Price Controls in Practice: Capping Medicine Prices

Price ceilings are a classic topic in economics textbooks. India offers a real-world example: controlling the prices of essential medicines and some medical devices.

How it works

• The National List of Essential Medicines identifies medicines considered most important for public health.
• The Drugs (Prices Control) Order, 2013 allows the government to set ceiling prices for these medicines.
• The National Pharmaceutical Pricing Authority, or NPPA, sets and enforces the ceilings.

Ceiling prices are based on the average price of brands with a significant market share, rather than production costs.

The stent example

In 2017, the NPPA capped prices of coronary stents, used to open blocked heart arteries. Prices fell sharply, by around 85 percent for some types. Knee implants were also capped later that year.

Benefits

• Affordability: patients, especially those paying out of pocket, save money.
• Less exploitation of patients with urgent, inelastic demand.
• Lower insurance costs.

Trade-offs

Standard economics predicts ceilings can cause problems:

• Shortages: if prices are set too low, some companies may reduce supply. After the stent cap, some international companies sought to withdraw advanced products, though the government restricted this.
• Quality concerns: companies may cut quality or stop innovating.
• Shifting: companies may shift to producing non-controlled versions or combinations.
• Hospital margins: some hospitals raised charges for procedures to recover lost margins on devices.

The inelastic demand case

Why control medicine prices specifically? Demand for essential medicines is inelastic: patients need them regardless of price and often cannot judge alternatives. This gives sellers market power, which is one reason governments intervene.