Trade Margin Rationalisation (TMR)

Trade Margin Rationalisation, or TMR, is a way of making medicines cheaper by limiting how much money the middlemen in the supply chain can add to the price. Instead of fixing the final price of a medicine, the government fixes the maximum gap between the price at which the company first sells the medicine and the MRP paid by the patient. The company is still free to choose its own selling price.

What is a trade margin?

A medicine passes through many hands before it reaches you:

1. The manufacturer (or importer) sells it to a stockist or distributor. This is called the first point of sale, and the price here is the price to stockist (PTS) or price to distributor (PTD).
2. The stockist sells it to a retailer (your chemist) at the price to retailer (PTR).
3. The chemist sells it to you at a price up to the MRP.

The trade margin is the difference between the MRP and the price at the first point of sale. It is the total amount shared by all the sellers between the factory and you.

Why does it exist?

In India, the MRP is set by the company. Some companies print a very high MRP but sell to stockists at a low price. The big gap is used to give hospitals and chemists large profits, so that they push that brand. The patient, who pays the printed MRP, loses. For example, a company may sell a cancer injection to a stockist for ₹1,000 but print ₹8,000 as its MRP. The mark-up here is 700%. The patient has no way of knowing this. TMR attacks this hidden gap directly.

Margin and mark-up: what is the difference?

These two words are often mixed up.

• Margin is counted on the selling price (the MRP). A 30% margin on an MRP of ₹100 means sellers keep ₹30, and the first sale price is ₹70.
• Mark-up is counted on the buying price. In the same example, ₹30 added on ₹70 is a mark-up of about 43%. So a 30% cap on margin is the same as a mark-up limit of about 43% on the first sale price.

Where did it come from?

The idea of controlling trade margins was discussed for years, including in the National Pharmaceutical Pricing Policy, 2012, and in a NITI Aayog framework for medical devices. India first used it on a large scale for medicines in February 2019:

• On 27 February 2019, the NPPA, using Paragraph 19 of DPCO 2013, capped trade margins of 42 non-scheduled anti-cancer medicines at 30% from the first point of sale. It covered 72 formulations and 355 brands, with new prices from 8 March 2019.
• The government called this a pilot for proof of concept: a test to see whether TMR works.
• As per government replies in Parliament, the MRPs of 526 brands fell, some by up to about 90%, with estimated savings of about ₹984 crore a year for patients.
• In 2021, during COVID-19, the NPPA capped trade margins of oxygen concentrators (June 2021) and of pulse oximeters, BP monitors, nebulisers, digital thermometers and glucometers (July 2021) at 70% at the price-to-distributor level.

How does it work, step by step?

1. The government picks medicines or devices where margins look unfairly high, often using data on mark-ups.
2. It notifies a cap, for example "trade margin cannot be more than 30% of MRP".
3. Each company looks at its own price at the first point of sale and recalculates the highest MRP allowed. If its PTS is ₹700, the MRP can be at most ₹1,000.
4. Companies whose MRPs are above this level must cut them and inform the NPPA, state drug controllers, stockists and retailers, usually within a short deadline.
5. The NPPA monitors the new prices. Charging above the allowed MRP is overcharging and can be punished.

How is TMR different from a ceiling price?

Under a ceiling price, the government sets one maximum price for all brands of a medicine. Under TMR, each company sets its own first-sale price, and only the gap to MRP is capped. So TMR mostly hits brands with inflated MRPs, while brands that already have fair margins see little change. It also keeps some price competition between companies.

Why is it useful for cancer and costly medicines?

Cancer medicines are expensive, needed for long periods, and mostly non-scheduled. Many are bought in hospitals, where patients have no choice of seller. Wide gaps between the first-sale price and the MRP are common here. TMR brings down the printed price without forcing a single price on all companies, which reduces the risk of companies stopping supply.

India's position and examples

Apart from the 2019 cancer drug pilot and the 2021 medical devices caps, TMR has been discussed as a wider tool for all medicines and devices. Industry groups have asked for a slow, step-by-step rollout so that the supply chain can adjust.

Commonly confused concepts

• TMR vs ceiling price: A ceiling price caps the final price for everyone. TMR caps only the gap between the first-sale price and the MRP, and each company's MRP depends on its own selling price.
• Trade margin vs retailer margin: Trade margin is the total margin of the whole chain (stockist plus retailer). The 16% retailer margin used in ceiling prices is only the chemist's share.
• Margin vs mark-up: Margin is a share of the selling price; mark-up is a share of the buying price. A 30% margin equals about a 43% mark-up.
• TMR vs Paragraph 20 monitoring: Paragraph 20 only limits how fast the MRP of a non-scheduled medicine can rise (10% a year). It does not touch an MRP that is already very high. TMR can bring such a high MRP down.

Issues, criticism and the way forward

• Benefits may not reach everyone: Large hospitals often buy at deep discounts and still charge patients the MRP. Lowering the MRP helps, but hospital billing practices also matter.
• Companies may raise their first-sale price: A company could raise the PTS to keep its MRP high. Regular monitoring of prices is needed to stop this.
• Supply chain concerns: Distributors and chemists say lower margins may hurt small sellers, especially in remote areas where transport costs are higher.
• Data gaps: Real transaction prices are hard to track, as discounts differ across retail shops, hospitals and online pharmacies.
• Way forward: Experts suggest using TMR more widely, publishing price data so patients can compare, and pairing it with generic medicine shops and insurance cover.

Concepts to Know

• Stockist / distributor: A wholesaler who buys medicines in bulk from the company and supplies them to chemists and hospitals.
• Non-scheduled medicine: A medicine not listed in the First Schedule of the DPCO. Its price is not capped, but its yearly increase is limited to 10%.
• Proof of concept: A small first trial to check whether an idea works before using it more widely.
• Information asymmetry: When one side of a deal knows much more than the other. Here, sellers know the real cost, but patients only see the MRP.