Saturday, June 28, 2008

Public health robbery through price control

In both textbook economics course and everyday common sense, people would normally understand that one important reason why the price of a certain commodity is high is due to the scarcity, if not absence, of its supply relative to people’s demand. For instance, the price of tomatoes can fall down to Php5 (about US$0.09) per kilo, even Php2 a kilo, during the summer months of March-April in a number of provinces in the Philippines. During the rainy season, the same quality of tomatoes harvested and sold in the same municipality and province can go as high as Php40 to Php50 (about US$1) a kilo, or even higher. What explains the big jump in price for the same commodity sold in the same locality in a span of just three to four months? Were there “tomato cartels” suddenly formed during the rainy months? Were there massive pest attacks that affect tomatoes every year?

People understand the “seasonality” of certain commodities, and they understand the downward or upward swings in the prices of those commodities. So they do not ask for more government intervention like tomato price control, or new taxes to subsidize tomato farmers during summer months, or the establishment of another bureaucracy like a Tomato Development Authority.

Entrepreneurs, both new and incumbent, would flock to an industry or sub-industry that experiences fast demand growth, or projected to experience fast consumer demand in the near future. When suppliers in the market become plentiful, the price of the supplied commodity or service can go down, the consumers benefit, and some producers will lose money. They will then try to innovate and produce a “hybrid” product or service that will hopefully attract a new set of consumers and buyers.

Government mentality though is often more myopic and conspiratorial than what consumers and producers would normally comprehend. Many people in government cannot appreciate the importance of just leaving the entrepreneurs or producers, and the consumers to interact with each other. That is why governments tax both producers (income tax, business permit tax, franchise tax, etc.) and consumers (value-added tax, import tax, excise tax, etc.). Aside from taxation, governments also impose more sinister forms of regulation like price control.

By imposing price control, governments think the “evils” in society are the producers of innovative and revolutionary goods and services. That is why consumers rush to purchase that new product or service, resulting in higher-than-normal price hike. And governments think these innovative producers should be disallowed from making “extra high profit”, even if these producers paid extra high costs, waited extra long years to develop their product, and endured extra high taxes and regulations.

In the recently-enacted “Cheaper Medicines Law” (Republic Act No. 9052) signed into law early this month, with the implementing rules and regulations (IRR) currently being drafted by concerned government agencies, price control is among the measures that the State – through the President and upon the recommendation of the Secretary of Health – can impose to make effective and safe, yet “expensive” medicines be made more accessible and affordable to the people. As mentioned above, the premise here is that the pharmaceutical companies that produce those medicines sought after by many patients are seen by the State not as innovators and revolutionary inventors of safe and effective medicines, but as “evil” cohorts that are only after big profit at the expense of poor patients.

But is it fair to impose price control after the State itself has imposed uncontrolled taxes and uncontrolled regulations, and devised a scheme (disrespect of patent and intellectual property right through parallel importation) that can pave the way for uncontrolled entry of unsafe and ineffective drugs, a.k.a. counterfeit medicines?

My bet is that people who understand and appreciate the role of profit to embolden entrepreneurs to take high risks, to face and incur huge losses in case they will not succeed in producing an innovative and successful product, will answer ‘NO’ to this question, while bureaucrats, politicians, and people driven by envy and hatred of profit and markets will answer ‘YES’.

Even assuming, for the sake of argument, that the bureaucrats and the envious are correct in saying that the State has the right to impose uncontrolled taxes and uncontrolled regulations then control the price of medicines later, what if the price of raw materials and intermediate goods, not to mention the salaries of research scientists and pharmacologists, have increased to high levels. Is the State still justified in keeping a price cap to the final product, in this case, safe, and effective medicines?

The case of huge spikes in the price of raw materials and intermediate goods for making effective medicines has happened in India. The Indian government has that cute and magic formula to keep medicine prices low: price control through its Drug Price Control Order (DPCO) enacted in 1995. Unfortunately, the prices of raw materials and intermediate products have recently risen very steeply, by up to 100 to 200 percent, due to tight supply of such products from China. And yet the Indian government allows price hikes of active pharmaceutical ingredients (APIs) to only 10 percent. Those chemical inputs constitute up to 80 percent of the total cost of bulk drugs.

The immediate result of this situation is that many bulk drugs manufacturers will be forced to stop producing. This is according to the President of the Bulk Drugs Manufacturers Association (BDMA) of India, Narayan Reddy. So if patients need those bulk drugs and manufacturers will limit, if not stop, producing those drugs due to government price control, who will suffer, the patients or the demonized drug manufacturers? Unfortunately, both will suffer, but more so the patients. Despite this situation, the Indian government is said to be dragging its foot in addressing this issue. Do we need the same thing to happen in the Philippines?

Finally, as I have noted in my recent paper, “Promoting innovation and public health through less government intervention”, price control will allow a corrupt President and/or Secretary of Health to use the measure for extortion. Like going to big pharmaceutical companies and telling them, “Hey, we’re going to issue price controls to your best selling drugs, unless you pay us…” Not that I am saying that the current Health Secretary is corrupt, but a price control measure will encourage an ‘extortionary’ and corrupt behavior to top officials of the Health Department or Office of the President.

I have other arguments in my paper why price control is bad public policy. I just hope that the writers of the IRR of RA 9052 will consider them. Otherwise, the country will be courting future public health risks by putting the interests of the extortionists and interventionists ahead of the interest of the patients.

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