Excessive Pricing in Medical Sector: A Pressing Need of Regulation
In 2015, Max Super Specialty Hospital along with its syringe supplier- Becton Dickinson was accused of charging an excessive price for the syringes. According to the complaint made before the Competition Commission of India [CCI], the in-house pharmacy of the hospital was selling the syringes at Rs. 19.50, this being the MRP of the syringe. However, the selling price of the same syringe at another Medical Store was found to be Rs. 10 with Rs. 11.50 being the MRP of the syringe.
After nearly six years of the complaint, in April 2022, the CCI sent a notice to Max Healthcare, Apollo Hospitals and Fortis Healthcare. The notice asked the said service providers to provide the details of the suppliers of their medical products and most importantly the criteria used by them to fix the price of the medicines when selling through their in-house pharmacies.
Absence of general guidelines in the European Union [EU]
In the EU, there is no concrete definition, formula or guidelines that can be applied to establish whether an entity has imposed excessive prices on its products. The first major case in the EU that extensively deals with excessive pricing was the United Brands v. Commission of the European Communities (1978) [United Brands]. Interpreting Article 82 of the Treaty of Functioning of European Union [Treaty] (currently, Article 102 of the treaty), the European Court of Justice [ECJ] prescribed a two-stage test to determine whether the price of a product is excessive or not.
According to the ECJ, the price charged by the organization will be considered excessive when (a) an excessive gap is present between the product’s cost of production and the price at which the product is selling and, (b) the product’s price is unfair when compared to other competitors who are selling the similar products.
However, at times different tests were used by the ECJ to determine price fairness. Most notably, in General Motors Continental NV v. Commission of the European Communities (1975), the ECJ came up with the economic value test. According to this test, to decide the fairness of price of a product, its selling price has to be compared with the economic value which the product provides. The economic value of a product is defined as the amount of benefit a customer gets by buying a product. The ECJ again applied this test in the British Leyland v. Commission of the European Communities case (1985). But after two decades, in Scandlines Sverige AB v. Port of Helsingborg case (2004), the European Commission has stated that the economic value test alone is insufficient to decide the culpability of the entity which is selling the products at a particular price. The Commission went on further to state that this economic value test can be used only to form a prima-facie opinion but not as a conclusive opinion. Once this prima facie opinion is formed, then to decide the culpability, the price of the product can be compared either with the price of the same goods which the entity is selling in the different relevant market or with the price at which similar goods are being sold by the competitors in the relevant market.
The latest case which deals with excessive pricing in the EU is the Aspen Pharma case (2021). The European Commission rather than relying on any particular test took into consideration the practical conditions of the case. In the instant matter, Aspen Pharmacare Holdings Ltd. was selling certain medicines which help in fighting cancer at a price which was far bigger than the cost of production of these medicines. Since no competitor of Aspen was able to produce substitutes for these medicines, Aspen could sell these medicines at any price according to its wish. The European Commission on comparing the medicine’s cost of production with its selling price found the prices excessive. Since there was no substitute for these medicines, different member states of the EU were compelled to pay the unjustified exorbitant price of these medicines. The court concluded that it is not required for both the conditions stipulated in the two-stage test to be fulfilled and fulfilling either of the condition would be sufficient to hold the entity liable.
Even after so many cases, the matter of excessive pricing is not settled in the EU. The Aspen case provided a good occasion for the Commission to define what pricing will be considered excessive and what parameters should be kept in mind by the entities to decide the selling price of their products to avoid the investigations.
A balanced approach in the United Kingdom [UK]
In holding Napp Pharmaceutical liable, the UK’s Competition Markets Authority [CMA] in Napp Pharmaceutical Holdings Limited v. Director General of Fair Trading case looked into the profit margins of Napp. By doing a comparative analysis between Napp’s and its competitor’s profit margins, the CMA concluded that since an excessive gap is present in the profit margins, Napp has sold its products at an excessive price. However, the negative connotation of the judgement is that it ignored the possibility that in the event of Napp charging excessive price, consumer welfare could not be disrupted since the consumers always had the opportunity of buying the products from Napp’s competitors.
Talking about the recent investigations, the CMA has found Pfizer guilty after founding it indulged in charging the excessive price for its products. The CMA used only the former part of the two-stage test. The decisive indicator used by the CMA was sales return which crossed the permissible threshold. However, on appeal, the Competition Appellate Tribunal overruled the judgement on the ground that CMA by partially using the test has failed to correctly apply it.
Interestingly, the matter on reaching the Court of Appeal upheld the decision of CMA. The Court ruled that once the first part of the test is correctly used and the entity is found guilty, then the CMA has discretion whether to further proceed or not.
The CMA did not apply the two-stage test in every situation and used additional methods accordingly. In contrast with the EU, the authorities in the UK have to look into other factors including but not limited to the evidence furnished by the accused if it chooses to apply only one part of the two-stage test (Pfizer case). The positive impact of this attitude is that it provides the accused entity a reasonable opportunity to defend itself.
Coming back to the Indian jurisdictions, Section 4 of the Competition Act, 2002 deals with excessive pricing. Even after mentioning unfair price as an explicit ground to prove abuse of dominant position, the CCI has failed to handle this burgeoning problem in the drug industry.
Various Ruling of the CCI shows that it has not come hard on the entities which apply excessive pricing in the health sector. In the Biocon Limited case, the CCI absolved the Roche Group from the accusation of excessive pricing merely on the ground that an entity can impose such pricing on its products if it has invested significantly in R&D. Moreover, the CCI in the Kapoor Glass case, acknowledged its hardships in proving the presence of excessive pricing.
Every year around three per cent of India’s population goes into poverty due to their inability to pay for expensive drugs. The Pradhan Mantri Jan Aushadhi Kendra scheme, an initiative of the government was launched to provide expensive medicines to poor people at subsidiary. But few years after its opening, the initiative failed to fulfill its promise due to insufficient quantity and defective quality of the medicines. The failure of such scheme has rendered poor people incapable to avail the expensive treatment thus imposing a moral duty on the CCI to prescribe a set of criteria/universal test to determine the justified price of medicines.
The current inquiry against Max Healthcare, Apollo Hospitals and Fortis Healthcare could be used by the CCI as an occasion to prescribe suitable criteria notwithstanding the decision of the inquiry. The best recourse for the CCI would be to take a clue from Pfizer’s case, by providing a chance for the accused to furnish the evidence in their defence. Moreover, there is a significant governing difference between the UK’s and India’s healthcare sector. While the UK’s healthcare industry is primarily controlled by the government, India’s healthcare sector on the other hand is largely governed by private players, with the government owning only 10% of the hospitals. This heavily privatized health sector gives freedom to the hospitals to unfairly impose excessive pricing on its medicines which in turn puts a greater burden on the CCI to fairly regulate the price of life-saving medicines.
Mohd. Fahad Ansari & Aditya Trivedi are law students at NUSRL, Ranchi.