Neeraj Sood and Chirantan Chatterjee

50-Years On: It’s time for De-Novo thinking in Indian Pharmaceutical Policy Making

Pharmaceutical policy making in emerging economies is going through heady times. In countries like Brazil and China, the issue of affordability of medicines is being contemplated through a variety of measures none unresolved in terms of their expected societal efficiency (Bertoldi et.al 2012). Even in India, the last couple of years have been landmark years for pharmaceutical pricing and policy making. And these recent developments have been built on a legacy of more than half a century of pharmaceutical policy making in India. Most of the action historically has centered on policy levers like price-controls on drugs since 1962 and changes in intellectual property regimes since the 1970s. But with the recent developments and prevailing confusion, one can ponder if it is indeed the time for some de novo thinking to Indian pharmaceutical policy making.

Let us first look at some recent activities around pharmaceutical policy making in the country, some of which has generated more heated debate than others. For example, reported not so long back in national media, the government has expressed clear intentions of passing legislation that would compel doctors working in public clinics and hospitals to prescribe generic drugs instead of branded drugs. In conjunction with this policy, the government has also initiated plans to introduce a new central scheme to supply free generic drugs. The goal of this policy is to reduce wasteful government spending on drugs by substituting away from branded drugs especially when lower cost and equally effective generics are available. The policy also aims to improve access to drugs by subsidizing costs for consumers at public clinics and hospitals. But what about access to drugs outside the gambit of the public health care system or access to newer and more expensive drugs for which cheaper generic counterparts might not be available?

To improve access to these drugs the government plans to regulate the prices of about 400 drugs accounting for more than 50% of the pharmaceutical market. Such an attempt would mark a step back to 1962, when India first employed price controls to make drugs affordable for the citizenry. The step came with the realization that the country needs to be self-sufficient in terms of access to antibiotics and drugs, in the aftermath of the Indo-China war. But it also comes with costs. Regulations on drug prices could cut both ways if one goes by standard economic intuition. In the short run, lower prices increase access to drugs today but in the long run, price controls might hurt innovation thus reducing access to drugs tomorrow (see for example Sood et al 2008 & Lakdawalla et al 2008 among many other scholars who have worked in this area). The situation is further complicated by the issuance of compulsory licenses which could send out mixed signals to the efficient functioning of markets. In addition, if prices are too low, firms with higher quality but higher costs drugs might leave the market increasing market share of low quality-low cost drugs. Drug manufacturers are also likely to waste resources on strategically gaming the system to avoid price controls.

50-Year Snapshot of Indian Pharmaceutical Policy Making

Year Event
1962 Price Controls Introduced
1970 Indian Patent Act
1978 Drug Price Control Order 1 (342 drugs in the list)
1987 Drug Price Control Order 2 (143 drugs in the list)
1995 Drug Price Control Order 3 (74 drugs in the list)
1997 National Pharmaceutical Pricing Authority Formed with an organizational motto of ‘Affordable Prices for All.’ It is entrusted with fixing, revising, and monitoring drug prices.
2000 100 percent FDI in Pharmaceutical Industry
2002 Pharmaceutical Pricing Policy of 2002 was challenged in courts and never implemented (All drugs with unit price less than Rs 2 were proposed to be excluded from the ambit of price control)
2003 Committee was setup to study and improve drug quality
2005 Excise Duty on Maximum Retail Price Imposed, number of regulated drugs declined to 24
2005 Patents Amendment Act of 2005
2006 National Pharmaceutical Policy of 2006 (Proposed expanding the price controlled drug list from 74 to 354)
2008 Price Revision Applications by Manufacturers began to be decided in 30 days instead of 60
2011 National Pharmaceutical Pricing Policy of 2011 (Draft)

Source: Bhaskarabhatla & Chatterjee (2012)

So what is the way out of this dilemma? How can we simultaneously ensure access to high quality drugs today and in the future and at the same time steer clear of the controversies around price controls for pharmaceutical products? One way out of this is to support insurance markets for prescription drugs and there are some compelling reasons why this might be a viable strategy.

First, insurance decouples prices consumers pay from prices manufacturers receive. Insured consumers pay a copayment which can be close to production costs to promote greater access to drugs. Manufacturers will negotiate prices with insurers (Lakdawalla and Sood, 2009). These prices would typically be higher than production costs for innovative drugs as the manufacturer will have more bargaining power vis a vis insurer. For less innovative drugs, which face competition from other drugs, prices will be closer to production costs. More importantly prices are more likely to be set “right” as they would be determined using market negotiations rather than by bureaucrats without a clear economic rationale. Second, insurance firms can be envisioned to be more effective than individual consumers in negotiating prices and monitoring quality. Insurers can use their bargaining power to lower prices for consumers (Duggan and Scott-Morton 2010). They can also regulate drug quality and steer patients to higher quality drugs by contracting with more reputed pharmacies and drug manufacturers. 

But who will pay the insurance premiums? With the assumption that most rich and middle class consumers can pay on their own, the poor in the country will need help or premium support from government. This might mean a strain on a resource constrained government but in an India where healthcare budgets have now been planned to be close to 2% of GDP, better management of chronic illness using drugs means reduced spending on costly hospitalizations and more efficient use of healthcare spending. In fact, the planning commission in a recently published report calls for increased government spending on drugs and very recently the government announced this new experimental scheme to supply free generic drugs in at least one district of each state on an experimental basis. One only hopes that the 12th Plan will only push efforts more in this direction.

These ideas of promoting insurance markets and providing premium support for prescription drugs to the needy should be a way forward for the Government of India. Recent evidence from the US which implemented a similar system for providing drug insurance to the elderly shows that such a system can be successful in simultaneously promoting access to drugs and reducing expenditures of costly hospitalizations (Zhang et al 2009). Overall, promoting a vibrant insurance market for drugs with some premium support should be a win-win situation for the patient as well as the social planner. Insurance markets are the prescription for reducing financial risks for consumers and improving access to drugs today and in the future. Whether this prescription will stop the bickering on what is the right price for drugs in a resource poor setting as that of India’s, one cannot be sure, but one can certainly hope so. 50 years on, Indian pharmaceutical policy making is certainly in need of some fresh legs and agile thinking.

 

[1] Sood (nsood@healthpolicy.usc.edu) is an Associate Professor, Pharmaceutical Economics and Policy, and Director of International Programs at Schaeffer Center, University of Southern California.

[1] Chatterjee (chirantan.chatterjee@iimb.ernet.in) is an Assistant Professor, Corporate Strategy and Policy, with expertise in global healthcare markets at Indian Institute of Management Bangalore. 

 

References

Bertoldi, D. Andrea, Helfler, P. Ana, Camargo L. Aline, Tavares, U.L. Noemia and Kanavos, Panos., 2012, “Is the Brazilian pharmaceutical policy ensuring population access to essential medicines?”, Globalization & Health, 8:6.

Bhaskarabhatla, A. and Chatterjee, C. 2012. Competitive Effects of High-End and Low-End Firm Entry: Evidence from the Indian Pharmaceutical Markets. Working Paper.

Chatterjee, C. 2011, “Intellectual Property, Incentives for Innovation and Welfare – Evidence from the Global Pharmaceutical Industry”, Doctoral Dissertation, Carnegie Mellon University.

Chaudhuri, S, 2005, “The WTO and India’s Pharmaceuticals Industry”, Oxford University Press, New Delhi, India.

Lakdawalla Darius and Sood, Neeraj, 2009, "Innovation and Welfare Effects of Public Prescription Drug Insurance," Journal of Public Economics, 91(1):541-548.

Lakdawalla Darius, Goldman, Dana, Michaud, Pierre-Carl, Sood, Neeraj, Lempert Robert, Cong, Ze, de Vries, Han and Italo Gutierrez, 2008, "US Pharmaceutical Policy in a Global Marketplace," Health Affairs, 28:w138-w150.

Duggan, Mark G., and Scott Morton, Fiona, 2011. The Medium-Term Impact of Medicare Part D on Pharmaceutical Prices. American Economic Review, 101(3): 387–392.

Sood Neeraj, de Vries Han, Gutierrez Italo, Lakdawalla Darius, and Goldman Dana, 2008, “The Effect of Pharmaceutical Regulation on Revenues," Health Affairs, 28:w125-w137.

Zhang, Y., Donohue J. M., Lave J. R., O’Donnell G., Newhouse. and J. P., 2009, “The Effect of Medicare Part D on Drug and Medical Spending”, New England Journal of Medicine 361 (1): 52–61.

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