Mediflation & innovation

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Mediflation & innovation

Friday, 08 November 2019 | Rakshit Tewari

Mediflation & innovation

As the Government prepares the draft of the Medical Devices Act, it is important to take a holistic view and consider both incentivising innovation and keeping the rising drug prices in check

India’s recent policy interventions in the healthcare sector have grabbed eyeballs around the globe. Be it the world’s largest healthcare scheme, Ayushman Bharat, that was launched by the Narendra Modi Government in order to ensure affordable medical care to the underprivileged, or whether it is in the field of building a holistic ecosystem that rewards innovation and provides the latest diagnostic solutions to patients, India has been in the news worldwide.

Hence, as the Central Government prepares the draft of the Medical Devices Act, it is important to take a holistic view and consider both incentivising innovation and keeping the rising drug prices in check.

Holding price fairness as its priority, the Government maintains that an alleged mechanism of profiteering, through both hospital bills or drug costs, is fleecing a patient up to 1800 per cent and needs intervention.

There is enough evidence of drug overpricing across the country. When the National Pharmaceutical Pricing Authority (NPPA) led an investigation into billing by two hospitals in 2018 it revealed mark-ups, ranging from 350-1700 per cent, adversely impacting the high and rising out-of-pocket-expenditure (OOPE) of patients.

High trade margins — the difference between the price at which the manufacturers sell the drugs to distributors and the final MRP (maximum retail price) — were held responsible for “mediflation” or rise in prices of medical care in cancer treatment.

At the centre of any healthcare ecosystem, the realities of accessibility, quality and affordability exist. Whereas critics of imported medical devices have raised concern about the high-cost burden and suggested imposing stringent measures such as irrational price caps, other healthcare experts and policymakers have pointed at potential quality lapses as a result of price caps.

One such example is that of the unsuccessful case of capping prices of coronary stents. While the objective was to curb high treatment costs and increase accessibility, other issues have often been raised. It is not a hidden fact how many of the global medical device companies began withdrawing their superior quality products from the market as price caps disincentivised innovation. They began skimming on research and development (R&D) resources that aid innovation. Although there have been multiple discussions between industry players and the Government to figure out a pragmatic solution to the ever-increasing treatment costs and sustaining innovation, nothing fruitful has been achieved so far.

In 2013, while hearing a case against  Ranbaxy for selling drugs at a mark-up of 900 per cent, the Punjab and Haryana High Court had maintained that there appears to be no legal provision in force to save the consumers from fleecing by the petitioner or other drug manufacturers who over-price medicines to such an extent.

In a bid to end the burgeoning OOPE, the Government then developed an indigenous model called Trade Margin Rationalisation (TMR) in 2018. This distinctive Indian intervention aims to address the whole gamut of dissimilar pressures that impact the final price. Through this the Government plans to make the Indian healthcare pricing architecture free from external forces which support “mediflation.”

Hailing TMR as pilot for proof of concept, the Government implemented it and capped the trade margin of 42 cancer drugs at 30 per cent. Through this proof of concept, the Government made an attempt to better comprehend the impact of this rationalisation on the end-user price of the identified cancer drugs. The result?

In his written reply in Rajya Sabha, Minister of Chemical and Fertilisers submitted that “MRPs have been reduced by up to 90 per cent  and calculated annual savings for patients are approximately around Rs 984 crore, much more than a minimum saving of Rs 200 crore per annum to cancer patients on account of this intervention.” The NPPA also advocated the same formula, for medical devices and consumables, of 50 per cent trade margin, hoping the MRP would come down by around 73  per cent.

But the Government needs to take a holistic approach while handling TMR, as price capping mechanisms have been regularly hitting the pharmaceutical and medical devices industry. A country that meets 80 per cent of its demand for medical devices through imports cannot suddenly disregard the innovative capabilities of the imported technology over cost. Hence, when adopting TMR as the best bet for affordability, the Government should also look at improving the overall health infrastructure. The strategy ahead should factor the cost calculation side. The Government should not follow a narrow approach when calculating margins. With a massive disease burden and disease profiles evolving by the day, can India afford to keep investors at bay?

There exists in India’s TMR approach a significant loophole, that can mar the inflow of optimum diagnostic technologies into the country. Take, for instance, the case of landed cost. An overly narrow approach does not consider various expenses of an investor. These expenses include training clinicians on technology, financing sales and collection costs, corporate taxes, and other routine expenses for developing and serving the market in India. After witnessing a sharp decline in the entry and sustenance of medical innovation, so much so that the bulk drugs industry started vanishing, the Government decided to discontinue disregarding an investor’s cost. (National Pharmaceutical Pricing Policy 2012)

Looking at the larger picture, the legislative price controls advocated by the Government might be a quick-fix. However, in the long run India will lose out on much-needed innovations and specialised treatments necessary to manage the complex and costly disease burden. This will also limit the access of advanced technology products to Indian patients.

Legislating non-remunerative pricing is limiting the usefulness to a single dimension price.  This may be limiting the opportunity to gain from the global enriching experience of the innovator for the entire healthcare value chain.

In such a scenario, differentiation in pricing, with respect to the cost involved would be a way to encourage innovation and with it catalyse better, focussed solutions.

Medical devices have wide, demonstrable differentiation that makes the same group of devices seem very heterogeneous. Both the local and stand-alone importers focus on high volume, low value and less technical medical devices such as syringe, needles, catheters and high-volume base level implants like stents. Local subsidiaries get supplies from their principals at transfer-price and local costs are borne by local subsidiary, which is additional costs like import duty, customs charges, clearance, warehousing, cost of capital, and so on.

The final price subsumes these costs and margins are calculated thereafter. Standalone importers in effect buy and their requirement plus the seller’s margin are a part of the price.

Any high-end medical devices which require sustainable training and quality assurance need direct involvement of subsidiaries of the parent companies. This complicates the matter and the one-size-fits-all base TMR rate of 30 per cent comes up for a serious debate. This also acts as a setback to the idea of different patient, different needs. 

While civil society groups insist on a price-fixation mechanism as a means to affordable care, nuances of the medical device industry including innovative, knowledge-base, clinical and technical support, storage, transportation —accounting for massive investments —cannot be ignored.

A holistic TMR should take into consideration the concerns of multiple stakeholders so that all the key stakeholders can function in coherence with each other. Such a robust and balanced TMR would address the hardships of end-users, address the commercial and industrial concerns of hospitals and providers, be remunerative to vendors and help the Government in its quest for universal healthcare for all at affordable prices. TMR is a veritable win-win solution.

(The writer is a public healthcare consultant with various industry bodies)

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