Drug Price Control Orders (DPCO)
Drug Price Control Orders (DPCO) are issued by the Government, in exercise of the powers conferred under section 3 of the Essential Commodities Act, 1955, for enabling the Government to declare a ceiling price for essential and life saving medicines (as per a prescribed formula) so as to ensure that these medicines are available at a reasonable price to the general public. The latest Drug Price Control Order (DPCO-2013) was issued on 15.05.2013.
Price controls are applicable to what is generally known as “Scheduled drugs” or “Scheduled formulations” that is, those medicines which are listed out in the Schedule I of Drug Price Control Order (DPCO), issued by the Government of India from time to time. (It may be noted that the use of the word “Scheduled drugs” is a legacy of the DPCO-1995. The latest DPCO 2013 only uses the word “Scheduled formulation” to refer to medicines in its first schedule since some of the bulk drugs when used as a single ingredient also act as a formulation. Hence, generally these medicines are referred even now as “scheduled drugs” from the perspective of price regulation). Since 2013, scheduled formulations consist of the “Essential Medicines” declared so by the Government through its National List of Essential Medicines (NLEM). In fact, Schedule I of DPCO-2013 is the NLEM-2011 list. Thus, NLEM forms the basis of deciding which medicines should come under price control via DPCO. Any formulation based on combination of any one of these drugs appearing under NLEM can be subject to price fixation. In the earlier DPCOs (those prior to DPCO-2013), NLEM was not taken into consideration for price fixation or price monitoring. Further, in the earlier DPCOs, only the bulk drugs were mentioned in Schedule-I and prices were fixed by the Government for both bulk drug as well as formulations based on any of these bulk drugs.
Since 2013, all essential medicines (as defined under NLEM) are treated as scheduled formulations (under DPCO-2013). However, it does not mean that all drugs brought under price control are essential medicines. As per Para 19 of the DPCO-2013, the Government may, in case of extra-ordinary circumstances and in public interest, fix the ceiling price or retail price of any drug, whether scheduled or non-scheduled or a new drug for such period, as it may deem fit. It also has powers to revise (either increase or decrease) the ceiling price or retail price of the drug which is already fixed and notified, irrespective of annual wholesale price index for that year (based on which companies are automatically permitted under DPCO to revise the prices annually).
Price controls are applicable irrespective of whether it is generic or branded.
National Pharmaceutical Pricing Policy (NPPP) is the policy governing price control and DPCO is the order by which price control is enforced. The Drug Price Control Orders are issued by Ministry of Chemicals and Fertilisers, which is the main nodal administrative ministry for pharmaceutical companies. They are issued under the “Essential Commodities Act 1955 whereby certain medicines could be declared to be essential commodities.
The latest Drug Price Control Order (DPCO-2013) was issued by the Ministry of Chemicals and Fertilisers on 15.05.2013 on the basis of National Pharmaceutical Pricing Policy, 2012 (NPPP), issued on 07.12.2012 for fixing the ceiling price of medicines contained in the National List of Essential Medicines -2011 (NLEM-2011), issued by Ministry of Health and Family welfare.
Under the latest DPCO 2013, the prices of 348 drugs appearing in the National List of Essential Medicines-2011 covering around 628 formulations have been brought under the purview of price control.
Drug prices are monitored and controlled by the National Pharmaceutical Pricing Authority (NPPA). All the powers of Government of pricing according to Essential Commodities Act have been delegated to it. Under DPCO, 2013 the powers to review are vested with the Government. Hence, the Department of Pharmaceuticals is the reviewing authority whenever pharmaceutical companies file review petitions against any price fixation done by NPPA. (Orders issued by Department of Pharmaceuticals on various review petitions may be seen here.) Policy related matters are also dealt by the Department of Pharmaceuticals.
It is pertinent to note that the Drugs & Cosmetics Act, 1940 and Rules made thereunder administered by the Ministry of Health and Family Welfare do not contain any provisions for pricing of drugs. Instead, pricing of drugs is administered under the provisions of the Drug Price Control Order (DPCO) and National Pharmaceutical Pricing Policy by the National Pharmaceutical Pricing Authority (NPPA) under Department of Pharmaceuticals, Ministry of Chemicals and Fertilisers.
Medicine prices fixed by NPPA may be seen here.
Policy governing drug price control
The National Pharmaceutical Pricing Policy-2012 which governs the norms for drug price control was notified on 07.12.2012. The objective of National Pharmaceutical Pricing Policy-2012 (NPPP-2012) is to put in place a regulatory framework for pricing of drugs so as to ensure availability of required medicines – “essential medicines” – at reasonable prices even while providing sufficient opportunity for innovation and competition to support the growth of pharma industry, thereby meeting the goals of employment and shared economic well-being for all.
The NPPP, 2012 envisages regulation of the prices of formulations only, identified on the basis of essentiality of drugs. Further, the basis of fixing the ceiling price of formulations has been changed from cost based to Market Based Pricing (MBP) in NPPP-2012. Thus, as per NPPP-2012, the three aspects of the regulation of prices of drugs are as follows:
Regulation of drug prices is on the basis of:
- essentiality of drugs as specified under National List of Essential Medicines (NLEM)-2011: Price of medicines is fixed because they are considered essential. This was done to abide by the Supreme Court’s ruling which, inter alia, had directed the Government to consider and formulate appropriate criteria for ensuring essential and life saving drugs not to fall out of price control. (earlier policy was based on market share criteria, whereby prices were brought under control if there could be possibilities of monopoly and cartelization, given the market share of companies producing it).
- regulating the prices of formulations only (i.e, medicines used by consumers and not applicable to any upstream products such as bulk drugs or intermediaries), as opposed to regulation of both bulk drugs and their formulations under DPCO-1995. Thus, even though the NLEM-2011 list contains 348 drugs with various dosages/ strength, any formulations based on combination of any one of these drugs can be subject to price fixation.
- fixing the ceiling price of formulations through Market Based Pricing (MBP) as opposed to cost based pricing in DPCO-1995 as it is easy to obtain price data than cost data. (However, a provision was proposed in August 2014 to revise the prices of medicines, if the input cost rises substantially due to more than 25% increase in the price of the bulk drug or active pharmaceutical ingredient. This is yet to be implemented).
The detailed rationale behind adoption of these three principles may be seen from NPPP-2012.
As per the provisions of NPPP-2012, all the manufacturers/importers manufacturing/importing the medicines as specified under NLEM-2011 will be under the purview of price control. Such medicines will have a maximum retail price (MRP) equal to or lower than the ceiling price (plus local taxes as applicable) as notified by the Government for respective medicines.
As per the provisions of DPCO-2013 ceiling prices are now being fixed at the average retail price of the medicine, produced by all those companies engaged in its production with a market share of ≥ 1% of the total market turnover, and adding 16% margin to the retailer thereto. All the previous DPCOs, 1970, 1979, 1987 and 1995 were based on cost to manufacturers with allowance for post manufacturing expenses.
No person is authorized to sell any scheduled formulation (medicine) to a consumer at a price exceeding the price notified by the NPPA under DPCO-2013. Ceiling price of scheduled formulations (meaning any formulation (medicine), included in the First Schedule whether referred to by generic versions or brand name) is revised on the 1st of April every year on the basis of wholesale price index (WPI) of the previous year. No prior approval of the Government in this regard shall be required as per DPCO-2013. However, manufacturers who wish to avail themselves of the revised ceiling price have to send intimation to the NPPA within 15 days of such revisions. In case of decline in wholesale price index, a corresponding reduction in the prices shall be made. While fixing the ceiling price, 16% margin is allowed to the retailers. In any case, MRP at no point in time can exceed ceiling price plus local taxes.
For non-scheduled formulations (medicines not under price control) there is no control over the launch price. (An internal guideline issued on 29.05.2014 had attempted to outline a methodology for fixing launch prices of non-scheduled formulations but it was withdrawn on 22.09.2014). In respect of non-scheduled medicines, manufacturers are allowed to increase maximum retail price (MRP) by 10% annually. In that sense, while essential medicines are subject to absolute price controls in the form of ceiling prices, the non-essential or non-scheduled medicines are subject to a managed price increase or a ceiling on price changes.
The ceiling price calculated and notified by the Government is applicable to imported formulations also.
Fixing of ceiling prices
A. ceiling price of a scheduled formulation
The ceiling price of a scheduled formulation of specified strengths and dosages as specified under the first schedule is calculated as under:
First the Average Price to Retailer of the scheduled formulation is calculated.
Average Price to Retailer, P(s) = (Sum of prices to retailer of all the brands and generic versions of the medicine having market share more than or equal to one percent of the total market turnover on the basis of moving annual turnover of that medicine) / (Total number of such brands and generic versions of the medicine having market share more than or equal to one percent of total market turnover on the basis of moving annual turnover for that medicine.)
Thereafter, the ceiling price of the scheduled formulation i.e. P(c) is calculated as below:
P(c) = P(s).(1+M/100), where P(s) = Average Price to Retailer for the same strength and dosage of the medicine as calculated in step1 above. M = % Margin to retailer and its value =16
There is no specific mechanism available in the DPCO, 2013 to check the difference between the actual cost of production and the retail price of medicines.
Ceiling price of a scheduled formulation in case of no reduction in price, due to absence of competition or cartelisation of a few players, is fixed by making certain adjustments as suggested in the DPCO.
B. Ceiling price of a new drug
The price to retailer of a new drug, not available in domestic market, is fixed by the Government with 16% margin on the principles of “Pharmacoeconomics” (a scientific discipline that compares the therapeutic value of one pharmaceutical drug or drug therapy to another) of the new drug and on the recommendation of a Standing Committee of Experts. (Here new drug refers to a formulation launched by an existing manufacturer of a drug of specified dosages and strengths as listed in the NLEM by combining the drug with another drug either listed or not listed in the NLEM or a formulation launched by changing the strength or dosages or both of the same drug of specified dosages and strengths as listed in the NLEM.)
A new formulation which is under patent would be exempted from the application of DPCO for the first five years since the commencement of commercial production.
C. Ceiling price changes in non-scheduled formulations
The prices of ‘non-scheduled’ formulations are not fixed by NPPA. There is no control on the launch price of the non-scheduled formulations. NPPA, however, regularly examines the movement in prices of non-scheduled formulations. The monthly market turnover reports of IMS Health (a US based company that provides information, services and technology for the healthcare industry) and the information furnished by individual manufacturers are utilized for the purpose of monitoring prices of non-scheduled formulations.
As per DPCO-2013, manufacturers are not allowed to increase the prices of non-scheduled formulations exceeding 10% per annum. In case, a company increases the prices of non-scheduled formulations beyond 10%, the specific cases are taken up by NPPA with the respective companies for rolling back the increase within the limit of 10%. In case, a company does not comply with the instructions as above, NPPA initiates the process for capping the increase in the prices upto a ceiling of 10% by fixing the price of respective formulations pack/ medicine.
Why price control?
As per WHO estimates, the economic impact of pharmaceuticals is substantial -- especially in developing countries. While spending on pharmaceuticals represents less than one-fifth of total public and private health spending in most developed countries, it represents 15 to 30% of health spending in transitional economies and 25 to 66% in developing countries. In most low income countries pharmaceuticals are the largest public expenditure on health after personnel costs and the largest household health expenditure. And the expense of serious family illness, including drugs, is a major cause of household impoverishment. Despite the potential health impact of essential drugs and despite substantial spending on drugs, lack of access to essential drugs, irrational use of drugs, and poor drug quality remain serious global public health problems:
India is among the countries with the highest Out Of Pocket (OOP) expenses on health care. Expenditure on drugs constitutes over 67% of out of pocket expenditure on health care (NSSO 68th Round 2011-12). High Level Expert Group Report (HLEG) on Universal Health Coverage (UHC) for India recommended that an increase in the public procurement of medicines from around 0.1% to 0.5% of GDP would ensure universal access to essential drugs, greatly reducing the burden of out-of-pocket expenditures and increasing the financial protection for households. As per WHO study estimates, about 65% of the Indian population lacks regular access to essential medicines. This is a paradox given that India is one of the largest manufacturers and suppliers of generic drugs to the world.
Branded medicines are generally costlier than generic medicines even though their effectiveness remains the same, given the standardized procedures for its manufacturing. Annual Report 2014-15 of Department of Pharmaceuticals points out some instances of such price differentials where certain branded medicines comes at 17 times costlier than the generic versions. In some cases, prices have dropped by almost one-third in certain states when publicly procured through an open tendering, indicating the super normal profit margin available to manufacturers in these cases.
Moreover, doctors hardly prescribe medicines by generic names, but by brand. In some states, instructions were issued that doctors should prescribe by generic names only. But this has not brought relief to the consumers/ patients since the chemist would give him/her a list of brands with the same chemical / generic name and ask him/her to choose. In the process they end up buying the costliest brand because of the notion that ‘the costlier the better’.
This is not to say that price regulation is the best solution in the present context. As is the case with any price regulation, some companies try to get around price regulation by registering their brands as nutraceuticals and declaring that these are not medicines! Also, there have been many instances when firms have resorted to changing their formulations by using derivatives of the scheduled drugs/ formulations (raw material) for escaping price regulation. Under DPCOs, particularly during the earlier DPCOs when the bulk drugs prices were fixed alongside their related formulations, some companies either stopped producing the particular formulation or started producing only for export destinations. All these point to the complexities involved in regulation of pharma pricing. However, given the asymmetry of information and the essentiality of the medicines, price controls are resorted to. This was also justified by the Supreme Court of India.
As mentioned in NPPP-2012, Government has resorted to a regulatory framework for pricing of drugs so as to ensure availability of required medicines – “essential medicines” – at reasonable prices even while providing sufficient opportunity for innovation and competition to support the growth of industry, thereby meeting the goals of employment and shared economic well being for all.
As per the estimates given in NPPP-2012, Indian Pharmaceutical industry is, globally, the 3rd largest producer of medicines by volume yet 14th in terms of value. The lower value is due to the fact that Indian medicines are amongst the lowest priced in the world. However, despite this, medicine costs continue to be an important component in the overall medical expenditure in the country, given the low purchasing power of the citizens.
There are 628 formulations specified in the first schedule of DPCO, 2013 as in September 2015, covering 27 therapeutic groups including medicines used in the treatment of Cancer, Tuberculosis, Diabetes, Cardiac disease, vaccines etc.
Significant reduction in prices have been effected on the medicines notified under DPCO, 2013 as compared to the highest price prevailed prior to the announcement of DPCO, 2013. Ceiling prices have been formulated for more than 84% of the medicines enlisted in the Schedule I of DPCO-2013. NPPA has also notified 139 retail prices of new drugs on request of the manufacturers till 31st December, 2014. Around 108 non-scheduled drugs were also brought under price cap using the exceptional powers granted under para 19 of the DPCO-2013. Prices of 127 drugs have reduced over 40% after the enforcement of DPCO, 2013 as per the Annual report of Department of pharmaceuticals 2014-15. Around 509 medicines in total have benefitted from price decrease.
Pharmaceutical companies had gone to the court against price controls. However, there has been no stay order on the reduced prices.
As reported in a press release dated 25 June 2015, over 10,000 manufacturers are making over one lakh formulations in the country. Every pharmaceutical company has to file a Form every quarter according to the Integrated Pharmaceutical Database Management System. (Integrated Pharmaceutical Database Management System is a Pharma Price Data bank that is used by pharma manufacturers/marketing/ importer/ distributor companies to make online submission of mandatory information/data as prescribed under the Drugs Price Control Order, 2013. Facility for submitting application for price fixation of new drug is also available.) More than 600 companies are already filing these forms. Through these forms Government will be monitoring their quantity, quality, price and all the parameters. As on date, the Government of India is working on setting up of a Price Monitoring Resource Unit in each State.
NPPA monitors shortages and availability of drugs on the basis of monthly reports received from State Drugs Control Administration and also complaints, if any, received from individuals. On receipt of such reports, NPPA immediately takes up the matter with the concerned manufacturer and advice them to rush the stock in the affected area. NPPA is also operating a portal “Pharma Jan Samadhan” that registers complaints about shortage or overcharging for medicines. Further, any manufacturer of scheduled formulation intending to discontinue any scheduled formulation from the market is required to issue a public notice and intimate the NPPA in a specified format as per DPCO, 2013. NPPA is empowered to direct the manufacturer to continue with required level of production or import for a period up to one year, in the public interest.
A number of drug companies have been found to be selling scheduled medicines at a higher price to the consumers. In such cases NPPA initiates action for overcharging based on the report from State Drug Controllers (SDCs), complaints from individuals, verification of prices list submitted by companies and suo moto purchase of samples of scheduled packs. In case, a company is found selling the schedule drugs / formulations at a price higher than the prices fixed by NPPA / Govt., appropriate action is initiated against them by NPPA for recovery of the overcharged amount.
The overcharged amount is recovered from the companies along with interest @ 15% per annum on outstanding amount. If the company fails to deposit the amount, the matter is referred to Collector concerned for recovery of the amount on arrears of land revenue under Essential Commodities Act, 1955. Since inception of NPPA (August 1997), over a thousand of such demand notices have been issued. Recovery from such instances is detailed in the Annual Reports of Department of Pharmaceuticals.
History of Price Control Policy
A history of drug price control policy is given in NPPP-2012.
Price control over drugs was first introduced in the country in the aftermath of the Chinese aggression with the promulgation of the Drugs (Display of Prices) Order, 1962 and the Drugs (Control of Prices) Order, 1963. These were promulgated under the Defence of India Act. With these orders, the prices of drugs were frozen w.e.f. the 1st April, 1963.
Thereafter, a series of price control regimes were notified through various Orders in the country from time to time based on different principles, in which the span of control of prices as well as the nature of control of prices varied from Order to Order as per the disposition of the respective Drug Policies. These were the Drugs Prices (Control) Order of 1966, the Drugs Prices (Control) Order of 1970 ‐ issued under the “Essential Commodities Act 1955 by declaring drugs to be essential commodities under the EC Act, 1955.
Thereafter the Drugs Prices (Control) Order of 1978, Drugs Prices (Control) Order, 1979 and Drugs Prices (Control) Order, 1987 were issued following the declaration of the Drug Policy, Drug Policy, 1979 and Drug Policy 1986. All these Policies were broadly based on the principle of effecting control over prices of essential drugs, and later bulk drugs, as well as availability of drugs while at the same time attending to the requirements of the indigenous industry for growth, cost effective production, innovation and strengthening of capacity.
The Drug Policy of 1994, as implemented through the Drugs Prices (Control) Order, 1995, was introduced in the context of the liberalization of economy and the abolishment of industrial licensing, as well as allowing of foreign investment in the country, including in the drug industry. The principle for price control broadly adopted in this policy represented a radical departure from the earlier policies. This envisaged control over prices on the basis of drugs on the basis of economic criteria as represented in the market share of different companies in the context of total market sales turnover of various drugs. Thus, those drugs were brought under the ambit of price control, where the company turnover was of a particular level and where the market share of leading producers was beyond a particular level. The control over prices was to be on the basis of the cost of production with allowance being given for post production expenses. As per the criteria of 1994 Policy, a list of 74 bulk drugs was identified and these drugs as well as the formulations based on these drugs (around 1577 in number) were brought under the price control regime. Certain exceptions such as for small scale units, drugs produced through indigenous research and development, etc were envisaged for exemption under the Policy.
In the year 2000, further liberalization in the economy was effected, in light of which, Foreign Direct Investment (FDI) in the pharmaceutical sector was brought in the automatic route and the limit raised upto 100%. Following this, a new pharmaceutical pricing policy was introduced in the year 2002 which further liberalized the span of control over pricing. The turnover limit for purposes of price control was raised from Rs. 4 crores to Rs. 25 crores and the parameters of market share were also relaxed further. All drugs where unit price did not exceed Rs. 2.00 were also excluded from the ambit of price control. There were also exemptions given for drugs developed through indigenous R&D, New Delivery Systems etc.
The 2002 Drug Policy was, however, challenged in the Karnataka High Court, which by order dated 12.11.2002 issued stay on the implementation of this Policy. This order was challenged by the Government in the Supreme Court which vacated the stay vide its order dated 10.03.2002 but observed that govt shall consider and formulate appropriate criteria for ensuring essential and life saving drugs not to fall out of the price control and further directed to review drugs, which are essential and life saving in nature till 2nd May, 2003”.
In the light of the order of the Supreme Court, it was decided that a fresh Pharmaceutical Pricing Policy be formulated and accordingly, the 2002 Drug Policy was never implemented and the 1994 Drug Policy continued to be applicable.
Meanwhile, in accordance with the guidelines of the Supreme Court, the Ministry of Health revised the List of medicines in the National List of Essential Medicines (NLEM) earlier notified in 1996. The revised list was notified as NLEM, 2003. In November, 2004, the Government also set up a Task Force under the Chairmanship of Principal Advisor, Planning Commission, Dr. Pronab Sen to look into the issue of price control, options other than price control, and other issues and to make recommendations for making available life saving drugs at reasonable prices. The basis of drugs to be considered was the NLEM, 2003, being the latest list at that time. The Pronab Sen Committee submitted its recommendations in September, 2005. In 2011 the Ministry of Health revised the NLEM and notified the new NLEM, 2011.
The various drug policies adopted from time to time have tried to cope up with the challenge of striking a balance between the at times varying requirements of enabling industry to grow and at the same time ensuring affordable and reasonably priced medicines to the consumers, particularly the poorer masses. This balancing of diverse and conflicting interests is indeed a difficult task, as is the reconciling of short term interests with long term goals and concerns.
The Government is therefore seized with the goal of enabling industry growth with attendant socio‐economic benefits along with balancing the declared objective of providing better health care including making available essential medicines at reasonable prices to all.
A need was felt to revise the Drug Policy, 1994 to meet the challenges brought about by the competitive international pharmaceutical industry in a globalised economic environment, as much as meeting the country’s requirements for safe and quality medicines at reasonable prices. Therefore, the Government enunciated the National Pharmaceuticals Pricing Policy, 2012 (NPPP-2012) which replaced the Drug Policy enunciated in September, 1994.
- Essential Medicines
- National List of Essential Medicines of India -2011
- Essential Commodities Act
- National Pharmaceutical Pricing Authority
- National Pharmaceutical Pricing Policy 2012
- Drug Price Control Order- 2013
- Press release of Ministry of Health and Family welfare dated 19 March 2013
- Annual report of Department of pharmaceuticals 2014-15.