The DPCO-2013 has finally been issued vide the Gazette of India Extraordinary, Part II, Section 3, Sub-section(ii) dated 15th May 2013 by the Ministry of Chemicals and Fertilizers (Department of Pharmaceuticals), Govt of India. It is a 67-page document with 32 Sections and 2 Schedules. Schedule I has the list of medicines (348) placed under the price control order and Schedule II contains the forms related to price fixation/revision and the information/reports required to be submitted by the manufacturers.
If we analyse the pricing mechanism, the cost of drugs to the consumers has the following components and can be inflated by each one of them.
- Cost of production because of inefficient technology / operational control.
- Costs of marketing / brand promotion as well as high profit margin of the manufacturer.
- The taxes (excise duty, import duty, CST, VAT etc).
- Profit margin of the dealer/retailer.
Cost components 1 and 2 are dependent on the manufacture and are significant factors in cost inflation. Component 3 is entirely decided by the government. Component 4 depends upon the retailer who inflates the prices with active connivance of the manufacturer. Knowing that the retail chemist will promote the sales of only those drugs, which give him the maximum profit, the MRP is being fixed by the manufacturer so as to provide maximum profit margin to the dealer/ retailer.
The ceiling on prices of drugs can be affected by the government by different approaches such as:
1. Fixing the prices on the basis of actual production costs plus a 50-100% markup (margin for overheads – marketing, distribution costs as well as the profit margin of the manufacture); or
2. On the basis of the government’s bulk procurement prices;
3. Market based pricing — basing the price on the average of the prices of various brands of the product in the market.
The first two approaches lower the consumer prices by cutting down the manufacturer’s expenses as well as profit margin. The third approach lowers the prices by controlling the retailer’s profit margin.
The DPCO-13 aims at controlling the drug prices broadly by two measures:
1. First measure — Controlling the Selling Price to Retailers. It aims to control the ex-factory price, that is reducing the cost to retailers by controlling the selling price of manufacturers. This measure could have had great impact, in case the pricing was cost based which is not the case here. What has been followed by the govt is the market based pricing (MBP) which works out the prices of drugs on the basis of average of prices set by manufactures with I% or more of market share. That may turn out to be the average of the high selling (and costly) brands rather than the cheaper brands. In any case it does not force the manufacturer to reduce the cost of production, overheads or his profits. This measure may not yield any substantial benefits to consumers.
2. Second measure – Fixing the Ceiling on the Retailer’s Profit Margin & Retail Selling Price is likely to have a major impact. Up to now the MRP was being fixed by the manufactures who were inflating the MRP grossly (up to 400-500% in some cases. This has been the single most important factor responsible for sky-high drug prices. Capping on the MRP has the potential to reduce the costs drastically.
Under the new DPCO, the MRP will not be decided by the manufacture.
MRP or the Ceiling Price of a scheduled formulation shall be calculated as under:
Step 1. First the Average Price to Retailer of the scheduled formulation – P(s) – shall be calculated by the formula:
Sum of prices to retailer of all the brands and generic versions of the medicine having market share more than or equal to one per cent of the total market turnover on the basis of moving annual turnover of that medicine
P(s) = ————————————————————————————————–
Total number of such brands/generic versions of the medicine having market share more than or equal to one per cent of total market turnover on the basis of moving annual turnover for that medicine.
Step 2. Then the Ceiling Price i.e. P(c) shall be calculated by the formula:
P(c) = P(s).(1+M/100),
P(s) = Average Price to Retailer calculated in step 1 above.
M = % Margin to retailer and its value = 16
The ceiling price calculated as above and notified by the Government shall be applicable to scheduled imported formulations also.
For fixation of retail price of new drugs for existing manufacturers of scheduled formulations the Government shall form a Standing Committee of Experts, within 60 days of notification of this order, to recommend the retail prices on the principles of “Pharmacoeconomics” (comparative therapeutic value of drugs with similar action).
Revision of Ceiling Prices:
- The DPCO provides for revision of the Ceiling Price by the Government every year on the basis of change in the Wholesale Price Index in April every year.
- The manufacturers may also increase the maximum retail price (MRP) of scheduled formulations once in a year, in the month of April, on the basis of the wholesale price index with respect to previous calendar year, without prior approval of the Government, but under intimation in electronic or physical form in Form-II within a period of 15 days. That means the revision may be upward or downward, matching the increase or decrease in the WPI.
The Order however, empowers the Govt to fix the ceiling price or retail price or allow an increase or decrease of price of any drug under certain circumstances, in public interest for a period deemed fit irrespective of annual wholesale price index for that year.
Display of MRP on the Labels : The manufacturer of a scheduled drug shall display in indelible print mark, on the label of the container/packing, the MRP based on the ceiling price notified in the Official Gazette with the words “Maximum Retail Price” preceding it and the words ‘inclusive of all taxes’ succeeding it.
Display of Price Lists : Under the new DPCO, the manufacturer is required to provide the revised price list of the formulations to the retailer/dealer who is required to display the price lists conspicuously in the premises and make them easily accessible to the consumers for perusal.
Discontinuing Production of Scheduled Drugs : Any manufacturer of scheduled formulation, intending to discontinue any scheduled formulation shall be allowed to do so after issue of a prior public notice and intimation to the Government as prescribed in Schedule II, at least six months prior to the intended date of discontinuation.
The Government may, in public interest, direct the manufacturer to continue production/import for a period not exceeding one year, within a period of 60 days of receipt of such intimation.
Production and Availability of Scheduled Drugs : The Government shall monitor the production and availability of scheduled formulations and their active pharmaceutical ingredients and the manufacturer shall furnish the information every quarter, as per Form-III of schedule-II.
Prices of Non-Scheduled Drugs : The new DPCO also has a provision for the government monitoring the prices of non-scheduled drugs and restricts the price revision by the manufacturer to not more than 10% per year.
Violations of DPCO-2013
No existing manufacturer of a scheduled formulation shall sell a new drug in the Schedule at a price higher than the retail price (plus local taxes as applicable) fixed by the Government. Violators, if any, will be liable to deposit overcharged amount along with interest, in addition to the penalty.
DPCO-13 is likely to bring down the prices of essential drugs brought under the price control. However, the extent to which it will be effective, remains to be seen as it depends a lot on how effectively it is implemented. It is a step in the right direction no doubt, but a lot more could be done. Drugs, being the lifesaving items, ideally the price reduction strategy should be multipronged, aimed at effective control of all the major factors as discussed above. Bringing down the manufacturer’s sale price to the level of generic medicines by reduction of packaging and marketing costs and profit margin, can be one such measure. Reduction, if not abolition, of the taxes which are a rather unjustified burden on the sick and suffering citizens is another area where there is ample scope of reduction of costs.
Dr S K Joshi is a hospital administrator, author of professional books and visiting faculty for postgraduate courses in healthcare management.