All You Need to Know About the New CCI Policy on Healthcare-Part I

It’s been around a week since the CCI released its press release on its policy note on ‘Making Markets Work for Affordable Healthcare’. In the past, the CCI has recognized the need to address issues in the healthcare industry on several occasions. For instance, it has observed in a past order that the lack of competitive forces in the pharmaceutical market has resulted in “innovative business practices, superior services, consumer choice, lower prices, etc.” taking a back seat. (In fact, the press release itself notes that the CCI has received “around 52 cases pertaining to the pharmaceutical and healthcare sector”.) This “first of its kind” policy note addresses issues of transparency of information and affordability of drugs in the healthcare industry and provides solutions for the same.

The Policy Note: It’s a great start…

Noting that the “information asymmetry” pervading the industry is resulting in restriction of consumer choice, the CCI pointed out four main issues and also gave related recommendations for dealing with the same:

1. Role of intermediaries in drug price build-up: The CCI noted that high trade margins have majorly contributed to high drug prices. Trade margins are the difference between the price at which manufacturers or importers sell to trade (“price to trade”) and the price at which patients avail the drugs (“maximum retail price”). The CCI recommended that high drug prices can be evaded by effective procurement and distribution of drugs, including e-trading of drugs.
2. Quality perception behind proliferation of branded generics: According to the CCI, the Indian market is filled with “branded generics which limit generic-induced price competition”. Note that branded generics are “drugs which are produced/marketed by the companies under their registered brand names/trademarks but their active pharmaceutical ingredients or process of manufacturing are not patented by them.” It was recommended that quality perception of these drugs should be addressed by ensuring that they adequately comply with quality control measures and regulations. The CCI also recommended combating the practice of artificial product differentiation with a “one-company-one drug-one brand name-one price policy”.
3. Vertical arrangements in healthcare services: The CCI made several recommendations such as issuing of periodic validated data by hospitals regarding mortality rate, infection rate etc. for better consumer choice, hospitals allowing consumers to purchase products from pharmacies outside, and not just in-house pharmacies, ensuring uniform quality of standards applied for accrediting diagnostic labs across India and ensuring portability of patient data between hospitals to aid hospital switching and to prevent lock-in effect.
4. Regulation and competition: The CCI noted that multiplicity of regulators at Centre and State level has led to lack of uniformity in implementation of regulations and suggested the promulgation of a mechanism under the Central Drugs Standard Control Organization to harmonize these regulations. It further recommended to make “approval of new drugs time-bound along with publication of detailed guidelines”.

Finally, the CCI also noted the issues of lack of healthcare professionals (attributable to the high cost of medical education) and inadequacy of health insurance.

…but what’s really in it for us?

It’s been opined that the Policy does not set out any new recommendations; similar suggestions have been put forward in the past. For instance, most of the aspects mentioned in the Policy regarding information asymmetry, quality perception of branded generics, procurement and distribution of drugs have found mention in this study by the CENTAD, prepared in consultation with the CCI and published way back in 2010.

The Policy, however, does take note of an important development: the governement’s shift from price control measures to trade margin rationalization. When price control mechanisms are adopted to protect consumers from high prices, the Government sets market prices of products (maximum price ceilings and minimum price floors) instead of letting market forces of demand and supply determine the rates. The latest price control order imposing price caps on scheduled drugs (“scheduled formulations” in the Act) was released in 2013. Price controls have mostly been criticized for being ineffective and having several unintended consequences. For example, in cases where low price ceilings are set, firms who cannot afford to sell products at such low prices are forced to exit the market, thereby restricting availability of drugs in markets and restricting consumer choice. (See our posts on the ineffectiveness of the Indian price control regime here, here and here.)

Trade margin rationalization, on the other hand, would involve “imposing a cap on upstream margins across the entire value chain, rather than imposing caps on prices of products downstream”. The Government has been taking several steps for introducing it in the healthcare industry and the NITI Aayog has also released a consultation paper for its introduction in pricing medical devices. Further, the Government is also considering introduction of trade margin caps for medicines and medical devices, respectively.

Responses to these measures have been mixed. Some say that these measures are a half-baked idea that would put Indian companies at a strategic disadvantage and affect consumers. It would lead to huge drops in MRPs of products and affect quality of healthcare. They further feel that these measures won’t have any real impact on product prices and will only need to unnecessary litigation and disputes and hence, lean in favour of continuation of price controls. On the other hand, these measures have been welcomed by many and have been termed as a game-changer for consumers, “if implemented in the right way, and at the right time”.

All in all, the Policy does give useful recommendations for reforming the healthcare industry. The problem, as always, lies in realization and implementation of these recommendations. Hopefully, these measures and solutions will be rationally implemented and will prove to be effective in increasing accessibility and affordability of products in the healthcare industry.

Image from here