Competition vs price control in healthcare

Deccan Herald, June 29, 2018

By Ujjwal Kumar

Local manufacturing of pharmaceutical products has been a policy goal for quite some time, which connects well with the other goal of access to affordable drugs. This has, in general, been achieved successfully and today India has one of the most vibrant pharma manufacturing clusters in the world, significantly helping access to affordable drugs.

However, unlike with pharmaceuticals, India has not been successful in engendering local manufacture of high end medical devices, and hence is largely dependent on costly imports. So, local manufacturing of medical devices has lately become a major policy aim, and is one of the focus sectors under the Make in India initiative. But there is one lesson from the drug price control regime that needs to be learnt for growth and development of local manufacturing capacity in medical device sector; and the sooner the better.

Price-control (and similar government interventions) distorts market and disturb competitive processes. So it needs to be avoided as much as possible. It must be an exception, rather than a rule. Ensuring competition, and thus helping market function well should be the core philosophy to make medical products affordable.

After all, why do we need price control when there is robust (potential) market competition in pharmaceutical and medical devices sector? Can ‘competition’ not achieve, what ‘price control’ aims to i.e. making medical products affordable?

Be that as it may, since the medical product market is imperfect, where end-consumers are not decision makers, the path to ensuring competition would be difficult to traverse, yet it would be the sustainable way to go.

Right paths are generally tougher paths. The easy short-cut of price control approach has caused and can cause further harm to the growth and development of medical device industry. From a competition perspective, the welfare of consumer and producer are both important. Closure of firms due to market distortions would tend to reduce competition in the market, thereby harming consumers.

For instance, the closure of the local API (Active Pharmaceutical Ingredient) industry is being attributed to the faulty price control regime in past, which squeezed profitability on APIs. No wonder, today our pharmaceutical industry is largely dependent on supply of APIs from China. This is now being recognised as a serious policy concern and is being addressed, among other things, through protectionist measures. China, on the other hand, has largely refrained from price control and is attracting more and more foreign investors.

Investment hampered

Apart from market distortions, price control also gives rise to uncertainty for investors and hampers innovation. This is particularly true for the medical device sector where we are aspiring for much-needed foreign investment under Make in India. Measures like price control could pose serious threat to such national aspirations.

The sweeping manner in which coronary stents and knee implants were brought under price control has discouraged potential investors (both existing well as new entrants) from production of high-end medical devices in India.

The stent price control, on the one hand, has lead to withdrawal of certain types of stents out of the Indian market, thus reducing choice for users. On the other hand, there are reports inferring that the capping of price on stents has not really benefited most end-consumers. This is because hospitals increased procedure costs to compensate the loss on stent margin.

Price control needs to be the last resort when there is market failure coupled with price gauging. Ensuring competition, though, is the best way forward in new India, even if this path is a bit cumbersome to traverse. Instead of investing in market distortionary measures, we need to invest time, effort and resources towards competition regime to achieve the same objective – affordable medical products.

Thus the scope of the present effort of the Competition Commission of India to study anti-competitive practices in the pharmaceutical sector need to be broaden to map distortionary effects of price control. Last year, the CCI had sought expression of interest with respect to survey-based market study in healthcare sector. It must be noted that the CCI, in recent past, has successfully cracked down on the anti-competitive practices prevalent in the drug distribution chain. Similar approach can be adopted for the whole value chain of medical products.

It was expected that the recent high-level review of the drug price control regime, which also involved the Prime Minister Office and Niti Aayog, would suggest dismantling it in a phased manner and rely more on ensuring competition. Alas! The current state of affairs does fall short of that expectation. Hope there will be course correction in the near future.

(The writer is a policy analyst, CUTS International)

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