India up for a trade war over price control, but there’s a Plan B

With this development, the timing of the Niti Aayog’s alternate price control policy has become curiouser. The discussion to change the price control policy has been doing the rounds for about a year, says a representative of an American industry body. But the government chose this month to share the proposed policy because the pressure from the US is mounting, he adds.

It all began in October, last year. The global medical device association AdvaMed, headquartered in Washington DC, filed a petition with the USTR. AdvaMed, which represents medtech majors such as Abbott, Boston Scientific Corporation, Medtronic and BD, asked the USTR to withdraw trade benefits that the US accords to Indian industries. This was followed by eight months of conversations, meetings and letters between the Indian Government, US President Donald Trump, industry bodies and the USTR. All of this culminated in the 19 June public hearing.

Now, all that is left is the USTR’s decision. This could take anywhere from three months to over a year, depending on how strongly the two countries stick to their guns. The Government of India, for its part, has suggested that it will drag the US to the World Trade Organisation because it has the right to make devices accessible to the poor. Battle lines drawn, the dispute threatens to turn into a trade war.

The new price control policy could defuse this ticking time bomb. It is the lifeline on which the future of the $5.2 billion Indian medical device sector—growing at 15.8% each year—rests, as over two-thirds of India’s medical devices are imported, and the majority of those are from the US. With the government intending to buy medical devices on a large scale for expanding healthcare under its ambitious Ayushman Bharat programme, it is hopeful that this new price control approach can get medtech multinationals to continue selling quality products in India.

The new policy is touted as a new chapter in price control policy-making, a hopeful new direction for the industry and the government. But can the government bring device manufacturers back to the table?

The fourth wave of price control

The first wave of price control was meant for essential drugs. The prices of popular devices, namely stents and knee implants, were controlled in 2016 and 2017, respectively. This was the second wave of price control. After these, now state governments have begun controlling medical procedure costs, marking a third wave. This latest policy, marks the fourth.

To ensure its success, the government is taking a consultative rather than an autocratic approach to drafting this policy. Indeed, the document released by the Niti Aayog asks the industry to choose from three different forms of ‘rationalising margins’ on medical devices. Industry stakeholders have been presented with the the following options:

  • MRP = Price at the first point of sale + percentage of trade margins (as decided by the government)
  • MRP = Landed cost + percentage of trade margins (as decided by the government)
  • MRP = Landed cost + markup due to services rendered (as declared by the manufacturer) + percentage of trade margins (as decided by the government)

Of these three, MNCs have unanimously backed the first option. For the new policy to work, the government must rationalise trade margins at the first point of sale, says a senior executive at a London-based device manufacturing company with a significant presence in India.

Some serious claims!

In 2016, the government’s own committee had suggested this very approach. The senior executive sees this as a ‘win-win’. It brings down the price of the device but it does not force a manufacturer to incur losses as the margin, rather than the price, is capped for every product. The policy is more nuanced than a one-size-fits-all, he says. As is evident in the graph above, the price of the device under the proposed policy diminishes significantly, thereby squeezing the margins earned by the hospitals rather than medical device manufacturers.

The Medical Technology Association of India (Mtai) represents the likes of Boston Scientific and Johnson & Johnson, who sell stents and knee implants in India, is also convinced (see graph below). Mtai, in a 19 June press release, notes that these MNCs do not favour any formula based on the landed cost as these formulas depends on the transfer price—the price at which the devices are transferred internally from the parent company to its subsidiary. The executive quoted above refers to the landed cost of a product as a gift that a father gives to his son, since it is determined internally by the parent company. It should not be the basis for calculating margins, he insists.

 

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