In the wake of actions to mitigate the effects of the covid-19 crisis, the federal government decided to suspend the annual adjustment of drug prices for 60 days. It was Executive Order No. 933/20, published on May 31, that implemented the suspension, postponing the annual adjustment of drug prices to June 1.
In Brazil, medications have a price schedule. The Medications Market Regulation Chamber (CMED) provides criteria to determine this price and discloses to consumers a table with the maximum prices to be charged by pharmacies. The inter-ministerial body responsible for the economic regulation of the drug market in Brazil is also in charge of determining the price adjustment, which occurs every year as of April 1st. The formula for calculating the annual adjustment currently takes into account the Broad Consumer Price Index (IPCA) for inflation, market characteristics, changes in input costs, and productivity gains of drug manufacturers.
The pharmaceutical industry is one of the examples of the use of regulatory mechanisms by the State to control prices in the production, marketing, and sale chain. From the economic point of view, state regulation of this industry aims to stimulate the supply of medicines, in order to allow monitoring of trade and the application of sanctions in the event of non-compliance with economic regulations. The near-term effects are protection of consumers of these products, which are relevant to public health, and promotion of pharmaceutical assistance to the population.
The essentiality of the drug market and the exceptional context in which Brazil finds itself may mean that debates on the constitutionality and legitimacy of price control in this particular case, as has occurred and is occurring in other contexts and economic sectors, may not be raised. In the case of drugs, the government acted preventively in face of the automatic regulatory mechanism already in place as a result of Law No. 10,742/03. On the other hand, the same factual reasons may justify the establishment of maximum prices in sectors in which, until now, a system of price freedom is in force.
Implementing a regulatory pricing policy under a tariff, freeze, or some form of binding adjustment, in certain circumstances and in relation to specific sectors, can be an important instrument to combat inflationary outbreaks and protect consumers against opportunism from economic players (especially in situations such as imminent shortages). As an example, it has been seen that the market is currently experiencing an increase in the price of items such as sanitizer, masks, and even cooking gas, in the face of insufficient supply in relatoin to strong and growing demand. In these cases, the institution of a price policy could meet the constitutional requirements that legitimize this type of economic regulation by the state, along with the sectors of the highest relevance for confrontation of the current crisis, such as drugs, where greater clarity is lacking.
Price control in the market stems from the constitutional requirement assigned to the State to act as a "normative agent and regulator of economic activity" (article 174 of the Federal Constitution). This form of state intervention on and in the economy runs counter to some fundamental dictates of the economic order idealized by the framers of the 1988 Constitution, among them free enterprise. For this reason, price control is an extreme measure that can only be justified if it is applied in circumstances of real need, under penalty of violating constitutional principles. Obviously, as is proper for the administrative legal framework, the exceptionality of the measure imposes a more intense burden as regarding justification of the reasons for the measure, and this need to justify more rigorously is placed as a true material limit.
Obviously, price control also encounters a formal limit: it does not dispense with legislative authorization for exercise thereof. In accordance with article 174 of the Federal Constitution, economic regulation can only be exercised by the Government if there is a law that establishes its limits and, consequently, if the regulation is found within these legal limits.
The Executive Branch's compliance with this competence cannot neglect freedom of initiative or business competition, values so dear to our legal system. However, as we have mentioned, it is undeniable that such principles are not absolute in their extent and may have relaxed application in the face of protection of other founding principles of the economic order, whose pillars are, aside from free initiative, the value of labor work and the objectives of ensuring a dignified existence for all, according to the dictates of social justice. In addition, consumer interests, the search for full employment, and environmental protection are principles applicable to the economic order (article 170 of the Federal Constitution). The justified protection of these legal assets therefore justifies the legitimacy of the State’s parameterizing economic relations and imposing restrictions on business freedom.
A proportionality must be observed, and in the case of medicines, for example, the President of the Brazil could not have ordered a definitive freeze on the price, and he did not. This is because, as we have said, the application of (somewhat opposing) fundamental principles in the economic order leads to a greater link between market containment measures and the reasons for them. Indeed, price control should be extraordinary and transitory. In these terms, the legal scholarship and case law of the Federal Supreme Court (STF) signals a consensus on the acceptability of price control and the limits thereof.
The STF has considered price regulation to be legally feasible in the face of public interest justifications. Examples of this are the occasions on which the higher court has accepted grounds based on the public interest associated with preservation of the right to health (ADI 2435-RJ, decided in 2003); protection of the right to education (ADI 319-DF, decided in 1993); and promotion of culture and leisure (ADI 1950-SP, decided in 2005, and ADI 2163-RJ, decided in 2018). On those occasions, the STF ruled price control constitutional to the detriment of the freedom of initiative of economic players. The grounds were based on reasons of public law deemed to legitimize State intervention in the economy.
The STF's assumptions in these precedents are that the Brazilian state is not subordinated to the classic liberal model and that it is permeated by social and public interest issues that support indirect State intervention through price control. In addition, it seems to be a general perception among judges that price control does not constitute abuse of economic power, market domination, elimination of competition, or arbitrary increases in profit.
On the other hand, the STF has already decided that State intervention in the economic domain is not lawful when based on mere discretion as to the measure's meeting public needs observed in the economic context, since such action may infringe on public freedoms, as well as cause unfair harm to individuals. In an emblematic case, the STF held that strict liability is applicable to the State, ordering the Federal Government to compensate the sugar-alcohol sector due to damage caused to this productive sector as a result of the pricing of the sector's products at values lower than the cost research conducted by the Getulio Vargas Foundation (cf. General Repercussion in Extraordinary Appeal with Interlocutory Appeal - RG REA 884325 - DF, decided in 2015). In this case, the STF held that there was violation of the constitutional value of free enterprise.
The topic is currently on the STF’s agenda, but there is a more conciliatory trend. ADIs 5956, 5959, and 5964 have as their subject matter discussion of the constitutionality of the establishment of minimum price for freight via road transport of loads provided for by Law 13,703/18, originated by Executive Order No. 832/18, in addition to ANTT Resolution No. 5,820. In 2018, Justice Luiz Fux, reporting judge in the case, granted an injunction suspending the imposition of fines for non-compliance with the floors provided for in Law No. 13,703/18. This decision was based on the harmful economic impacts of the establishment of a minimum price for the freight, in addition to the following allegations of the plaintiff that the minimum price represents "an affront to free enterprise, a fundamental principle applied under the Rule of Law (article 1, IV, and 170, head paragraph), to free competition (article 170, IV), consumer protection (article 170, V), to the provision of state intervention in private activity in an indicative manner only (article 174) and all other norms of the Federal Constitution that establish capitalism as the Brazilian economic system." In February of 2019, Justice Fux suspended all proceedings relating to MP 832/18 and reinstated the imposition of a fine for failure to following the minimum freight price. Before the joint judgment of the ADIs, postponed to April of 2020, the Justice coordinated a conciliation hearing that included representatives of truck drivers and businessmen who are members of the Brazilian Highway Freight Transport Association, the Confederation of Agriculture and Livestock of Brazil (CNA), and the National Confederation of Industry (CNI), signaling the possibility of settlement, to be determined in future rounds of negotiation among the same players.
It is clear that, given the specific circumstances of the market and of the Brazilian economy and the relevance of the activity regulated, it is necessary to find an optimal midpoint between (i) individual rights and respect for the freedom of economic players; and (ii) protection of the public interest and constitutional principles that privilege social and consumer rights.
The adversities observed in the current scenario make it obvious and urgent that the Government should resort to economic regulation for certain products and services. In addition to allowing for management of the current crisis, price control can prevent the charging of abusive pricing for essential items, in addition to protecting consumers and, especially, the most vulnerable from the economic point of view. However, it is essential that, in these times and in the future, State intervention through price control be restricted, and proportional, to the real need, so that all the principles and rights involved are safeguarded simultaneously.