Price caps always lead to shortages. Fixing the price of stents will harm both patients and manufacturers.
It is fascinating to observe how governments tend to be delusional about their own powers, sincerely believing that they can bend market forces to their will. Over the last few weeks, there have been price ceilings on school fees and hospital charges, imposed by the Gujarat government and the West Bengal government respectively. In a similar vein, the Union government imposed a price cap on coronary stents, a wire mesh tube used to clear blockages in coronary arteries and prevent heart attacks.
Noble intentions, no doubt! The rhetoric used and the colourful anecdotes narrated while passing these bills in their respective parliaments would rally even the stonehearts on their side. “Education is a service and not a business… For those who want to earn profits should open a factory or a business establishment (sic),” said Gujarat’s state minister for education Bhupendrasinh Chudasma while tabling ‘The Gujarat Self Financed Schools (Regularisation of Fees) Bill, 2017.’ With regard to school fees, he further added: “This is not fees. It is extortion. This has caused personal pain to me. I cannot bear it any more and so we are bringing in this legislation”. Surely his pain is genuine and palpable.
Similarly, West Bengal Chief Minister Mamata Banerjee gave a rap on the knuckles of private hospitals and came down hard on them for ‘overcharging’ for substandard services. “This is not a building material supply business,” she said. “You can’t charge patients whatever you want. You should not forget that providing life and service is a major part of your business.”
Surely, these are positive steps taken by the government for the benefit of the population, right? And then, one remembers that quote from Friedrich Hayek in ‘The Fatal Conceit’:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
Here’s what economics teaches us: A price cap on school fees will lead to private schools shutting down, and create supply shortages. It will also cause the quality of education will drop, as schools will now have to pay lower wages to teachers and other staff. Doctors, similarly, will not receive appropriate remuneration from hospitals, queues in hospitals will increase, quality of medical equipment used for treatment will suffer, and overall healthcare will take a turn for the worse.
In February this year, in an obvious example of overzealous regulation, the National Pharmaceutical Pricing Agency (NPPA) capped the prices of coronary stents, resulting in as much as an 85% drop in prices for certain varieties, which should fill the hearts of patients with happiness (apart from blood, of course). According to a notification on NPPA’s website, the ceiling price of bare metal stents has been fixed at Rs 7260 per unit and that of drug eluting stents (used 95% of the times) has been fixed at Rs 29,600 per unit. The corresponding average MRPs before the price control stood at Rs Rs 45,100 and Rs 1.21 lakh respectively, though some varieties are priced significantly higher. The move will supposedly save about Rs 4450 crore for patients, said Minister of State for Chemicals Mansukh L Mandaviya in a written reply to the Lok Sabha in March.
Bizarrely, the order was in effect immediately, which meant that distributors and hospitals who had stents on their inventory would make a significant loss, as they would have bought these at the previous higher prices. Immediately, and as expected, cost of procedures (which are presently not regulated) saw a spike. Customers do not buy medical equipment on their own. Instead, they pay for the entire package of surgery, and hospitals immediately compensated their losses through higher procedure costs. If the government decides to cap that as well, hospitals will quite simply charge a higher price for hospital rooms, or will find innovative ways to cover their costs.
One of the problems with this move is that it does not differentiate between different models of drug-eluting stents. These come in large varieties and have different price points according to their quality and technological innovation. The price cap will deprive consumers of choice. Higher-end and sophisticated models will disappear from the market, and consumers will be left with only those models that can be profitably sold at the capped price. What’s more, industry experts, such as Dr. Vivek Jawali, chief cardiothoracic and vascular surgeon of Fortis Hospital, believe that “such a regulation might lead to flooding of substandard products from China and Canada. US FDA approved stents will be withdrawn from the market as the government has brought all stents under one category.” Companies will chose to focus on other markets and will withhold launching newer and more sophisticated products in India. It will also stifle any form of innovation by domestic producers.
Right on cue, three major companies, Abbott, Medtronic, and Boston Scientific, have requested the NPPA to allow them to withdraw their latest stents from the country, explaining that the current price cap would make it unviable to sell these products in India. The premium stent market in India is dominated by 4 MNCs, while domestic players focus on the low-cost models. Thus, a withdrawal from the MNCs will create severe shortages for advanced stents.
The government’s reaction to the anticipated shortages will induce a teary-eyed nostalgia among the older generation, and a feeling of time-travel for the younger lot. The Department of Pharmaceuticals has asked stent manufacturers to maintain uninterrupted supply of coronary stents by invoking an emergency clause of the Drug Price Control Order 2013 in public interest. It has labelled stents as an Essential Commodity, and has thus rejected the MNCs’ request to withdraw their products from the market. The companies are further asked to submit a weekly report of their supply and the prices of their products. The order is valid for six months. It has also issued a threat that any violations of these rules will result in a permanent blacklisting of these companies.
Surely even the government understands that it cannot sustainably arm-twist a company to sell its products at a loss. Also, given that the market is dominated by four MNCs, is blacklisting any of them even a credible threat? What will happen to the supply? What if patients actually die because of shortages?
Coronary diseases are a real killer in India and it is laudable that the government wants to fix the problem. However, these crude attempts at designing the market will end up causing more fatalities. Price caps always create shortages – that is the undeniable wisdom of economics. Oh, when will they ever learn?