Tuesday, May 31, 2011

Facebook and the subversiveness of capitalism

Friendster will officially shut down today, May 31, 2011. Nine (9) years of existence (March 2002 to May 2011), was the #1 social networking site around the world (I think) sometime in 2005-2007, and much ahead with facebook then. Then things just collapse, or implode. RIP friendster, or it will be resurrected as a new social network, affiliated with google or youtube or yahoo?

Capitalism showed its ugly face on friendster - and its handsome face on facebook. And this is one more proof that capitalism -- not socialism or communism or fascism -- is the most subversive economic system in the world. When left on their own, private enterprises can be friendly with, or be fierce and ruthless against, one another. And the main partners of the entrepreneurs in their competition with other entrepreneurs, are their workers.

Speaking of facebook, I got these interesting statistics from Resti Reyes' article today, Update: New Statistics on Social Media.

* 23.4 million Filipinos, or 93.7% of all who are actively online, are on Facebook. We are No. 7 worldwide in terms of our Facebook population, but No. 1 in terms of net reach over total internet population. Facebook has quickly overtaken all other forms of social media, almost doubling its Pinoy subscriber base in the past 12 months.

* There are now 667 million people on Facebook worldwide. If FB were a country, it would be the 3rd most populous nation on earth, after China and India. It would be more than double the size of the U.S.

* How busy is Facebook? 25 billion – that’s the amount of content (photos, updates, web links, stories, blog posts, etc.) that is uploaded to Facebook every month.

Here is a good statistics how huge or how invasive social media has become.

Majority of the big newspapers worldwide are suffering from declining sales as people turn to the web to read news. And that's another example of how subversion within capitalism is causing certain industry instability while creating stability in new industries or sectors springing up.

And many people have already declared that "Capitalism is over, it's finished." When? Well every time there is a regional or global financial turmoil. Yeah, they may be right.

Monday, May 30, 2011

Drug price control 7: Pricing by drug inventors

I posted Part 6 of this discussion series in the Minimal Government yahoogroups. It attracted a number of good and long comments from some members of the ygroups, I'm happy with it, below. Posting this with author permission to use their comments.

1. Noy I agree with you generally but I hope you can recommend a way of capping the profiteers who put too high mark ups relative to their operating costs! -- Floro

I thanked Floro for his comments. I added the following:

All high risk sectors and businesses have high profit or high losses financial outcome someday.

Take this hypothetical case. I am an agri-businessman. I want to develop a rice variety that is (a) high yielding, something like at least 175 cavans per hectare, (b) flood resistant, (c) insect resistant, (d) rodent resistant, the stem is yucky to rats, (e) harvestible in just 2 1/2 months, (f) has high multi-vitamin content, and so on. It's like a super-miracle rice. If I become successful there, I will become a multi-billionaire in just a few years as tens of millions of rice farmers, small-scale or corporate farms, from all over the world, will buy my rice seed variety.

Since this is a next to impossible task, I hired the full time services of the best minds around the world in molecular biology, biochemistry, botany, agronomy, biophysics, etc. The research facility is state of the art. I borrowed several hundred million dollars to put all things together.

If I don't succeed in developing such seed variety, sorry na lang. I will lose all my properties and shirts and go to jail and still I won't be able to pay all my loans. That's life.

If I succeed, I will become a super-super rich man. That's life. My problem though is that many people will think that my being so rich is so undeserving, that many governments, the UN, FAO, etc. should all conspire to regulate my seed invention, my research work, my wealth, etc.

So judgment of "too high mark ups relative to their operating costs" is very subjective and hence, subject to heavy politics.

2. I always thought the most democratic way to set the price of medicine is for drug companies to first ask patients (who may be dying or are in horrible pain) how much they are willing to pay for a drug to cure them.

If they give a price that the drug company feels commensurate to the risk/cost of failure, then the company pursues research. If not sorry na lang.

Another way though is to put a gun to drug companies heads to do the R&D. But that won't last for long. People won't study to be scientists if they feel the reward is insufficient. Like it or not, much of the advances in medical tech is a result of the profit motive. Those virtuous people who develop treatments not for money but because the reward of helping his fellow man is enough (e.g. inventors of synthetic insulin) wouldn't or shouldn't be turned off medical research just because their colleague makes more money.

Then there is the state subsidizing drug company research. Two problems:

1.) Subsidies have an oddly reliable way finding their way to people who connections rather than qualifications in ANY society.

2.) The moral dilemma of having patients suffering from one disease subsidizing the cure for the disease of another group of patients. This may result in the former group being unable to help themselves. The price system is pretty efficient in making only those that stand to benefit from something pay for it. One can say only healthy people should pay for the subsidy, but even healthy people have other needs. They may have loved ones sick of another disease. Should we have politicians telling us what our value system should be? -- Mark Belo.

I also thanked Mark for his comments. I added the following observations:

Drugs are just one aspect of treatment. The other aspects are (a) physicians, the specialists and super-specialists if possible, not just ordinary physicians, (b) other health professionals (nurses, radiologists, med techs), (c) diagnostic tests (X-ray, blood tests, CT scan, MRI, etc.) and other hospital services and facilities.

You will notice that there is not much politics, not much calls for more government regulations and price restrictions, in the other 3 groups mentioned above. It's mostly the "evil" innovator pharma companies who invent new drugs. Sometimes the generic pharma companies who invent zero new drugs ride on with the anti-IPR, anti-multinationals bandwagon.

I think ALL known diseases have drugs already to at least control the fast spread of those unwanted cells, if not kill those diseases. It's just that they are "old" drugs, meaning off-patent, have lots of generics equivalent, and are deemed to be not-so-effective because diseases are never static, they are also dynamic and evolve into another branch of the old diseases. I read before that even the WHO recognizes that about 99 percent of all "essential drugs" are off-patent already.

So people want to get those new drugs. More revolutionary, more disease killer. It just so happens that these newly-invented drugs are expensive, their manufacturers just came from spending several hundred million $ just to invent, develop and market those new drugs, they want to get back their investments, plus high returns whenever possible. Thus, people turn to governments, WHO, big health activist NGOs, to call for IPR-busting like compulsory licensing, parallel importation, drug price control, and related measures.

3. Anything that makes an inordinate amount of money will be bound to receive some amount of protest, fair or unwarranted.

The price of healthcare has to place some premium on the skills and talents of the people who provide it. I believe it is unfair to point the finger solely at the pharma companies for this, but they do deserve a heapful of blame since they have perpetuated a corrupt system of introducing and marketing new drugs.

That's because doctors and health facility administrators demand golf junkets, expensive vacations and other perks from the pharma companies to push these new drugs. I don't know which party started out with the payoffs (most likely the pharma companies), but this is a vicious cycle that must be broken.

That's because more and more technology is being thrown at the problem, and while new machines do improve diagnosis and make life simpler for both doctor and patient, the same system as with selling medicine is likewise venal and corrupt. New machines would not help if the people making the diagnoses are not as sharp as they would like to be, even though everybody is an expert now that you can research almost everything from the Internet.

I believe the system for medical tests is fair insofar as cost of operation goes, but as my experience with OFW medical testing tells me, any medical problem can be fixed on your documents.

The state should get out of healthcare altogether, because as things operate, it's what people normally do when they are not sick that is making them sick - overeating, lack of exercise, smoking, eating the wrong kind of food. If government were to intervene, they should run after all producers of consumer goods. For example in Singapore, where the state is all, government intrusion is such that your child's school will call you if you are giving your child the wrong kind of food. The government intervenes if you require additional check-ups once in a while, and take this, if you slack off work because you get sick, you can be subject to disciplinary action.

As to the pharma companies' dilemma, I think Noy you provided the answer yourself - the rate of innovation being demanded from the pharma companies creates interesting side effects:

1) innovation in creating new drugs to battle medical conditions which are not yet properly treated is dependent on societal pressure, and is skewed by public calls for government funding
2) the price of fueling this innovation is dependent on continued profitability of drugs already marketed, or variants of the same that are repackaged once in a while to disguise innovation
3) drugs which are cosmetic or solve conditions which are not life-threatening (i.e. Viagra) hit the jackpot and drive profits, thus skewing everything
4) cutthroat competition fuels the drive for sometimes unethical practices or overpricing all drugs across the board.

For some reason I find this statement made by Mark "I always thought the most democratic way to set the price of medicine is for drug companies to first ask patients (who may be dying or are in horrible pain) how much they are willing to pay for a drug to cure them" offensive for being misguided and stupid. Of course people will pay for anything if they think it will cure them! And how will you safeguard against any kind of scam that makes unreasonable promises? Nothing personal, Mark, but come on, man. -- Joseph "Otep" de Guzman

Lots of good points from Otep there, including the blamability of the pharma industry. Well, all business sectors and professional groups I think, have their own set of problems and weaknesses.

We can divide the pharma industry into two main groups, the innovators and the generics manufacturers. The former are those who invent new drugs, patent them, spend lots introducing the new drug. The latter produce zero new drugs, they only wait for the patent of successful drugs to expire (not all patented drugs are successful), develop their own branded generics, spend lots on marketing as there are many other "me too" drugs by other generics producers.

The corruption in the marketing of drugs I think is committed by both groups, although I think more by the latter. They produce no new drugs, there are so many many generics producers worldwide. So how do you differentiate your own generic products to the generics of hundreds or thousands of other companies, except to spend lots on marketing.

I particularly like Otep's point that "The state should get out of healthcare altogether."
This is similar to my repeated over and over argument: healthcare is principally personal and parental responsibility,not government responsibility. When people over-smoke, over-drink, over-eat, over-sit, over-fight, live in dirty places, etc., even if they have access to free physician visit daily, free hospitalization anyday, free medicines, their health outcome will be poor.

Otep mentioned Singapore's BIG Brother in healthcare. A friend who lived in Singapore for several years told me that if your child is fat, Big brother will make your child run in the school regularly until he loses his excess fat. Big brother is saying, "When you get sick, I take care of you. When you are not sick or before you get sick, I take care of you."

About innovation's side effects, hahaha, I like them. #3 in particular, I have pointed that out in my previous papers. If there are threats of IPR busting and drug price control for patented, expensive but life-saving drugs, then some innovator companies can shift some of their research capability to producing non-life-saving drugs like breast enhancers, penis enlargers, new shampoo, deodorant, mouthwash, skin whiteners, wart remover, various food supplement, etc. Here, there is sure money and yet there is zero threat of IPR busting or price control.

Another diversion is to shift some of their research capability to producing drugs against common diseases by dogs, cats, birds and other pets. With flat or negative population growth of people in many rich countries but fast population growth of pets as more people substitute pets with having kids, there is also big money there with zero threat of IPR busting and drug price control.

Cutthroat competition can lead to unethical drug promotion and soaring drug prices, true. But in most cases, it can lead to price reduction. For instance, at the time that drug price control was imposed in the Philippines in mid-August 2009, amlodipine molecule (against hypertension) has several dozens of different brands. Innovator brand was Norvasc by Pfizer, but there were so many generic brands too. Price range then was from cheapest P8.50 per 5mg tablet up to most expensive P44+ Norvasc. So people really had lots of choices from among those different brands.

4. Noy, again I agree with this example and hypothetical situation. What I am after at are middle men who make money earn money without really producing any added value. -- Floro

5. Floro, "Again I agree with this example and hypothetical situation. What I am after at are middle men who make money earn money without really producing any added value."

Thanks Floro. But hope that the inputs of Otep, Noy, and myself shew what is at stake (the enormous positive contributions of big pharma in a profit motive system) that we need to tread carefully so as not to kill the goose that lays the golden egg. So to speak.

Otep, "For some reason I find this statement made by Mark "I always thought the most democratic way to set the price of medicine is for drug companies to first ask patients (who may be dying or are in horrible pain) how much they are willing to pay for a drug to cure them" offensive for being misguided and stupid. Of course people will pay for anything if they think it will cure them! "

Thanks Otep and you're right. It is stupid! I was trying to show the absurdity of trying to maintain the values of a free society (people should be free to decide if they want to engage in medical research under their own terms) with government meddling. Perhaps the government can just set a price: anyone who finds a cure for AIDS can only charge so-and-so (we could try auctioning patent protection to drug companies). I just wanted to point out the superiority of letting people voluntarily risk their own resources to create medicines on the hope that others would compensate them imperfect as it is.

I say a big problem is that we often see big pharma as some anonymous monolithic thing. It is not a person. It doesn't have feelings. We forget that it is made up of individuals who dedicated their lives to medical research and for whatever reason made the world better. To set price controls is to belittle the efforts and decisions of these people.

I came across a quote from someone who wishes to remain anonymous for fear of his life:

"Christian charity is: what's mine is yours. Communism is: what's yours is mine." : )-- Mark Below

Friday, May 27, 2011

Energy rationing 5: RE law and Vince Perez

The Renewable Energy Act or simply the RE law (RA 9513) is proving more as another corrupt law that creates another cronyism, energy cronyism, in the country. I discussed in Part 2 of this Energy rationing series, at least two provisions of the law, the Renewable Portfolio Standards (RPS) and Feed in Tariff (FIT), ensure that the RE power producers have assured income and assured profit for up to two decades from the effectivity of the law, by forcing us energy consumers, to pay them high power rates.

Aside from those take-it-at-this-high-power rate provision, the law also provides a lot of give aways and freebies to developers and suppliers of RE power plants. Exemptions from income tax, from import tax, from VAT, accelerated depreciation, low realty tax, etc.

And aside from those companies not paying certain taxes, legally, they will also get cash incentives (transfers?) and financial assistance from us taxpayers. Hit us with even higher power rates, then hit us further with more taxes going to their companies and pockets. What else can you ask for?

I posted an earlier paper by Romy Bernardo, a BusinessWorld columnist, in Part 1 of this discussion series. Romy also criticized the FIT system.

Yesterday, another business columnist, also fellow of the Foundation for Economic Freedom (FEF), Boo Chanco, criticized the FIT. He wrote in Renewable energy, The Philippine Star, May 27, 2011.

Here is something to think about for us electricity consumers, already burdened by one of the highest electricity rates in the world. We are being asked to subsidize the cost of electricity produced by solar, wind and other so-called renewables through the mechanism of the so-called feed in tariff or FIT.

Unless we speak up, we will be forced to shell out some P9 billion every year for FIT for 20 long years… even after technology has made those renewables economically competitive. Of that amount, 50 percent goes to solar and wind, even if they will only account for 20 percent of the RE generated power under the FIT program.

There are those who say we have such a small carbon footprint and because we use significant amounts of geothermal and hydro, our electricity generation mix is already at least 32 percent renewable compared to the US which is under 10 percent. That means the Philippines is already contributing three times as much RE as the US on a country basis.

So why subsidize these fashionable RE technologies now? Why can’t we just wait for the more technologically advanced and financially capable developed countries to shepherd these technologies along until no subsidy will be required? Ironically, these developed countries are cutting back on their RE subsidies lately, notably in Europe....

There is one person whose shadow stands tall in the crafting of the RE law and its implementation: fellow UPSE alumni, former Department of Energy Secretary (2001 to 2005), Vincent "Vince" Perez.
In one of his presentations as DOE Secretary then, he showed this in his 38-slides presentation, The Philippine Energy Sector, October 2004. Wind power was close to his heart then.

In June 2009, as a private citizen and businessman, he presented this paper at the ADB during a climate and energy conference there. He mentioned 3 of his concurrent positions then -- with Merritt, Alternergy and the World Wilflife Fund (WWF). Two companies in the wind energy business, and heading a huge environmental NGO that is pushing hard for RE like wind power.

I checked today Merritt Partners' website, he remains as its Chairman.

Two notable things here. One, he was the head of two RE companies, Merritt and Alternergy, that will benefit from the cronyism  of the RE law. Second, he is the head of a big environmental NGO, the WWF, that put constant pressure to policy makers to stick to the cronyism of the law.

Government should get out of playing favoritism and cronyism among energy producers. If things are indeed "free and renewable" with the RE power plants, then they should not be given any subsidy. But that is not the case. Those RE plants like wind and solar are NOT really free and renewable. The cost of putting  up just one huge tower for a wind turbine should cost six digits already.

Free Trade 17: Consumer Surplus and Human Rights

Yesterday afternoon, I attended the forum, Did the Philippines Sacrifice Human Rights in the Altar of Free Trade?, sponsored by the Friedrich Naumann Foundation for Liberty, FNF Philippines and the Ateneo Human Rights Center, held at Ateneo Rockwell, Makati, campus.

The speakers were Dr. Felipe "Philip" Medalla of the UP School of Economics (UPSE) and Foundation for Economic Freedom (FEF), Comm. Loretta "Etta" Rosales of the Commission on Human Rights (CHR), and former Sen. Wigberto "Bobby" Tanada of the Fair Trade Alliance (FTA).

Philip had an explicit NO answer to the forum title, Bobby had an explicit YES answer, and Etta I think had an indirect Yes. In my earlier discussion, Forum on HR, free trade and democracy, I also argued that the quick answer to the forum title is NO.

Bobby had a long, prepared speech, argument, why free trade is contrary to human rights. He cited certain rules of the WTO which disallow countries to protect their workers via certain "safety nets" and subsidies, as unfair intervention and dictation by the rich countries over poorer countries, resulting in more unemployment, more poverty in the latter. He also cited some economists like Joe Stiglitz and Paul Krugman for their critique of neoliberal policies by the WB, IMF and WTO imposed upon poorer countries.

Of course I don't believe those arguments by him. So when it was open forum time, I was the first to raise my hand and asked the former Senator with two direct questions:

1. When people go to Divisoria, Baclaran, Quiapo, tiangge-tiangge to seek cheap, free trade price of various commodities, was there any human rights violation committed?

2. Many protectionists and statists criticize the WB, IMF, WTO, other multilateral agencies for their "neoliberal" and "Washington Consensus" policies. Do you support the abolition of these bodies then as you criticize them anyway? Many free marketers that I know of, are calling for the abolition of such international bureaucracies.

Bobby said trading in Divisoria, Baclaran, etc. involve smuggled goods that is why those goods are cheap. There are human rights violations there because more local companies and more local jobs will be threatened with extinction if more people will patronize foreign smuggled products. Government is also deprived of additional revenues which can be used to provide social and economic safety nets for the affected workers and small businesses.

He did not answer my second question though.

To illustrate the mistake of the above reasoning by the former Senator, I developed this graph below. Consumer surplus before and after free trade.

Consumer surplus is defined as the difference between the maximum amount or price that a consumer is willing to pay for a commodity, and the current or actual price of that commodity. For instance, a shopper loves a particular handbag that she is willing to pay P2,000 for it. Upon checking various shops from various malls that sell that particular handbag of same quality, she finds one, two or three shops that sell that handbag for only P900. That shopper then realizes a consumer surplus of P1,100. Thanks to competition among many shops and retailers.

Free trade expands the supply curve from the original S1 to S2. This results in reduction of the price from the previous equilibrium price of P* (before free trade) to P1. Likewise, the quantity sold in the market expands from the original Q* to Q1. That's what free trade mainly does -- expand the volume and quantity of various goods and services that are available to the local consumers. Various suppliers and sellers from many parts of the world bring in their goods to the local market, and local consumers are happy with lots of choices. And protectionist philosophy thinks this is wrong.

What happens to consumer surplus? CS A (before free trade) expands to CS B (after free trade), or CS B > CS A (B is greater than A). This is good, not bad, right?

What do the consumers do with the larger consumer surplus? Most protectionist and statist arguments are silent on this question. They only think that the shift of consumer patronage from local producers to foreign producers result in the bankruptcy of the former, loss of many local jobs (that is why there are many Filipinos working abroad), and hence, more poverty. Wrong.

When a poor household benefits from rice free trade, so that what used to be P40 per kilo rice can be sold for only P30 per kilo, that household realizes a consumer surplus of P10 per kilo. If they consume 2 kilos per day, they realize a P20 per day saving on rice alone, or P140 per week. This household will not throw away that P140 per week consumer surplus. They will use it to buy an extra kilo of chicken, or extra 1.5 kilo of tilapia, or extra 3 kilos of vegetable X, and so on.

The lesson is that savings and additional CS from free trade will expand the consumption capacity of the average consumers even if their average household income remains the same. Instead of buying 3 kilos of chicken per week, they can now buy 4 kilos per week. Or instead of buying 4 kilos of tilapia per week, they can now buy 5.5 kilos per week, and so on. And this expands the market and consumers of chicken farmers, tilapia farmers, vegetable farmers, etc. Which creates more jobs for those sectors and sub-sectors, which reduces poverty.

Free trade is fair trade. Protectionism is unfair trade.

See also:

Thursday, May 26, 2011

Tobacco Tax 4: Finding the Optimum, Not Maximum Cigarette Tax

This afternoon, I attended a round-table discussion sponsored by the Alternative Health Cluster and 3CPNet, about tobacco regulation and taxation. Venue was the Oxfam-Manila office.

There are at least three taxes imposed on cigarettes and other tobacco products: excise tax, value added tax (VAT) and local government taxes. For imported cigars and cigarettes, there is a 4th tax, import tax and duty.

The "sin taxes" or taxes on "sin" products, aka "public bads", that people are talking about, that are being discussed in Congress, refer only to excise tax. Such tax measures do not include or touch the two or three other taxes on those products, namely the VAT, local government taxes, and import tax.

Currently, there are four tiers of taxes on cigarettes in the country. The cheapest brands are slapped with P2.70 per pack, and the premium, more expensive cigarettes are slapped with P28 per pack. This multi-tier tax rates is an opening for loopholes and will definitely invite cheating in tax payment, in connivance with government tax assessors and collectors, namely the BIR people.

The important tax reform in this sector therefore, is to introduce only one tier or one specific tax for all types and brands of cigarettes, from the cheapest to the most expensive ones. Two House Bills propose a P30 per pack flat rate.

I think this rate is a rational and optimal one. Some can propose that the tax should be "as high as possible", perhaps P500 or P1,000 per pack, in order to drastically drive people away from smoking. This is not going to happen. The higher the tax, the higher the incentive to cheat, to resort to smuggling. As long as the demand is there -- people who smoke even if they are fully aware that smoking is bad for their health -- supply will also be there. So higher tax rate, higher smuggling incidence, and more people will still be smoking with cheaper, smuggled cigarettes.

So we should be looking for that "optimum", not maximum, level of tobacco tax. A P30 or P40 per pack, flat rate, should be fine. It is considered as "optimal" because (1) it will help raise tax revenues for the government -- so that income tax cut, if not income tax abolition, can be introduced someday, and (b) it will not encourage more smuggling.

Being a non-smoker (I tried smoking in the past, but my tongue simply rejects it, so I have not finished smoking even a single stick of cigarette all my life), I have little or zero sympathy for smoking. But I also recognize that people own their lives. If they wish to smoke and smoke -- and over-drink, over-eat, over-sit, etc. -- it's up to them. Somehow they should know that such abuse of their body will attract some undesirable bacteria, virus or other diseases into their body soon.

Taxation and other forms of government regulation can only achieve so much. I would add that a tax-hungry government can actually be jumping with joy (but silently, of course) if there are more people smoking because that would mean more tax revenues. So government is not the best institution to rely on to tell people to control or quit smoking. Individuals and civil society groups campaigning for tobacco control should instead go straight to the public, approach schools and universities, public and private, to spread awareness to students that smoking is not good for their health and that it can be addicting. Cut the demand, and supply will soon be cut.

Last January 5, 2011, I wrote this:

Smokers, taxes and Pfizer

There is this interesting news report today in NYT, In Japan, Pfizer Is Short of Drug to Help Smokers. Japan's government imposed a tobacco tax hike law in December 2009, and its implementation would be in October 2010. A pack of cigarette in Japan was selling for 300 yen, about $3.60. By October 1, it jumped to over 400 yen, including 70 yen in taxes.

This tobacco tax hike plus various strict regulations and restrictions on smoking made thousands of Japanese smokers to consider quitting. It is estimated that some 130,000 Japanese die each year on average due to tobacco-related illnesses. Pfizer's Chantix was a blockbuster anti-smoking drug there. But not totally.

Prior to October 2010, Pfizer was selling the drug to about 70,000 patients a month. By September 2010, or a month before the tobacco tax hike, demand rose to 170,000 persons, and went much higher the next month. And Pfizer did not have enough supply for the huge increase in demand, resulting in many grumbling Japanese would-be-smoking-quitters.

There are two important factors why the Japanese government raised the tobacco tax, and would be raising it further in the near future. One is the high incidence of tobacco-related deaths among Japanese people. And two is the high budget deficit and high public debt that requires more tax revenues.

One may say that Pfizer is only capitalizing on the growing health consciousness of many people and the awareness to limit, if not quit, smoking. Well, that's how business works. Where there is a new demand, big or small, just supply it and make money from it.

Meanwhile, this is one of the few instances where government taxation can help promote public health.

See also:

Tobacco Tax 1: Telecom and Medicine Taxes Too, September 15, 2009 
Tobacco Tax 2: Higher Tax + Corruption = Lower Revenue, June 06, 2010
Tobacco Tax 3: When Supply is Killed But Demand Persists, November 15, 2010

Wednesday, May 25, 2011

Drug price control 6: Exploring just one price for each drug

(Note: this is my article today in thelobbyist.biz, Merits and demerits of high drug prices, Part 1.

When drug prices are high, people complain and governments are pressured to intervene to stabilize, if not cut, drug prices. When drug prices are low or are given away for free, irrational drug use can happen as people tend to over-dose, or take medicines just for the psychological effect of getting well. Drugs are cheap or free anyway.

Drug pricing, like oil pricing, electricity and food pricing, will remain a contentious issue in many countries, developing ones especially like the Philippines. The drug price control policy imposed since August 2009 for selected drug molecules and products remain until today and there seem to be no signs of being withdrawn.

Last week, I attended a meeting of the Coalition for Health Advocacy and Transparency (CHAT), a coalition of health NGOs and some think tanks which have health research projects. It is also the civil society partner or component of the Medicines Transparency Alliance (MeTA)-Philippines. The think tank which I head, Minimal Government Thinkers, is a member-NGO of CHAT.

There were many topics that were discussed during the meeting, but I will focus here on three controversial proposals made by some fellow NGO leaders within CHAT.

1. There should be only one price for each drug – of the same molecule, same brand, same dosage, from the same manufacturer. Regardless of the drug outlet – government hospitals, private hospitals Mercury Drugstore, Botika ng Bayan or any other public and private drugstores. And regardless of outlet location – Metro Manila, other big cities, far away municipalities and barangays.

2. There should be no advertising allowed for medicines in order to help reduce drug prices. Instead, all pharma companies will be featured in a public forum attended by physicians, pharmacists, other health professionals and the public.

3. Government should put up its own pharmaceutical company to produce essential medicines. Thailand has one, the Government Pharmaceutical Organization (GPO).

Here are my comments and reactions to the above three points.

On #1. Prices of drugs in hospitals are generally higher than the average price in most drugstores. Hospitals also generally do not allow patients’s guardians to buy drugs outside of the hospital pharmacy while the patient is still confined. One explanation is given by the President of the Private Hospital Association of the Philippines (PrHAP), Dr. Rustico Jimenez, is that some patients who happen to ingest substandard or fake drugs bought somewhere because the drugs there are sold there very cheaply, either do not get well or develop negative reactions or new diseases. And the hospital and the attending physicians are sued by some patients.

Former DOH Secretary and now President of Medical City Hospital, Dr. Alran Bengzon, explained in one of the meetings of the DOH Advisory Council on Price Regulation sometime in late 2009, explained it clearly. I was there in that meeting. He said, “We are in the business of healthcare, not selling medicines. The reason why hospital prices of drugs are higher is because there are administrative costs in the prescription, dispensation and monitoring of medicine to patients. After we give medicines to patients, we monitor if the expected improvement within a few hours will happen. If not, our physicians can discontinue such drugs and prescribe another medicine or other treatment. There are costs to these that we pass on as additional cost to medicines. Our goal is our patients to get well the soonest time possible.”

And each drug retail outlet has its own operating cost that is different from other outlets. For instance, some drugstores are air-conditioned while others are not. Some drugstores have competent full-time pharmacists who are paid higher while others have less-trained and part-time pharmacists who are paid lower. Other outlets are in more expensive locations where the rental cost per square meter is higher. Some cities charge higher and plentier local taxes and business permit fees than other cities and municipalities. Local taxes and annual business permit fees in the cities of Makati and Manila for instance, are a lot higher than local taxes and business permit fees in the cities of Davao, Dumaguete, Tagbilaran, Tacloban and other cities. The above factors can explain why some smaller drugstores can survive in cheaper cities even if their drug prices are lower, but cannot survive in more expensive cities.

This graph will help explain the point further.

Each point (A, B, C,.. X) represents an “equilibrium price” for each outlet. Some can sell at a lower price and still make a profit. Some can sell at a higher price while paying higher operating costs and still make a profit. We can say that points A to D are prices by four different hospitals. Points F to G are prices by the top three drugstore chains, while points H to X are prices by the Botika ng Barangay, Botika ng Bayan, or smaller, independent private drugstores.

The differences in various costing, differences in shop branding, also explain why a softdrink from the same manufacturer, say Coke in can, has different prices – in a sari-sari (variety) store, in a carinderia, in a convenience store, in a medium-priced restaurant, in an expensive restaurant, in a 3-star hotel, in a 5-star hotel, and so on. The restaurant or shop owners attach various costs to the marketing and selling of their food and drinks products and services.

It is wrong, therefore, to expect or demand, that “there should be only one price for each drug product nationwide”.

Part 2 next week will tackle my comments to point #s 2 and 3 above.

See also Drug price control 5: Mandatory discounts and acronym politics

Tuesday, May 24, 2011

Healthcare Competition 7: Moral Hazards in Healthcare Subsidies

To reduce the information imbalance between healthcare providers and the public/patients, one solution is to encourage branding by various service providers. That way, patients can expect the kind of service, the cost and pricing if they will go to company or hospital C rather than company or hospital A, B, D and so on. See my earlier note,  Healthcare Competition 4: Solving Info Assymetry, September 08, 2010.

I read today a good paper in the New Asia Republic (NAR), Is there moral hazard in Healthcare subsidy? by Kelvin Teo. Kelvin discussed the paper by Malcolm Gladwell, “The Moral-Hazard Myth” and he argued against the moral hazard approach to health insurance. Kelvin concluded his long paper with this note,

As for the final verdict over the existence of moral hazard in wholly subsidised preventive healthcare... we cannot rule out the fact that the total subsidy will attract health conscious citizens to consume preventive health services at higher frequencies. For moral hazard in heavily or totally subsidised curative treatment, arguments for and against it is a matter of patient perspective; those who take their health for granted due to subsidies versus those who care about quality of life not to let their health degenerate to the level of organ failure. Thus, it will be premature to consider moral hazard in healthcare subsidy a myth.

There is a long exchange between Kelvin and some readers. One angrydoc for instance, argued that

...based on my personal experience and from talking to my colleagues that patients who do not pay out of their own pockets do consume more healthcare. With subsidised curative healthcare, it doesn’t matter if patients do or do not consciously neglect their health – the burden of curative treatment still falls on the government/tax payers.

To me, the bottomline question is not whether we can or should hold people responsible for their behaviour which affect their health (because in reality we don’t), but why a person’s healthcare cost should be anyone’s but his own responsibility.

I tend to lean on “healthcare is mainly personal (and parental) responsibility, not government responsibility.” Thus, I get the point of angrydoc. The level of moral hazards in healthcare is dependent on how much individuals will pay (in the case of co-payment by government and individuals) in relation to publicly-funded insurance. My friend in Japan told me a few years ago, that in Japan, a hospitalized patient pays only 5 percent (personal, or company or private health insurance) and government pays the 95 percent. So some patients do abuse, staying in the hospital for 1 week or more when their condition would already allow them to go home after 2 or 3 days confinement. Even doctors and private hospitals would be happy with this arrangement as this would mean bigger revenues for them.

One important consideration in bringing back to the individuals the personal responsibility aspect of healthcare, is that in both rich and poorer countries today, “lifestyle-related" or non-communicable diseases (NCD) are now the main killers, not those old sickness like malaria, flu, polio, dengue, etc. So if people get sick later because they tend to over-smoke, over-drink, over-eat, over-sit, etc., why would the rest of taxpayers pay for their treatment later on?

On accidents and predisposed diseases (say prostate and breast cancer), I think all people understand that somehow, sometime, they will get sick or get injured someday. Thus, the need to get a personal or corporate health insurance. Or even a village and small community health insurance.

So my answer to the article's title, “Is there a moral hazard in healthcare (government) subsidy?” is Yes. To reduce if not totally remove that moral hazard problem, remind people that healthcare is first and foremost a personal and parental responsibility, not government responsibility. Then healthy lifestyle, preventive and wellness programs, private health insurance will naturally come out as solutions, not more taxes and more government involvement -- like drug price control policy, busting the patents and IPR of newly-discovered medicines, health insurance monopoly, etc.

When healthcare has been decentralized down to the level of companies, small communities and individuals, a dynamic competition among various healthcare providers, drug manufacturers and retailers, should emerge.

Here's a related short article that I wrote last February 21, 2011:

Healthcare cost: payment vs. subsidy

Health, like food, education, housing, information, etc. has costs. They cannot just be provided "for free" out of thin air, somebody has to pay for it.

A nice theoretical framework of when a productive person will start receiving health subsidy (from his parents, other family members/friends, government, etc.) and when he should contribute to such subsidy.

(Click the picture to see a larger image) At a young and non-productive age (say, still a student), the person receives subsidy. When he begins working, he is a net contributor to the subsidy pool even if he also receives some healthcare from the system.

When he grows older and becomes less productive, or still productive but chooses to just enjoy his remaining years, he becomes a net recipient of healthcare subsidy again.

Nice and simple model. The "subsidy" here should be taken in its generic or general use, meaning not exclusively referring to "government subsidy" but also to "parental subsidy", "siblings/friends' subsidy", "private health insurance", and so on.

I lifted this from one presentation by Dr. Alvin Caballes, a Filipino physician-economist. He's a friend who also came from UPSE PDE.

See also:
Healthcare Competition 5: Thailand, September 24, 2010
Healthcare Competition 6: United States, May 05, 2011

Forum on HR, free trade and Asian democracy, Manila

There are two good fora this week and next week here in Manila, sponsored by the Friedrich Naumann Foundation for Liberty, FNF Manila Office and Liberal International.

On Thursday this week, forum on human rights (HR) and free trade, and on June 1 Tuesday, forum on Asian democracy. I particularly like the May 26 forum. Though it seems that of the 4 speakers that afternoon, 3 would be coming from the Human Rights aspect and only 1, Dr. Medalla, coming from the free trade aspect.

Now, if I will be asked to answer this question, "Did the Philippines Sacrifice Human Rights in the Altar of Free Trade?", my quick answer would be NO. We are not a free trade country. The notoriety and corruption of the Bureau of Customs is one quick proof to that. Another would be the high difference between Philippine prices and foreign prices of certain products and services (computers, iPad, certain brands of cellphones, tv, rice, etc.). For me, the Philippines sacrifice human rights in the altar of bureaucracy and BIG government. It has nothing to do with free trade and free market.

On the June 1 forum, I like it because of the speakers, especially Rainer Adam. Rainer is the head of FNF South East Asia, and FNF is active in the human rights campaign in the region. Talk about human rights in front of the Myanmar and Laos generals, for instance, and one will see the difficulty of pushing the subject. Another good speaker there is Neric Acosta, former Congressman and incoming DENR Secretary.

These two events are free, no need to pre-register. Just show up at the venue and register right there.

Monday, May 23, 2011

Think tanks for liberty 2: FEI and JTR, Japan

A friend in Tokyo, Japan, Hiroshi Yoshida, posted in his facebook status today, "Tokyo tea party and friends celebrated Taxpayer's Day Eve Last Night. Today is taxpayer's day in Japan." He posted several pictures.

A big crowd who came last night. Hiroshi is the guy standing on the right. Hiroshi heads the Institute for Public Sector Accounting (IPSA) and the Free Economy Institute (FEI) in Tokyo. The core beliefs of FEI are: (a) free market, (b) limited government, and (c) (respect of) traditional Japanese values.

This is Mr. Masaru Uchiyama or simply "Mr. You", the President of the Japanese for Tax Reforms (JTR). FEI is a think tank, JTR is a taxpayers' movement but both work together. JTR's main advocacy is low and simple taxes in Japan. JTR is also a member of the Asia-Pacific Taxpayers Union (APTU). See my story about the recent APTU meeting in Bangkok last month.

Hiroshi and Mr. You are my good friends since 2005, when we first met in Phuket, Thailand during the Atlas-FNF Asian colloquium on Friedrich Hayek's book, The Constitution of Liberty.

Our picture in Atlanta, Georgia, USA in April 2008 during the Atlas Liberty Forum. From left is Dr. Jo Kwong, then VP for Institute Relations of Atlas, Mr. You, Hiroshi and me. We miss Jo Kwong as she has moved to another institute, still in Washington DC, after more than 2 decades in Atlas cultivating many free market leaders in Asia and elsewhere, like Hiroshi and Mr. You.

JTR is not as influential as its US counterpart, the Americans for Tax Reforms (ATR) headed by Grover Norquist. But JTR plays an important role in Japan reminding the Japanese government that Japan's development and industrialization is due mainly to Japanese corporations, entrepreneurs and workers, not its government. Thus, the entities that produce the country's wealth should not be over-burdened by high and complicated taxes.

See related paper here, Think tanks for liberty 1: IDEAS, Malaysia

Sunday, May 22, 2011

Responsible parenthood cannot be legislated, Part 3

One of the important premises of the population control policies by many governments and the officials of the multilateral and foreign aid institutions, is that when an economy or country is poor, it is not Ok, not good, that its population is expanding fast. But if the economy is developed, it is Ok, even encouraged, that its population show grow, fast whenever possible.

Here's a graph from The Economist, May 5th 2011 issue; its original data coming from the UN. The graph says that such premise is mostly wrong; or whatever population control policies and programs by the respective governments and the UN + foreign aid bodies, would be a failure.

The population of poor economies Nigeria, Tanzania, Congo, Afghanistan and India would be rising so high by 2050, until 2100, except India which is expected to have a population drop in 2100, but still at a high level of more than 1.5 billion then. The US would probably be the only rich and big country that will experience a rising population.

Could it mean that AIDS and other killer diseases in many African countries would be defeated, so that mortality would have declined significantly while birth rate remains very high, so that the net population (birth - death + net migration) would be very high.

Meanwhile, the population of many richer countries like Germany, Russia and Brazil would be declining. China's population control policy of one child per family should have its own momentum by now or in the next few years. China's population would be slowly shrinking. Or many Chinese would have migrated to other countries where they can have two or more children and they will not be persecuted by the state.

And another graph also from The Economist, May 13th 2011 issue, the pyramid by age of world population until 2100.

The message is very clear: life expectancy will continue to increase, meaning people would be dying at a later age. And all those talks of "more and more people dying because of poverty and expensive medicines/treatment" would be slam-dunked as false.

What are the implications of the two graphs above, in relation to population control policies, like the proposed Reproductive Health (RH) and Responsible Parenthood (RP) bill in Philippine Congress now?

1. Responsible parenthood cannot be legislated, parental decision will prevail over government and politicians' decision with regard to the size of household. Otherwise, the population of Germany, UK, France, Japan and other rich economies would be rising because of the various subsidies and entitlements given by the governments of those countries for their citizens to produce more offspring. And the population of Nigeria, Congo, etc. would be declining because of the various "free" condoms, pills, injectibles, sex education and other government-sponsored interventions.

2. As the average age of people around the world is rising, meaning there will be more senior citizens, more pensioners, more ageing people requiring longer and more expensive healthcare, the need for more younger workers and entrepreneurs to sustain the needs and subsidies for the older people, should also rise. But what if, because of population control policies, the population of the younger people will only stabilize, if not decline, who will work more to sustain the oldies -- robots, migrant workers, trained animals, or younger government bureaucrats themselves?

On MARCH 24, 2011,  I wrote this:

Global market capitalization and population

Around 3rd quarter of last year, China overtook Japan as the world's 2nd biggest economy in terms of GDP size. The 1st place is held by the US economy always.

This week, after significant declines in Tokyo stockmarket since last week, China overtook Japan as the world's 2nd biggest market capitalization.

Source of graph is Bespoke Investment. H/t to Prudent Investor Newsletters, a Manila-based financial and free market blog that I regularly visit.

The other notable point from the above table is the slow but consistent rise in global market capitalization share of other Asian dragon or emerging economies. Date compared is from 01 January 2005 to 23 March 2011:

China, from 1.25 to 7.38 percent (almost 6x increase in 6 years and 2+ months.
Hong Kong, from 2.40 to 4.77 percent;
India, from 1.08 to 2.70 percent; S. Korea, from 1.16 to 2.02 percent;
Taiwan, from 1.33 to 1.63 percent; Singapore, from 0.59 to 1.03 percent.

The combined share of the above 6 countries plus Japan over the same period, is from 18.43 to 26.58 percent, or an increase of more than 6 percentage points.

While certain economic "models" would have some bearing on such significant growth in market capitalization of the seven Asian economies mentioned above, one important factor is the huge population of China, India and Japan. More people, more entrepreneurs and workers; more producers and consumers; more sellers and buyers.

As productivity increases across sectors, a rise in per capita productivity multiplied by a rise in working age population would translate to more economic activities in those countries.

Another important reason why I do not support governments- and foreign aid-sponsored population control programs.

And on FEBRUARY 25, 2011, I also wrote this:

Increasing population, no problem

(Notes: (a) This is my article today in thelobbyist.biz; (b) Pictures here are not part of the original article there; and related article here is Population policy: Big Govt or Big Church?)

More population means more productive hands and minds, more businesses and more diversity in human growth and enjoyment.

But many sectors do not see it that way. For them, more population means more houses and offices, more malls and shops, more cars and buses, more planes and ships, more power plants, more global warming, more ecological catastrophe.

Thus, their favorite proposal is to limit population, which in turn limit the growth of new houses and offices, new malls and shops, new cars and buses, which in turn limit the need for more power plants especially the “non-clean” energy sources, and they "save the planet." That is why the population scare is directly related to climate alarmism and ecological socialism movement.

There was a report last week, Planet could be 'unrecognizable' by 2050, experts say. It said,

The United Nations has predicted the global population will reach seven billion this year, and climb to nine billion by 2050, "with almost all of the growth occurring in poor countries, particularly Africa and South Asia," said John Bongaarts of the non-profit Population Council.

To feed all those mouths, "we will need to produce as much food in the next 40 years as we have in the last 8,000," said Jason Clay of the World Wildlife Fund at the annual meeting of the American Association for the Advancement of Science (AAAS).

"By 2050 we will not have a planet left that is recognizable" if current trends continue, Clay said.

The swelling population will exacerbate problems, such as resource depletion, said John Casterline, director of the Initiative in Population Research at Ohio State University….

This is a typical "control population" scare by the socialists and global central planners at the UN, WWF and other international groups. When the world population was only 1 B entering 2 B, they said the same catastrophic warning. When world population was only 2 B entering 3 B, they said the same catastrophic warning. And now that the world population is entering the 7 B mark, the same catastrophic warning.

I think there is zero limit to human imagination and capability for continuous improvement and modernization. Before, 1,000 people would need probably at least 2 hectares of land area for housing. Now 1,000 people can have spacious housing in just 3 high rise condo buildings occupying just 1/4 of an hectare, with swimming pool, jogging path, gym, theater, convenience store, etc.

In agriculture and food production, traditional farming will need several hectares of land for vegetable production. Now even one-fifth (1/5) of an hectare can produce tons of vegetables per year with all-year round production via greenhouse and hydroponics farming. Even with heavy rains or prolonged drought, production continues, and the veggies are usually 100 percent organic as they do not need soil. Bacteria and fungi that attack leaves and fruits are generally soil-dwelling.

The population increase of the poor that those central planners are scared to see should not be seen as more people that need more government subsidies. Such planners and socialists have little concept or belief in more personal and parental responsibility. For them, almost everything is government responsibility: education, healthcare, housing, pension, transportation, environmental protection, and so on.

The poor generally do not seek “government welfare” as they see that there are tons of bureaucracies and political interventions before they can enjoy whatever is given. The poor can start an ordinary food shop, barbeque stand, barber shop, vulcanizing shop, and many other micro entrepreneurial projects. But governments always say that all those initiatives are illegal and prohibited, unless the would-be entrepreneurs would first get various permits, licenses and certifications and pay the corresponding taxes and fees from the village, city/municipality and national government agencies.

And this is the main cause of poverty: prohibiting productive activities unless there is blessing and approval by the central planners themselves.

Socialists are generally unproductive people. Not engaged in any productive enterprises that rely on voluntary exchange between sellers and producers. Thus they are concentrated in government bureaucracies, national and international like the UN, or big international NGOs like WWF, producing tons of papers of new studies that justify more regulations, prohibitions and taxation, to "save the planet."

Who will "save humanity" from such huge army of international do-gooders who rely 100 percent on tax money?
See also Part 2 of this discussion series.

Armageddon, crackpots and governments, Part 2

These are among the "scenarios" that would have happened yesterday, the May 21, 2011 "Judgment Day". Or in previous doomsday and Armageddon prophesies.

It should be safe to say that the same imagery will resurface again and again in the future, like the 2012 doomdsday. Some crackpots can be imaginative in painting a scary future and a non-existent past. The important thing for them is that planet Earth will end... soon... or the soonest time possible. They must be watching a lot of zoombie movies and Al Gore fiction documentaries?

These are among the imageries by the man-made warming religion. These will happen just 89 years from now, by 2100. Or 200 years, or 1,000 years from now. The important thing is that this "will" happen. Courtesy of the UN IPCC, FCCC, UNEP, GISS-NASA (James Hansen kingdom), Al Gore, Arnie Schwarze, Leonardo di Caprio, and so on.

Another Armageddon imageries. This time, hitting the world's financial centers New York and London. Wait, the UN headquarters is in NYC. It should be the dark building on the left.

This will happen also in 2100? Or 200 years away? Well, GISS' James Hansen wrote in February 15, 2009: "If we burn all fossil fuels, we will destroy the planet we know. Carbon dioxide would increase to 500 ppm or more. We would set the planet on a course to the ice-free state, with sea level 75 metres higher...." (from The Guardian UK)

75 meters rise in sea level! We should indeed be scared and worried. Be very worried. Thanks to the UN and many governments for reminding us.

See related articles:

1. Armageddon, crackpots and governments
2. Global warming hits the Arctic