‘Daylight dacoity’: As top court hears petitions, here’s how medicines are priced in India

The remarks came in the context of an essential cancer drug that is being supplied to retailers for Rs 2,700 but carries an MRP of nearly Rs 27,000. Questioning the difference, the bench said, “The MRP is 10 times the rate at which it is provided to the retailers. If this is not extortion, then what is it?… That’s absolute rampage, carnage, broad daylight dacoity… It is very surprising that the authorities who are supposed to take a decision on this are absolutely silent. We don’t need to spell out the reason for that,” the bench said.

The petitions seek regulation of drug prices, generic prescriptions, and medical devices. They also seek stricter enforcement of price controls under the DPCO to prevent disproportionate profit margins across the drug supply chain. But how are medicine prices fixed and why do some medicines remain outside price control? We explain.

The legal framework for pricing medicines

The Essential Commodities Act, 1955, gives the Centre power over essential goods, including medicines.

Section 3(1) allows it to regulate production, supply, and distribution “for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution and availability at fair price”. Section 3(2)(c) allows for issuing orders controlling commodity prices.

The DPCO is such an order. It is the primary framework governing medicine prices in India. It authorises the National Pharmaceutical Pricing Authority (NPPA), set up in 1997 under the Department of Pharmaceuticals, to fix and revise ceiling prices of scheduled formulations, set retail prices for new drugs, monitor overcharging and implement the DPCO.

For medicines covered under the DPCO, the NPPA sets a maximum price that companies cannot exceed. It also monitors whether companies are following price control rules and can order recovery of money if patients have been overcharged. In some situations, it can also cap the prices of medicines or medical devices otherwise outside regular price control.

Scheduled and non-scheduled medicines

The DPCO divides medicines into two broad categories — scheduled and non-scheduled formulations. A formulation refers to a medicine in a particular strength and dosage form.

Scheduled formulations are medicines included in Schedule I of the DPCO. Schedule I is based on the National List of Essential Medicines (NLEM), a list prepared by the Ministry of Health and Family Welfare, identifying medicines considered essential for meeting the country’s healthcare needs. Non-scheduled formulations are medicines that are not listed.

The current list contains 384 medicines, accounting for only 20% of the total drug market turnover. Medicines included under Schedule I are subject to government price controls.

How ceiling prices for medicines are calculated

A ceiling price is the highest price at which a scheduled formulation can be sold to a consumer before taxes, and NPPA calculates it based on prices already being charged in the market.

The NPPA first looks at every version of the formulation that has the same active ingredient, which is aimed at producing a certain effect in the body. A brand is a version sold under a company’s trade name. A “generic version” contains the same active ingredient but is sold under the ingredient’s name, or under a company’s own name without the originator’s brand.

The NPPA then removes the brands or generic formulations that account for less than 1% of total domestic market sales from the calculation. Market share is measured by “moving annual turnover (MAT)”, which basically is the product’s popularity in its total sales over the last year. The data comes from market research firms, which record medicine sales by brand.

For each version, the NPPA considers the price to retailer (PTR), or what the manufacturer or distributor charges the chemist or hospital pharmacy. The NPPA takes the average of these PTRs and adds a 16% retailer’s margin. The result is the ceiling price.

For example, if three versions of a scheduled medicine with the same strength and dosage hold at least 1% of the market share, with PTRs of Rs 8, Rs 10, and Rs 12, the NPPA takes the average, which is 10, and adds a 16% permitted retailer margin, resulting in a ceiling price of Rs 11.60. The MRP printed on the pack can not be higher than this amount, apart from local taxes or GST.

Ceiling prices are revised annually on April 1. The revision follows the Wholesale Price Index (WPI), a measure of the average change in wholesale prices. Manufacturers can raise prices to the WPI change for the preceding calendar year without approval. If the WPI falls, they must reduce prices within 45 days.

Medicines outside price control, what petitions say

Medicines not on the NLEM are generally treated as non-scheduled formulations and do not have price ceilings. Under the DPCO, manufacturers are free to set the initial MRP of a non-scheduled medicine. The only restriction is that the MRP cannot be increased by more than 10% in 12 months.

It is this very framework that is now under challenge before the SC. Petitioners argue that since the DPCO does not regulate initial launch prices, manufacturers can set inflated launch prices from day one, rendering the price hike cap ineffective.

The PILs challenge the lack of control over the launch price, arguing that the power to regulate medicines flows from Article 21, the right to health guaranteed under the right to life. According to a petition, allowing the manufacturers to set the initial MRP gives them “arbitrary, unrestricted power to set any MRP, regardless of the actual cost of manufacturing the medicine.”

One of the pleas also focuses on the pharmaceutical supply chain and markups by retailers and hospitals. It states that retailers are extracting “ten to sixteen times higher profit” than the permissible 16% margin. It states that an antibiotic named Tigebax 50mg, with an MRP of Rs 5,635, is sold at full MRP in a bigger or corporate hospital. However, it is being sold in the open market outside the hospital at just Rs 350.

It adds that hospital pharmacies play a significant role in determining medicine prices, claiming “retail price or MRP of medicines by companies are decided according to inputs of corporate hospitals”. It claims that 30-40% of a critically ill patient’s bill in a corporate hospital comprises pharmacy expenses.

The plea also raises concerns about branded medicines and prescribing practices. Referring to statements made in the Lok Sabha, it says that medicines sold under generic names, which are their composition names, are “50% to 90% cheaper than their branded counterparts.”