ECONOMYNEXT – When this columnist was barely five years old, and his family was living in a fairly large sized town in the hills he was in the throes of high fever and repeated injections were not having much effect.

The doctor prescribed a syrup, since it was judged that too many injections had been given to the child, but warned that is may not be available in the vicinity and it may only be available in Colombo. The father went to the nearby provincial capital after getting leave from his job and was lucky to get the medicine and return within a few hours.

Socialist Controls

Times were hard. Not only drugs were hard to come by, but there were shortages of many other items, from sugar to bread. There were foreign exchange shortages, price controls, bread queues, petrol queues and rationing. State intervention in price control was supreme. Marxism was in full swing.

When governments print money (excess of rupees) there is a ‘shortage’ of foreign exchange. There can be higher inflation as there ‘shortages’ of goods to match the new money spent by state workers who get salaries of printed money. When the state then puts price controls or imposes rationing, goods disappear from the shelves. Blackmarkets are then born.

Much later, when this columnist was older, and even when the economy was freer, some medicines were sent by relatives and friends abroad from the abroad because they were not available here.

Those times are gone.  Now those very same foreign residents – much older- load themselves up with various cheap drugs available in Sri Lanka when they come for holidays.

There are many more pharma companies now. Practically every large Western pharma company that invents new drugs to cure the sick, help relieve symptoms and make life of the elderly less difficult or less painful, or help extend their life, has an agent here. Almost all the large generic firms in India, Bangladesh and some in Brazil that copy their inventions and offers them at a lower price (partly due to lower regulatory costs and no requirement to prove their efficacy) has an agent here.

There is a massive network of pharmacies stretching to every corner of the island. Advanced drugs are available deep in rural areas. Poor or rich or middle class patients or those who care for them in rural areas do not have to go to Kandy and Colombo to get drugs stopping work for half a day or a day or even two at a loss of their income to buy drugs. They are available and two or three pharmacies literally at your doorstops.

In fact whether or not a certain area is ‘rural’ or ‘remote’ may very well be decided by the number of pharmacies and ready availability of drugs in that area which equal the facilities available in a big city.

Community Enterprise

It was not the heavy handed vicious coercive powers of the state enforced by the threat of violence from armed police, revenue authorities and jails that did all this.

It was done by the people in freedom, friendship and free exchange. By pharma companies owned by the people and mostly independent pharmacies owned by entrepreneurs in our own neighbourhoods and community.

If there were complex regulations to open new pharmacies it would not have happened. If there were large government fees charged for pharmacy licenses it may not have happened, though quite possibly it may have happened, only the prices of drugs would have been higher to compensate.

Many drugs are now cheap compared to the past and considering rupee depreciation caused by the rulers through their imprudent monetary and fiscal policies and their mania to show high ‘growth’ numbers.

Branded or ‘original’ drugs are much cheaper in this country than in their home markets in the US and Western Europe. They are expensive in those countries partly due to high regulatory costs. People in developed nations pay for the compliance and development costs which can be up to 300 million US dollars per drug.

When drugs are not available at state run hospitals, people can buy it from the pharmacy in your community. Many people, rich and poor, go to private doctors not because they are stupid or have too much money but because it is cost effective do so.

A mason earning 1,500 rupees a day would take his child to a private doctor at 6.00 pm after work, pay 200-300 rupees for consultation and get medicine for 200-300 rupees and probably turn up for work the following day.

Taking the child to a government hospital the following day and sacrificing a day’s pay of 1500 rupees is too expensive for him.

Squeezing Supply

According to a media conference given by some medical practitioners accompanied by Health Minister Rajitha Senaratne, they wanted to limit the number of different makes of drugs that were available.

Not only that they wanted to reduce the number of registered companies that could bid for hospital tenders for drugs.

Was this just for the hell of it? Or were they bribed by pharmaceutical companies to restrict supply and drive up process by creating oligopolies. No, apparently it was too much trouble for them to approve a large number of drugs.

In their convoluted reasoning – whatever that is – these doctors and bureaucrats thought that a wider and freer supply drove prices up. They seem to have no idea at all that the opposite was true in reality.

If the number of drugs are reduced, the supply of drugs will be reduced and there will be upward pressure on prices.

If suppliers are reduced, the newly created National Medicinal Drugs Regulatory Authority will then have a reason for existence – to control prices it has driven by its own torpedo aimed at an existing much freer market.

There are already reports that the NMRA has begun to harass the company that delivers the life-saving drug to your neighbourhood pharmacy.

When the NMRA delays approvals and sends the pharmaceutical company officials from pillar to post and mistreats and humiliates them as media reports are now saying they are doing, that agency is hurting you the sick person by driving up the cost of drug supply.

Delays are a big cost in these days of just-in-time inventories and fast time to market.

Bureaucratism and Sovereignty

Why do the bureaucrats harass the pharma company workers in this way?
The Island newspaper quoted a pharma company official as saying that the NMRA treated them like ‘pick pockets’.

They act in this way because it is the nature of workers of the European nation-state on whom all government agencies here are based to act in this way. Under the British system many state workers were real public servants.  But in most East European countries they turned out to be true bureaucrats.

"It is true that the officeholders are no longer the servants of the citizenry but irresponsible and arbitrary masters and tyrants. But this is not the fault of bureaucracy,"  Economist and philosopher Ludwig von Mises wrote in 1944 after watching increased state intervention particularly in countries like Germany.

"It is the outcome of the new system of government which restricts the individual’s freedom to manage his own affairs and assigns• more and more tasks to the government.  The culprit is not the bureaucrat but the political system. And the sovereign people is still free to discard this system.

"It is further true that bureaucracy is imbued with an implacable hatred of private business and free enterprise.

"But the supporters of the system consider precisely this the most laudable feature of their attitude. Far from being ashamed of their anti-business policies, they are proud of them. They aim at full control of business by the government and see in every businessman who wants to evade this control a public enemy."

In Sri Lanka the people are not sovereign yet. The state and rulers are sovereign. People are not sovereign because they have outsourced their sovereignty to the rulers. The NMRA is just one example.

Price Control Farce

There are also plans by rulers to control prices, based on what is called the ‘cost’ plus margin. This move can be the most deadly of blows that can be delivered to the patients by the bureaucrats, politicians and the state.

At the moment different brands charge different prices. That may depend on the price charged by the foreign principal and the operating costs of the distributor here, the salary structure of their staff and the cost of their distribution network.

A determinant of the final price will be their sales volume.

It is quite possible that companies that have a higher market share may be able to charge a lower margin than a company with a smaller market share, because fixed costs per pill will be lower.

It is also possible that a company which has a number of drugs on their portfolio will use the profits of one or two brands to cover part of the costs of another and build market share.

It may also depend on the amount of stocks that they carry. Companies that have lean inventories may be able to charge lower prices (or have higher margins.) Companies that order in bulk or have close relationships with principals may be able to get discounts not available to others.

Companies with principals on different locations may be able to give prices based on exchange rate movements that are not available to suppliers based in one country.

To say that a drug must be priced at a margin of 50-percent or 80-percent or 100-percent of import cost is just nonsense.

To get the lowest price competition has to determines prices, not cost plus margin. That is why companies that cannot compete, or cannot make their operations efficient, go out of business. If cost plus margin was true all state enterprises should be profitable.

Worst Case Scenario

The worst case scenario is that regulated prices will simply lead to smaller companies being put out of business. The larger firms with a bigger share that can withstand any price controls may survive. That will reduce competition and lead to higher prices, making price regulation necessary.

In fact smaller pharmacies may also be forced to close, in some areas if price controls are very far off. But people are ingenious despite the obstacles placed on them by the interventionists. They may sell other goods to boost revenues and keep the pharmacy open, which they are already doing and keep drugs available at your doorsteps.

But price controls may put drugs or medicines that are rarely used out of the shelves. Or it may limit availability of rarer drugs to larger pharmacies in bigger cities where demand is higher, as it used to happen about three decades ago. Limiting supply means patients will have to travel longer distances to get them at a cost that is not counted by politicians and bureaucrats but is very real to the patient.

Rarely used drugs have to be kept in stock for a longer period, tying up working capital. As a result margins have to be higher, though profits may or may not be the same as another more widely used drug. Rarely used drugs may also expire requiring them to be thrown away, unlike fast moving popular drugs, pushing up costs.

Cost plus margin price regulation is a joke. Under cost-plus pricing nobody will have any incentive to cut costs. Importers will have a field day driving up CIF prices to show higher costs.

Instead of using their ingenuity to make the distribution system more efficient they will now use their intellect to ‘beat the system’ and get approval for the highest price possible.

It is also possible that corruption will increase and officials in charge of the price approvals will be in the catbird seat.

A good example is telecoms. When telecom was a state monopoly people had to wait in line for decades for a phone. When the market was freed, there was price regulations based on costs. Prices always went up initially.

Telecom prices only fell after price regulations were stopped and more operators were licensed. In fact prices are now artificially kept up by the state through floor interconnect tariffs.

Electricity and bus fares go up for the same reason. Cost based regulation is a farce and while it may be better than monopoly pricing, it is definitely inferior to free market pricing.

To go to cost plus margin in pharmaceuticals where free market competition has already been established is a near-criminal act against the sick and the elderly.

The problem is doctors and bureaucrats who are paid by taxes extracted from the people through the threat of violence are manning the National Medicinal Drugs Regulatory Authority how economics (practical markets) are blind to the realities of free exchange.

Their very salaries are paid through taxes, by money extracted from the people through the threat of violence by the state.

These people will not suffer. They will have connections to get the drugs from abroad through visiting friends or other means if there are shortages here. It is people like us on the streets that will have to suffer.

Efficacy Tests

There are also attempts to stop doctors from prescribing drugs by brand on the basis that generics are just as good as the original drugs sold by the firm that invented it.

This is a lie.

While some generics made by companies who have built their own brands may be as effective as the original drug, there is no certainty that they will all be. That is because efficacy tests have not been performed using those drugs, which is an expensive process involving real world trials.

Brands are a type of market regulation and an assurance to the customer that certain quality and attributes are present. A damaged brand is a big loss to a company. A brand therefore benefits the customer. Bureaucrats do not understand this.

Only the original branded inventor has performed tests and trials to get the approval of the US or EU drug regulators. There is no real way to say whether a generic works or not.

The chemical composition of a drug can be checked in a lab. National drug agencies generally test drugs for ‘bioequivalence’ to see whether the active ingredient is delivered to the patient.

Though chemical analysis may detect impurities or any obvious counterfeit drugs, their effectiveness remains in doubt.

That is why some drugs work and some don’t. Doctors routinely speak of giving a ‘good antibiotic’ or a ‘good drug’.

They know from complaints from patients which drug works and which doesn’t. If you don’t want a repeat visit at double the cost, make sure that a ‘good’ drug brand is prescribed.

Whether a drug is effective also depends on the packaging. Some drugs are packed in plastic and foil, darkened to keep out light and in multiple layers to trap air and prevent heat from going in.

That is done to keep the chemical which is the active ingredient stable.

So generics that come in a plastic can, counted out one by one, may not be as effective as the better packaged one which is priced a few rupees higher.

What the any drug regulator should do is to free ride on approvals done in the US or EU on branded drugs whose effectiveness had meet the standards observed in those countries and save money on tests and approve as many drugs as possible.

Rule of Law

Already there are signs that the state is building supply monopolies indrugs. Some drugs are no longer available at your neighbourhood pharmacies. This columnist had to go spend several hours recently to find a state Osu Sala in heavy traffic, sacrificing half a day’s work and incurring the cost of transport to get a pain killer for a family member because the drug Tremadol has been made into a state monopoly.

It is not known how many other drugs have been made into state supply monopolies putting patients and their family members in difficulties and pushing up their transport costs and time. This is on the pretext that such drugs are being abused as narcotics.

The answer is to have a buyers’ register  – which can be easily done through a web-based system – where prescriptions and the buyers’ name and ID card is taken down. The same should be done for cough medicines which are abused, as it is done in countries like the US to identify repeat buyers.

This will push costs up, but it will less costly for the patient than travelling far and wide in search of a state drug outlet.

The pharmacies that sell these drugs without prescription should be punished after establishing a law. The guilty has to be punished. That is what a Statewhich upholds the rule of law is supposed to do and can do.

Instead, collective punishment is imposed on the innocent sick people by robbing their freedom to access to drugs and creating a state monopoly at the Osu Sala.

This is in line with therecent knee jerk reaction to re-impose the death penalty.  Liberals in the 19th century Europe did not transform rule of law by increasing punishments. They did the exact opposite. Debtors prisons were closed, people were no longer transported for stealing a loaf of bread.

Punishments were reduced but the court system was reformed so that even aristocrats were caught.

It is true that some of these pharmacies do not have pharmacists with certificates. This is something that has to be rectified. Each pharmacy should have at least one experienced worker. It is also no secret that many of the older workers and proprietors are very knowledgeable about the drugs.

Delivering drugs that have been written down does not require a diploma in rocket science. Unlike in the old days there are no drugs to be mixed and dispensed. Those days have gone also.

One challenge is not the knowledge of drugs per se but the ability to correctly decipher the prescriptions of some of the doctors who write gibberish.

The pharma industry is accused of bribing the Rajapaksa administration to stop the drug regulatory agency. That is wrong and bribing is a crime by existing law. Predictably no one is punished.

In terms of prices, what will hurt consumers is when companies lobby the government to tax imports and give higher prices or privileges including procurement guarantees to domestically located firms.

That is standard trick that has been performed in food and building materials sectors to make food more expensive for the hungry and houses more expensive for the homeless.

Let’s not fall for that trick in medicines and sell sick and old people down the river to greedy hands of nationalist ‘domestic production’ business. Ironically companies that ask for these privileges do so in the name of ‘saving foreign exchange’.

The Foreign Exchange Deception

Health Minister Rajitha Senaratne was quoted as saying that large numbers of drugs available in the market caused foreign exchange losses. So, the argument goes, the number has to be restricted by the state agency.

When private sector workers in assembly lines produce goods and export them to earn foreign currency, when poor people in rural areas work in the Middle Easter desert and send back the foreign exchange, life-saving medicine is the best use forex can be put to.

Make no mistake. The 10 rupee or 20 rupee antibiotic is life-saving. An infection that would have killed your grandfather is now cleared in three days with antibiotics produced by the much maligned capitalist ‘Big Pharma’ in the West.

Giving tax free BMWs to ministers or tax slashed cars to state workers is a second best usage of foreign exchange compared to importing the latest life-saving drug that we take for granted for 200 rupees.

Foreign exchange losses are caused by printing money not by importing goods or anything else for that matter – automobile included. At the moment money is printed wholesale to pay salaries of state workers.

It is quite possible that the cost of operating the NMRA is also borne by printed money.

When Senake Bibile, a known Marxist brought the so-called ‘drug policy’ on which the NMRA is supposed to be based in the 1970s, this country was suffering from the worst shortages of foreign currency and as well as the most draconian exchange controls ever.

In fact the Marxian policy which were applied in the 1920s in the Weimar Republic in Germany led to hyper-inflation. The suffering of the German people were great. Greater than the suffering of Sri Lankan people in the 1970s when Marxian policies were reigning supreme.

It is the Central Bank that destroys the currency and pushes up the cost of drugs. When the currency is destroyed by the state, prices of all imported and domestically produced goods go up.

Already this administration has destroyed the rupee from a little over 130 to over 140 rupees now. So import costs of drugs are up 7 or 8 percent already this year, thanks to the state, rulers, bureaucrats, the Central Bank and the state generally.

If prices have not gone up already, it is due to private sector efficiencies and a reduction in margins they have taken.

Money is still being printed. Expect more currency depreciation.

The NMRA is a farce. It is a dangerous farce. If the rulers want to keep prices down, not only of drugs but of all goods, first follow prudent monetary and fiscal policies that allows for exchange rates to be stable.

Or abolish the Central Bank and re-create a currency board so that money printing is illegal and the currency is fixed.

Abolish the NMRA along with it and reduce the burden of its operating costs from all Sri Lankans, the sick included. NMRA is a farce. It is a farce for which the patients will pay.

But it will get away with it. That is the problem with dealing with the counterfactual.

We will not be able to say in the future, how low the price of a drug would have been in a freer market without the drug authority to intervene and undermine the market forces, take the power of the consumer to deliver price signals away, kill competition and push the price up. (Colombo/Nov 04/2015)

This column is based on ‘The Price Signal by Bellwether‘ published in the November 2015 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.