Price controls: Remedy worse than malady

What former US president John F. Kennedy said about victory and defeat can be paraphrased in the Indian context as: statism has a thousand fathers, but liberty is an orphan. Most politicians and intellectuals root for big state in almost every walk of life, while few have any concern for freedom, especially economic freedom—that is, the rights of businesspersons to conduct their businesses without meddlesome government intervention. The Delhi government’s desire to cap profit margins for hospitals is another episode in our political class’ jihad against wealth creators.

To be fair to our political masters, we must admit that decades of socialism have not only harmed the economy but also badly corrupted the minds of people. Some time ago, a child died because of dengue at a private hospital which also charged over Rs 15 lakh for treatment. There were also other incidents of alleged medical neglect. In one case, a newborn declared dead was found to be alive (but the child didn’t survive).

There was considerable public outcry and media outrage after the incident. Everybody was baying for the blood of those who run ‘corporate hospitals’ and indulge in sharp practice—both sets of people were anyway same, radical activists thundered. Besides, there is always and everywhere a demand for ‘affordable healthcare,’ cheaper drugs and medical devices, for state control—‘government should something about the health sector.’

So, in a way, when our politicians take decisions shackling businesses, they also respond to the popular demand. For instance, there was perceptible support for the Delhi government’s decision to shut down the private hospital whose doctors, it was alleged, had wrongfully declared a living baby dead. It is instructive to note that no government hospital has faced a similar fate despite regular reports of negligence and worse over there. The hospital concerned survived the temporary shutdown, but private hospitals, in general, may have a tough time in the foreseeable future.

For the Delhi government is contemplating caps on profit margins of hospitals. The idea is to control the prices of medicines, consumables, and devices like stents. For the purpose, the state government had constituted a nine-member committee in December 2017. It comprised members from the Delhi Medical Council, the Indian Medical Associations, and top officials from the health department. The panel has already submitted its recommendations to the government.

According to media reports, the panel has favored a maximum 50 per cent profit margin for drugs and devices above the manufacturing or procurement costs, whichever is lower. The caps will also be imposed on the packages for procedures. Emphasis is on transparency in anything that private hospitals charge from patients. Further, they also have to explain cost escalations.

If the Delhi government accepts the recommendations and implements them, it would be the first state to do that—and is likely to be followed by other states. For in our country bad ideas spread faster than the good ones; and they have a very high probability of getting executed.

Everything that the committee has recommended is bad because each of them has the potential of growing into a monster. Consider the provision of the 50 per cent profit margin cap on drugs and devices. Who decides about the cap? Bureaucrats, politicians, technocrats, etc., but all of them are maneuverable. How are the costs determined? Again there is scope for discretion; and in a sarkari set-up, discretion is the better part of corruption, not valor.

This fact was highlighted by Arvind Panagariya, Vice-Chairman, National Institution for Transforming India (NITI) Aayog, about three years ago. Delivering the Sixth R.K. Talwar Memorial Lecture on July 17, 2015, on ‘Growth, Poverty and Economic Transformation of India,’ Panagariya said, “Strict investment licensing, reinforced by protection against imports, promised guaranteed monopoly profits, which were anathema under the prevailing socialist norms. Therefore, the government came to fix the prices of many of the products such as cement, steel, scooters and automobiles at levels that would rule out obscene profits. Price controls in turn produced shortages and had to be complemented by controls on distribution through permits. So, queues and corruption emerged as natural responses. If you wanted an automobile, you had the option to either wait in a years-long queue or pay a bribe to jump the queue. And even then you received a vehicle of quality that no customer today would buy.”

The wise, they say, learn from the mistakes of others, while fools learn from their own mistakes. Our political masters refuse to learn any sensible lesson.