Context

• Consumers may have to pay more for medicines and medical devices if the National Pharmaceutical Pricing Authority (NPPA) allows a price hike of over 10% in the drugs and devices listed under the National List of Essential Medicines (NLEM), this coming month.
• The escalation which is expected to have an impact on nearly 800 drugs and devices is propelled by the rise in the Wholesale Price Index (WPI).

How does the pricing mechanism work?

• Prices of Scheduled Drugs are allowed an increase each year by the drug regulator in line with the WPI and the annual change is controlled and rarely crosses 5%. But the pharmaceutical players pointed out that over the past few years, input costs have flared up.
• As per the Drugs (Prices) Control Order 2013, scheduled drugs, about 15% of the pharma market, are allowed an increase by the government as per the WPI while the rest 85% are allowed an automatic increase of 10% every year. The pharma lobby is now asking for at least a 10% increase for scheduled drugs too than going by the WPI.

Who regulates prices?

• The NPPA was set up in 1997 to fix/revise prices of controlled bulk drugs and formulations and to enforce price and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995-2013.
• Its mandate is to implement and enforce the provisions of the Drugs (Prices Control) Order in accordance with the powers delegated to it, to deal with all legal matters arising out of the decisions of the NPPA and to monitor the availability of drugs, identify shortages and to take remedial steps.
• The ceiling price of a scheduled drug is determined by first working out the simple average of price to retailer in respect of all branded and generic versions of that particular drug formulation having a market share of more than or equal to 1%, and then adding a notional retailer margin of 16% to it. The ceiling price fixed/revised by the NPPA is notified in the Gazette of India (Extraordinary) from time to time.
• The NPPA is also mandated to collect/maintain data on production, exports and imports, market share of individual companies, profitability of companies etc., for bulk drugs and formulations and undertake and/ or sponsor relevant studies in respect of pricing of drugs/ pharmaceuticals.
• Prices are revised when there is a rise in the price of bulk drugs, raw materials, cost of transport, freight rates, utilities like fuel, power, diesel, and changes in taxes and duties. The cost rises for imported medicines with escalation in insurance and freight prices, and depreciation of the rupee.
• The annual hike in the prices of drugs listed in the NLEM is based on the WPI. The NLEM lists drugs used to treat fever, infection, heart disease, hypertension, anaemia etc and includes commonly used medicines like paracetamol, azithromycin etc.

Why are inputs costs high?

• One of the challenges is that 60%-70% of the country’s medicine needs are dependent on China. 
• Self-reliance for India also means self-reliance in bulk drugs (Active Pharmaceutical Ingredients/APIs) and chemicals/intermediates that go into making the drug.
• The method to calculate the annual ceiling price increase should be revisited. WPI is dependent on price rise in a basket of a range of goods that are not directly linked with the items that go into the cost of medicines. More importantly, the unrealistic simple average method of calculating ceiling prices should be replaced by a cost-plus mechanism that was prevalent under the earlier DPCO 1995.

Reference:

1. https://www.thehindu.com/sci-tech/health/explained-what-is-the-national-pharmaceutical-pricing-authoritys-role-in-fixing-drug-prices/article65240274.ece