How does the Government Regulate Drug Pricing?

Governments have the power to control and change the cost of drugs being sold in pharmaceuticals.


Regulation of drug prices is a very important aspect when it comes to the pharmaceutical industry. These companies can function relatively unregulated and can raise drug prices beyond inflation rates allowing them to increase revenue despite sluggish demand. This is where the government intervenes with regulation policies which mainly revolve around price controls. Pharmaceutical companies oppose drug pricing reform arguing that lowering the cost of prescription medications will hinder innovation. However, such high surges in drug prices can affect the economic status and health conditions of citizens.

Drug Pricing in the absence of regulations depends on the following factors

Uniqueness

If the market is saturated with the same drugs to treat a certain illness then the price of new drugs innovated for the same illness will be lower. Uniqueness is important when it comes to setting the price.

Competition

The popularity and success of the drug’s competition determine the price of the drug. If the drug provides additional benefits then it will have a higher price.

Research and Development

The amount of time, effort, and money that a pharmaceutical company invests in the R&D for each drug must be weighed when the drug is priced.

Effectiveness

The new drug should be able to change the current way of treatment of the illness like preventing the need for certain medical treatments or surgeries, etc. They should be more effective in treating the illness and saving other costs for consumers.

‘‘

The price ceiling policy in India placed more than two decades ago has led to India having one of the lowest drug prices in the world.

How Governments Regulate Drug Pricing

If drug prices are too high, consumers may not go for it. Health insurance payers may not allow reimbursement and physicians won’t prescribe it. To ensure affordability and a proper healthcare system, the governments initiate price control policies that make drugs cheaper and easily accessible to everyone which is necessary for a country where most of the citizens cannot afford medications.

The price ceiling policy in India placed more than two decades ago has led to India having one of the lowest drug prices in the world. However, the information asymmetry between the buyer and the seller has led to black markets and the selling of spiked drugs. Prices of essential drugs are regulated by the Indian central government under the Essential Commodities Act, 1955.

In 1997, the National Pharmaceutical Pricing Authority was set up to revise prices of drugs, enforce the Drug Price Control Order (DPCO) and monitor the prices of drugs. Today, the DPCO lists 851 drug formulations whose prices can be capped based on certain dosages.

The ceiling price is set as the average price for all brands selling a particular drug with more than 1 percent of the market share. If the price of a drug is below the ceiling price, it can be raised only after a year. Patented drugs or fixed-dose combination drugs are exempted from this policy.

Impact of Drug Pricing

The drug price control policy has led to many pharmaceutical companies going out of production causing substandard and spurious drug manufacturers to thrive in the industry. With poor regulations, there is a trade-off between price and quality leading to several black markets for drugs, selling of fake drugs or dangerous drugs to patients in need. Sale of cap priced drugs reduced while those without any cap increased. Medications for diseases like HIV or cancer are not on the list and hence their drug prices remain sky-high.

However, price controls help poor consumers to opt for a recognisable brand instead of settling for fake medicines. It increases affordability and accessibility for patients across the country. However stricter guidelines and more transparent information about drugs and drug companies are required to ensure an efficient system.

Smruthi Krishnan
Smruthi Krishnan
Smruthi interviews and writes on inspiring entrepreneurs and the success stories of start-ups. She is currently pursuing Economics major from Delhi University.

YOUR VIEW MATTERS

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Disclaimer: The opinions expressed by columnists are their own, not those of Dutch Uncles

If you wish to contribute or have a story suggestion,
email to editor@dutchuncles.in

ALSO READ

Become a Smart Trader of Dalal Street...

India has made gradual progress over the decade in...

This is How 2% Rule in Stock...

In the 4th test of the 2001 Ashes tournament,...

Active or Passive Investment: What’s the Right...

Whether to invest actively or passively has always been...