An Interesting Price Discovery Mechanism

Vol – L No. 2, January 10, 2015 | Sugata Marjit Reports From the States Web Exclusives
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The 24×7 Fair Price Medicine Shops in the public hospitals of West Bengal have visibly reduced the average price of critical medicine and appliances. Their services should now be extended beyond hospitals so that they reach out to a larger share of patients.

Sugata Marjit ([email protected]) was the Director, Centre for Studies in Social Sciences, Calcutta.

Provision of medicines at an affordable cost in public hospitals and health centres has been an objective of state governments for many years. One way of helping patients is to provide them free medicines, the cost of which is covered by the government and constitutes the implicit subsidy financing the programmme. The medicine stores of the state public hospitals that maintain stocks and distribute medicine have been a hotbed of corruption for many years. The corruption story became almost a legend – the telling saga of medicines, supposed to be distributed to the public at a nominal price, finding ways to the market outside. For that matter the story is the same in many other states where hospital staff induced poor patients to pay that “extra” beyond the just price for quicker availability of necessary health-related items.

Typically poor patients would be turned away from the official counter due to non-availability of medicines. Later they would be compelled to purchase it from the shops in the open market. The price difference would be shared by the corrupt stakeholders. The system would continue even as the patients kept being cheated. The storekeepers would foil any attempt to computerise the stock taking activities and thanks to the political support extended to them by the regime of the “people”, no one would raise a voice against this malpractice. Surprisingly in early 2012 right after the Trinamool Congress (TMC) led government took charge, the health department decided to experiment and solve the problem once for all. In the process a mechanism was designed which stands out as a rare example of solving the “price discovery” problem in medicine and health related appliances market.

Introduction and Reach of FPMS

This is the story of the 24×7 Fair Price Medicine Shops (FPMS) being located in major public hospitals all across the state. In the plan 121 shops were proposed, of which 93 have become operational since the end of 2012 providing medicines by privately-run outlets at a discount ranging from 47% to 67% of the maximum retail price (MRP) quoted in the open market to all customers, including the patients of the hospitals. Such has been the success of this model that the Union Ministry of Health and Family Welfare has requested other states to design such a mechanism in ways suitable to them. The state health ministry data shows that for 35 FPMS, during December 2012 to November 2014, total sales has been of the order of 414 crores and discount availed by the people is to the tune of 250 crores that have benefited 85 lakh persons. This means that the MRP value of the same amount of medicines and accessories would be more than 650 crores. For example, ordinary pacemakers that cost around 1 lakh per piece, now costs around 30,000in the FPMS according to a published price list of the Seth Sukhlal Karnani Memorial Hospital (SSKM) unit in Kolkata.

This mechanism has reduced the effective MRP (including discounts offered by open market shops to the customers) by around 15% to 20% through competition. For rare expensive medicines this amounts to saving thousands of rupees. Till date, the state has installed a nationally-recognised quality audit and inventory control system and the FPMS units are operated by reputed retail outlets who confess that their branches outside have lost sales due to competition. But they do not mind as they make good money due to sheer volume effect. To mitigate the excessive marketing margin imposed on the price of the branded medicines, the pressure is on the doctors to recommend generic drugs with some success, but greater success is expected and desirable.

Mechanism of FPMS

The bid for the FPMS is based on the extent of discount on MRP a unit is willing to offer. This automatically brings down the price of the medicine nearer to the competitive price. It also shows that MRP is actually a collusive price and the marketing margin, partly due to the clandestine relationship between medicine sellers and unscrupulous doctors, is excessive. The captive customers of large public hospitals generate a sales volume because of the convenience and proximity of these shops to the hospitals themselves. Also the mechanism takes care of the corruption of the artificial scarcity of free medicines, although it continues to be an add-on programme of the existing free medicine project. But patients themselves flock to the FPMS for good quality, quickly available drugs and the departmental stores within the hospitals have become useless for all practical purposes to the utter dismay of corrupt agents. The programme has hit hard the tacit collusive practice hidden under the cover of MRP. Initial steps in the formation of FPMS drew huge protest and agitation from chemists and medicine shops. But the official verdict ultimately prevailed and the experiment is already yielding exemplary results.

It is obvious that few FPMS would not lead to a full-scale competitive market because of the capacity constraints faced by each shop. Few emerging complaints that medicines are not always available are likely to be due to such problems. But one must be vigilant that there is no hidden agenda of arbitrage. Simple economics suggests that since the FPMS is making good money with the accepted significantly lower-than-MRP bid price, possibility of their engaging in corruption is limited at this stage. Undoubtedly, the FPMS project is a radical step to contain the tyranny of the MRP and corrupt pricing of medicine.


Callous policymaking in the name of helping the poor has been a hallmark of this nation at large. The principle of giving something free and then reducing the effective supply to the poor is hailed as a virtue. The FPMS idea tells us that people are willing to pay a bit more if they could be guaranteed good quality medicines round the clock. The next step would be to create such shops beyond the hospitals, make provisions of public space and strengthen the force of competition.