January 01, 2012

People’s Democracy

(Weekly Organ of the Communist Party of
India (Marxist)


No. 01

January 01, 2012


Nefarious Design to Legitimise
Exorbitant Prices


Amit Sengupta


THE government has recently
made public the “Draft National Pricing
Policy, 2011.” The circulation of the draft
policy, supposedly to make
medicines more affordable, comes in a situation
where studies show that out-of-pocket medical
costs push over 2 per cent of the
population below the poverty line in one year. A
major part of expenditure on
health in India,
that people have to meet from their own
resources, goes towards buying
medicines. This is so because the government
spends too little on health care
and medicine prices are too high. Unlike in
countries with well-developed
public health systems, where a major proportion
of medicines consumed is
provided by the public health system, in India
around 85 per cent
of medicines consumed are bought by
patients from
chemists shops.




While medicine prices have been
controlled in some manner since 1962,
the first comprehensive drug price control order
(DPCO) was introduced in 1979.
Since then, the DPCO was amended in 1987 and 1994.
While in 1979, most
medicines were brought under price control,
amendments to the DPCO in 1987 and
1995 resulted in most drugs being removed from
price control. (See the Table


Table: Change in Drug Price Control




No of Drugs under

Price Control

Percent of Market

Covered in Price Controlled

Category (approx)

Mark-up (Profitability)



80-90 per cent

40 per cent, 50 per cent and
100 per cent in three categories termed
“life saving”, “essential” and “non



60-70 per cent

75 per cent and 100 per cent
in two categories, subsequently one
category with 100 per cent mark up



25-30 per cent*

100 per cent

* Even
less now, as many of the 74 drugs are now
obsolete and just over 30 of the drugs in the
price control list have any relevance
for public health.


Thus, over time, the prices
of an overwhelming majority of medicines in
the market have been decontrolled. While the
Government has continued to reason
that such decontrol is necessary for the health of
the industry, it has had a
serious and continuous impact on drug prices –
which have grown exponentially
over time. (See the Chart alongside.)

Rise in the Pharma Sector



















have risen in the past decades because of price
decontrol and through
of the market by pharmaceutical
companies. That the market for medicines is rigged
by drug companies is clear
from the fact that top-selling brands of medicines
are often the most expensive
or one of the most expensive. This  is
clearly not a free market situation where
competition helps stabilize prices,
but a situation where large companies maintain
high prices by bribing doctors and
chemists to promote their more expensive medicines
even though the same drug is
available at 1/5 or 1/10 of the price charged by
many top selling brands.


In 2002
a new drug policy was announced, which,
if implemented, would have further slashed the
number of drugs under price
control from the 74 in the 1994 policy. However a
PIL challenged the policy in
the Karnataka High Court on the grounds that it
did not effectively control
drug prices. The Karnataka High Court issued a
stay on the implementation of this
policy. This order was challenged by the
government in the Supreme Court. The
All India Drug Action Network joined this PIL in
the Supreme Court which
vacated the stay vide its order but observed:


suspend the operation of the order to
the extent it directs that the policy dated
15.2.2002 shall not be implemented.
However we direct that the petitioner shall
consider and formulate appropriate
criteria for ensuring essential and life saving
drugs not to fall out of the
price control and further directed to review
drugs, which are essential and
life saving in nature till 2nd May, 2003.”


then there have been several calls for the
introduction of a fair pharma pricing policy.
These calls have also been echoed
by the Parliamentary Standing Committee on Health
and by the Supreme Court. The
government responded to such calls by constituting  several
committees, e.g. the Sandhu committee
and the Pronob Sen committee. A ‘group of
ministers’ was constituted during the
term of UPA-1 to effect a fair resolution of the
issue. It remains a mystery
why the group failed, in seven long years, to find
a solution.




It is
in the above background that the draft
Pharma policy, 2011 has to be seen. It has been
formulated in a situation when:
1) Most medicines are outside price control; 2)
There is complete anarchy as
regards prices of medicines outside price control,
with clear evidence that the
same medicine is being sold at prices that vary
enormously. 3) The prices of
top selling brands of the same medicine are often
the most expensive.


proposed policy starts with a radical and
welcome proposal that all drugs (348) in the
National Essential Drug List
brought be brought under price control. But this
proposal hides a much more
nefarious design that seeks to legitimise the
rampant practice of profiteering
in the pharmaceutical market
It does so by proposing that henceforth prices of
medicines shall be fixed
based on “market based” criteria. Till now, drug
prices were fixed by using a
‘cost plus’ formula. The
of the finished product sold in the market was
fixed by calculating the
cost of manufacturing and then by placing a
ceiling on the post manufacturing
expense. The post manufacturing expense (MAPE)
allowed included the profit for
the company – as per the 1995 DPCO it stands at
100 per cent. Thus if the cost
to manufacture a formulation is Rs.1.00, it can
be sold at Rs 2.00.


new policy makes two significant
departures from the existing methodology of
calculating the price of a medicine:


It will only fix the prices of formulations
(finished medicines sold in the market) and not of
bulk drugs (raw material
used to manufacture the finished product)


It will not use the earlier cost-plus
formula but shall use what it calls “market based”


In its
defence, the draft policy says: “The emphasis
on price control starting at
the bulk drug stage itself has in recent times,
resulted in amongst other
reasons shifting of manufacture of drugs away
from the notified bulk drugs
under price control. In fact only 47 bulk drugs
out of the 74 notified in the
First Schedule of the DPCO, 1995 are now under
production. This has had a
cascading effect on the formulations
manufactured from the concerned bulk drugs
which in turn has affected the availability of
such formulations.


This is
a patently false argument. First,
companies shifted production away from notified
bulk drugs, not because the
bulk drug price was controlled, but because prices
of formulations that could be
made from the bulk drug, were controlled. In fact,
the industry has never
clamoured for an upward revision of bulk drug
prices. Its emphasis has always
been on asking for decontrol of formulation
prices. The reason is simple. Bulk
drugs are not sold to consumers but to
manufacturers of formulations. Hence
bulk drug prices cannot be manipulated in the
market like formulation prices
and competition works to keep these prices stable.
On the other hand, by
unethical promotional practices, formulation
prices can be manipulated as these
are sold through recommendations by doctors and


even more blatant manipulation of facts is in
evidence when the policy argues for “market based
pricing.” The draft policy
argues: “The
Indian economy is today
largely market-driven and, particularly in the
area of pricing of manufactured
products, prices are determined by market
conditions and market forces.
Administered prices exist in a few areas, such
as pricing of petroleum products
and procurement prices of foodgrains but these
are closely connected with a
regime of subsidies paid by the Government. The
pharmaceutical industry is a one
lakh crore industry of which about Rs 48,200.00
crore is the domestic marke


Thus the cat is finally out of
bag! What is important for the policy is to
safeguard the interests of a one
lakh crore rupees industry, not of lakhs of
people who die or are pushed below
the poverty line because of high drug prices.


It may
be pointed out that in many areas like
electricity, telephone (both landline and mobile),
government puts a ceiling on


So what
is this “market based pricing”?  The draft
policy says: “The formulation will be priced only by
fixing a Ceiling Price (CP)
..… The Ceiling
Price would be fixed on the
basis of Weighted Average Price (WAP) of the top
three brands by value.
This constitutes complete capitulation to the
interests of the drug industry
and complete denial of the rights of poor
patients. By fixing the prices of
drugs based on the cost of top-selling brands
(which often means the most
expensive) the government wishes to allow top
companies to continue charging
exorbitant prices for their medicines. In the case
of a life-saving product,
one would expect that prices fixed in a
price-control regime would be the
‘floor price’, i.e. the price being charged by
least expensive brand. Instead,
the new policy, seeks to price drugs at the level
charged by the most expensive
brands. It is clear, whose interests such a policy
will serve.