the hospitals put no restriction the purchase of standardised products from the open market, accept and initiate treatment based on test reports of outside labs and allow portability of patient data.

Regulation of pharmaceutical sector and competition
Regulation of manufacturing, distribution, sale, and import of drugs is essential for ensuring the safety, efficacy, and quality of drugs produced and sold in the country. The regulatory framework that governs these aspects has a concomitant influence on the entry of drugs as well as players into the market. Inconsistent application of regulations may lead to irrational entry restriction and/or distortion of the level playing field. Thus, it is important that regulations strike the right balance between preventing sub-standard drugs from being manufactured or sold in the markets while making sure entry is not unnecessarily deterred or made difficult.

In India, there are multiple regulators governing the pharmaceutical sector at the centre and state level. As a result of which implementation of regulations is not uniform across the country. This has resulted in multiple standards of same products and also different levels of regulatory compliance requirements. There are no statutory timelines prescribed for processing of new drug applications. Further, the dual requirement of treating each biological medicine from a non-originator source as a new drug, with the additional requirement of proving bio similarity, takes so much time
and investment that a handful of companies compete thereby softening competition.

Harmonisation of processes through effective center-state coordination and time-bound approval for new drugs are recommended to address this issue There is a need to ensure harmonisation of criteria/processes followed by the state licensing authorities and centralisation of training of inspectors to ensure uniformity in interpretation and implementation. It is also imperative to make the approval of new drug time-bound along with detailed guidelines governing each stage of new drug approval process.

CCI to enforce anti-trust rules
CCI will continue to enforce antitrust rules in the pharmaceutical and healthcare sector via its instruments of enforcement and advocacy, the note says. The focus areas for enforcement will inter alia include activities of trade associations in the pharmaceutical distribution chain and the practices in delaying or hampering the introduction of generic medicines upon patent expiry.

Trade associations control supply chain
The cases before the commission have shown that the entire supply chain of drugs is self-regulated by the trade associations who regulate entry by mandating a NOC prior to the appointment of stockists, control distribution by restricting/controlling the number of stockists and influence price by deciding the wholesale and retail margins of drugs. The innovator companies are filing for injunction with the aim to pre-empt competition and delay exports of generics. They have succeeded in some cases in getting injunctions from the Courts. The stakeholders are of the view that the CCI should take up the issues of frivolous litigation not only through enforcement but also for discussion with the judiciary and other relevant forums, the commission says.