The Pope and Capitalism

A friend from UPSE alumni association, Mike A. wrote me in our SEAA yahoogroups and asked my views on   Pope  Francis, as  he  has  made a critique  on the Free  Market  ideology, and the Social Darwinian "survival of  the fittest" philosophy. Below is portion of a news report from theblaze.com.

Pope Francis Made Some Pretty Big Comments on the Global Economy: Here’s What You Need to Know

Nov. 26, 2013 1:26pm  By  Becket Adams

Pope Francis rebuked the culture of profit at any cost as he issued a 224-page mission statement for his papacy Tuesday, saying that mankind is called first to care for his neighbor and the poor….

The document also denounced the survival of the fittest theory of economics “where the powerful feed upon the powerless” and the poorest in society are excluded….

Unsurprisingly, as is the norm for this particular pontiff, some media outlets chose to present Francis’ words as an attack on yet another traditional pillar of “conservative” ideology: the free market.

Today Pope Francis blasted capitalism as "the new tyranny" that "kills" people.

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Well, a religious argument is based on faith, on belief and morality not so much on hard facts. No one asks for graphs, charts, tables and regression analysis to believe that a God exists, people just believe and have faith in a God.

To disappoint some people’s obsession with central planning and critique of free market, now invoking the Pope to strengthen their weak and lousy belief, here are some quickies.

1. The free market system, the capitalist economic system, gave us yahoo, yahoogroups, google, facebook, youtube, twitter, linkedin, Samsung, Apple, iPad, HTC, Starbucks, McDo, Mang Inasal, Aling Karing Carinderia, Toyota, GM, BMW, Vespa, Suzuki, Shimano bikes, etc. They are all useful. If people do not find any of them as useful, then they don't use or buy it. There are still people in fact who don't have facebook until now, it should be fine, no one coerces them to get one. In addition, no one was also coerced via taxation to finance the start up of those private enterprises.

2. The non-free market, the non-voluntary exchange, the force and coercion sytem, gave us what? Thousands of bureaucracies, local-national-multilateral, and tens or hundreds of thousands of central planners, very often their plans contradict or duplicate the plans of other bright boys and bureaucracies. 

There is also "state capitalism" where an institution of coercion tries to enter the world of voluntary exchange. But such state capitalism is possible only via rule of men, not rule of law. Certain requirements and polices on taxation, business registration and other regulations that normally apply to private enterprises do not apply to government- or state-owned enterprises (SOEs).

3. "Survival of the fittest" economic theory is a wrong term. The appropriate term is "expansion of the efficient" and "non-expansion of the inefficient", or Yes, “bankruptcy of the inefficient.” Mr. A puts up a bakery shop in a corner lot, it was doing well initially. Then Mr. B and Mr. C also put up a competing more glitzy, more fanciful bakery shops nearby and draw in many customers of A. Does this mean the death, non-survival of bakeshop A?

Maybe yes, but maybe No. People are rational, they innovate and adjust as much as possible. Those who do not adjust and innovate are likely to go bankrupt. So bakery A can focus on cheaper (and smaller) pandesal at P1 per piece while B and C sell fancy pandesal at P3 or more a piece. They serve certain markets, certain consumers, over the same locality, and they can all survive, no one dies. Instead of A prospering to become a big bakery shop, it just retained its small size in that area, and can plan an expansion elsewhere, in another village or municipality where it can innovate in its products, pricing and marketing.

Market segmentation, product and pricing differentiation. These are the key for enterprise innovation, market competition and economic freedom. Even people who took Economics for their college degree forget their Econ 102 or Micro Economics course. They may consider reading old books on microecon, or have a sit down in one undergrad lectures at UPSE.

Instead of listening to the Pope on economics, perhaps people should consider listening to undergrad lectures at UPSE or other universities. They will learn more. But if they want to hear stories for enrichment of the soul, then they should listen to the Pope.

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See also: 

Welfarism 26: John Mangun on Economic Decline of the West, July 31, 2013 

Inequality 16: Inclusive Growth and Central Planning, October 21, 2013 

EFN Asia 32: Day 2 of Conference 2013 in Bangkok, November 09, 2013

PhilHealth Watch 3: Market failure vs. Government failure in health insurance

When my wife gave birth to our 2nd child early last week, I needed to get her member data record (MDR) as one of the requirements for PhilHealth claims/deductions. I went to PhilHealth Quirino Ave. office to get it. The printing of that document should not take more than 1 minute, I guess.

But the long lines just to get that MDR -- as shown in this photo -- was que horror! About 30+ people queuing to get an MDR or PhilHealth ID and only 1 PhilHealth staff to entertain them all. It took me 1:40 hours just to get that simple document.

Does PhilHealth think that their members are jobless people who have nothing else to do and hence, can endure queueing for hours just to get simple documents, or file claims? I filed a claim, again for my wife who was hospitalized about 3 months ago. Just to file the claim took me 2:05 hours. Then we will have to wait at least 60 working days (roughly 2 1/2 months) to get the claims.

While people endure the slowness of PhilHealth bureaucracy when their members get their rightful claims after religiously paying their mandatory monthly contributions for years, there is a poster inside, shown in this photo, that members can send in their contribution by texting. When you send your contribution, PhilHealth wants to get it within seconds or minutes. When you get your claims, PhilHealth wants you to wait for hours queuing, and several months waiting for the actual claims.

Now we are resigned to the fact that PhilHealth's universal coverage will become even bigger and bigger, fine. The poor deserves healthcare. But do we all pay bigger mandatory monthly contributions then? Do we all endure even longer queues and longer waiting period to get Philhealth benefits?

The future is not yet here but my guess is that the answer to my own questions above are all Yes. Endure more ugly government bureaucracies.
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On March 25, 2009, I wrote this:

Health Insurance and Markets

Yesterday afternoon, I attended a round-table discussion by the "Ayos na Gamot sa Abot-Kayang Presyo" (AGAP), or Good ,medicines at affordable price. While I did not share with AGAP its position on the "cheaper medicines law", some leaders of AGAP are my friends as we belong to a new big coalition of NGOs on health transparency in the Philippines(to be formally launched in the next few days). That's why I was among those invited to attend the round-table discussion.

The topic was about health insurance in the Philippines and the main presenters were officials from the state-owned Philippine Health Insurance Corporation (PhilHealth), as well as a staff of a Congresswoman who authored a bill revising the law on PhilHealth. Other participants were mostly health NGOs affiliated with AGAP.

The PhilHealth guys presented and made further elaboration during the earlier part of the open forum. I have to raise my hand to make several points.

1. Our main concern is expanding access by more people to quality health care, or access to quality food, quality clothes, quality cellphone, etc. The problem has been identified and the solution is either more government intervention and subsidies, or less government intervention. Most of the concerns and sentiments are for the former.

2. But think of this: there is no government food insurance corporation -- all restaurants, all fastfood chains, all carinderias and street food vendors, are private, there is no government restaurant or government carinderia, and people are eating. There is no government transportation insurance corporation -- all buses, taxis, jeepneys, tricycles, airlines, shipping lines, etc. are private, and people are moving. There is no government clothing insurance corporation -- all clothes, pants, shoes, etc. are privately manufactured and distributed, and people have various clothing and footwear.

3. In education and health care, there is heavy government presence and intervention, and that's where problems and scandals come -- the Department of Education (DepEd) is among the most corrupt agencies in the government as perceived by many people, PhilHealth was used during the 2004 elections where millions of non-contributing people were given health cards, there are many reports of stealing and padding of claims by some hospitals, physicians and members amounting to huge amount of money.

4. Even if the staff and personnel of PhilHealth are good people and angels, but if the President and/or top political leaders are corrupt, the institution will be corrupted and so indirectly, will be its staff. Why did the "membership" of PhilHealth jumped suddenly in 2004 and not in 2003 or 2005? Because of the 2004 Presidential elections. So we can expect the same pattern next year where there will be another Presidential elections.

5. It is apparent therefore, that the solution lies in making the government step back, in reducing its intervention and allow the markets to come in a competitive environment. I am not saying that PhilHealth should be abolished or privatized, it can be shrank and become one of the many health insurance providers in the country. Membership in PhilHealth should also not be made made mandatory; it should be voluntary.

One reason why there is low formal business activities in the country, why there is high incidence of the informal sector, is because businesses have to pay plenty of mandatory taxes and contributions to the government: (1) BIR for monthly remittance of income tax, value added tax, other taxes; (2) SSS for monthly remittance of social security mandatory contributions; (3) Pag-IBIG for mandatory housing contributions, (4) PhilHealth for mandatory health insurance contribution, (5) local governments, (6) SEC, (7) DTI, etc. Government is a big burden for entrepreneurs, so that making health insurance voluntary and not mandatory will help reduce the burden in business and entrepreneurship. Also in the "cheaper medicines law", the government boasted of advancing this philosophy, yet government taxes and fees (national and local governments) comprise about 20 percent of the retail price of medicines, making said government pronouncements an irony if not a hypocrisy.

Oww, I could see some smiles and grumbles from the audience while I was talking. After I talked, some laughter. Maybe some were wondering, "which planet does that perspective come from?" :-)

More discussions and exchanges later, one PhilHealth official mentioned about "market failure" that is why government must come in to provide support to the poor and disadvantaged people. This I could not allow to pass, I rose my hands again and spoke for the second time.

There is market failure, true, but when there is stealing in government, that's "government failure". When the thieves in government do not go to prison and keep their positions instead, that's another "government failure". If those thieves will hire fellow crooks, thus perpetuating the system into large-scale, from top to bottom levels of corruption, that's another case of "government failure". There are many cases of government failures that we don't realize, we only hear "market failure".

Besides, there will always be market failure anytime, anywhere. If I demand a USB with 10 GB memory and sold for only P500 (nearly US$10), there is already market failure because while there is a demand (my personal demand), there is zero supply. So will government come in to produce that powerful but dirt-cheap USB? Another case, if there is a helicopter service from Quezon City to the Manila international airport for xxx thousand pesos and there are no takers or passengers, that again is market failure because while there is a supply of a service, there is zero demand. So will government come in to subsidize the fare in that helicopter service, in order to prevent the bankruptcy of the helicopter company?

There will always be market failure but it does not imply that government should come in all the time. Many if not most market failure does not need any government intervention because the market is capable of correcting itself (reduce or stop the supply of something if demand is small or zero, or vice versa).

In the case of health insurance, my idea is that people can have dual health insurance -- the one by government (PhilHealth) and a private health maintenance organization (HMO). The latter will be operating in a competitive environment and level playing field, so that each player will be forced to continuously improve their services. Allow also price segmentation, so that HMOs can charge P1,000 per year or P10,000 per year or P100,000 per year, depending on the budget and specific needs of their clients. Lower annual payment for fewer services, higher annual payment for plentiful and elaborate services.

This way, instances of claims-padding by the contributing members and/or physicians and hospitals can be minimized if not stopped because PhilHealth's coverage will be capped to a certain maximum. Whether patients will stay in a hospital for only 1 day or 1 week or 1 month, claims padding will be minimized. Whatever amount in excess of PhilHealth coverage can be sourced by the patients and their families to their HMOs or personal/household savings, or they can approach their local politicos for assistance. Price segmentation or price differentiation is a wonderful mechanism to allocate resources properly among people with different budget and different needs.

It was a great afternoon of exchanging ideas, but for me, it was an opportunity to douse some sense to heavy statist philosophy that more government intervention, taxation, regulation (and the corruption and waste that often come with such heavy intervention), is the solution to any social or economic problem.

PhilHealth Watch 1: Claims vs. reimbursement

This afternoon, I went to the Philippine Health Insurance Corporation or PhilHealth, Manila office at Quirino Ave. My purpose is to file the form for reimbursement (plus official receipts) of my wife who was hospitalized last month.

The claims and membership assistance section is on the 4th floor of the building. Outside the room there is this flowchart on steps for claims. Sorry, my camera phone is low-tech and can only give a low res picture. But at least there is effort by PhilHealth to inform members of some steps to go.

Inside the room though, there are plenty of people waiting for their number to be called. I entered that room and got my number around 2:25pm, was entertained around 4:30pm (or about 2:05 hours waiting). It's not a good way to spend your working day, waiting for 2 hours or more. Anyway, the staff are helpful and professional, except that they are still few compared to the big number of members and fund contributors filing for claims and other purposes.

The reimbursement will be given after at least 60 working days, or about 3 months at least, wow! One may wonder why it takes that long for PhilHealth to give the reimbursement, considering that members and fund contributors are paying on time. If they are not updated in their payment, they may not be eligible for reimbursement.

Perhaps PhilHealth needs to check and re-check the papers and receipts presented, in order to weed out bogus or excess claims by some opportunist members, or opportunist physicians, hospitals, etc. I think there should be some ways to shorten the period of reimbursement. My wife's expected reimbursement is not big, only P5,000+.

I just checked PhilHealth's website, I was looking for some statistics about membership. It's not there anymore, it's gone. They used to have a powerpoint presentation for the latest quarter of the year available.

In some of my papers last year, I slammed PhilHealth for exagerrating their number of beneficiaries, saying that they have already covered up to 85 percent of all Filipinos as of mid- or end-2009. It's not true, it's a misleading data, if not a lie. I think their actual coverage, including dependents of members, will not be more than 40 percent of the entire population.

Hospital data, both public and private hospitals, show that PhilHealth reimbursement constitutes only about 15 percent of their revenues, with the bulk, about 50 to 60 percent are out of pocket (OOP) expenses, about 20 percent from private health maintenance organizations (HMOs), about 5 to 10 percent from other government entities (local governments, PCSO/Pagcor, DSWD, etc.).

PhilHealth got lots of money, P100 billion plus in reserves. That's why it is a big candidate for politicized funds.

Meanwhile, I wish that they can speed up the reimbursement period to their members. They owe that to those who were forced and coerced to become PhilHealth members.
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Meanwhile, I wrote two similar articles over the last few months.

(1) Health Insurance and Government Failure

August 21, 2009

I presented this paper last Monday here in Manila during the "Social dialogue on health care". It's 7 pages including a 1-page annex.

Among my arguments there are the following:

1. Market failure and government failure: Sectors with little government direct intervention

In food, there is not a single government restaurant or government carinderia or “turo-turo”, or government supermarket, and yet people are eating. Some food are cheap, some are very expensive, but most people eat at least 3 meals a day.

In clothing, there is not a single government clothing and jeans corporation, or government shoes and slippers corporation, but people have clothing and slippers. Some are cheap, some are very expensive, but people have something to protect their body and feet.

In transportation, there is not a single government bus line, government jeepney or taxi or tricycle corporation, government shipping or airline company. But people are mobile. Those who can afford buy their own private vehicles or private boat or private plane.

Compare that in health care where there are government hospitals and clinics, government pharmacies and drugstores, and government health insurance. On top of that, there are plenty of government regulations of private enterprises and corporations in the healthcare industry, like the current drug price control of selected medicines. And yet public health problems are often more pronounced than food, clothing and transportation problems.

Why?

Competition and market dynamics respond to whatever big market failure is existing. Whereas more politics and more intervention exacerbate whatever is an ongoing government failure.

Product differentiation and market segmentation – different prices for different products and services for different people with different needs and different budget – is an excellent tool to correct any market failure. Different suppliers and sellers target their specific buyers and consumers, and the latter send certain signals (like price and quality preferences) to the former, which allow the former to adjust the products that they supply and sell to the public.

This spontaneous and quick adjustment is difficult and very slow when government comes in to politicize the delivery of certain services, like healthcare. Things become rigid and less flexible once politics comes in. The bureaucracies and rent-seeking behavior associated with various regulations and taxation get in the way as government comes in.

2. Taxation and hypocrisy

From “expensive medicines”, the government says it wants cheaper medicines, thus the “Cheaper medicines law”. And yet government slams various taxes on medicines that contribute to their high prices. There is clear hypocrisy there.

When PhilHealth was created (RA 7875, February 1995), it is explicitly stated.

“SEC. 15. Exemptions from Taxes and Duties – The Corporation shall be exempt from the payment of taxes on all contributions thereto and all accruals on its income or investment earnings.”

So government recognizes the distortionary impact of income tax and related taxes, that it has exempted PhilHealth and other government corporations from such taxes. So while private health insurance corporations that also provide healthcare services to the public are slam-dunked with various taxes and duties, the government health insurance corporation is exempted from such taxes and duties.

There is dual hypocrisy there. Taxing medicines that contribute to their high prices and still loudly call for cheaper medicines. Exempting a government corporation from taxes when the government wants more and higher taxes from almost everything and from everybody.

This explains, partly or largely, why the government has low moral ascendancy in expecting public support for its various programs.

3. So, is there government failure in health insurance?

Yes, there is. The same way that there is also market failure in health insurance. The only difference is that there are market solutions to market failure that are quicker to emerge if politics should step aside. Whereas government solutions to government failure results in more expensive and more bureaucratic way of solving problems.

Despite the “compulsory coverage” provision where “all citizens of the Philippines shall be required to enroll in the Program”, PhilHealth membership remains low, only 13+ million of paying members out of the 35 million employed Filipinos. If PhilHealth membership is voluntary and not mandatory, there should be less than 13+ million members, probably only one-half of that number.

See the full paper here, http://www.minimalgovernment.net/media/mg_20090817.pdf


(2) Health financing and market segmentation

April 20, 2010

I just produced a new paper, Socialized healthcare vs. Market segmentation, dated April 6, 2010, 6 pages.

I believe that market segmentation of healthcare financing via health maintenance organizations (HMOs) deregulation and more local government provision/participation will allow the majority, especially the poor, to have greater access to better healthcare.

National health agencies like Philhealth and the DOH should step back a bit, and allow more roles for local government (like in San Isidro, Nueva Ecija case) and the HMOs. Let them be engaged in fierce competition to get more patients. When the national government comes in the provision of health financing and insurance, there is zero competition. When the design of the project is lousy, it will become lousy when it is implemented. If there are waste, inefficiencies and corruption at the top, such wastes are repeated at the bottom.

My hypothesis is that a better, wider coverage of health financing, can be done through more HMOs deregulation, more LGU participation, as add-on to PhilHealth membership.

PhilHealth is lousy. They say they have covered up to 85% of all Filipinos already. If that is true, why is it that in many hospital records, between 50-60 percent of costs come from out of pocket (OOP), only 12-15 percent come from PhilHealth?

So if PhilHealth is lousy after about 15 yrs in existence, why should we work to further expand PhilHealth power and mandatory contribution?

Let us try other modes, like more HMOs competition, more cooperative and LGU health card system. If we combine competition among HMOs, cooperatives and LGUs, it should be fun and challenging. Those who are lousy in providing health financing will lose clients. But not PhilHealth, because membership there is by coercion, by force. Whether you like it or nor, you become a PhilHealth member. That is the only way why Philhealth is making money, by forced and coercive contribution.

Spontaneous Market 7: Price Control is Price Dictatorship

The price of a commodity is an indicator of both its value or usefulness to society (demand side) and its availability or scarcity (supply side). Thus, when a product or service is deemed useless by the consumers, say telegram or personal pager, then its price based on the willingness to pay of the consumers, will be zero or near-zero. At that price, no service provider will supply the service. The result will be clear: telegram or paging companies will cease to exist.

On the other hand, when a commodity or service is deemed very useful to society but it is freely available, or the supply is unlimited, like air, then the price for its consumption will be zero. Luckily, the supplier of that service – nature – does not demand any monetary compensation. But there are certain places and instances where air is very thin if not absent and hence, people will have to buy a “bottle or tank” of air for them to survive, like those in scuba diving or those climbing Mt. Everest or other very tall mountains.

Price, therefore, is a beautiful mechanism that tells people and producers what products and services are most or least demanded by certain groups of consumers in a particular place in a particular time. It is necessary therefore, that pricing of commodities and services be left as freely and spontaneously as possible to allow both producers and consumers, both sellers and buyers, to adjust to each other. If the price is too high, consumers can walk away and the sellers will not sell anything and go bankrupt, even temporarily. If the price is too low, producers will not supply and consumers will buy nothing that they need and they will be the end-losers.

The idea of controlling the price of anything is born out of various motives, from humanitarian and pure public service, to political rent-seeking and pure envy. Price regulation and control is a clear proof and explicit signal that an economy is not free, that pricing of the regulated commodity is highly politicized. Price control is also a naked and blunt proof that there is price dictatorship: the price dictators decide at what price the producer and/or seller of a final product or service can sell, even though the same price dictators do not decide nor dictate the price of all inputs and intermediate products and services needed to produce that final product or service.

Thus, while the rationale or alibi given to institute price regulation and control is to “give justice to the consuming public”, there is great injustice to the same consumers when producers and/or sellers of commodities whose price has been politicized and regulated will be discouraged from producing further. When prices are controlled, producers who can possibly make some “miracle” products at sky-high and “miraculous” costs will be discouraged from innovating and producing those products. Ultimately, it is the public, the consumers, who will be the losers because they will be deprived of enjoying such revolutionary products.

Can people expect the “same” quality of a commodity after government has distorted and coerced a lower price? This does not look possible.

Producers will be discouraged from producing better quality commodities or products that require higher cost of raw materials and intermediate inputs, higher wages for higher labor and technological skills, higher office and plant rentals for cleaner production environment, higher cost of storage and packaging, etc. When the price of the above-mentioned production and marketing costs are uncontrolled, plus there are uncontrolled taxes and fees slapped on them, then the price of the finished product will be controlled later, then it is a perfect formula to discourage production of good quality commodities. Only low quality and mediocre products will be produced and sold in a politicized pricing system.

This partly explains why under normal, non-coerced, non-politicized pricing system, there are different prices for different quality products of the same generic category. For instance, there are different prices for different designs and brands of running shoes. And people love this price segmentation or price differentiation for differentiated designs, quality and packaging of products.

Here in the Philippines, price control is seldom practiced, thanks to some sanity in the minds of government regulators and bureaucrats. Unfortunately, that populist and interventionist policy is never erased in the minds of many people in government. That is why in the recently-enacted “Cheaper medicines law” or RA 9502, price control of some drugs and medicines “when national emergencies exist” was included.

This already sends a negative signal to producers of good quality and innovative medicines while sending positive signal to producers and traders of low quality, non-innovative, even counterfeit medicines. Because a “maximum price” to be set by the government through the Department of Health (DoH) and ordered by the President of the country will now be used by the second group of medicine producers and traders as a “target” price. Even low quality and non-innovative drugs can be priced near or at the level set as “maximum price” by the State.

The potential damage of the price control provision in the law, however, can be mitigated if the implementing rules and regulations (IRR) that will be issued will make it difficult and nonarbitrary to declare a “national emergency” to justify medicine price control. Thus, certain safeguards that are strict enough should be included in the IRR.

The current draft IRR prepared by the DoH somehow lists some good and strict criteria before a maximum retail price (MRP) can be declared. Among such criteria are the dozen-plus factors and inputs that contribute to the final price of medicines, like cost of research and marketing, taxes and fees, exchange rate, and so on.

But the composition of the Price Control Advisory Body or Consultative Council was not defined. This writer suggested some proposals on who should be in that body or council, mainly players from the private sector plus consumers. Since the composition of the body or council is not defined in the DoH draft IRR, it is possible that such body may be packed with lots of government officials, like people from the DoH, DTI, BFAD, DoST, DSWD, NEDA, DILG, and so on.

A definition of what constitutes “national emergency” was also not made in the section on Definition of Terms. Again, there is danger that such phrase can be abused by an abusive and corrupt DoH Secretary and President of the country someday. They could threaten the manufacturers and distributors of safe, effective, but “expensive” medicines with: “Hey, we will issue price control (or compulsory license) on your most popular and blockbuster medicines, unless you pay us…”
This is not to say that the current DoH Secretary and President are corrupt and extortionists. This law will stay with the citizens and residents of this country for the next 20 or 50 years or even longer, unless amended by another law where the price control provision is removed and abolished. The appearance of corrupt and extortionist DoH Secretaries and Presidents of the country in the next 20 or 50 years or even longer, is a big probability considering the bad governance culture and history in the country.

Hence, mechanisms should be instituted to make it difficult for future corrupt and extortionist DoH Secretaries and Presidents to impose medicine price regulation and control arbitrarily. More innovators and inventors of effective, revolutionary and safe medicines should be encouraged to come in, and not discouraged with politicized pricing and patent confiscation. With more competition among such type of medicine producers, the public will be protected with quality and affordable medicines.

* See also:
Spontaneous Market 5: Limits to Free Market? November 16, 2007
Spontaneous Market 6: Removing Pork Barrel, December 16, 2007