Excessive Pricing Allegation against three Hospitals: CCI’s Golden Opportunity to take Cognizance?

[By Swetha Somu]

The author is a student of Gujarat National Law University.

In 2015, a social worker filed a complaint to the Competition Commission of India [CCI] against Max Super Specialty Hospital and its disposable syringe supplier, Becton Dickinson India, an MNC. The complainant alleged that the in-house pharmacy of Max Hospital charges an excessive amount of Rs.19.50 (the printed MRP) for Becton Dickinson’s disposable syringe bought by its patient. This allegation was made because the same brand of disposable syringe had a cheaper MRP of Rs.11.50 when bought outside from a local pharmacy.

On the basis of this 2015 complaint, the CCI in April 2022 sent a notice to Max Healthcare, Apollo Hospitals, and Fortis Healthcare for the furnishing of details on its suppliers of pharmaceutical products, its method of determining prices when selling in its in-house pharmacies, and other relevant details. The matter is slowly shaping towards an issue of excessive pricing.

Now, this article aims to explore the grey area of excessive pricing predominantly in relation to the Indian pharmaceutical sector. It analyses excessive pricing in other international jurisprudence before suggesting how to mould and incorporate the same into the Indian landscape efficiently.

How ‘excessive pricing’ is dealt with in other countries

Firstly, excessive pricing can be defined as an antitrust violation in which a dominant firm charges an excessive price relative to an appropriate competitive benchmark in an unfair manner. It does not necessarily mean that there’s a threat to fair competition but rather an abuse of one’s dominant position for one’s own advantage.

European Union [EU]

The first EU case which took a full-fledged attempt to look into the aspect of excessive pricing was the prominent United Brands case (1978). The European Court of Justice [ECJ] laid down a standard two-fold test under erstwhile Article 82 of the Treaty of Functioning of European Union [TFEU] (now, Article 102 of TFEU) that states that a price shall be deemed excessive if (i) the difference between the dominant entity’s cost of production and the actual price charged by it must be excessive (cost-plus assessment test) and, (ii) the price in comparison to competitor’s price or market price is unfair or by itself unfair.

Before the United Brands decision, the European Court of Justice [ECJ] in General Motors Continental NV v. Commission of the European Communities (1975) held that a price is to be termed excessive against the economic value of the provided service. The ECJ referred to and upheld the merits of this economic-value test in its British Leyland (1985) case. However, the European Commission in Scandlines Sverige AB v. Port of Helsingborg (2004) stated that this economic-value test of cost and price comparison is to be used only as a preliminary step in the determination process as it is inconclusive on its own in deeming an action violative. The Commission went on to say that the price could be compared with either (i) the price charged by that dominant undertaking for the same good/service in other relevant markets (cost-plus assessment test), or (ii) the prices charged by businesses providing similar goods/services in various relevant markets.

Post the Scandlines decision, the topic on ‘excessive pricing’ was brought up again by the EC in the Aspen Pharma (2021) case. The EC concluded that Aspen’s prices for cancer-related products were unquestionably excessive in this particular circumstance as it routinely generated sizable profits. Aspen was easily able to charge these amounts since the market did not offer any substitutes for these specific cancer treatments. As a result, the national governments of the member states were unable to switch the products and eventually gave in to pressure to provide the necessary medications at whatever cost Aspen demanded. The court held that the two prongs of the test are not necessarily to be applied cumulatively but rather as an alternative.

In the EU, the authorities don’t intervene in price wars unnecessarily and only to compelling needs. The Aspen case, which took four years to conclude, failed to use this opportunity to lay down general guidelines comprising accurate parameters and acceptable pricing behavior which could have allowed for a uniform application across all jurisdictions. Still, the Commission failed to seize the opportunity.

United Kingdom

The UK’s Competition Markets Authority [CMA] in Napp Pharmaceuticals case, stated that Napp’s prices and profit margins were much greater than those of its rivals, hence coming to the conclusion that it was charging unreasonable prices. Although the verdict made significant points about misuse of a dominating position and exorbitant pricing, it can be criticized because Napp’s rivals could profit from it and force Napp out of its dominant position.

Moreover, there are a handful of notable, recent national cases as well. In particular, in Pfizer/Flynn Pharma (2020) case, both Pfizer and Flynn Pharma were fined by the CMA for charging exorbitant prices after applying the first part of the two-fold test. This was done by simply observing that sales return was above the determined threshold rather than comparing it against a benchmark. The decision was subsequently annulled by the Competition Appellate Tribunal for the incomplete application of the two-fold test laid down in United Brands case. However, the UK Court of Appeal found that the CMA was correct as it cannot be forced to go beyond the first prong (cost-plus assessment) to determine price excessiveness.

Recently, in Auden Mckenzie/Actavis UK (2021) case, the CMA found that the prices charged were excessive and unfair under Chapter II prohibition in the Competition Act 1998 (the equivalent of Article 102 of TFEU). Other recent cases include the Essential Pharma case and the Advanz Pharma (2021) case.

Interestingly, the CMA has applied the United Brands two-fold test with no strict adherence to the same. Unlike the EU, the UK authorities do not look at the two parts of the test as solid alternatives to each other. The authority is bound to accept other evidence submitted by the alleged company even if it is only under one prong of the test, than that of its own (Pfizer/Flynn Pharma case). This broad approach gives the private players a way to justify their actions and reasonably protect their interests.

United States

The antitrust jurisprudence in the U.S. does not recognize excessive pricing as a violation of the law. This is because it believes that (i) it limits the freedom to set prices and subsequently waning the incentives to compete and innovate (ii) interfering with market pricing mechanisms typically distorts supply and demand and impedes efficient allocation of resources (iii) that determining the reasonableness of prices charged by a lawful monopolist goes beyond their competence and importantly, the difficulty crafting an antitrust remedy for excessive pricing.

India

The ground of ‘excessive pricing’ falls under the ambit of Section 4 of the Competition Act, 2002. Additionally, it is important to note that despite the Indian regulator’s pivotal role in regulating the pharmaceutical industry in merger control, the CCI has not taken any major enforcement action against excessive drug pricing in the pharmaceutical industry.

Previous CCI decisions show an apparent reluctance to acknowledge excessive and unfair pricing as an abuse of dominance. Similarly, the ground was rejected in Biocon Limited v. F. Hoffmann-La Roche AG as the initial increase in price was attributed to R & D. In Kapoor Glass (India) Private Limited v. Schott Glass (India) Private Limited, the CCI expressed its difficulties in determining the purview of excessive pricing. Likewise, the requirement of concrete proof for cost factors, pricing strategy and other muti-dimensional facets such as demand-side and supply-side factors, etc. led to its inability in sustaining as a legally valid ground in India.

However, the CCI may soon have to deal with an increase in the number of investigations into the drug pricing of pharmaceutical companies due to the increasing trajectory on excessive pricing in the pharmaceutical sector, the enormous size of the Indian pharmaceutical industry, and the presence of large multi-national pharmaceutical corporations.

Concluding remarks

India is known as the world’s pharmacy yet, it still cannot cater to its domestic needs pushing almost 3% of its population to poverty as a result of medical debt every year. The government’s Pradhan Mantri Jan Aushadhi Kendra scheme has been introduced to battle expensive generic medicines that are available through the private players by providing subsidised medicines at their outlets (Janaushadhi Kendras). However, the scheme has steamed off due to quality issues and low stock. Despite these types of initiatives, which eventually only exist on paper, the CCI, as a regulatory authority, can come forward to tackle unjustified high prices by laying down a uniform test that is neither favouring the capitalist nor the socialist.

The recent investigation of Max Healthcare, Apollo Hospitals, and Fortis Healthcare provides an opportunity for the CCI to lay down guidelines regarding the determination of excessive pricing, irrespective of whether these hospitals are liable or not. The CCI can explore the two-prong test laid down in the United brands case; however, it needs to be mindful of balancing the interests of the private party as well as the larger public’s affordability. The capitalist mindset of private hospitals shall not override the socialist need for cheap and accessible pharmacies and at the same time it must not encroach upon the private players’ freedom of business.

Along these lines, India could adopt UK’s broader approach to the two-prong test as private players, who hold the majority of market share in the Indian pharmaceutical sector, are given a fair opportunity to justify their actions by putting forward their best evidence. Nevertheless, it should be kept in mind that the UK’s healthcare sector is heavily centralized. Conversely, in the decentralized Indian sector, only 10% of the hospitals are in the public sector, meaning thereby that the prices of in-house pharmacies are not regulated by the government and are left to the hospitals. Therefore, there’s a greater responsibility on the CCI to not give any leeway to the heavily private player-dominated pharmaceutical sector and not letting go of them scot-free for their antitrust actions.

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