India is the largest supplier of generic drugs in the world, and Indian pharmaceutical companies have famously succeeded in pushing down the cost of medication in many countries across the world. Yet, too many Indian citizens do not get access to medicines owing to high costs. The preferred solution of the government right now—price control—is suboptimal.
The problem starts with the thin insurance cover that leads to most patients paying for medical expenses out of their pockets after they have been diagnosed with an ailment. The latest National Sample Survey Office (NSSO) survey on healthcare, in 2014, shows that 86% of the rural population and 82% of the urban population were not covered under any scheme of health expenditure support, and that medicines are a major component of total health expenses—72% in rural areas and 68% in urban areas. Healthcare costs pushed 60 million Indians below the poverty line in 2011. Therefore, even a modest drop in drug prices will free hundreds of households from the widespread phenomenon of a medical poverty trap.
The government is aware of the problem, which is why it has been fixing the prices of “essential medicines” for some time, and even medical devices such as stents and knee replacement caps from this year. As this newspaper has argued, price controls have their costs. First, investment in price-controlled medicines has fallen vis-a-vis non-price-controlled ones. Second, while stent manufacturers like Abbott have been denied permission to withdraw their high-end stents from the market, it is also unlikely that high-end, innovative products will be introduced in the market if they’re commercially unviable.
Generic medicines are affordable versions of the drug, introduced after a company loses patent over a medicine. These medicines are sold either by their salt-name or by a brand (called branded generics). For example, Crocin is a branded generic whose active ingredient is paracetamol. A study by the Indian Journal Of Pharmacology in 2011 revealed that the price to the retailer for the branded product of cetirizine was 11 times the price of branded generics by the same company—the price of the generic was Rs2.24 per strip of 10 tablets and that of the branded medicine, Rs27.16. These costs reveal the markup that companies charge for the research, reputation and marketing costs of branded medicines. However, doctors continue to prescribe branded medicines for rational reasons.
In most countries, the generic drug manufacturers have to prove “bio-equivalence”, i.e. the generic medicine works the same way, to the same extent and for the same purpose, as the originally patented drug. The regulations in India until April 2017, oddly, required bioequivalence testing only during the first four years of a drug becoming available for generic production; after four years, manufacturers only need permission from the state licensing authorities that don’t demand the data. The law has changed to require bioequivalence tests for some classes of generic medicines, but its coverage is not universal and enforcement is yet to be evaluated.
This is going to be a challenge because the Central Drugs Standard Control Organization (CDSCO) has been accused of engaging in malpractices such as faking endorsement letters from doctors to secure marketing authorizations, approving drugs without conducting clinical trials, and accepting bribes from companies for fast approval of products. Moreover, the president of the Indian Medical Association (IMA) told The Hindu in April 2017 that there is an inadequate number of drug inspectors—roughly 1,800 for the entire country.
Thus, there are several challenges before generic medicines can become mainstream. First, the poor regulatory regime has dented perceptions about the quality of generic drugs. Second, since generic products don’t advertise—and save costs that way—the good-quality manufacturers are not able to compete with shoddy manufacturers on cost, essentially creating the “lemons problem” by driving the good-quality generic manufacturers to advertise and become branded generics, or exit the market. Third, the incentive to cut costs increases as massive government contracts are allocated to the lowest bidder. That probably explains why over 10% of the medicines in the government supply chain were found to be not of standard quality (NSQ), according to the National Drug Survey 2014-16. The globally accepted NSQ level is only 2%.
The government’s strategy of increasing affordability by reducing compliance costs on the pharmaceutical industry has increased the advertising burden on the good-quality producers. Certification practices, whether by government or a private agency, can mitigate that problem and allow good-quality generic medicine manufacturers to differentiate themselves on a variable other than price.
Cheaper generics are one of the important factors for reducing healthcare cost. The practice of generic substitution is strongly supported by health authorities in many developed countries, where bioequivalence tests are mandatory, to help contain prescription drug spending. These requirements might increase the price of generic medicines slightly, but they will drive poor-quality manufacturers out of the market and allow generics to compete with branded generics.