Decisions taken in the last year by the National Pharmaceutical Pricing Authority (NPPA) seem to suggest that capping market prices have become the go-to solution in India. Imposing price ceilings are far from the panacea they are touted to be. Without catching the drift of long-term implications, unmethodical price regulation will be detrimental to India’s healthcare system. Using price ceilings as a low-hanging policy tool to correct perennial systemic problems in our formal healthcare system is akin to paralyzing the body while treating a sore arm.
Incorrect understanding of what our healthcare sector needs
Countries that have managed to effectively use price ceilings have done so to primarily determine the threshold amount for reimbursement through state co-payment schemes. The problem in our system runs deeper than just a fragmentary co-payment mechanism. Our public healthcare system fails to provide a viable alternative, which is not surprising since India spends more money on road transport and highways than on health of its citizens. Compare 2 percent spending of our GDP on health (and family welfare) with Brazil’s allocation of almost 10 percent of its national income on health.
While the NPPA identified that markups along the supply chain and the presence of information asymmetry in the market leads to high prices of drugs and devices, it could have looked at affordability and access in a holistic manner. In fact, a recent study by the Advanced Medical Technology Association that consists of nearly 300 global medical technology companies empirically found that the price cap on stents neither led to better accessibility of angioplasty procedures, nor affordability for patients bearing out-of-pocket expenses.
We have completely sidelined the issue of timely access to improved equipment and drugs. We should rather create enabling environment for those who are bringing innovative and effective devices in a timely manner to our healthcare market, be it an Indian or a foreign firm. In this regard, videshi bhagao campaign seems to run contrary to the larger vision of Modi government.
However, India is still import-dependent in the technology-intensive segment of the medical equipment industry with 75-90 percent of ‘equipment’, ‘implants’ and ‘patient aids’ being imported, simply because R&D and innovation are not a priority.
A recent study found that cost-containment approaches of policies that focus on static, allocative efficiency may produce favorable outcomes in the short term, but have an overall adverse effect on the innovation potential of the industry. After all the hugely successful and innovative licensing mechanisms, such as the UN-backed Medicines Patent Pool or tiered pricing models, that maximize public health benefits were initiated and propelled by the same firms that are now being pushed out of what was a level-playing field.
The market for medical devices certainly offers huge potential for the Indian industry to tap into. But, to become internationally competitive, mollycoddling has to stop for the industry to see beyond current myopic vision. Indian patients miss out on half of new medicines that are launched in other countries by at least five years.
At best, misguided; at worst, disastrous
A part of the challenge of providing solutions is to get the problem right. There is a need to look at the overall healthcare ecosystem when thinking of solutions. Due to information asymmetry and multiple markups, price ceilings do not tackle the real reasons that contribute to high prices for medical treatment for the end consumer. In fact, it might make more sense to consider price regulation for older technologies that have already been disseminated in the market, rather than distorting the free market for new technologies, thereby putting the lid on the potential for innovation in new medical technologies.
According to the World Health Organization and Health Action International, more than 50 percent of the end price of medicines is contributed by components other than the manufacturer’s selling price. The NPPA’s design of the price-control mechanism is detached from the price build-up. Other than exacerbating the real risk of cutting down supply of medical technologies in the market, price ceilings do nothing to stop several service providers from recouping their lost profit margins from elsewhere. At the end, patients end up paying a higher price of a misguided policy, either through lack of supply in the market, or through higher price of complementary medical services.
Instead of populism, economic evidence should guide policymaking
Unlike profiteering, profitability that is based on legitimate, market-based methods is not a zero-sum game. Profit is a Marshallian surplus, i.e. creation of wealth in the system through market transactions that are mutually beneficial. Policies are meant to ensure that allocation of this surplus is equitable. When creation of market surplus is hindered, there would be no investment, no entrepreneurship, no employment and no opportunity to enhance social welfare in the long run.
It is important to weed out profiteering if it does not result in evident benefits trickling down to end consumers. But, in attempting to do so, if we choose misguided policy measures that kill incentives for innovation, we run the risk of crippling the long-term financial sustainability of the sector and, with it, the opportunity to ameliorate challenges in our healthcare system.