CUTS meeting on
“Collusive Behaviour in Health delivery in India: Need for Effective Regulation”
Tuesday, 6th July, 2010,
India International Centre, New Delhi
Yogesh Pai
Asst. Prof of Law
National Law University, Jodhpur
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The context- focus on pharmaceutical
industry- therapeutic drugs
Systemic issues peculiar to pharmaceutical
industry- supply chain and other issues
Ex-ante regulatory framework to prevent
abusive practices
Competition Act, 2002- Anticompetitive
agreements and collusive practices in health
care delivery
Conclusions- more questions than answers!
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The paradox:
◦ Access to affordable health care is central- access to
medicines is at the forefront- Draft Pharmaceutical
policy (2006) and other health policy instruments
pointing towards the same
◦ And yet, we witness that consumers shell out of pocket
expenses- private expenses in health care growing
◦ Drugs and medicines account for a vital and substantial
share of healthcare in India.
◦ Household out-of-pocket (OOP) expenditure in India
constitutes a sizeable 69 percent of overall healthcare
expenditure.
◦ Of this, three-quarters of the total OOP health
expenditure is spent on drugs.
Many news reports in India and abroad and
regulatory action by different competition
authorities and other regulators
◦ The European Union Competition Commission inquiry of
the pharmaceutical sector
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The EU report states: from 2000 – 2007 originator
companies spent on average 17% of their turnover from
prescription medicines on R&D worldwide. Approximately
1.5% of turnover was spent on basic research to identify
potential new medicines. 15.5% of turnover was spent
on clinical trials and to obtain marketing approval.
Strikingly, expenditure on marketing and promotional
activities accounted for 23% of their turnover.
The collusive practice of “Pay for delay” actions by the USFederal Trade Commission
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Concerns over delayed entry of generics due to an existing regulatory
loophole.
This concern may not be of much relevance to India since there is nothing
like the Hatch Waxman Act regime for term restorations or generic
exclusivity period- Congress proposes to amend the law
What lessons for India?
◦ Is the regulatory over-watch catching up in India?- experiences of
the erstwhile MRTP regime
◦ Different set of expectations from the Competition Commission
of India and other regulatory bodies DCGI, MCI. Active role of
consumer groups, Pharma orgs et al.
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Information asymmetries lead to erratic working of
competitive forces in the pharmaceutical markets.
◦ Doctor chooses, patient pays in case of prescription drugs (except
generic-generics, this practice is quite visible in both generic and
patented drug markets)- lack of price competition and influencing
preference for a particular drug
◦ OTC- driven by advertising and marketing strategies
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Perverse incentives: conduct of physicians-unethical drug
promotion does led to skewed nature of consumption
pattern and hence impacts effective competition in
pharmaceutical markets.
◦ Some genuine concerns among physicians about alleged
difference in quality- between patented/originator drugs and
branded generics; and/or between patented/branded generics v.
generic-generics- However, factually irrelevant
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Drug advertising and direct to consumer marketing (DTCA)
also adds to the passive exploitative situation created by
information asymmetries.- more so in case of newly
patented drugs
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Linkages in the supply chain: Evidence of linkages between
pharmaceutical firms and doctors/hospitals; retailers and doctors;
Stockists/wholesalers and chain pharmacies, hospitals- collusive
monopsony like practices; group boycotts by pharmacists;
Abuse of spatial monopoly is rampant- more seen in the case of
hospital pharmacies and chemists near hospitals and other localities
Price competition among retailers can be hardly witnessed- owing to
its nature of collusive practices, the pharma markets are less
susceptible to predatory pricing- it’s often the case of monopolistic
pricing
◦ There is evidence of inefficient allocation of resources in the distribution of
pharmaceutical products as studies available indicate that the profitability
margins of different actors is quite high and keep huge mark-ups for nonDPCO drugs and non-scheduled drugs
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Possible collusive bidding in drug procurement: represents 10% of
total health expenditure by Govt.
◦ While there is general downward trend in prices, studies show that the year
2007-2008 saw an increase in prices of more than 50% of drugs procured.
◦ Studies indicate that there is increasing price parallelism in super-speciality
drugs being procured TMSC. (unpublished study by M. Cauksi, PHFI 2009).
Reasons for proposing increased rates in bidding can be possible due to few
number of firms involved and possible collusive bidding activities
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Regulating Perverse incentives for physicians:
The Medical Council of India, Act 1956: Lax enforceability regime
December 2009 amendment to the Indian Medical Council
(professional conduct, etiquette and ethics) regulations 2002,
has specified certain acts as running fowl the law on the
relationship between the pharmaceutical industry and the
medical profession in India
The 2002 regulation requires prescription in generic names- “as
far as possible”
The amendment clearly specifies don’ts in relation to gifts,
travel, hospitality, cash and monetary grants, exceptions to grant
for medical research and maintaining professional autonomy;
No public endorsement by a medical practitioner- any views or
efficacy tests to be published in journals of scientific bodiessilence on continuing medical education (CME)
The regulation does not refer to quantity of distribution of free
samples: To the contrary The Pharmacy Act allows medical
practitioners to dispense medicines to patients under their
supervision- large scale use of free samples for commercial
purpose is thus abetted
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Regulating Drug promotion by companies: Providing product
information to physicians necessitates some amount of information
exchange between physicians and pharma companies- The blurring
boundaries of what constitutes fair practices are of intense debate in
issues involving drugs promotion.
In the year 2008, the pharmaceutical industry in India spent a total of Rs
4941.15 crore, in which Advertising expenses were 823.57 and drug
marketing 2470.44 crore Indian rupees.
World Health Organization (WHO-1998)- “Ethical criteria for medicinal
drug promotion” states that “[s]cientific data in the public domain should
be made available to prescribers and any other person entitled to receive
it, on request, as appropriate to their requirements. Promotion in the
form of financial or material benefits should not be offered to or sought
by health care practitioners to influence them in the prescription of
drugs”.
However, it does not substitute domestic legislation- nothing much has
worked since Drug Enquiry Committee in 1930 under the
chairmanship of Sir R.N. Chopra which scrutinized the pamphlets of
drugs which made spurious claims
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Voluntary codes by IFPMA, OPPI, IDMA and other are not meant to be
rigorously pursued. Voluntary codes are antithesis to the idea of robust
regulation- double standards in implementing the code
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Regulating conduct of pharmacists:
Prescription drugs are listed under Schedule H on the Drugs and
Cosmetics Act.
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There are about 570 molecules in this category that are stocked in a total
of 5 to 8 lakh retail chemists.
The Pharmacy Act, 1948: The Pharmacy Act was passed with
the objective of regulating pharmacy education in the country
and to regulate the profession and practise of pharmacy- A
weak piece of legislation to deal with collusive behaviour
among pharmacists-physicians-manufacturers/CFA/Stockists
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Largely deals with registration of pharmacists and maintenance of registers
Section 36- Removal from register- (ii)
that he has been convicted of any
offence or has been guilty of any infamous conduct in any professional respect
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that where the offence is an offence under the [Drugs and Cosmetics Act,
1940 (23 of 1940)], the registered pharmacist has not used due diligence in
enforcing compliance with the provisions of that Act in his place of business
and by persons employed by him [or by persons under his control].
However, Section 46. Power to make rules -2.[(kk) the conduct of pharmacists
and their duties in relation to medical practitioners the public and the
profession of pharmacy;- Ins. by Act 24 of 1959, sec.17 (w.e.f. 1-5-1960).
Does not prescribe counter measures for resale price maintenances
Does not allow pharmacists for generic substitution
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Advertisements and unfair trade pracitices:
Drugs falling in schedules H, X (prescription drugs) and schedule G
(antihistamines) of Drugs and Cosmetics Act, 1940 are currently not
advertised to the public
The Drugs And Magic Remedies (Objectionable Advertisements) Act,
1954: The purpose of the Act is to control advertisements of drugs in
certain cases and to prohibit advertisements of remedies that claim to
possess magic qualities.
According to this Act, advertisement includes any notice, circular, label,
wrapper or other document and any announcement made orally or by
means of producing or transmitting light, sound or smoke.
The schedule under the Act specifies a list of ailments for which no
advertising is permitted.
◦ The list contains 54 ailments including Cancer, Venereal Diseases, Tuberculosis, and
Diabetes to name a few. Apart from this, there is no specific law which prohibits
advertising of prescription drugs although industry practice is not to advertise
prescription- only drugs
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Does not have any bearing on DTCA
Does not have full-proof mechanism for pre-approval of advertisements
Only general guidelines applicable framed by Advertising Standards
Council of India- a voluntary self regulated code
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Replaces the erstwhile MRTP Act, 1969- MRTP adopted a
structural approach rather than an effect based approach.
New economic conditions post 1991 led to enactment of
the Competition Act, 2002
There were some important prosecutions against
organizations of druggists and pharmacists under MRTP in
relation to unfair trade practices and restrictive trade
practices- often have led to conflicting decisions
Competition Act primarily an ex-post measure (except
pre-merger
approvals)
is
used
after
evaluating
anticompetitive effect in the relevant market.
Competition
law
experiences
from
comparative
jurisdictions suggest that it may run the risk of under
enforcement or over-enforcement. Chicago and PostChicago based arguments since 1970s have made a case
for under enforcement
Specific regulation in certain areas may have an upper
hand; but the specific regulation v. competition law
jurisdictional enforcement yet to be solved
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Governs largely three type of anticompetitive conduct, mainly:
◦ Anticompetitive agreements (section 3)
◦ Abuse of Dominance (section 4)
◦ Regulation of combinations (sections 5&6)
Restrictive trade practices and unfair trade practices in relation
to healthcare delivery can be largely dealt under provisions
pertaining to anticompetitive agreements (section 3)- can be
further classified as horizontal or vertical agreements
◦ Horizontal agreements are those between undertakings at the same
level of market, while vertical agreements are between undertakings
at different levels of market.
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Abuse of dominance deals with issues of unilateral dominance
and/or group dominance of firms- largely to do with
monopolistic pricing, predatory pricing, impeding technological
development, interfering in secondary markets, unfair or
discriminatory conditions in purchase or sale of goods, denial of
market access etc…
Combinations (mergers and acquisitions) although a type of
collusive practice is regulated through different provisions since
they raise different type of concerns- mainly relating to
foreclosure of competition
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Anticompetitive Agreements and its application in relation to practices in
the pharmaceutical supply chain
◦ An agreement under the Act need not necessarily be written or oral- tacit
understanding/arrangement to collude would suffice; such agreements need not be
even enforceable by law.
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Not all agreements would come under the purview of anticompetitive
agreements- any such agreement “which causes or is likely to cause an
appreciable adverse effect on competition within India”.
The test AAEC in India – section 19(3) factors may be consideredprimarily guiding towards certain anticompetitive and procompetitive factors- however, still the regulation must further scope
them in to actionable outcomes
Horizontal agreements (cartelization)- price fixing, output
restriction and market allocation agreements- shall be presumed to
have AAEC in India- a rebuttable presumption and not per se
illegality
Vitamins Cartel (2003)- The EC Competition Commission fined eight
undertakings totalling to Euro 855.23 million (reduced to Euro
790.50 million) for running the vitamins cartel. Foreign MNCs like
Roche, BASF, Aventis were found to be involved in cartels.
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Group boycotts by pharmacists/doctors through their
associations or through smaller groups constitutes a section 3(3)
violation
Bid rigging or collusive bidding can be dealt with under
provisions relating to anticompetitive horizontal agreements
Vertical agreements- The most useful provision to deal to
collusive practices in healthcare delivery (pharmaceutical supply
chain)
◦ Some practices may initially appear to be unilateral but may also be a
result of concerted practice, more so like a vertical agreement
◦ not all agreements (horizontal or vertical) have actual effects on
markets. This is due to their weak position in the market concerned-
deminimus doctrine.
◦ Healthcare supply chain presents a case of non-vertically integrated
markets- where the distribution of products is undertaken in cheaper
ways by different actors
◦ Vertical contracts between firms may out of necessity be procompetitive- but there can be per se illegality of certain vertical
contractual restraints (e.g RPMs until 2007 US SC decision)
◦ Vertical contracts may be entered to overcome the “free-rider”
problem
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Physicians- Drug manufactures relationship can be challenged
under Section 3(4) for being an “Any agreement amongst
enterprises or persons at different stages or levels of the
production chain in different markets, in respect of production,
supply, distribution, storage, sale or price of, or trade in goods
or provision of services…”,
◦ However, AAEC must be shown- this can be shown through lack of
otherwise competitive forces that must prevail in prescription marketscan be challenged as market allocations through unfair practices- also
because such practices are already prohibited under some other law
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Retailers- Physicians relationship can also be challenged as a
market allocation agreement as above
A case of presumed illegality can be followed since such
agreements are already prohibited under some other law
Resale price maintenance can be challenged as a vertical
restraint- the approach can be controversial, though
Other category of vertical agreements dealing with “exclusive
supply agreements”, “exclusive distribution agreements”, “tie-in
agreements” and “refusal to deal” can also be challenged under
vertical agreements having AAEC in the healthcare delivery
system in India
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In EU there are Block exemptions (safe heavens) read
with Commission’s guidelines on Vertical restraints,
coupled with the deminimus doctrine.- the effect:
most vertical agreements where the market share of
each of the parties is below 30% will fall outside the
scope of anticompetitive vertical restraint- provided
it’s not a hardcore listed agreement
The effect should be seen in a relevant product
market and relevant geographic market
◦ Conditions for assessing relevant product market usually
follows the ATC (Anatomical Therapeutic Classification)
divided into various levels- level 3 dealing with therapeutic
compounds is generally followed in pharmaceutical inquires
◦ Identification of relevant product market is fraught with
difficulties since general conditions of competitive market
forces are absent in “ethical drug” industry
◦ In most cases under scrutiny the Commissions usually find
out the most narrowest relevant product market that is
affected (except in case of merger inquiries)
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Is an over-regulated industry in need of more regulation?- the
approach should be towards effective implementations of
existing laws rather than creating new ones, except where there
is an evident gap
Enforcement machinery under different regulations should be
put to task
Competition Act, 2002 is well equipped to deal with collusive
practices in healthcare delivery
CCI should trump sectoral regulators if they fail to bring in
regulations or to implement them- moreover, even if implement
and yet AAEC seen, CCI must jump into the fray
CCI may initially start with prosecuting collusive vertical
agreements rather than hardcore cartels since it is difficult to
detect cartels
Need for detailed regulation/guidelines from the CCI on
horizontal and vertical restraints- more clarity needed on what
type of information exchanges and vertical restraints allowed
under the Act- it would provide more business clarity and might
benefit consumers as well