Price caps are a bad idea

As expected, the government’s decision to cap the price of stents is leading to some problems

Dmitry Stolyariv, a heart surgeon, holds a stent, which is inserted into constricted coronary arteries to help keep them open and normalise blood flow, as he performs a surgery on a patient with a blood clot in the carotid artery at the Federal Center of Cardiovascular Surgery in the Siberian city of Krasnoyarsk, Russia, September 28, 2016. Picture taken September 28, 2016. REUTERS/Ilya Naymushin

Cardiac stents, the medical devices used to prevent fatal heart attacks by allowing the easier flow of blood, are a lifesaver for millions of patients in India. It was no wonder that when the government decided in February this year to cap the price of stents to improve affordability, it brought a huge sigh of relief.

The National Pharmaceutical Pricing Authority (NPPA) slashed the price of stents by up to 85%. The price of bare metal stents (BMS) was fixed at ₹7,623 and drug-eluting stents (DES) at ₹31,080; down from ₹45,000 and ₹1.21 lakh respectively. The NPPA later raised the price cap by around 2% from April to compensate for the rise in the input costs of producers.

The government estimated that the control of stent prices could save as much as ₹4,450 crore a year for patients. That obviously sounds fabulous. But what if the price cap has other unseen effects? Government policies often have unintended consequences, as economists have long warned. And when it comes to price caps on life-saving devices, actions taken for the public good may actually be fatal for patients.

Unintended consequences

In particular, price caps have some unintended consequences. For instance, by adversely affecting the returns pharmaceutical companies can earn on making stents, price caps can reduce their supply. For instance, fixing the price of stents below their cost of production would offer no economic incentive for firms to continue production. It wasn’t any surprise then that last week, three international manufacturers (Abbott Healthcare, Boston Scientific, and Medtronic India) that supply stents in India threatened to pull out of the market. The NPPA refused to approve the withdrawal request of two of the companies, shedding bad light on doing business in India. In addition, there came reports of stents shortages immediately following the price cap order in February.

The NPPA has justified the price cap saying that these companies can earn profits even at the lower prices mandated by it. This misses the point that investors judge the attractiveness of an investment based on its expected return compared to other investments. Thus, as long as price caps affect relative returns, it would affect the amount and urgency of investments into making stents.

None of this is new. The price caps imposed on 74 drugs under the Drugs (Prices Control) Order (DPCO) 1995 led to the stoppage in production of half the drugs. The DPCO 2013, which capped the price of 348 drugs, dried up any new investments in them — something crucial to lowering drug prices in a sustainable manner. The government’s desire now to go down the same failed path suggests it has not learned any lessons.