In-House Pharmacies: Abuse of Dominance & Distortion of Competition

[By Sanidhya Bajpai & Akash Gulati]

The authors are students of Dr. Ram Manohar Lohiya National Law University, Lucknow.

 

Introduction

Committed to maximizing profits, some mega-hospital chains have adopted unfair measures, and the patients often face the brunt of such measures. Through their numerous manoeuvres, these private super specialty hospitals have gone on to maximize their profits while the patients swallow the pill. Case in point, Max Hospital (“Max”) prima facie found to be abusing its dominant position to exploit the in-patients. In 2015 the Competition Commission of India (hereinafter “CCI”) ordered Director General’s investigation into the matter. The matter still awaits final adjudication by the CCI. This piece delves into the prima facie anti-competitive practices adopted by Max and some general practices of other hospitals to exploit in-patients and distort competition, specifically through their in-house pharmacies and the inherent monopoly over the restricted choices of in-patients; it further proposes rectifying the status quo.

How Hospitals Abuse Dominance via In-House Pharmacies

To scrutinize the discernible abuse of dominance by Max, CCI considered the market for ‘provisions of healthcare services/facilities for in-patients by private super specialty hospitals in Delhi’ as the relevant market.

The private super specialty hospitals including Max enjoy a dominant position in the said relevant market w.r.t Section 19(4) and have been prima facie abusing it through their in-house pharmacies with exploitative pricing of medicines, collusion with pharma manufacturers and seemingly exclusive supply agreements, which is further discussed in detail.

  • Dominance Over The In-Patients

Max enjoys absolute dominance over the in-patients, once they are admitted to these hospitals, it becomes obligatory for them to avail the subsequent services from these hospitals even if they are available at a discounted price elsewhere. This creates a locked-in effect for the in-patients and equips the hospitals to abuse their dominant position, which amounts to a contravention of the provisions of Section 4(2)(a)(ii) of the Act. The DG also observed the same in the Max Hospital case.

  • Price Disparity Of Medicines, How Hospitals Collude With Pharma Manufacturers

The hospitals abuse their dominant position by charging exploitative prices for the medicines they procure from the pharmaceutical giants at a lower rate than the market, often through exclusive supply agreements. The pharmaceutical manufacturers compete to have their medicines and other products stocked at the pharmacies by offering high retail margins to the pharmacies. The hospital’s in-house pharmacies, from where the in-patients are mandated to buy the medicines, become a blooming ground for such anti-competitive agreements as the in-house pharmacies sheathe the patients from the retail competition, and consequently allow the pharmacies to extract exorbitant profits through exploitative prices.

  • Printing Of Higher MRPs For Medicines To Be Sold By The In-House Pharmacy

As mentioned above, the pharmaceutical manufacturers offer a higher retail margin to be stocked at hospitals, and these higher retail margins for non-scheduled drugs that are outside the scope of regulation, are clinched by higher M.R.P.s. An analysis by National Pharmaceutical Pricing Authority (N.P.P.A.) reveals that the most reputed private hospitals are making profits of 1,737% from drugs, consumables, and diagnostics. These profits are extracted by imposing inflated M.R.P.s; the profits on drugs which are not under price control range from 160% to 1200%, on consumables (which are also not under price control) range from 350% to 1700%, and the profits were from 115% to 350% for drugs under price control. The biggest beneficiaries of this trade are the hospitals, who, on the one hand, extract high retail margins from manufacturers and, on the other hand, impose inflated M.R.P.s on the patients. This unequivocally shows that the competition of retail margins at the manufacturing level neither fosters competition at the retail level nor results in competitive prices for consumers; rather, it aids hospitals in making exorbitant profits through anti-competitive agreements and abuse of dominance.

  • Exclusive Supply Agreements Among Hospitals And Manufacturers

High-end hospitals such as Max generally have arrangements in exclusive supply agreements with manufacturers. These agreements restrict the patients from availing of other alternatives in the hospital, and the situation becomes even dire when you’re an in-patient and have no recourse but to avail of the available services. The commission in the ‘Hiranandani’ case held that the exclusive contract contravened Section 3(1) of the Act as it had an appreciable adverse effect on competition. The same was criticized by the COMPAT, citing that such exclusive agreements are not anti-competitive as there were other suppliers, and patients were free to avail of their services. However, the present situation is distinct regarding in-patients in context, as they don’t have any liberty to avail the services outside the hospitals. This makes the exclusive supply agreements anticompetitive and aids hospitals in abusing their dominant position. The recent amendments to Section 3(3) and the introduction of the hub and spoke cartels ensure that the selling side is liable for such anti-competitive agreements.

A Case for Aftermarket Abuse

Apart from a prima facie case of abuse of dominance the current scenario also exhibits the symptoms of an aftermarket abuse. An aftermarket is usually a chronologically succeeding market that emerges to utilize the primary product/service properly or further. In Shamsher Kataria, the CCI explained aftermarkets as a market for complementary goods and services for a primary durable product or service. In conventional scenarios, such aftermarkets are usually of the nature of spare parts and repairs. In the Kodak Case, the US Supreme Court illustrated the market of service & repair as an aftermarket of the primary product of photocopying machines sold by Kodak. Similarly, when we consider healthcare service at a super-specialty hospital as the primary product, the succeeding market complementing the treatment with pharmaceuticals and associated products can be viewed as the aftermarket to the primary market.

It is pertinent to note that aftermarket abuse does not necessarily require the perpetrator to be dominant in the primary market. The lock-in effect caused by the provision of the primary product/service provides the perpetrator the ability to acquire a dominant position in the aftermarket. It is this dominant position in the aftermarket that enterprises then abuse.

The case of aftermarket abuse in the case of hospitals catering to in-patients is a peculiar one. Even in the absence of a monopoly, in its strict terms, the in-patients are subjected to a practical monopoly. The prescriptions consist of patented medicines instead of generic substitutes, and the in-house pharmacies sell pharmaceuticals only from select brands coupled with inflated MRPs.

We also see a lock-in effect which bounds the in-patients to buy the prescribed pharmaceuticals & other associated products from the in-house pharmacies. Firstly, because of the direct compulsion from such hospitals. Secondly, due to the usual gravity of the situation wherein time is of prime essence and spending time to visit outside retail pharmacies isn’t practicable. In this bargain of money for life, the kin of the in-patients usually overlook the hole that such hospitals burn in their pocket. Lastly, in cases where time is not of the essence, the in-patients are locked-in due to the high switching costs of porting to another hospital. In DLF Park Place Residents vs DLF Limited, CCI remarked that the lock-in factors that cause a bargaining power asymmetry can give rise to dominance in the hands of one party and hence open the gates for abuse.

Moreover, CCI’s market study on the pharmaceutical sector (2021) remarks that hospital pharmacies are entirely insulated from retail competition because they force in-patients to buy medicines from in-house pharmacies. This ousting of competition also makes it easier for hospitals to abuse their position in the aftermarkets. These hospitals yield their market power “to force a purchaser to do something that he would not do in a competitive market”, that is to buy cheaper substitutes of different brands, and in our case, even of the same brand but from an outside pharmacy. This use of market power in such a way to exclude competition from other pharmacies and subject the in-patients to exorbitant prices blatantly reeks of an abusive nature.

In the Max Hospital case as well, we see an allegation of aftermarket abuse of a similar kind as we discussed above, which was referred back to the Director General for a more elaborate investigation. The fate of this case awaits final adjudication by the CCI, and upon final adjudication, it might prove to be a watershed moment for such abusive conduct of private hospitals.

Rectification of Status-Quo

The fate of this situation will substantially be decided in the Max Hospital case by the CCI, hopefully soon given that the CCI is working with efficiency with a full quorum. The rectification of the status quo is pertinent given the sensitive nature of the sector and the seemingly infallible positions that the dominant hospitals assume. Patients at the end of the day should have a substantial choice of choosing amongst bio equivalents whenever available, the precursor to this should be the absence of any coercion, direct or indirect, from the hospitals.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in