Government Plans to Cap Drug Prices at First Point of Sale

The government is considering a proposal to make essential medicines more affordable by capping prices at the first ‘point of sale’ rather than retail price, according to a report in the Economic Times newspaper. The move is intended to curb margins offered to hospitals, distributors and doctors to push particular brands.

In a proposal submitted to the Prime Minister’s Office, Niti Aayog suggested tweaking the current price fixation mechanism “to check exorbitant prices” of essential medicines. Market and institutional data such as costs at central, state and private hospitals will be used to arrive at ceiling prices.

At present, the government caps prices of essential drugs based on the average ‘price to retailer’ of all brands of any particular medicine with at least 1% market share. This price includes all trade margins, except for the retailer margin, which is fixed at 16% and added to the ceiling price to arrive at an MRP.

While the wholesaler’s margin is also fixed at 8% under the current pricing mechanism, it is usually not closely monitored as it is inbuilt in the ‘price to retailer’ – used for calculating ceiling price which, Niti Aayog says, is an opaque procedure that lends to profiteering.

Niti Aayog proposed to use ‘average price at the first point of sale’, or price to the stockist, wholesaler, distributor or hospital for calculation of ceiling price and fixing a total trade margin of 24%, which can be added to the ceiling price to arrive at MRP.

Drug-makers currently have the leeway to change prices by tweaking trade margins given to distributors and retailers. This also includes hefty expenses on marketing and promoting drug brands among hospitals and doctors.

Currently, the government directly controls prices of over 850 essential medicines by capping their prices. Around 17% of the more than Rs. 1-lakh crore domestic pharmaceutical market is under direct government price control. By volume, the government regulates 24% of all medicines sold.