Parsing The Physician's Prescription Under The Competition Law Lens

The inherently existing information asymmetry in the pharmaceutical industry in India is aggravated by the nature of the anti-trust laws. I will use the test suite of the generic drugs industry to back up the claim and then I will propose an ex-ante solution to the problem.

The Background:

When an inventor invents a molecule, they procure a patent from the controller general after undergoing clinical trials. The rationale is to enable the originator to recover its R&D investment, so that it can use the profits to innovate again. During this period, the originator sells the drugs under its brand name on a high price.

After 20 years, pharmaceutical companies (PCs) which are driven by volumes of sales can sell the generic drugs under their chemical name. However, the PCs driven by prices, assign a proprietary name and then build their brand equity by promotions and advertisements. Thereafter, they sell the same generic drugs in the name of a brand. The pharmological characteristics of generic and branded generic drugs are identical. They ought to undergo similar bio-equivalence tests and are equally effective. But the only difference lies in their price (30-90%). For instance, Generic drug Paracetamol costs ₹1 for 1 tablet, and branded drug Crocin costs ₹2 for 1 tablet.

The Misconception:

The cheaper price of the generic drugs deters the consumers from buying them, as they start doubting the quality of the generic drugs due to their lesser price.

The patient's misconception gets aggravated, when the physicians only prescribe branded generics instead of the generic drugs. They cite the better quality of the former as the reason to prescribe them, thereby flouting regulation 1.5 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('Ethics Code') which mandates the doctors to prescribe the generic names of medicines. However, empirical studies show that generic drugs are as efficacious as their branded counterparts.

The Anti-trust Problem:

The real reason behind physicians prescribing branded generics is their own vested interest and not any quality concern.

As per a study conducted by Sathi (Pune), the PCs incentivize doctors with foreign trips, vouchers and even "women for entertainment." While, incentives are cannot be availed from the generic drugs industry.

Generic drugs are as therapeutic as branded drugs. But the promotions by Pcs and endorsement by physicians creates an artificial product differentiation between the two.. as a result of the same, patients become even more convinced to buy the costlier branded drugs, even when substitutable cheaper drugs are available.. further, Due to the patient's consumption behavior, the generic drug industry which is predominantly volume driven is unable to make profits. This is how such an equation forecloses rival competition thereby affecting consumer welfare and harming the weaker player.

The Law tries to remedy this, but in inefficacious ways. Clause 6.8 of the Ethics Code prohibits the doctors from accepting any bribes from the PCs. Further the Drug Technical Advisory Board (DTAB) via a recent notification directed all the pharmacies to display generic drugs on separate shelves, so that they are clearly visible to the consumers. But this amounts to treatment of symptoms instead of eradication of the disease.

The physicians are the recipients of the incentives, whereas the PCs are the offerors in this case. Thus, a permanent solution to the problem of collusion between the PCs and physicians is to hold the offerors accountable, instead of directing the limited administrative costs towards enforcing the ethics code on physicians.

The Ex-post Remedy:

The PCs and Physicians lie at different stages of the same market indicating that it is a non-horizontal interaction is covered under section 3 (4) of the competition act (CA02).

The PCs offer incentives to physicians and make them prescribe the drugs manufactured by the PC alone. This indicates that it is an agreement between the two for exclusive distribution of the drugs produced by the pharma companies to the consumers within the meaning of section 3 (4-B) of CA02.

Such agreements have the potential to affect consumer welfare and foreclose competition for the rivals. As per section 3 (4), such agreements are void and illegal if they cause an appreciable or adverse effect on competition.

Even though section 3 (4) does not have the analytical shortcut of presumption of AAEC like in section 3 (3) which covers horizontal agreements, one still ought to view such vertical agreements between physicians and pharma companies because medical market is a peculiar market when viewed from the perspective of patient's rights and consumer welfare. This has to do with the fact that right to life cannot be subjected to derogations and all other rights be it constitutional, fundamental or statutory depend on this right alone.

Kenneth Arrow argues that the medical industry has some ethical challenges that set it apart from all other industries.

Patients are unable to make an informed choice with regard to purchase of drugs due to the information asymmetry. They rely on the physician's advice while making their consumption decisions.

Due to this stark inequality in bargaining power, it is better to have an ex-ante regulation of the generic drug industry instead of providing ex-post facto remedies under section 3 (4) after the damage is already done. After all, prevention is better than cure.

The Gaps:

A voluntary Uniform Code of Pharmaceutical Marketing and Practices (UPCMP) came about in 2015. The government expected that the industry will self-regulate.

Section 6 and 7 prohibits the PCs from extending any monetary or non-monetary grants to physicians. But studies reveal that the PCs blatantly violate the code by offering monetary and non-monetary incentives to physicians in turn over prescribing their drugs to the patients.

Besides being non-binding, the code is also very lenient. As All complaints are examined by the ethics committee which comprises of the members of the pharma associations themselves. Even the power of review lies with the members of these associations. But an industry which has repeatedly violated laws, is known for patient's exploitation and is inherently hyper-technical – needs to be held accountable from the outside, instead of being left alone to govern itself.

Further, The penalties under the code include interalia, making the PC to recover the items like freebies, gifts etc. from the physicians. However, this penalty is not deterrent as it amounts disgorgement of sorts, wherein the PC or physicians are not supposed to pay any monetary/non-monetary penalty and are just supposed to re-pay the ill-gotten gains.

This is how law aggravates the pre-existing information asymmetry by not intervening to reduce it.

The alternative

Wouter Wills argues that the purpose of anti-trust enforcement is to prevent the violation of antitrust laws. Thus, the law should ensure that (i) PCs do not get an opportunity to commit the violation; (ii) there is no willingness to commit the violation; and (iii) the law is deterrent i.e., the expected costs of violation exceed the benefits accruing out of it.

Under the present model, (i) PCs get an opportunity to commit violation as they have the capital to bribe the physicians; (ii) they are willing to commit the violation as offering such incentives was profitable for them in ensuring high sales in the past; and (iii) the cost of violation is nil due to the lack of enforceability and toothlessness of UPMCP.

Thus, it is suggested that UPCMP be made mandatory and deterrent to the extent that costs of violation exceed the benefits accruing from it. This way it will act as an effective ex-ante remedy.

The pharmaceutical industry is inherently fraught with the issues of quality sensitivity and information gaps. These challenges are dilated by the socio-economic factors like poverty and illiteracy. Out of the total expenditure on health, nearly 70% is covered by the patients from their own pockets, pointing to the limited reach of insurance and government health schemes.

The law adds to this information gap by not fixing it. In the view of the same, the state ought to view such arrangements between PCs and physicians with greater caution and curb them before they engender disaster.