Over the previous posts (here and here), I outlined the current state of pharmaceutical price control, and outlined inefficiencies inherent to the existing framework. Over the course of this post, I dive deeper into the harms caused by an ineffective price control regime, and outline more optimal policies to enhance access to drugs.
Price control as a boogeyman
The fact that price control in the drugs market today is entirely ineffective appears to be the subject of a careful cover-up by industry players. Associations such as the IPA are known to frame victim narratives in which they hold price control squarely responsible for the pharmaceutical industry’s stunted growth in recent years. More insidious is the fact that they do this despite well-documented internal statistics dispelling this claim. In fact, a PharmaTrack report records that the majority of the market is effectively out of price regulation. An estimated 2-4% of IPA members’ revenue was hit by price control. Price regulation, to quote a senior executive of an IPA member company, is not one of the industry’s primary problems. These findings have been sourced from this piece, which extensively details the IPA’s actions with respect to price control.
Ineffective price control as an antitrust vaccine
In an overwhelming majority of cases, the ceiling price is likely to be well above the price set by the market in equilibrium. I argue that the imposition of such ceilings effectively immunises manufacturers from antitrust scrutiny for at least some of their actions on the market.
This is because a price control model of this sort effectively gives manufacturers free licence to do as they please as long as they stay beneath the ceiling price. While this would ordinarily pose no significant problem, it results in concrete harms in situations where the ceiling price is substantially supra-competitive in and of itself.
A unique chain of circumstances allows manufacturers to take advantage of pharmaceutical price control at the expense of consumer welfare. To begin with, the price control regime (effectively acting as an administrative determination that supracompetitive pricing, to a point, is acceptable) permits sub-ceiling price increases by manufacturers. In any other country or any other market, the first supplier to carry out such a price increase would be severely undercut by competitors, and forced to return to the equilibrium market price. In ordinary circumstances, even a relatively small lone supplier holding out at the equilibrium price would suffice to combat a coordinated price increase by the rest of the manufacturers. However, another factor unique to the Indian market prevents this failsafe from kicking in: intermediary demand consolidation through organisations such as the AIOCD. Since these intermediaries act as retail gatekeepers, any manufacturer that cheats or holds out from a coordinated price increase is likely never to see a consumer at the end of the tunnel. Finally, when the entire act does finally come before the antitrust regulator, it is unlikely to be treated as a serious infraction of antitrust law, since the burden of proof for the regulator increases manifold when it needs to show that a sub-ceiling price increase adversely impacted consumer welfare.
Hypothetically, if the price of generic insulin in the market today is 60% of the ceiling price, then a coordinated price increase to about 80% of the ceiling price would enrich manufacturers and retailers immensely at the expense of consumer welfare, while simultaneously staying below the antitrust radar.
Price-fixing by generic drug manufacturers is a global phenomenon, as evidenced by the fact that no fewer than twenty states in the US have initiated antitrust proceedings in this respect. The fact that leaders in the Indian generic industry such as Aurobindo Pharma and Emcure Pharma have been implicated in the suits (with the latter being named as the “ringleader”) must come as no surprise, given the results of the metformin study discussed in the previous post.
Remedies in patent and competition law
I argue that the ends sought to be achieved through price control can be attained through consistent CCI intervention, especially when coupled with strict enforcement of the local working requirement in patent law. In the absence of a ceiling price, any coordinated increase in the price of drugs would be fair game for an antitrust investigation. In addition, antitrust jurisprudence in India seems to be better equipped to tackle IP-heavy industries such as patented drugs than price control. The ill-fated cotton price control order should serve as a lesson against depriving patentees of their right to set prices – although there was a measure of short-term joy, the overwhelming long-term impact was the unavailability of Monsanto’s next-generation technology to Indian farmers.
The CCI’s limited (and somewhat lacking, by most accounts) analysis of IP suggests that it is open to inferring dominance from the mere fact that a market player holds patents over certain technologies. Going further, the CCI has also recognised that the threshold for abuse of IP-induced dominance in the market is not high. In the Auto Parts case, for example, the CCI has held that unilateral refusals to license patents would violate Section 3 of the Competition Act if they foreclosed market access to downstream players such as independent service providers and small mechanics.
More pertinent for our purposes is the CCI’s treatment of vertical agreements between licensors and licensees of patents, since this is the nature of the relationship between large foreign originator MNCs and local Indian drug manufacturers. In such circumstances, the CCI has leaned perilously close to holding “restrictive” vertical agreements as per se anticompetitive:
“…a non-dominant enterprise may enter into a vertical agreement which forecloses the market but enhance certain distribution efficiencies, and in such conditions the Commission on balancing the factors provided in section 19(3), may conclude that such agreement does not cause an AAEC in the market. However, where such agreements are entered into by a dominant entity, and where the restrictive clauses in such agreements are being used to create, maintain and reinforce the exclusionary abusive behavior on part of the dominant entity, then the Commission should give more priority to factors laid down under section 19(3)(a) to (c) than the pro-competitive factors stated under section 19(3)(d) to (f) of the Act, given the special responsibility of such firms not to impair genuine competition in the applicable market.”
In essence, the CCI’s stance appears to be that while restrictive vertical agreements entered into by non-dominant players are subject to a “rule of reason” analysis, those entered into by dominant players are subject to a modified form of scrutiny in which the anti-competitive factors are weighed heavier than pro-competitive ones.
When combined with the working requirement, the upshot of this stance (controversial as it may be to antitrust scholars) is that a foreign patentee/originator must either license its patent for Indian use at favourable terms to the licensee, or supply the market itself at prices lower than the threshold to attract a compulsory licence. I submit that this is a reasonable equilibrium which balances out patient welfare with patentee and manufacturer interests.
Over this series of posts, I hope that I’ve established that:
- The government has been inconsistent in its stance on pharma price control.
- Price control disregards ground realities endemic to the Indian drugs market.
- Price control does not seriously prejudice local manufacturers’ profitability.
- Ineffective price caps harm patients by providing antitrust immunity to manufacturers.
- Access to medicines can be maximised while offsetting the above harm through consistent application of principles already in place in patent and antitrust law today.