case-of-price-controls-in-case-of-essential-medicines

Context: National Pharmaceutical Pricing Authority (NPPA) recently allowed pharmaceutical companies to increase the price of essential blood thinner heparin by as much as 50 per cent .

More on the news:

  • This comes when heparin is among those essential medicines that are needed for combating the ongoing Covid-19 pandemic.
  • This hike is contrary to the past trend. As earlier the government had aggressively capped the prices of several drugs.
    • The number of drugs under price control has steadily increased from just 74 in 1995 to 860 in 2019.
    • Over the past few years, the NPPA has aggressively capped the prices of several drugs and medical supplies, starting with slashing the prices of coronary stents by 80% in 2017.
  • However, Heparin is only the latest example in more recent trend of price increases
    •  The first time NPPA increased the prices of medicines that were under price control was in December 2019.
      • At that time it hiked the prices of 21 drugs, which were integral to public health programmes, by 50 per cent. 
      • These drugs were often used as the first line of treatment and included the BCG vaccine for tuberculosis, vitamin C, some antibiotics, the anti-malarial drug chloroquine and leprosy medication dapsone among others.

Why is the government raising prices smack in the middle of a health crisis?

  • Scarcity of raw materials:
    • The NPPA said that there is a scarcity of the inputs required to make these medicines.
    • Scarcity implies higher costs of manufacturing, which, in turn, necessitates higher prices.
  • Demand Supply mismatch
    • Prices reflect the current state of supply and demand in an economy and work as an incentive mechanism for producers to produce more when prices rise and for consumers to consume more when prices fall.
    • The implicit logic is that allowing the prices of these drugs to rise will address that scarcity and, thus boost supply.
  • Removing unintended consequences of price capping
    • If you fix the price of a particular good as a producer you are likely to cut costs, use inferior quality inputs.
    • If prices are capped at lower levels there will be endless queues and massive wastage of time.
    • A price cap also destroys any incentive to put the scarce resource to best use.
  • Capping prices may also have adverse impact
    • A 2005 National Bureau of Economic Research paper found that 
      • “Cutting prices by 40 to 50 per cent in the United States will lead to between 30 and 60 per cent fewer R and D projects being undertaken in the early stage of developing a new drug”
    • The process of discovering cures and making medicines follows the same laws of economics and markets that making a new car design does. 
    • If anything, the chances of failure in the pharma industry could be higher and the process far more demanding in terms of monetary and time investment required to be successful.
    • So capping medicine prices might provide immediate relief but it also has an adverse impact.

Conclusion

  • Instead of capping prices, governments should realise that high prices show a demand-supply mismatch. 
    • A crucial reason why private hospitals are able to charge exorbitant prices — for drugs, tests or beds is that there is inadequate public healthcare provisioning.
  • If governments invested in public healthcare and bought the essential medicines in bulk, they would have a better chance of making healthcare affordable without distorting the market.

About National Pharmaceutical Pricing Authority (NPPA)

Establishment

It was constituted by the Government of India Resolution in 1997.

Ministry

It is an attached office of the Department of Pharmaceuticals (DoP), Ministry of Chemicals & Fertilizers .

 

Functions

It is an independent Regulator for pricing of drugs and to ensure availability and accessibility of medicines at affordable prices.

NPPA fixes ceiling prices of essential medicines that are listed in Schedule I of Drug Price Control Orders (DPCO), 2013.