Introduction
The Indian pharmaceutical industry has traditionally been subject to price control mechanisms. The objective behind such action is to ensure consumer welfare by increasing access to medicines while ensuring that pharmaceutical companies have incentives to continue supplying the market within the price ceiling imposed by regulatory authorities.
Price controls are imposed on the industry by the National Pharmaceutical Pricing Authority[i] (‘NPPA’), in its administration of the Drug Price Control Order, 2013 (‘DPCO’). The DPCO imposes market-based caps on the price of drugs contained in the National List of Essential Medicines[ii] (‘NLEM’), with patented drugs being outside the scope of its authority.[iii] The NPPA has largely tended to be an activist body. An instance of this would be the situation that arose in 2014 when the NPPA invoked emergency provisions in the DPCO to impose price controls on several drugs not contained in the NLEM, some of which were protected by valid patents.[iv] A writ petition filed in the Bombay High Court against this order was dismissed when the Court, endorsing the actions of the NPPA, held that the imposition of price control on non-essential medicines was backed by a reasonable exercise of discretion by the body, upon the recommendations of an expert panel.[v]
However, the current administration has proposed changes in this regime that would give it greater control over the pricing of medication while substantially altering the scope of authority and functioning of the NPPA. As per the draft policy, the Government would take control of the NLEM, and decide which medicines would be under price control mechanisms. The main aim of this would be a move from price control to a general monitoring of drug prices, so as to facilitate the ease of doing business.[vi]This policy has led to widespread condemnation from various groups who see it as an attempt to undercut consumers by increasing the price of medication and thus, cutting off access to healthcare.[vii] In light of this, the author examines the effect of price control on competition in the Indian pharmaceutical industry and whether the previous regime of price control was successful in its stated goal of increasing access to healthcare while incentivizing manufacturers to supply the market within the price ceiling. The author also attempts to provide solutions or alternatives to this mechanism.
Effect of Price Control on the Industry
In order to understand the effect that price control has on competition law in the pharma industry, it is imperative to examine the unique nature of the pharmaceutical market in India. The factor that differentiates the Indian market from others is the existence of a strong middle player between the manufacturers and consumers of drugs.[viii] The prime example of this would be the All India Organization of Chemists and Druggists (‘AIOCD’), a union of retailers that wields a great degree of bargaining power against both, suppliers and consumers. The AIOCD consolidates the entirety of the retail sector of the pharmaceutical industry resulting in manufacturers having to supply drugs to a virtual monopsony.[ix] The blatantly anti-competitive conduct of this body has, on multiple occasions, fallen foul of competition regulations, with the CCI returning findings of violations of Section 3 of the Competition Act.[x]
Therefore, organizations like the AIOCD are able to influence the supply chain by ensuring that the market access of each manufacturer is dependent upon them.[xi] Actions such as boycotting manufacturers, wholesalers or retailers who enter the market without obtaining a No Objection Certificate from the association or set prices without its consent, further the instances of anti-competitive conduct in the industry.[xii]
It is organisations like the AIOCD that are largely at fault for the failure of the price control regime established by the NPPA. The circumvention of price control occurs through an overall increase in the market price of a specific drug, in the period immediately preceding the imposition of price control. This ensures that the price ceiling of the drug, which is derived based on market price, is inflated.[xiii] As mentioned above, the absolute dominance of such organisations in the industry ensures that all manufacturers and retailers increase their prices in coordination; failure to do so would result in denial of market access for such enterprises.
The price ceiling thus, is set above the market price for the medicine. This permits a situation where manufacturers and retailers are free to coordinate a price increase in the retail price so long as they stay below the price ceiling. Such tactics ensure that these enterprises are able to maximize their profits, while remaining immune from the purview of competition law. Even though it may be theoretically possible for a single enterprise to refuse to increase prices along with the other enterprises in the market, realistically, such an action could lead to a boycott of this enterprise by the association.
A demonstration of the anti-competitive impact of such actions would require proof of substantial harm caused to consumer welfare before the CCI.[xiv] However, the fact that these price increases are made below the price ceiling make it increasingly difficult to satisfy this burden of proof, and thus, sufficiently undermine the current regime of price control.[xv]
Conclusion
Price control has been singled out by the OECD as a mechanism which is likely to produce harmful effects on competition. This is because it reduces the incentive that manufacturers have to innovate and produce products of a higher quality, and forces them to coordinate price increases with other manufacturers and suppliers.[xvi] This is the simple reason why price control has failed to work in India too. Further, although the aim of the new draft policy is to move away from price control to monitoring, the pharmaceutical industry and its representatives are of the opinion that the system of price control will not be substantially weakened by this policy, and will continue to exist.[xvii]
Therefore, it is important to consider other alternatives to this system. The first is to abolish the system of price control altogether. In such a situation where manufacturers and retailers would be free to establish a retail price, in the absence of any price ceiling, any coordinated price increase, as is common in the current Indian market, would come under the purview of the Competition Act as an anti-competitive agreement under Section 3. If monitored and enforced strictly by the Commission, this would ensure free entry and competition in the market, leading to competitive pricing and easier access to medication for the consumers. [xviii]
Second and in the alternative, if increased regulatory monitoring and enforcement is not successful in this endeavor, the Government can focus on public procurement of medical supplies as a solution. Public procurement has been recommended by the OECD as a viable solution to avoid waste in the healthcare sector.[xix] In this case, the Government would procure drugs and other supplies at a lower, negotiated price, and then supply this to hospitals, clinics or retailers at a subsidised prices, ensuring availability of low- priced medicines in the market, leading to the maximisation of consumer welfare.[xx]
Such measures would ensure that the pharmaceutical industry is more competitive, and thus, is more suited to balance the consumers’ need for access to healthcare and the manufacturers’ requirement of greater profitability in the industry
This post has been co-authored by Jasel Mundhra, a third year student and Eisha Kalra, a first year student of the West Bengal National University of Juridical Sciences, Kolkata.
[i] The National Pharmaceutical Pricing Authority is a governmental regulatory agency, formed in order to control the pricing of drugs in India. Some of the primary roles of this body are to publish lists of medicines with their maximum ceiling prices, and to enforce the provisions of the Drugs Price Control Orders.
[ii] The National List of Essential Medicines, as the name suggests, is a list of medication considered to be essential in India. It is prepared by the Ministry of Health and Family Welfare. The medicines are selected with regard to the prevalence of the concerned disease, efficacy, safety and comparative cost-effectiveness. These medicines are intended to be available within the health system in adequate amounts, in appropriate dosages, with assured quality.
[iii]Balaji Subramaniam, Pharma Price Control and Policy Schizophrenia – I: Background and Context, Spicy IP (May 2017), https://spicyip.com/2017/05/pharma-price-control-and-policy-schizophrenia-i-background-and-context.html.
[iv] Ramnath Subbu, Pricing row hits pharma industry, The Hindu (Sept. 2014), http://www.thehindu.com/business/Industry/pricing-row-hits-pharma-industry/article6453089.ece.
[v]Indian Pharmaceutical Alliance v. Union of India, WP(C) 2700/2014 (Unreported).
[vi]S.Srinivasan, Why Is the Draft Pharmaceutical Policy Shaking up India’s Drug Price Regulator?, The Wire (Aug. 2017), https://thewire.in/171874/draft-pharmaceutical-policy-national-pharmaceutical-pricing-authority/.
[vii] Ari Alstedter & Abhijit Roy Chowdhury, India’s plan to reduce medicine prices faces industry pushback, The Economic Times (Jan. 2018), https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/indias-plan-to-reduce-medicine-prices-faces-industry-pushback/articleshow/62472881.cms.
[viii] Institute of Medicine, Countering the Problem of Falsified and Substandard Drugs (Gillian G. Buckley & Lawrence O. Gostin eds., 2013).
[ix]Balaji Subramaniam, Pharma Price Control and Policy Schizophrenia – II: Cheating the consumer, spicy ip (May 2017), https://spicyip.com/2017/05/pharma-price-control-and-policy-schizophrenia-ii-cheating-the-consumer.html.
[x]M/s Peeveear Medical Agencies v.All India Organization of Chemists and Druggists, 2014 Comp. L. R. 10 (Competition Commission of India).; Santuka Associates Pvt. Ltd. v.All India Organization of Chemists & Druggists, 2013 Comp. L.R. 223 (Competition Commission of India).
[xi]India Competition and Regulation Report (ICRR 2007), cuts-international, http://www.cuts-international.org/pdf/ICRR07_%20Pharma.pdf
[xii]P.K. Krishnan v. Paul Madavana, 2016 Comp. L.R. 83 (Competition Commission of India).; Santuka Associates Pvt. Ltd. v.All India Organization of Chemists & Druggists, 2013 Comp. L.R. 223 (Competition Commission of India).
[xiii]Balaji Subramaniam, supra note 4.
[xiv] The Competition Act, 2002, §19(3) (‘Act’).
[xv]Id.
[xvi]Competition Assessment Toolkit: Volume III – Operational Manual, Organization for Economic Co-operation and Development (June 2015), http://www.oecd.org/daf/competition/COMP_Toolkit_Vol.3_ENG_2015.pdf.
[xvii]Aesha Dutta, Draft pharma policy dilutes powers of pricing regulator, The Hindu Business Line (Aug. 2017), http://www.thehindubusinessline.com/economy/draft-pharma-policy-dilutes-powers-of-pricing-regulator/article9821835.ece; Isha Trivedi, Industry wary over government’s new pharma policy, Livemint (Aug. 2017), http://www.livemint.com/Industry/5N30F4unfm7gJew2m1rJwI/Industry-wary-over-governments-new-pharma-policy.html.
[xviii]Balaji Subramaniam, Pharma Price Control and Policy Schizophrenia – III: Make Antitrust Great Again, spicy ip (May 2017), https://spicyip.com/2017/05/pharma-price-control-and-policy-schizophrenia-iii-make-antitrust-great-again.html. See also Act, supra note xiv, §3.
[xix]Health and Public Procurement, Organisation for Economic Co-operation and Development, http://www.oecd.org/gov/public-procurement/health/.
[xx]Subir Roy, Pharma price controls hurt consumers, The Hindu Business Line (Nov. 2017), http://www.thehindubusinessline.com/opinion/pharma-price-controls-hurt-consumers/article9939882.ece?ref=relatedNews.
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