INDIA’S TWIN MECHANISM FOR GOVERNING DRUG PRICES: DPCO, NPPA, AND THE RIGHT TO HEALTH

Why In News?

The Supreme Court is examining public interest petitions challenging the regulatory loopholes in India's pharmaceutical pricing regime.

What is the Drugs Price Control Order (DPCO)?

• DPCO 2013: Issued by the Central Government under Section 3 of the Essential Commodities Act, 1955, serving as the statutory instrument for regulating the prices of medicines across India.

• Statutory Price Regulation: Mandates enforceable legal price caps on essential pharmaceutical formulations to prevent predatory pricing and profiteering by drug manufacturers.

• Essential Medicines: Primarily covers drugs notified under the National List of Essential Medicines (NLEM), designated as "Scheduled Formulations."

• Ceiling Prices: Establishes a uniform, non-negotiable maximum ex-factory price (plus statutory local taxes) for scheduled medicines, applicable across all brands in the domestic market.

• Retail Prices: Fixes the maximum retail price (MRP) for new drugs or specific brand combinations launched by existing pharmaceutical manufacturers.

What is the National Pharmaceutical Pricing Authority?

• Establishment in 1997: Created as an attached office of the Department of Pharmaceuticals under the Ministry of Chemicals and Fertilizers.

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• Price Regulation: Functions as the apex statutory authority tasked with implementing, enforcing, and monitoring provisions of the Drugs (Prices Control) Order.

• Ceiling Price Fixation: Analyzes market data to calculate, notify, and periodically revise the ceiling prices of scheduled pharmaceutical formulations.

• Monitoring Overcharging: Tracks pharmaceutical market prices to detect unauthorized price increases or non-compliance with notified price ceilings.

• Recovery of Overcharged Amounts: Exercises statutory powers to recover excess amounts charged by pharmaceutical manufacturers along with penal interest and penalties under the Essential Commodities Act, 1955.

What is the National List of Essential Medicines?

• Essential Healthcare Medicines: A national registry of vital drugs compiled to satisfy the priority healthcare needs of the majority of the population.

• Public Health Importance: Formulated by an expert committee under the Ministry of Health and Family Welfare (MoHFW) based on disease prevalence, efficacy, safety, and comparative cost-effectiveness.

• Scheduled Formulations: Formulations explicitly listed in the NLEM are incorporated into Schedule-I of the DPCO, automatically bringing them under mandatory statutory ceiling price caps.

• Inclusion Criteria: Prioritizes essential molecules used to treat widespread communicable and non-communicable diseases (e.g., cardiovascular drugs, diabetes therapies, oncology medications, antibiotics).

• NLEM and DPCO Linkage: The Health Ministry determines which drugs are clinically essential (NLEM), while the NPPA under the Ministry of Chemicals and Fertilizers determines how their prices are capped (DPCO).

How Does the Twin Pricing Mechanism Work?

• Scheduled Formulations: Comprises medicines listed in Schedule-I of DPCO (derived from NLEM), subjected to strict, mandatory ceiling price caps.

• Non-Scheduled Formulations: Encompasses all other pharmaceutical drugs, active therapeutic molecules, and branded combinations not included in Schedule-I, governed under a lighter market-based monitoring framework.

• Ceiling Price for Scheduled Medicines: Calculated using the "Simple Average Price to Retailer (PTR)" methodology rather than production cost-plus auditing.

• 16% Retailer Margin: The DPCO statutorily mandates a fixed 16% profit margin for retailers built into the ceiling price formula for all scheduled formulations.

• 10% Annual Increase Limit for Non-Scheduled Medicines: Manufacturers of non-scheduled drugs are legally permitted to increase their Maximum Retail Price (MRP) by a maximum of up to 10% within a 12-month period.

• WPI-Linked Annual Revision: For scheduled drugs, annual price adjustments are linked to the annual change in the Wholesale Price Index (WPI) of the preceding calendar year. 

How are Scheduled Drug Prices Fixed?

• Price to Retailer (PTR): Evaluates the wholesale trade price at which pharmaceutical manufacturers sell formulations to retail chemists and stockists.

• Market Share Criterion (1% Cut-Off): Considers only those market brands that command a value market share of 1% or more of the total domestic turnover for that specific chemical molecule and dosage.

• Average Price Method: Calculates the Simple Average of the Price to Retailer (PTR) of all qualifying brands meeting the 1% market share threshold.

• 16% Retailer Margin Addition: Adds a statutory 16% retail margin to the derived average PTR to arrive at the final benchmark figure.

• Ceiling Price Notification: The resulting calculated value is formally notified in the official gazette as the maximum allowable ceiling price (exclusive of local GST) for that specific drug formulation.

• Annual Inflation Indexation: Re-indexed on April 1 every year based on the previous year's WPI, allowing automated price adjustments across pharmaceutical supply chains.

How are Non-Scheduled Drug Prices Regulated?

• No Direct Upfront Ceiling Price: Manufacturers are free to determine the launch price and Maximum Retail Price (MRP) of non-scheduled formulations based on commercial cost structures and brand positioning.

• 10% Annual Increase Limit: A pharmaceutical manufacturer cannot hike the MRP of a non-scheduled formulation by more than 10% over the preceding 12 months.

• Monitoring by NPPA: The NPPA monitors market sales data through pharmaceutical audit software (such as Pharmatrac); if a firm breaches the 10% annual threshold, it is issued demand notices to roll back the price and deposit the overcharged amount.

• Initial Launch Price Concerns: The regulatory framework leaves the initial launch price completely unregulated, allowing companies to introduce new molecules, combinations, or isomers at extraordinarily high launch mark-ups.

• Market-Based Pricing Flaws: Assumes that free-market competition drives down medicine prices, whereas information asymmetry and physician brand prescription patterns often sustain high prices.

What are the Major Problems?

• High Medicine Mark-Ups: Disproportionate trade mark-ups across distributors, stockists, and retail pharmacies, with profit margins on generic formulations sometimes exceeding 500% to 1,000%.  

• High and Discretionary MRPs: Setting inflated Maximum Retail Prices allows supply chain intermediaries to capture massive trade margins while advertising artificial consumer discounts.

• Branded vs Generic Price Gap: Significant price variance between branded generics marketed by top pharmaceutical companies and identical unbranded bioequivalent generics produced by small-scale units.

• Limited Control Over Initial Launch Prices: Drug companies bypass DPCO price caps by reformulating molecules into minor dosage variants, sustained-release derivatives, or fixed-dose combinations (FDCs) that classify as non-scheduled drugs.

• Hospital-Level In-House Mark-Ups: Private corporate hospitals dispensing non-scheduled medicines and surgical consumables through in-house captive pharmacies at full MRP, prohibiting patients from buying lower-cost retail alternatives.

• Retailer Margins and Trade Push: Retailers are incentivized to stock and recommend high-priced brands that yield larger absolute margins over cheaper generic alternatives.

• Consumer Information Asymmetry: Patients cannot exercise sovereign consumer choice because drug purchases are strictly dictated by doctors' brand-specific handwritten prescriptions.

Way Forward

Comprehensive Review of Non-Scheduled Drug Pricing: Expand the scope of direct price controls beyond the NLEM to establish formula-based ceiling caps on chronic, high-cost non-scheduled formulations.

• Example: Trade Margin Rationalisation (TMR) Model for Cancer Drugs, where the NPPA successfully capped trade margins at 30% for 42 anti-cancer medicines, slashing retail prices by up to 85%.  

Rationalize Supply-Chain Trade Margins: Cap the distributor, wholesaler, and retailer margins for all branded and generic drugs at a uniform 10%–20% to eliminate predatory price gouging.

• Example: CCI Recommendation on Trade Margin Capping, advising the government to fix percentage caps on trade margins from the ex-factory gate to retail sales. 

Promote Quality-Assured Generic Prescriptions: Strictly enforce statutory medical council guidelines mandating doctors to prescribe medications using International Non-Proprietary Names (INN / Generic Names) rather than commercial brand names.

• Example: Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP), operating over 10,000 Jan Aushadhi Kendras delivering certified generic medicines at 50% to 90% cheaper rates than branded equivalents.  

Strengthen Hospital Pharmacy Regulation: Legally prohibit private hospitals from forcing in-patients to purchase medicines exclusively from internal hospital pharmacies at full MRP.

• Example: State Clinical Establishment Rules Amendments, mandating that patients be permitted to procure prescribed medications from open-market pharmacies.  

Deploy Digital Price Tracking and Transparency Apps: Scale up real-time public medicine price-comparison applications to empower consumers against overcharging.

• Example: Pharma Sahi Daam Mobile App, developed by the NPPA to enable consumers to verify ceiling prices and report retail overcharging directly.  

Conclusion

Balancing pharmaceutical innovation with the constitutional guarantee of the right to health requires closing the regulatory gap between scheduled and non-scheduled drugs through trade margin rationalization, mandatory generic prescribing, and strict statutory price transparency.

Source: INDIANEXPRESS.