Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
SHARE:
CONCEPT – TRADE MARGIN RATIONALISATION (TMR)
Read more on - Polity | Economy | Schemes | S&T | Environment
- Indian govt. recognises : The government's recognition of trade margin rationalization for medical devices as a fair and balanced approach to ensure reasonable prices to consumers was welcomed by many. Under the proposed TMR regime, manufacturers would be allowed to offer a limited price margin for the entire trade channel.
- Five factors determine cost : 5 key factors determine the cost of a medical procedure - Cost of device/implant, doctor fees, room rent, drugs and consumables, and diagnostic/hospital charges. As on date, the most focus is only on the first factor. (This is perhaps the real reason behind restricted access to angioplasty treatments in India)
- Need more competition in medical : There is a need to balance "access and affordability" by inducing more competition. Successful licensing mechanisms, including medicine patent pool or tiered pricing models, which maximise public health benefits are reliable alternatives we have. Based on the Department of Pharmaceuticals’ Report of the Committee on High Trade Margins in Sale of Drugs, 2016, there seems to be some consensus towards adopting a solution around trade margin rationalisation (TMR).
- 'Price to Trade' : This is an important element in rationalising trade margins and there should be an equitable framework for ascertaining the Price to Trade for both importers and local manufacturers. The government may want to calculate the Price to Trade for domestically manufactured medical devices and imported medical devices differently.
- Landed Cost concept : Some suggest that the 'Landed Cost' (the price of a device after customs clearances in India) should be considered for the trade margin calculation for imported products, while simultaneously advocating that in case of domestic manufacturers' the first sale to the distributor should be the starting point for calculation of trade margin. The term 'Ex-Factory Cost' and 'first sale to distributor' are used interchangeably. The correct definition of Ex-Factory Cost as defined by the erstwhile Drug Price Control Order, 1995 is standard manufacturing costs. The Ex-Factory Cost leaves a lot of scope for manipulation of costs, lending a free hand to local manufacturers to escalate prices by manipulating costs. By definition and impact, Ex-Factory Cost is different from 'first sale to distributor' and should be treated as such.
- How to do it logically : Logically, a comparable base for calculating margins for both foreign and domestic manufacturers would be the first commercial sale to an unrelated third party (Distributor/Stockist) in India. The location of the 'First Point of Sale' in case of imported medical devices is still a confusing issue, and NITI Aayog has issued a Concept Note to seek comments from all.
- More on landed costs : Landed Cost is an overly narrow and unfair framework which does not consider a foreign firm's numerous expenses in India such as training clinicians, providing technical support, financing sales and collection costs, paying corporate taxes, and other normal expenses for developing and serving the market in India. The Department of Pharmaceuticals has looked at Landed Cost as the basis for trade margin rationalization but it abandoned this approach recognizing that it did allow for sufficient value generation. Fixing trade margins on Landed Cost to arrive at Price to Trade will kill the innovators and hurt the patients alike.
- The best approach : The approach developed by the Department of Pharmaceuticals in its 2016 Report on High Trade Margins is by far the most practical methodology to usher in better transparency in pricing medical devices leading to more accessibility and affordability. Implementation of this Report would not only allow medical device companies to continue innovating but also tackle excessive mark-ups that distort the market and unnecessarily burden Indian patients. If the Indian government decides to set different starting points for foreign and domestic manufacturers, specifically applying Landed Cost for foreign manufacturers while allowing the Price to Distributor for domestic producers, it would be discriminatory (some claim).
- Imposing TMR : It involves imposing a cap on upstream margins across the entire value chain, rather than imposing caps on prices of products downstream. This would certainly be a game-changer if implemented in the right way, and at the right time. The Department of Pharmaceuticals report observes that high trade margins enjoyed by distributors, hospitals or retailers are the main reason for cost escalation of drugs and devices. Based on this, the report suggests capping trade margins (the difference between price to distributors and retail price) at 50% for medical devices, whether produced domestically or imported.
- Trade margin is the difference between the price at which the manufacturers (indigenous /overseas) sell to trade and the price to patients (MRP). The market place is skewed where suppliers induce hospitals to buy and push their brands based on profit margins and not on basis of cost savings on the procurement cost by a hospital. The main aim of rationalisation of trade margins in medical devices should be to help consumers. It must also allow rationalised profits for traders, importers, distributors, and wholesalers and retailers and create equity for domestic industry vis-à-vis foreign manufacturers. There should be clear objectives for any policy intervention so as to avoid distress (to consumers), distrust (in industry) and disruption (to market).
- More on landed costs : The Government may consider to cap trade margins along entire supply chain of devices at a maximum of 85 per cent. This will help in reducing MRP of medical devices to less than half of the current prices while not being unreasonably detrimental to traders and hospitals. Additionally, manufacturers will be encouraged to attract clients on competitive features and hospitals will start buying on evaluating cost of purchase and quality, instead of considering margins to be made on higher MRP.
- Price controls can be done in a calibrated manner through:
- One per cent Goods and Services Tax (GST) on MRP as a tax-based disincentive;
- Capping trade margins to a rational level;
- Price caps on few priority devices.
* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.
COMMENTS