Drug Price Controls– A Double Edged Sword

In 2011, the Indian Government put up the national list of essential medicines – NLEM, soon after which, the price caps on these drugs were imposed by the National Pharmaceutical Pricing Authority in 2012. The status of this was amended recently, where hopes flew high for the removal of these price caps. However, we only saw a change in the committee in charge; the regulation of price control now being shifted to the NITI Aayog. The policy implemented under the Drug Prices Control Order, 1995, was done as a means of lowering the prices of essential medicines. The cause and move seem noble indeed, where the Government can be seen as a welfare proponent, contemplating pro-poor strategies in the healthcare sector. This, in fact, appears to be the narrative surrounding price controls in the pharmaceutical industry in India.

Unfortunately, reality seems to paint a different picture. The price caps on drugs were brought about with the aim of affordability. However, we are now in fact faced with a situation where the sheer availability of these drugs comes into question, which makes the affordability factor secondary. This scenario thus, begs for a new policy reform to be put into place.

Drug price controls: Indian realities

Owing to the price cap on essential drugs, there are fewer discoveries and innovations taking place in the Indian pharmaceutical industry, which has resulted in lesser availability of new drugs to consumers in the market over the last 5 years. There has been a 75 percent slowdown in the launch of new drugs in the Indian market since 2011, as per IMS Health statistics. According to this study, in the year following the drug price cap policy, a decline in the consumption of the price-controlled medicines was also observed.

Moreover, on assessing the accessibility and availability of the essential medicines, it was found that a select few brands were dominating the market. Therefore, the decline in research and development has, in essence, incentivised oligopolistic behaviour in the Indian pharmaceutical market owing to the high barriers to entry, resulting in reduced competition. In addition to this, the drop in the prices of leading brands has incentivised medical professionals to prescribe these brands of medicines, further strengthening the oligopoly.

Hence, based on these findings it can be said that although the price cap policy regulated by the National Pharmaceutical Pricing Authority (NPPA) aimed to make essential medicines more affordable, the objective has not been achieved as the price cap has, in turn, restricted the availability of medicines.

Disconcerting research findings

Regulatory mechanisms like price ceilings on drugs have faced significant criticism in literature. According to a study conducted by the IMS Health in 2015, it was found that regulatory measure like price ceilings that are stated at a level below the market price, results in a reduction of suppliers as they withdraw from the market, further resulting in lower supply and availability of medicines. A longitudinal study of 19 countries over 13 years reported that out of the regulatory measures on drug pricing, a direct price control had the most negative impact where the increased affordability in the short run was at the cost of a generational impact of delayed launch of new medicines.

Price caps on drugs also have a significant impact on the volume of the sales of these drugs, where post the price cap policy in India, a study revealed that a sharp decline in sales was observed which indicates decreased availability of the essential medicines to patients.

The economics behind price controls

Direct price controls on drugs are a policy that economists have over the years looked down upon, owing to the fact that the unintended consequences of price caps far outweigh its benefits. Putting this in perspective through the neo-classical economic lens, price controls disrupt the demand and supply mechanisms. When the price ceiling is above or below the market-determined equilibrium price, suppliers and consumers exit the market. This is where we stand; India is currently facing a dearth of suppliers that has resulted in the reduced availability of essential medicines. In addition to this, the lack of innovation and discovery of new drugs owing to the lack of competition has led to fewer drugs being available to consumers, further reducing the accessibility.

Moreover, the consequences of these price caps don’t end with the lack of availability. With this exit of suppliers, oligopolistic behaviour is encouraged. This means that the few leading companies that the government sought to make worse off, are in fact still enjoying the profit margin, thus further widening the poverty gap.

Cases of other countries: Scoping for alternatives

It thus becomes clear that the drug price control policy may not best for our country. We can then seek to refer to what’s working for other countries in the hope of finding a viable option. The United States’ policy on drug prices follows a more market centred solution where the government negotiates a deal with the big pharmaceuticals. However, this too is not the most efficient solution with the United States having the highest drug prices. This alternative would definitely not play out well in a country like India. Since both regulated and market-driven policies aren’t the most feasible, where then do we find common ground, with the balance between innovation and affordability? The European countries have gotten as close as it gets to this utopia.

The reference price model in pharmaceuticals is a pricing strategy where drugs are grouped into classes based on therapeutic value. The therapeutic value is calculated based on the effect, after using the drug treatment. For example, anti-inflammatory drugs would fall into one drug class based on this model; this would be further divided based on the effect in curing the symptom. The reference price model is implemented in health insurance schemes where the insurer pays one amount (reference amount) for any drug in the class.

This reference pricing model would incentivize consumers to pick the most cost-efficient option. This policy recommendation doesn’t curtail innovation, but rather encourages a new form of innovation where the increased competition within the same class of drugs would bring down prices by a significant margin. Moreover, it would still encourage other research and development, with drug classes which have not been tapped into yet, as there is scope for higher reward in these cases, till they are added to the reference price model.

This pricing strategy has been adopted in various parts of Europe, Germany is a prime example, which has the lowest prices of prescription drugs. According to a study published in the American Journal of Managed Care, the implementation of a reference pricing model could result in a price reduction of up to 7 percent – 24 percent. This alternative, therefore, would help achieve the policy goals by lowering prices, whilst not inhibiting innovation but rather promoting it. Adopting this policy would also maintain the availability of enough drugs as competition has increased, which should increase its accessibility in private retail stores. That being said, the economic structure of the advanced European countries is very different from that in India. Therefore, more empirical research needs to be done to see how this policy plays out in a country like India.

Drug price controls are in an essence a double-edged sword waiting to be reformed; where, although its outcomes in the short run may be favourable, its implementation can have a multitude of unintended consequences in the long run like the problem of lack of affordability, accessibility, and innovation that the price control policy implemented by the National Pharmaceutical Pricing Authority has brought about over the last 5 years.

On scoping for alternatives in countries, the policy of the Reference Pricing Model seems to fare well; where it is a cost-effective one, the projected outcomes are moderately equally distributed, the effectiveness and encouragement of innovation are high, and the likelihood of the formation of an oligopoly is low. In addition to this, literature around reference pricing models as a tool to reduce prices of essential drugs suggests its success in many European countries. That being said, considering the varying economic structures of European countries and that of India, more research needs to be conducted in order to assess how such a policy find its place in India.

Picture Courtesy- Harvard Political Review


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