Thursday, January 31, 2008

Stairway to heaven: prices and price control

One of the classic songs of the rock n roll genre was Led Zeppelin’s “Stairway to Heaven”. In that song, they wrote:

“And if you listen very hard
The tune will come to you at last
When all are one and one is all
To be a rock and not to roll.”

Some people think that different products or brands for one category should be priced as one, or at least the top or highest price among varying prices should be capped to a level that is deemed “affordable” to many people, so that those people can have their “stairway” to good health, fame, greatness, or whatever. The premise for this thinking is that some producers or manufacturers are evil and driven only by greed, and not the health and welfare of many people.

But people are diverse, and so are the various products and services that they produce. Diversity is the rule, not the exception. Producers and manufacturers face diverse production and marketing costs, like different taxes by different governments; different wages by different workers with different skills, and so on. And consumers have different aesthetic or health reactions to similar goods and services.

Thus, price segmentation – different prices for different products or services for different people – is a perfectly rationale and healthy mechanism. This way, people from different economic status can be served. Think of ticket prices in a single championship boxing fight: ringside seats are the most expensive; prices descend as one is seated farther away; for those who cannot afford even the cheapest ticket, they can watch through pay-tv which are cheaper and still watch the fight live. And for those who cannot even afford the pay-tv, or have no access to pay-tv, they can watch the game free via delayed broadcast by tv stations which paid their way inside the boxing stadium. At the end of the day, everyone who wanted to watch the fight was able to see it, live or delayed. Such is the beauty of price segmentation, or “tiered pricing”. But some people think this is ugly if not evil. Because only the rich are served well while the poor are served late or delayed, and they are pestered by too many tv commercials and ads.

Extend this thinking to the prices of food and medicines, and this group of people will push for price regulation or price control. That is, some bright men and women, often those in government bureaucracies, can determine and dictate which products are useful to people and which prices of these products should be allowed and which ones should be controlled. But can price control lead to good health?

The authors of the House version of “cheaper medicines bill” think it can, that is why they want to create a Drug Price Regulation Board. They think that high profits and high advertising costs by pharmaceutical companies – not high and multiple taxes, high cost of R&D in medicine innovation, related costs – are the main roadblocks why many people cannot have their “stairway to good health”. Hence, prices of certain medicines should be regulated, and people from the Health Department, Congress and other government bureaucracies, some civil society groups, have enough wisdom and heart for the sick that they can determine which prices are tolerable and which ones are not.

When prices are controlled, then producers who can possibly make some “miracle” products and medicines at sky-high costs will be discouraged from innovating and producing those products. Government puts up uncontrolled taxes, fees and regulations, then control the price of commodities later. This is unfair. And this will not lead to “stairway to heaven of good health”; rather, lead to a “stairway to bureaucracies and product

Globalization and market turbulence





Thursday, January 24, 2008

Regulating patient-physician trust

When a person is sick, he sees a physician, not a mechanic or lawyer or congressman. The patient puts his trust on the physician, otherwise he would not see the latter. The physician listens to the patient’s feelings, the symptoms, his other sickness if any (is he asthmatic, diabetic, with hypertension, has allergies, etc.). From a list of several dozen potential medicines on that particular disease, plus consideration of the patient’s condition, the physician chooses one and gives a prescription to the patient, including dosage and frequency of taking the medicine.

One factor that the physician considers in recommending a particular medicine, say brand C, is its proven effectiveness to other patients who have similar disease. Or he used to prescribe medicine brands A and B before, but they proved ineffective to his other patients; then he suspects the quality of brands D, E and F. So this time, he is prescribing brand C.

Can the state regulate this trust by the patient to his physician? Obviously it can, because the state has already regulated many other aspects of our lives. But should the state do it again in this case? And should the state regulate the physician’s trust on particular medicines made by particular medicine innovators?

Patient-physician trust is a matter of personal relationship. It can even be a matter of life and death for some cases. The same way, the physician-pharmaceutical manufacturer trust is a matter of personal relationship too. When the state will try to intervene and dictate the physician that he can only prescribe a generic formulation, and that he should not prescribe to his patients brand C or F or Y or AB, especially those manufactured by multinational pharmaceutical companies, that is going overboard and breaking the patient-physician trust.

In the House version of “cheaper medicines bill”, the Congressmen are proposing to criminalize the physicians who will prescribe certain brands to their patients. Physicians should only prescribe generics formulation, then patients will ask the non-physicians, could even be non-pharmacists, in the drug stores, or super-markets or convenience stores or variety (“sari-sari”) stores that sell medicines, which of several drugs in the same generic category is the cheapest, so that the patient can buy “cheaper/cheapest medicine”.

It looks cute, except that it could be risky for the patients. Physicians and pharmacists observe that different brands under one generic category are capable of causing different effects, delayed effects, or allergic reactions to different patients. That is why doctors always ask the symptoms and feelings of the patients, previous history of contracting that disease, any allergies or related diseases, before prescribing a particular brand.

One reason given by the Congressmen why they resort to such “brands disallowed, generics only” intervention, is because they suspect that physicians are under the influence of big multinational pharmaceutical companies. This wholesale suspicion and distrust of physicians is unfair if not dangerous, and the danger will be transmitted to the patients.

Medicine innovation is a must that should be undertaken by pharmaceutical companies if they want to remain relevant to the public, the physicians and patients in particular. Diseases evolve, so must be the medicines to eliminate or neutralize those diseases. Even pests and insects in rice and other crops evolve, that is why pesticide companies or organic farming practitioners also innovate on new formulations or practices to neutralize those pests that can possibly wipe out a farmers’ potential harvest. Even cellphone manufacturers never cease to innovate new models, discovering new uses to previously underutilized features of other cellphone models.

Physicians understand and appreciate the efforts made by medicine innovators, aka pharmaceutical companies. That is why physicians who truly care for their patients tend to choose those brands that they think truly innovate and innovate continuously, unceasingly.

Unfortunately, there is a big cost to innovation. In addition, government taxes and fees, plus other government health regulations and inspections, add to the already high cost of innovation, clinical trials and product development. This aspect of high and multiple government taxation of medicines and medicine innovators, unfortunately, has escaped the minds of legislators.

Tuesday, January 15, 2008

Intellectual property and innovation vs. envy

January 8, 2008

Some groups have convinced the public that intellectual property (IP) through patents can be skipped and overruled when we're talking about public welfare, public health in particular. The catchword, "patients over patents" summarizes it. Intellectual property rights (IPR) is an important matter that should be respected and strengthened, not weakened, if we want to encourage continuing innovation to battle ever-changing and evolving diseases.

One analogy can be presented this way. Consider you are an agri-biotech company. You have developed a rice variety that can help its consumers boost their immunity against malaria, tuberculosis, and diarrhoeal diseases. It took you two to three decades of painstaking research and development, employing the brightest scientists and most dedicated researchers in the world. Naturally the price of your rice is high, maybe five to 10 times the price of ordinary rice. Then government comes in to compel you to shorten your patent on such rice variety, if not outright skip your IPR to such invention, because many poor people cannot afford to buy that rice, because public health is at stake. How would you feel?

Property rights is the cornerstone of a free society. Remove or weaken property rights and some bully can expropriate your property anytime, from your cellphone to TV, to your song composition and biotechnology invention, and society will border into mediocrity, if not chaos. It will be a society where hard work and innovation will be discouraged, and robbery and envy is encouraged.

The “Cheaper Medicines Bill” currently in Congress is an example of weakening IPR, demonizing the medicine innovators as evil while retaining the multiple taxes on medicines and keeping silent on the limited competition among pharmaceutical companies. If our Congressional leaders really want medicines to become more affordable to the people, they should have crafted a bill that will drastically cut or abolish import tax, VAT, and other taxes on medicines, the way they are debating whether to abolish the import tax and reduce/abolish the VAT on petroleum products as world oil prices have touched the 3-digit level of $100 a barrel. This way, the price of medicines will not only go down, but the number of competing pharmaceutical companies, even drug traders and drug stores will also increase, which will further add more pressure for prices to go down and quality to improve. Let the currently demonized pharmaceutical companies expand to several dozens, if not hundreds, and let them slash each other’s throats in fierce competition.

Theoretically, IPR on an innovation should be forever, not limited to some arbitrary number of years of patent life. Why 20 years? Why not 15, or 23, or any other number of years? When Toyota invented the Corolla, it has forever IPR or patent on that car model, and it prevents Nissan, Ford, Honda, GM, Fiat, Hyundai, or any other car manufacturers from creating another Corolla, but they can create their own car model that has more or less similar features and power as the Corolla, at a different price. So the charge that a patent or IPR is equivalent to a “monopoly” is wrong because competing firms can always produce a similar product or model with a different name.

Thus, the Senate version is wrong in weakening IPR for medicine innovations. Instead of encouraging the entry of more competing medicine innovators from around the world to come into the country through IPR laws that will give them longer term, if not forever protection of their innovation, the Senate version has chosen to discourage their entry.

But the House version is worse because it intends to create another bureaucracy, a drug price control body. Price control attempt by governments of any commodity or service almost always results in even higher prices. This is because price control discourages sufficient supply of good-quality commodities or services, and low supply relative to demand results in higher prices.

"Parallel importation", or the importation of patented or licensed product or service without the permission of the IP owner, is another track in weakening IPR and innovation. Better to have free trade, with no government bureaucracy giving accreditation or authorization of who can do the importation. And free trade necessitates the abolition of import tax as this tax immediately raise the price of the imported good or service.

People, firms, and institutions that are not innovative enough are often driven by envy. They envy those who risked high and later earned high. But risk-takers do not always earn all the time, they also lose since innovation is always a risky undertaking. You do not know whether your invention will be useful or not, and if proven to be useful, you are not sure if the consumers will patronize it or not. And if the consumers will patronize it, you are not sure if government regulations and bureaucracies will allow it to prosper or not.