8 min read.Updated: 29 Oct 2019, 10:51 PM ISTAmir Ullah Khan
Drug price control makes voters happy, but it has a negative impact on healthcare. Surely, there’s a middle ground
The prevailing thinking in India is that drug prices should be brought down through measures such as listing drugs as essential, diluting intellectual property rights, or imposing price-caps
India has been waging a war on drug prices. The list of drugs under price control has steadily expanded from 74 in 1995 to nearly 860 by 2019. The prevailing thinking in the country is that prices should be brought down through measures like listing drugs as essential, diluting intellectual property (IP) rights and imposing price caps. The impact is not insignificant: recently, the government claimed that certain anti-cancer medicines are 90% cheaper due to price control.
While such measures make voters happy, the impact on the healthcare system and on innovation can be debilitating. As more Indians gain better access to healthcare, the quality of drugs—from stents to cancer medicines— will depend heavily on the price regime and whether there is room to reward new innovations.
This raises important questions: is the system of price ceilings, which grew out of citizen movements fighting for inexpensive “life-saving" drugs in the 1990s, the best way to maximize consumer benefit? If nearly half the expenditure on healthcare goes into buying medicines, should the government force manufacturers to sell below a price cap? Are there more effective ways to get pharmaceutical companies to reduce drug prices?
The big picture
More than 55 million Indians are pushed into poverty every year due to out-of-pocket healthcare expenses. In India, the state spends less than 1.3% of the gross domestic product (GDP) on healthcare. The out-of-pocket expenditure on healthcare is 80% in Bihar and 50% in Gujarat. The world average is 18.6%, according to the World Bank.
Of the 55 million who fall below the poverty line due to illness, more than 38 million do so because of medicine costs alone. Capping prices therefore serves as a quick fix to a systemic problem. The fact is high drug prices impact health seeking behaviour negatively, leading to higher morbidity.
The drug price increase is a serious matter across the world. The NHS in England cannot any longer afford Orkambi, a drug used against fibrosis. The Dutch are struggling with increasing costs of the immuno-oncology drug, Keytruda. Access to healthcare is becoming increasingly difficult as inelastic prices of medicines make patients pay more and more, even as demand rises.
A broken healthcare system, sporadic interventions in pricing, health financing issues and the lack of trained health sector resources are just a few of the major issues that define where India went wrong.
The fact is India spends too little on providing healthcare. India’s new National Health Policy of April 2017 aims at improving healthcare service delivery in a big way, but does not specify how it is going to do so. It relies again on the Primary Health Centres, or PHCs, (now called Health and Wellness Centres, or HWCs) that will cater to non-communicable diseases, mental health, geriatric care, palliative care and rehabilitative care services.
Our PHCs have not worked well in the past and are the main reasons for low access levels to healthcare for the poor. Of the 150,000 HWCs that the government plans to develop, only 20,000 are being claimed as functional yet, and there is little evidence to prove this. For most poor Indians, therefore, high drug prices are the proverbial final straw that breaks the camel’s back.
Diabetes and cancer
Diabetes is a perfect example of this problem as it has become a major epidemic. The World Health Organization (WHO) estimates that 98 million people in India, almost the same number as in the US, suffer from diabetes. Once exclusively a rich man’s disease, diabetes now causes morbidity across class, gender and region. No wonder that the recent spurt in insulin prices has attracted so much attention.
In the US, a study recently published in the Journal of American Medical Association shows how one in four patients are rationing use of insulin because of increased prices, resulting in higher morbidity and in some cases, death. In India, the price of insulin used by most patients to regulate sugar levels between meals has gone up by nearly 20% between June 2018 and June 2019, as a result on increasing demand and the falling rupee value. We know very little about the impact on dosages, but it will not be surprising if patients here too are reducing their insulin intake. This will surely lead to another disaster.
Cancer is the other example. In 2018, cancer claimed the lives of around 800,000 people. The out-of-pocket expenditure on cancer hospitalization is 2.5 times the overall average hospitalization cost.
In March 2019, the National Pharmaceutical Pricing Authority (NPPA) capped trade margins of 42 cancer drugs at 30%, expanding the span of price control to curtail undue profiteering by chemists and drug stockists on various medicines which were outside the price regulation so far. Subsequently, in May, the regulatory body capped the prices of nine non-scheduled cancer drugs. As a result, the maximum retail price of around 526 brands of cancer medicines has been reduced by up to 90%.
As the demand for healthcare increases, ensuring universal healthcare requires cheaper and far more easily available drugs. Therefore, each country ought to be working towards providing the best incentive to pharmaceutical research by way of encouraging higher outlays in research and development, particularly for neglected diseases.
Medicines, their molecules and formulations, are patented by drug companies that invest large sums of money in research and development. These investments sometimes go into millions of dollars. Therefore, drug manufacturers register patents, disallowing others from making the same drug. The patent law gives inventors 20 years of absolute ownership after which other manufacturers can produce and sell the same drug.
The blame, therefore, easily falls on the IP regimes that protect drug patents and where firms price products without state intervention. Populist governments, however, are driven to dilute property rights, introduce compulsory licensing and demand low prices. This is despite the fact that evidence on state intervention is not very clear.
With some exceptions, the countries with strong access to medicines have a strong IP regime. In sectors such as healthcare, innovation is crucial in order to reduce drug prices. New compositions, molecules and formulations are by and large more effective and less expensive and therefore are tools used to have universal healthcare.
With the exception of North America, the countries that rely on compulsory licences are all those that have very low budgets for healthcare. These are also the same countries that suffer from large fiscal deficits. That is why their usual inclination is to put pressure on drug firms to either reduce drug prices, or intimidate them through the use of compulsory licences. Most of these countries also use severe drug price controls to curb prices.
The current price control framework certainly does not encourage innovation that is the cornerstone of healthcare provision for the poor and for the neglected diseases. Even if the out-of-pocket expenditure mainly consists of costs of medicine, the rest of the burden is significant and tends to go up as healthcare providers seek to substitute loss in drug margins by increasing consultation fee, diagnostic and hospitalization costs.
Even after imposing price caps for medical devices in 2017, there is enough evidence now that there has been no significant improvement in accessibility.
What are the solutions then, if not simply harsh price controls? The first solution is a scientific approach called trade margin rationalization (TMR). A complex supply chain exists in the drug market, from the stockist to the retailer. Therefore, rationalizing trade margins does end up regulating prices for medicines and devices.
It is important that robust healthcare infrastructure is created that values patient safety, encourages innovation and reduces costs. India must encourage research-based organizations to operate in India. That’s reason enough to ensure a moderate return on investment for both domestic and foreign firms. TMR is one such solution that allows manufacturers of drugs and medical devices to invest in new drugs and vaccines while competing with others in the market.
The second solution is to move towards centralized procurement. This would give the state stronger negotiating power and greater bargaining clout. There is nothing that stops states from bringing drugs and devices under bulk procurement. Tamil Nadu’s success proves that changes in procurement and inventory management can be transformational.
The other solutions that have worked in various geographies are social health insurance schemes, cross subsidization and state financing of essential drugs. Using these multiple solutions will not only make healthcare affordable, but also give our state accessibility to latest technology.
Arbitrarily cutting prices and issuing compulsory licences will make the ease of doing business go back to old levels and strike at the very root of innovation. It’s important here to note that India’s healthcare sector remains an import-driven market, despite price caps on key devices.
Apart from the foreign sector, the private sector’s role in India’s healthcare reforms is also more than significant. The best option would have been to take the entire healthcare mechanism under the government control and move to state provision and public financing of healthcare. However, given that state and Union budgets are now under much pressure, we need to explore ways in which the costs of medicines and equipment can be brought down.
What is needed is good healthcare infrastructure and larger public investment in health. In the absence of these, we are left with the second best option of letting the large private sector play a stronger role in provision of drugs and vaccines. At the moment, the state machinery is absent in most parts and healthcare needs are met by the private sector. Nearly three-fourths of all medical expenditure is spent on privately provided care.
The other solution towards lower out-of-pocket expenditure is social health insurance. When an individual falls sick, there can be a severe impact on household finances. If social safety nets are inadequate, a family can become impoverished not only directly from the out-of-pocket payments for medical care, but also indirectly from missing work, disability, or premature death, thereby leading to lowered income. However, health insurance also needs a careful control over prices and a check on frauds, which Ayushman Bharat is already struggling with.
Clearly, given that India has a large patient base that suffers from neglected diseases, anything that further disincetivizes the market and innovation cannot be a good policy.
Amir Ullah Khan teaches economic policy at the Indian School of Business and the Nalsar University of Law.