Government Schemes, Procurement and Pricing Mechanisms for Medicines in India

Public health administration in India relies heavily on ensuring the availability, accessibility, and affordability of essential medicines. Out-of-pocket expenditure on health accounts for a substantial share of total health spending in India, with pharmaceutical purchases contributing over 60 percent of this out-of-pocket burden. To address market failures, price distortions, and supply chain bottlenecks, the Union Government employs a dual-track strategy consisting of statutory price regulation and targeted public procurement schemes.

Regulatory Framework for Drug Pricing in India

National Pharmaceutical Pricing Authority (NPPA)

• The National Pharmaceutical Pricing Authority functions as an attached office under the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers.
• Established in August 1997, NPPA fixes and revises prices of controlled bulk drugs and formulations.
• The authority enforces price compliance, monitors drug availability, prevents artificial shortages, and recovers overcharged amounts from manufacturers.
• NPPA operates the Integrated Pharmaceutical Database Management System (IPDMS 2.0) and the Pharma Jan Samadhan portal for digital monitoring and public grievance redressal.

Drugs (Prices Control) Order (DPCO)

• The Union Government issues the Drugs (Prices Control) Order under Section 3 of the Essential Commodities Act, 1955.
• DPCO 2013 replaced DPCO 1995, shifting the pricing framework from a cost-plus method to a market-based pricing mechanism.
• Under DPCO 2013, formulations listed in Schedule I are classified as scheduled formulations and subjected to mandatory price caps.
• Non-scheduled formulations are allowed a maximum price increase of 10 percent over the preceding twelve months under Paragraph 20 of DPCO 2013.

National List of Essential Medicines (NLEM)

• The Ministry of Health and Family Welfare prepares the National List of Essential Medicines based on priority healthcare needs, efficacy, safety, and comparative cost-effectiveness.
• NLEM 2022 includes 384 essential medicines covering 27 therapeutic categories, replacing NLEM 2015.
• Once a drug is added to NLEM, it automatically becomes part of Schedule I of DPCO, requiring NPPA to fix its ceiling price.
• Medicines are categorized according to primary, secondary, and tertiary levels of healthcare delivery.

Pricing Mechanisms and Price Fixation Formulas

Market-Based Pricing Mechanism

• The ceiling price of a scheduled formulation is calculated as the simple average of retail prices of all brand versions that hold a market share equal to or greater than one percent of total turnover for that drug.
• A mandatory 16 percent retail margin is added to the simple average price to fix the final ceiling price per dose or pack.
• Manufacturers must sell scheduled formulations at or below the notified ceiling price plus local taxes.

Trade Margin Rationalization (TMR)

• Trade Margin Rationalization caps the profit margin earned by distributors and retailers between the Price to Distributor (PTD) and the Maximum Retail Price (MRP).
• NPPA applied TMR to anti-cancer drugs, medical devices like knee implants, cardiac stents, oxygen concentrators, and diagnostic kits.
• Margin caps prevent exorbitant trade markups on non-scheduled specialized drugs and complex medical devices.

Wholesale Price Index (WPI) Price Adjustments

• Paragraph 16 of DPCO 2013 allows manufacturers of scheduled drugs to adjust ceiling prices annually according to the change in the annual Wholesale Price Index.
• The adjustment takes effect on April 1 each year based on WPI data provided by the Office of the Economic Adviser.
• In years with negative WPI, ceiling prices of scheduled formulations decrease automatically.

Central and State Medicine Procurement Schemes

Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP)

• Launched in 2008 as the Jan Aushadhi Scheme and rebranded in 2016, PMBJP is implemented by the Pharmaceuticals and Medical Devices Bureau of India (PMBI).
• The scheme provides unbranded generic medicines at prices 50 percent to 90 percent lower than branded equivalent drugs.
• Jan Aushadhi Kendras are operated by individual entrepreneurs, non-governmental organizations, cooperative societies, and state agencies.
• PMBI procures medicines from World Health Organization Good Manufacturing Practice (WHO-GMP) certified manufacturers to maintain quality standards.

AMRIT (Affordable Medicines and Reliable Implants for Treatment)

• Launched in November 2015 by the Ministry of Health and Family Welfare, AMRIT outlets supply expensive oncology, cardiovascular, and surgical implants at heavy discounts.
• AMRIT pharmacies operate within tertiary care institutions, central government hospitals, and All India Institutes of Medical Sciences (AIIMS).
• HLL Lifecare Limited, a public sector enterprise, manages procurement and store administration for the AMRIT network.

National Free Drugs Service Initiative

• Launched in 2015 under the National Health Mission (NHM), this initiative supports states in providing free essential medicines at public health facilities.
• It mandates the establishment of IT-enabled supply chain management systems like DVDMS (Drugs and Vaccines Distribution Management System).
• States receive financial incentives under NHM for adopting standard treatment guidelines, prescription audits, and transparent procurement systems.

Centralized State Medical Services Corporations Model

• State governments use autonomous procurement corporations to aggregate demand and issue open competitive tenders.
• Tamil Nadu Medical Services Corporation (TNMSC) established the pioneer centralized procurement model featuring bulk purchasing, pass-through quality testing, and direct warehouse distribution.
• Rajasthan Medical Services Corporation (RMSC) and Kerala Medical Services Corporation (KMSCL) execute similar bulk procurement frameworks to support free medicine schemes.

Institutional Matrix of Pharmaceutical Regulation

Key Facts to Remember

• Out-of-pocket expenditure on medicines accounts for more than 60 percent of total personal health spending in India.
• NPPA was constituted as an attached office of the Department of Pharmaceuticals on August 29, 1997.
• DPCO 2013 derives its statutory power from Section 3 of the Essential Commodities Act, 1955.
• The National List of Essential Medicines 2022 contains 384 medicines grouped under 27 therapeutic categories.
• Under DPCO 2013, non-scheduled formulations cannot increase their Maximum Retail Price by more than 10 percent in a 12-month period.
• The simple average price calculation for scheduled drugs includes brands with a market share of at least 1 percent.
• PMBJP is executed by the Pharmaceuticals and Medical Devices Bureau of India (PMBI), formerly known as BPPI.
• Jan Aushadhi Kendras supply generic medicines at 50 to 90 percent lower costs than branded equivalents.
• HLL Lifecare Limited runs the AMRIT retail pharmacy network across premier medical institutions.
• Tamil Nadu Medical Services Corporation (TNMSC) pioneered the autonomous state bulk procurement model for essential drugs in 1994.