Conclusion

In this book, we attempted to examine the effectiveness of the design, implementation, and compliance with partial price control regulations on pharmaceuticals in India. We presented anecdotal evidence to suggest the history of cost-based regulation in this sector leading up to the 2013 DPCO had been ineffective. The government spent nearly a decade from 2002 until 2012 to decide on the design of the regulation. The new design deviated from the earlier design by relying on a market-based mechanism for determining price ceilings and using the prices of firms with a relatively larger market share. We find that the design of the regulation is ineffective. In particular, the partial nature of the regulation and the exclusion of other dosages of the same medicines as well as fixed-dose combinations of important substitute medicines led to compensatory shifts in the demand and prices in unregulated markets. We also find evidence to suggest that the implementation of the regulation has been suboptimal. In particular, the regulator had limited access to reliable data on the prices, which led to delays in fixing ceiling prices and disputes with the pharmaceutical firms, which challenged the ceiling price orders in several cases. The regulator has also compounded the problem by following at times what appears to be inexplicable interpretations of simple formulae to determine the ceiling price. The regulator’s efforts over the last 3–4 years to develop a database of prices and market shares by requiring firms to submit such information received low levels of cooperation from the industry. The enforcement of price control regulations in India has been historically weak with the absence of built-in penalties to dissuade pharmaceutical firms from for charging prices above the ceiling price, the regulator identifying a small fraction of the potential ceiling price violations, and then recovering only a small fraction of the overcharged amount successfully after years of legal proceedings. We find that the pharmaceutical firms responded by increasing prices before the implementation of the regulation, shifting the demand away from the regulated to unregulated medicines, introducing more product varieties of unregulated medicines, and increasing retailer incentives to push products with higher margins. While in the short term the impending regulation increased the prices of both regulated and unregulated medicines, in the medium term, the weighted average prices of partially regulated medicines have not declined in absolute terms. A major limitation of the current regulation is its inability to limit exorbitant retail margins resulting from consumer prices that are several times higher than the wholesale prices. While we find evidence to suggest that pharmaceutical firms coordinated to undermine the effectiveness of the regulation, their trade associations have also supported studies questioning the economic rationale for pharmaceutical price regulations in India. It is also concerning that IMS has taken up the task to evaluate the effectiveness of price control regulations despite its key role in providing data for determining the ceiling price as well as the many questions raised about the quality of its data.