High Out-Of-Pocket Expenditure of 78% Limits Healthcare Spending

Tuesday 10 April 2012, Amsterdam

The report closely scrutinizes the major changes in pharmaceuticals related pricing and reimbursement in the recent past and the impact these changes will have in the future. The health insurance is responsible for facilitating demand by making the high-cost prescription drugs more affordable. Although the per capita income is rising in India, the modest income of most of the population keeps the high cost drugs and medicines unattainable. Drugs would become more costly with the enforcement of product patents and so sales of the expensive drugs depend on the growth and the maturity of the health insurance sector. If the health insurance industry does not mature, the market for patented drugs would experience adverse effects. The next three to five years will see significant growth and change in the Indian health insurance industry as new insurance players and insurance products respond to the increased demand.

They analyzes that the Indian pharmaceutical market is characterized by differences in prices for the same product and high profits, apart from marketing and the selling of unnecessary combinations. Drug pricing is an important issue confronting the Indian government. Due to intense competition, the drug prices are already the lowest in the world. The government should take a holistic view of healthcare costs and pursue a broader set of initiatives to ensure the access and affordability of the medicines to the common people.


High Out-Of-Pocket Expenditure of 78% Limits Healthcare Spending

See figure: Pricing and Reimbursement in India, Healthcare Expenditure in India, 2010

The figure depicts the breakdown of healthcare expenditure in India, in 2010. Out-of-Pocket (OOP) expenses account for 78% of the total healthcare expenditure followed by government spending at 20%. The insurance sector accounts for 2% of the healthcare expenditure in India. India’s per capita healthcare expenditure is low due to its billion-plus population and low per capita
income.


Reference Pricing can be Adopted for Generic Products and “Me-Too” Branded Products

One of the major reasons behind the increasing popularity of reference pricing is the increasing pressure felt by the reimbursement agencies for healthcare expenditures. Reference pricing allows a country to set minimum possible rates for a particular drug. It is generally adopted for generic products and “me-too” branded products for which comparable references are present in other geographical regions. Innovative products are generally excluded from reference pricing.

The National Pharmaceutical Pricing Authority (NPPA) has asked the government to negotiate the prices of patented medicines used by a central agency, based on a reference pricing system. The central agency should estimate the market potential of new patented drugs and negotiate their prices based on market levels where the purchasing power parity (PPP) and the per capita income of the people of India are comparable. A reference price should then be set based on the average or the lowest of the reference countries’ prices.


Annual Turnover and the Demand of a Drug are the Main Rationale to Fix the Price of a Drug

The annual turnover helps in identifying the drugs of mass consumption; the drugs are selected based on their annual consumption and demand as well as their annual revenues. This leads to the exclusion of those that may not be drugs of mass consumption but still critical or life-saving.

Demand elasticity varies with the form of payment; it is directly proportional to the OOP expenditures. The larger is the proportion of OOP expenditures, the larger the elasticity. In the case of medicines, the elasticity of demand would vary with the urgency of the situation. In all circumstances, the demand for medicines will be less elastic than that for many other consumer products. In the developing countries like India, spending on medicines comes largely from household resources, contributing substantially to OOP expenditures. Therefore, the demand for pharmaceuticals is stronger and less elastic in developed countries like the US and the UK, compared to India.