FROM BUSINESS WORLD OF 7 SEPTEMBER 2006
Rethinking drug policy
The health
ministry is giving final touches to a new drug policy. Some years ago, that
would have been a ponderous exercise. First, the government would have decided
which drugs to ban the import of; that would have been done on the basis of
what could be produced in the country, regardless of cost. Then it would have
decided which drugs should be produced by its own enterprises, multinationals’
subsidiaries, large Indian firms and small firms. Then it would have decided on
the prices of domestically produced drugs. The whole exercise would have taken
months, and entailed endless lobbying by representative bodies of
manufacturers.
All that
rigmarole has now dwindled. Indian drug manufacturers have become
internationally competitive. They no longer need protection. So imports have
been opened up. The only thing the government continues to bother about is
control on the prices of what it chooses to call essential drugs. The exact
number of such drugs is difficult to determine, for the government wants to
control not only the price of drugs, but also of their variants in terms of
strength and quantity. The number of drugs and the number of manufacturers make
drug control virtually unmanageable. So the government has tried to simplify
its task by saying that if the price is under Rs 3, it would not attract price
control. That induces manufacturers to minimize the quantity they sell for Rs
3; so the government makes rules about quantities as well. It is a nitpicker’s
dream, and everybody else’s nightmare. The government should look for less
bureaucratic alternatives.
Drug prices are
of concern to many governments, especially to those that run public health
systems. However, governments that run health systems are monopoly or at least
dominant buyers of drugs. They have overwhelming bargaining power, which they
use to keep down drug prices. Their monopoly buying power encourages producers
also to combine; the degree of concentration in the pharmaceutical industry of
industrial countries is typically high. Their governments accept this; they
treat big local companies as national champions, and often promote their
interests abroad. This type of arrangement has not emerged in India. For one
thing, the state hospital system here is not so large. For another, its
ownership is divided up amongst the central and the state governments, and they
do not present a united front. And finally, central buying and distribution of
drugs would require more efficient administration than India can muster.
That is why the
government defines a set of generic drugs as essential and controls their
prices. But price control has well known defects. It encourages cost-cutting,
which can affect quality adversely; this can be serious in respect of drugs,
whose quality matters. It reduces profits on drugs whose prices are controlled.
The government is well aware of this; that is why it tries to fix the prices on
the basis of costs. That gives manufacturers to inflate costs, and involves the
government in a continuous struggle to monitor costs. And it encourages a
flight from the manufacture of controlled to that of uncontrolled drugs, and a
consequent shortage of controlled drugs.
Despite these
shortcomings, it is not possible to imagine that the government would give up
drug price control; hence the question to ask is whether price control can be
better designed. One obvious option is to get away from the control of
individual drug prices, and instead to control a price index of essential drugs
– to lay down how much it can increases annually. An index can be applied only
to suppliers who can supply the entire range of essential drugs. Hence it could
be used only if the government imposed on every large manufacturer the
obligation to supply the entire range of essential drugs. He would not have to
manufacture them all; he should be allowed to outsource any part of the supply
he likes.
The same
obligation to supply the range of essential drugs can be imposed on retailers
as well. That may be more appropriate since it is they that sell directly to
consumers. But many retailers would be too small to stock the entire range. One
way would be to restrict the obligation to retailers above a certain size. But
that would create an incentive for retailers to stay below that size.
Still, essential
drugs could be made universally available if general stores were allowed to
sell them: they would only have to give part of their shelf space to drugs, and
could use drugs to attract customers. In the United States, the term
‘drugstore’ has come to mean a general store because such stores are allowed to
stock common medicines. That is a concept we should import.
