The antibiotics challenge

Don’t extend price caps on drugs

An expert committee, according to a report in this newspaper, is likely to recommend to the drug price regulator that it should “rationalise” caps on antibiotic prices by bringing non-branded generic medicines into the net. Currently, branded antibiotics like Augmentin have a margin cap of 8 per cent for stockists and 16 per cent for retailers, while their wholesale prices are fixed by the regulator. Similar regulations will now be introduced, if the National Pharmaceutical Price Authority agrees, for generic antibiotics. The immediate impact of such a change is not known, although it is speculated that hospital margins will be most affected. But this is an opportune moment to reflect on the problems with price caps on antibiotics in general. Rather than helping consumer welfare, they destroy value and hurt the consumer.

Any price cap has a supply response. The supply response in the case of medicines like antibiotics will be harmful in many ways. First, shortages of drugs brought under price control may become common: Rationing may take place if the price cut is particularly deep. Resources could be transferred to more profitable production of drugs whose price is not capped, for example. Some companies can exit from producing certain pills entirely. Others might collude with doctors or hospitals to ensure that pills that are excluded from price caps are the ones being recommended — this is perhaps what is happening with regard to branded and non-branded generics. The second form of response will exacerbate the problem: A supply response that will adversely affect quality. Drug makers will cut corners, and in the absence of proper regulatory supervision will produce pills of poor quality. Inappropriate prescriptions are already a serious problem in India and price caps have made them worse. A study by researchers at the Indian School of Business on the supply and demand response in India to the introduction of price caps for Metformin, a medicine used for the treatment of Type II diabetes, showed that all these effects were visible. In addition, companies colluded with one another to capture the market for Metformin following the regulation of the price of Metformin 500, in particular. None of the companies has been hauled up so far for such actions. Regulation without the capacity for follow-up implementation is a bad idea and should be avoided.

Overall, research and studies have established that the effect of pharmaceutical price controls in India is adverse. Emma Dean of the Centre for Global Development in Washington, DC, has shown that an outcome of price caps in India was “decreased sales of price-controlled and closely related products”. In other words, some patients could no longer access the drugs. Prof Dean shows that this disproportionately harms poorer and rural consumers.

The obvious corollary is that richer consumers with better access to drugs can procure them more easily. This also encourages an unhealthy rise of inappropriate prescriptions and their misuse by some patients. With antibiotics, the overall effect of such inappropriate prescriptions would then be particularly dangerous — over-prescription to those who do not need the drug. India is already the worst country in the world for antibiotic resistance, which is a global crisis. India also faces a public health crisis, thanks to poor quality drugs being universally available. As the country moves to universal healthcare, it should move away from arbitrary price controls for drugs.