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PERMISSIBLE PRICE INCREASE AND CALCULATION OF OVERCHARGED AMOUNT UNDER DRUG PRICES CONTROL ORDER (DPCO)

DRUGS AND MEDICAL DEVICES PRICE INCREASE RESTRICTIONS

The Division Bench of the High Court of Delhi, in the case of Union of India v Bharat Serums, has laid down how the overcharged amount should be calculated by India’s drug price control regulator, National Pharmaceutical Pricing Authority (“NPPA”). The judgement will have a significant impact on existing as well as future demands for overcharging which are raised on pharmaceutical and medical device companies in India.

Background

Under Para 20 of India’s drug price control law, the Drug (Prices Control) Order, 2013 [“DPCO”], all non-scheduled formulations are allowed to increase their price by 10% in 12 months. Non-scheduled formulations are non-essential drugs or medical devices that are not listed in the schedule of DPCO. Most pharmaceutical and medical device companies do not use the 10% price increase opportunity in the 12-month period and elect to increase the price after a number of years.

When the opportunity does arise to increase prices, the question that always arises is whether the company can increase the price by the ‘aggregate’ of permitted percentage increase, or by a maximum of 10% from its last published Maximum Retail Price (MRP). For instance, if the MRP of a drug or medical device was Rs. 100, and the company selling the product decides to increase the price of the drug or medical device after a period of 5 years, would it be entitled to increase the price of the product by Rs. 50 (10% increase allowed every 12 months period), or by Rs. 10 (10% increase from last MRP irrespective of the time gap).

The other question that arises is if a pharmaceutical or medical device company increases the MRP of its product by more than 10% in a 12-month period, then how should NPPA recover the overcharged amount? For instance, if the MRP of a drug or medical device was Rs. 100 earlier, and if the company revises the MRP of the product to Rs. 200 after 5 years, how should NPPA calculate the overcharged amount? Should NPPA assume that the company was only allowed to increase MRP by 10% and recover the remainder amount as an overcharged amount? In other words, should NPPA give a concession of Rs. 10 to the company and proceed to recover Rs. 90, or should NPPA ‘assume’ that the company would have increased its price by 10% each year, and proceed to recover only the balance amount, in this case Rs. 50 (or more accurately Rs. 39 since a 10% increase every year for 5 years would have resulted in MRP of Rs. 161).

The above questions were conclusively answered by the Delhi High Court and are discussed below.

Interpretation of 10% permissible price increase in 12-month period

The Delhi High Court has interpreted the 10% allowance to increase MRP as follows: the MRP of non-scheduled formulations can only be increased by 10% in a period of 12 months, at a time, but in case of overcharging, the NPPA will have to assume that the company would have taken the 10% MRP increase and will be permitted to recover the ‘net’ amount.

The above interpretation is explained using examples in the paragraphs below.

Examples

What is permissible MRP increase for a pharmaceutical or medical device company?

If the MRP of a non-scheduled drug or medical device was Rs. 100 in 2014, the permissible price increase on yearly basis would be as follows:

Years01.01.201401.01.201501.01.201601.01.201701.01.201801.01.201901.01.2020
  Actual MRP100110121133.1146.41161.05177.15

If a pharmaceutical or medical device company wishes to take 10% increase after 5 years, how much can that be?

If the MRP of a non-scheduled drug or medical device was Rs. 100 in 2014, and the company decided to take a price increase in 2019, the maximum permissible price increase would be Rs. 110.

Years01.01.201401.01.201501.01.201601.01.201701.01.201801.01.201901.01.2020
  Actual MRP100100100100100110121

How should the overcharged amount be calculated, in the event of default by a pharmaceutical or medical device company?

In a hypothetical scenario, where the MRP of a non-scheduled drug or medical device was Rs. 100 in 2014, and the company decided to increase it to Rs. 161.05 in 2015 and later to 177.15 in 2020, the overcharged amount will have to be calculated as follows:

Years01.01.201401.01.201501.01.201601.01.201701.01.201801.01.201901.01.2020Total ovecharged amount
  Actual MRP100/-161.05161.05161.05161.05161.05177.15–
Permissible MRP (with 10% increase)Not applicable110121133.1146.41161.05177.15–
How NPPA calculated overcharging amount ? (Not legal)Not applicable51.0551.0551.0551.0500204.2
Overcharged amount as per Delhi High CourtNot applicable51.0540.0527.9514.6400133.69

The above table is instructive because it illustrates the incorrect methodology applied by NPPA to calculate the overcharged amount that has been routinely demanded and recovered by NPPA so far from pharmaceutical and medical device companies.

Until the Delhi High Court judgement, the NPPA demanded an amount which was excessive and incorrectly calculated (Rs. 204.2). However, after the Delhi High Court judgement, irrespective of the amount that has been calculated by the NPPA, the actual payable amount will be significantly lower than the amount demanded by NPPA (Rs. 133.69).

Impact

This particular Delhi High Court judgement on permissible price increase of drugs and medical devices will have a far-reaching impact on existing overcharging demands which have been raised by NPPA, and the demands that NPPA will raise in the future. All existing demands for overcharging raised by NPPA, which have been calculated using incorrect methodology due to incorrect interpretation of overcharging provisions of DPCO by NPPA, should be rolled back by the NPPA. A pharmaceutical or medical device company that has currently received such a demand should strongly object to the NPPA’s demand on the strength of the Delhi High Court judgement.

Pharmaceutical and medical device companies should also be careful in taking price increases for non-scheduled formulations in the future, and should not assume that they will be able to take an ‘aggregate’ price increase after a certain number of years if they haven’t availed the option to increase the price every 12 months.

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Pricing Information of Medical Devices Marketed in India to be Submitted to National Pharmaceutical Pricing Authority (NPPA) by March 10, 2021

India’s medical device price regulator has issued a direction to importers and manufacturers of 24 categories of medical device to submit price-related information, including the price at which they sell medical devices to distributors and hospitals in India, by March 10, 2021.

Background

In India, medical devices are regulated not just for quality, but also for price. The Drug (Price Control) Order 2013 (“DPCO”) regulates prices of all medical devices that are marketed in India. Some medical devices such as coronary stents, drug eluting stents, condoms and intra-uterine devices that are listed in the schedule of DPCO have their ceiling price fixed by the National Pharmaceutical Pricing Authority (“NPPA”), while all other medical devices (i.e. the non-scheduled medical devices) have to abide by a restriction whereby their maximum retail price cannot increase by more than 10 per cent in any given 12-month period.

Direction

In order to ensure that medical device manufacturers and importers are complying with the requirements of DPCO, the NPPA has been given powers under DPCO to issue directions to manufacturers and importers to submit price related information. It is in furtherance of this power that NPPA has directed that the following information be submitted to it:

  • Medical device category as per risk classification published by DCGI
  • Product name or specifications
  • Brand name or description
  • Date of launch in India
  • Minimal unit of sale/retail pack size
  • Price per unit to distributor / stockist
  • Price per unit to hospital
  • Price per unit to retailer
  • Applicable GST percentage
  • Moving Annual Turnover
  • Maximum retail price for unit as on January 1 of the years 2018, 2019, 2020 and 2021 (for a few categories, only the MRP as on January 1, 2021 needs to be submitted)

A copy of the said direction is available at this link.

24 Categories of Medical Devices covered by the Direction

Disposable Hypodermic SyringesDisposable Hypodermic NeedlesDisposable Perfusion SetsIVD devices of HIV, HBsAg and HCV
CathetersIntra Ocular LensesI.V. Cannulae       Bone Cements     
Heart ValvesScalp Vein SetOrthopedic ImplantsInternal Prosthetic Replacements      
Ablation DevicesOrgan Preservative SolutionBlood Grouping SeraLigatures, Sutures and Staplers
Tubal RingsSurgical DressingsUmbilical tapes     Blood/Blood Component Bags
NebulizerBlood Pressure Monitoring DeviceDigital ThermometerGlucometer

Challenges with submitting price for retailer

There may be certain fields for which information has been requested by NPPA, but the information may not be available with the importers or manufacturers. For example, the details of price to retailer sought by NPPA may not be available since importers and manufactures typically sell to a distributor or hospital, and not directly to a retailer. In such cases where the information is not available due to the nature of the manufacturer’s or importer’s business model, the importer or manufacturer may simply submit to NPPA that the information is not available with them. The importer or manufacturer is not expected to retrieve this information from its supply chain and submit to NPPA. Being in possession of such information may in fact result in breach of anti-trust laws, as an attempt to undertake resale price maintenance.

Sale of imported medical devices marketed by marketer

Some importers import and sell directly to a marketer in India. In that case, it is the marketer who is supposed to provide this information as price related information is not available with the importer. However, the importer should ideally endorse and countersign the information submitted by marketer because the primary obligation to submit this information is with the importer. Alternatively, the importer may submit whatever information that it has and give a written undertaking along with the submission that the remainder of the information will be submitted by the marketer because the remaining information is unavailable with the importer.

Requirement of license

The direction also contains a note which states that manufacturers and importers must attach a copy of the licence obtained from the DCGI for each medical device. It may be difficult to furnish the manufacturing licence for Class A and Class B medical devices (such as Glucometer). The said licence is actually issued by State Licencing Authority of the state where the medical device is manufactured. In order to comply with the requirement of the direction, a copy of the licence issued by State Licencing Authority should be annexed in place of copy of license from DCGI.  

Format for submission

All the above information has to be certified by a qualified chartered accountant or cost accountant in a physical format, and the same information is also required to be sent in form of an Excel Sheet to the NPPA at the following email ID medicaldevices-nppa@gov.in

What should manufacturers and importers of medical device take this direction very seriously?

Any non-compliance with the direction of NPPA to submit price information may result in criminal prosecution under provisions of Essential Commodities Act of 1955.

The information will also be used to ascertain whether any manufacturer, importer or marketer has fixed the MRP of the medical device in excess of ceiling price or has increased the MRP over the permissible 10 per cent limit in a 12-month period. In both these cases, the NPPA has the power to recover the excess price paid by the end-consumer from the importer or manufacturer, and to levy a penalty for overcharging in certain cases.

That apart, the information will most likely be used by NPPA to track  or validate the market share of various medical devices and medical device manufacturers in terms of moving annual turnover (MAT) of said medical device under the submitted medical device category. If, at any time in future, a medical device is inserted in the schedule of DPCO on the grounds of essentiality to the Indian population, then the market share in terms of MAT will become an important consideration before NPPA in fixing the ceiling price that medical device.

Therefore, manufacturers and importers of the 24 categories of medical devices listed above must take this exercise seriously and submit the requisite data to the NPPA in prescribed form within timelines, both in physical and electronic format.

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India’s new price regulation for medical devices and equipment – impact on price and supply chain due to Drugs (Prices Control) Order, 2013

Summary

On February 11, 2020, the Indian Government had gazetted a notification that brought all medical devices and medical equipment sold in India under existing quality and safety regulatory framework by declaring them as “drugs”.  However, this notification has exposed all medical devices to India’s drug price control regulation that was put in place to make drugs affordable and accessible as well. So, from April 1, 2020 (i.e. the effective date of the notification), all manufacturers and importers of medical devices and medical equipment sold in India will have to be careful to not increase the maximum retail price of their products by more than 10% within 12 months. They will have to make periodic trade-related filings with the Government in which they will have to submit price information such as price to distributors, price to stockist, price to hospital and price to retailer. And, on top of all this, they will have to operate under constant risk of price fixation at the hands of the Government, like was done in the case of coronary stents and knee implant systems in 2017.  

Background

The quality and safety of drugs sold in India is regulated by the Drugs and Cosmetics Act, 1940 (“DCA”). There is no equivalent legislation for medical devices. Therefore, the Indian Government notifies those medical devices whose quality and safety it intends to regulate as ‘drugs’ from time to time.

Prior to February 11, 2020, the Indian Government used to regulate the quality and safety of medical devices in a piecemeal  manner. There were only 37 categories of medical devices and  medical equipments that had been notified as drugs under DCA (see annexure for this list). However, on February 11, 2020, the Government declared all medical device and medical equipment to be drugs in order to bring them under the fold of quality and safety regulation under DCA, effective April 1, 2020. We have written extensively about it here.

There was a collateral impact of this decision of the Government on price and supply chain of medical devices and medical equipment. India regulates production, control and supply of all essential commodities through a law called the Essential Commodities Act, 1955 (“ECA”). ‘Drugs’ are regulated as an essential commodity under ECA. Therefore, the Government has power to regulate product control and supply of all drugs under ECA. In furtherance of the provision of ECA, the Government has notified a price control order for drugs called the Drugs (Prices Control) Order, 2013 (“DPCO”).

On February 11, 2020, when the Government decided to regulate all medical devices and medical equipment by notifying them as drugs, it automatically subjected them to the provision of DPCO. The authority responsible for the administration of DPCO, the National Pharmaceutical Pricing Authority (NPPA), has already brought out a clarificatory order stating that the provision of DPCO will squarely apply to all medical devices and medical equipment.

Impact on price and supply of medical devices after April 1, 2020

From April 1, 2020, all medical devices and medical equipment manufacturers and importers will have to comply with the provisions of DPCO. The obligations imposed by DPCO on all manufactures and importers of medical devices and medical equipment are as follows:

Retail sale price to be mentioned on all medical devices, including ones for institutional use: The DPCO requires that every SKU of medical device and medical equipment must be labelled with its maximum retail price (“MRP”) that is to be set by the importer/manufacturer/marketer. The said price must be prefixed by the words “Maximum Retail Price” and suffixed by the words “inclusive of all taxes”.

Before April 1, 2020, there was an exemption available for medical devices and medical equipment that weighed more than 25 kg or that were intended for institutional use,  from declaration of MRP under the Legal Metrology (Packaged Commodity) Rules, 2011. However, from April 1, 2020, all medical devices and medical equipment, irrespective of their weight and intended use, will have to declare MRP on the label of each SKU in the manner specified above.

% cap on variation of retail sale price: The importers, manufactures and marketers of medical devices will have to be cognizant about variation of the MRP declared on the label of their medical devices. The MRP of the product should not be varied by more than 10% in any 12 month period, else the variation in excess of 10% will be recovered as ‘overcharging’ from the business concerned. For example, if an importer of medical device decides to reduce the MRP by 20%, but after a single quarter decides to return to the original retail price (i.e. increase by around 20%), then it won’t be permitted to do so. It can, at best, increase its MRP by 10% of the reduced price. If it starts selling the product at the original MRP, then the 10% excess will be recovered from the importer on MRP basis i.e. by multiplying the number of units sold with the 10% excess, along with intrest and penalty.

Price related filings to be done from time to time: All importers, manufacturers and marketers of medical devices and medical equipment will have to submit price to distributors/stockists, price to retailers/hospitals and retails sale price in format prescribed under Form V of Schedule II of DPCO (with appropriate modifications) in the event of revision of MRP. The aforesaid information is to be submitted on an online platform called Integrated Pharmaceutical DataBase Management System operated by NPPA.

Risk of price fixation: The NPPA has the powers to fix ceiling prices of any drug under extra-ordinary circumstances and in public interest. Now, from April 1, 2020, this power will extend to all medical devices and medical equipment. Once a price is fixed, the importer, manufacturer and marketer of said medical device has to set its MRP either equal to or below the ceiling price. Most of the times, NPPA also fixes the margins that may be offered to the supply chain and makes the concerned importer/manufacturer/marketer liable for any breach of margin by the supply chain.

In the past, the NPPA has used this power to fix prices of coronary stents and knee implant systems (both devices were notified as drugs in 2005). In the aftermath of the price fixation, many advanced coronary stents were sought to be withdrawn from India by the manufacturers on the grounds of unviability. A prior permission from NPPA is required to withdraw or to reduce production / import of medical device whose prices have been fixed by NPPA in public interest.

Risk of being subject to market based pricing: The Ministry of Health and Family welfare brings about a National List of Essential Medicines (“NLEM”) every few years. Medical devices are also included in the said list from time (e.g. coronary stent). The consequence of being included in NLEM from pricing perspective is that the medical device in question automatically becomes subject to a market price based price control i.e. the MRP of the said device must not exceed the average MRP of all importers, manufacturers and marketers who sell the same device and who have more than 1% market share in that particular device market. The said average MRP (referred to as “Ceiling Price”) is decided and set by NPPA. The Ceiling Price may go up or down every year, depending on the wholesale price index of the Government. The MRP of the medical device will have to be adjusted accordingly.  A prior permission from NPPA is required to withdraw or to reduce production / import of medical device which are recognized as ‘essential’ by the Government.

Consequences of non-compliance

There are different consequences associated with different violations. Any violation of DPCO is serious because its parent legislation, the Essential Commodities Act, 1955, stipulates that any breach of DPCO may result in imprisonment and fine for the company and person(s) in-charge of the company for conduct of its business. However, undoubtedly, the most draconian provision of DPCO is the liability to deposit any amount ‘overcharged’ by the importer or manufacturer in breach of DPCO in addition to the interest and penalty.

Final comments

It is extremely important for medical devices and medical equipment companies doing business in India to be aware of the compliance requirements and obligation under India’s price control law (i.e. EC Act and DPCO). Since all medical devices and medical equipment are now regulated as drugs, and all drugs are treated as essential commodities, an inadvertent violation of India’s price control laws may have serious consequences for the business of these companies.