Opinion | Learning from the past on medical device pricing
The government’s previous attempts to cap high trade margins in the sale of drugs show that getting the balance wrong can hurt patients
After having brought down the prices of drugs, the government has medical devices on its agenda. It will soon announce its decision on the method of rationalizing trade margins for medical devices from the first point of sale. The moot point in this debate has been the incidence of high margins, whether they accrue to the distributor or to the hospital.
According to the report of the committee of high trade margins in the sale of drugs, released by the department of pharmaceuticals in 2016, the price to the distributor for both global and indigenous companies was considered from the first point of sale. This report clearly identifies that it is the margin between the price to the distributor and maximum retail price (MRP) that results in the escalation of the latter, and recommends that this should be capped.
Subsequently, data published by the National Pharmaceutical Pricing Authority (NPPA)—also available in the public domain—shows that margins are indeed skewed towards hospitals.
The National Pharmaceuticals Pricing Policy, 2012 (NPPP-2012) provides a pointer to understanding which method to opt for when rationalizing trade margins. Till 2012, the practice followed by the NPPA was a maximum allowable post-marketing expense (Mape) over standardized manufacturing cost or over landing cost of the product.
According to the observations documented in NPPP-2012, the manufacturing cost/landing cost methodology of price capping had led to “possible manipulation” of cost data, resulting in entry barriers. This was neither good for the patient nor for industry growth, and it impacted “the industry’s ability to invest in enhancing in capabilities”. In other words, the techniques that were used for knee and stent price capping have been attempted in the past as well, and, predictably, failed. So why is the government continuing with the same method for knee and stent price capping?
The idea of price capping based on manufacturing cost/landing cost as per Drug Price Control Order 1995 was an unmitigated disaster. The emphasis on price control starting at the bulk drug and formulation stages resulted in drug manufacturing shifting away from notified bulk drugs and formulations under price control. In fact, only 47 bulk drugs out of the 74 notified in the first schedule of the DPCO 1995 were in production by 2012. As a result, patients were adversely affected.
Considering the need for investment in skill development, in-clinic support, innovation and after-sales service of equipment, the scale of investment in pharmaceuticals is less than what it is for the medical device industry. Hence, in the latter case, the magnitude of the adverse effect will be higher if any cost-based price control is imposed.
Let’s now look at the demand side.
Who deals with medical devices? The demand comes from doctors at the primary, secondary and tertiary healthcare levels. They need to be aware of the availability of various medical devices for different conditions before treating a patient so that they can guide patients and form an effective referral chain to super-specialty care. For this, the global research-based companies need to invest and support clinicians in education and skill building.
Every year, around 2.3 million healthcare professionals are trained by these companies. We need to do much more if we are to have universal coverage. Who will invest in skill development and therapy awareness if medtech companies and their subsidiaries find margins capped unreasonably from landing cost?
If a patient feels a certain medication is not effective, he will go back to the doctor to change it, but this is not the case when it comes to medical devices. The risk factor is high, as medical devices can’t be replaced without re-operating on patients. So a doctor needs to be well informed about the quality and functionality of the devices for better clinical outcomes.
The government should initiate a collaborative effort with industry to ensure circulation of information on alternative therapies among clinicians. Without this, diagnosis and patient prognosis will not be complete.
In this Union budget, the government focused on the healthcare sector, launching the world’s largest government-funded healthcare programme, Ayushman Bharat. Besides providing health insurance to 100 million poor families, the government also plans to open 150,000 health and wellness centres to provide comprehensive healthcare with free diagnostics and treatment. For the success of these initiatives, a lot of skill-building activities are required.
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At this stage, if the rationalization of trade margin is not calculated from the first point of sale, companies will stop investing in these activities. That would increase the chances of the scheme failing.
In such a situation, with the government still undecided which way to go, the department of pharmaceuticals’ recommendation on trade margin rationalization from the first point of sale is the most viable solution. It will not only allow global companies to sell innovative products, but also enable them to invest in skill development along with therapy awareness, while still ensuring affordability by correcting the skewed margins in the supply chain.
Amir Ullah Khan is director of research, Aequitas.
Comments are welcome at firstname.lastname@example.org
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