Wednesday, November 18, 2009

Patent Nonsense!

The Health Minister, Mary Harney has mentioned a new proposal (likely to be included in the forthcoming Budget) regarding the making of a nominal charge (50c) for every prescription.

As well as providing some additional revenue to the Exchequer this would perhaps have the benefit of discouraging many freely availing of prescriptions (on the Medical Card) which they don't subsequently use. It is estimated that up to a quarter of the drugs dispensed by pharmacies in this way are wasted!

However there are more serious issues that need to be addressed.
A critical matter relates to the fact that the cost of drugs in Ireland is exceptionally high compared to other countries.

One important contributing factor relates to the excessive mark-up enjoyed by pharmacies for dispensing drugs. In fairness this was addressed earlier in the year by the Minister leading to a tentative compromise resolution with the pharmacies in August.

However the key factor has not yet been addressed which relates to the exorbitant amounts paid by the HSE (as the National Purchasing Agency) to the drugs companies.

Two reasons have been put forward for this problem.

1) The practice still predominantly exists in Ireland whereby medical practitioners prescribe patent drugs (which generally are much more expensive) rather than their generic substitutes (which become available after the initial patent period expires).

Apparently in the UK more than 50% of drugs prescribed are of the generic variety (whereas in Ireland it is down at around 10%).
So clearly much more should be done to persuade doctors here to prescribe generic rather than patent drugs whenever possible. (It should be borne in mind that generic substitutes are not inferior to the patent brands!)

However there is another problem here. Doctors will maintain - perhaps correctly - that in Ireland that often there is no appreciable price difference as between patent and generic varieties. Therefore in many cases they lack any real incentive to prescribe generics (even when available).

So the real problem in Ireland seemingly relates to the fact that the HSE pays far too much for its drugs (and especially for generic substitutes).
Indeed it appears that the cost to the HSE of buying some of these generics runs at 16 times the corresponding cost to the UK authorities (which is totally ludicrous).

Even more ludicrous is the attempted explanation by the drug companies of this vast price discrepancy on the grounds that they cannot obtain the same economies of scale (presumably in relation to distribution) with respect to Ireland as in the UK market.

Now the HSE say that their hands are tied as the current agreement will run till next next September.

However though some concessions on price will possibly be made by the drugs companies in new negotiations with the HSE, I would confidently predict that we will still be paying considerably more for the same drugs than our UK counterparts.

One would of course like to offer a real explanation here. On the face of it - presuming that the HSE's account is accurate - the drugs companies are in breach of competition law (as they are enforcing a clear case of blatant price discrimination with respect to two EU markets).

Why therefore has the HSE not asked the EU Commission to investigate this case which could have far reaching implications? I am aware that there is on-going case involving EU Competition Policy in relation to GlaxoSmithKline which was seeking to prevent discounters obtaining drugs from Spain (where prices are generally lower than in the UK). The pharmaceutical industry would maintain that such price discounting - it it were to become commonplace - could eventually erode justifiable profit margins on drugs. However, whatever the merits of this argument it cannot justify the blatant price discrimination they operate with respect to the Irish market.

One obvious remedy would entail that a Central agency (within the EU) in future would negotiate directly with the drugs companies purchasing on behalf of all EU countries. Then having afforded the pharmaceutical industry maximum "economies of scale" in this fashion (and with due regard to acceptable profit margins for the manufacturers), it could then distribute to national agencies in accordance with agreed allocations. Failing that, if manufacturers persist in their exploitation of the Irish market, authorities here could seek to purchase drugs from other EU markets (where prices are so much lower).

However precisely because these options have not been pursued in Ireland (despite such massive price discrimination) I suspect that another explanation must exist.

I have often argued on these blogs that the Government has effectively followed a policy of appeasing multinational investors at every turn. Because such investment has become so vitally important to the economy it is then loath to take any action that might incur possible disfavour.

In particular the chemical and pharmaceutical companies dominate the landscape in Ireland with over 60% of all merchandise exports now coming from this sector. As argued before, this sector offers special advantages with respect to tax diversion activities which perhaps explains the considerable extent of their presence. Indeed many of the drugs prescribed by the doctors are produced by subsidiaries of these same pharmaceutical companies located here in Ireland.

It is the very dominance of such companies with respect to the economy that gives them great bargaining power. And this power has been been apparently used to extract a far higher price for drugs here than in other markets.

Sooner or later we will have to recognise this elephant in the room i.e. multinational activity and how both directly and indirectly it is effectively determining so many of our economic decisions (greatly limiting in the process any genuine exercise of freedom).

Thursday, November 12, 2009

Taxing Wealth

There is a great deal of unrest with much simmering anger evident in Ireland at present. The economy is in deep recession with borrowing rapidly mounting (both in the public sector and private households).

Meanwhile the Government is making preparations to bring in a draconian budget which threatens to depress living standards further for those already struggling to make ends meet.

How have we got ourselves into such a mess? Also what is the best way forward in such trying circumstances?

On the face of it per capita income in Ireland is still very high and - indeed - well above the EU average (which - by world standards - remains a highly privileged area). Yet so many people genuinely seem to be faced here with real financial worries and potential hardship.

There are indeed many possible explanations for this.

Firstly, because of the highly artificial nature of the Irish economy. which is so dependent on multinational activity, official figures overstate true per capita income.

Secondly the cost of living is very high in Ireland - and exceptionally high - in relation to many basic services. Also because of the excesses of the Celtic Tiger, services that are provided - at inflated prices - are often of low quality.
In many cases therefore consumers could expect to get much better service for less in other countries.

Thirdly the spread of income and wealth is very uneven in Ireland with a small untouchable minority pocketing the lion's share of the gains of the Celtic Tiger era.
Furthermore the culture has evolved to offer privileged protection to this minority.

Fourthly, in the latter phases of the Celtic Tiger an explosion in credit took place. This meant in effect that it became widely acceptable to live well beyond one's means. As much of this credit creation was related directly to the financing of property, people took comfort from short-term gains in wealth (based on the escalating value of such property).

Meanwhile the financial institutions were liberally throwing money at both developers and consumers alike in a desperate attempt to maintain a continuing property bubble.
Thus now that the bubble has burst, many who had become over-commited financially are greatly exposed with negative equity growing on their homes and debt payments mounting.

Also the general standard of living has sharply contracted within the last two years and unemployment has soared.

And just as the boom distributed gains in a very uneven fashion, likewise the recession is now distributing pain in a similarly uneven fashion.

For a considerable minority, life still remains very comfortable. However major adjustments are now being forced on large sections of the population with genuine hardship looming in many cases.

At government level a chronic hole in the public finances has emerged with current expenditure massively exceeding revenue intake. In simple terms at present we are spending €3 for every €2 taken in revenue (a position which obviously cannot be sustained.)

So the clamour now regards the prospect of sharp cuts in expenditure allied to further increases in taxation.

Understandably much attention has focused on the higher income earners with many suggesting that they should bear the brunt of taxation.

Now it is certainly true that unnecessarily large amounts are paid at the top end of the public service e.g. to well known broadcasters, executives of state companies and agencies, secretaries of civil service departments. Also the state has been in the habit of paying ludicrously high amounts to consultants and advisors for legal and financial services.

And in the private sector not everyone is facing the brunt of tough competition with many professionals e.g. dentists, consultants, lawyers and accountants quite expert at maintaining their customary privileges.
In particular, the unjustifiable rewards pertaining to senior management of the major banks - who failed us disgracefully - remains a special bone of contention.

So certainly, much higher marginal rates of taxation are justified on the top income earners.

Unfortunately even with such measures are imposed, are we likely to see a major dent in the public financing gap. Also, they are unlikely to have any real impact on the distribution of wealth in our society.

Those who are most wealthy generally do not derive their gains from accountable income. Rather they are likely to be prominent business people who hire tax experts for the specific purpose of avoiding tax. And if this requires becoming "tax exiles" as for example with Denis O'Brien and U2 well so be it! Also considerable "super-normal" profits were made by many entrepreneurs e.g. large developers during the boom. However remarkably little information is available both as to to the extent of such earnings or as to their subsequent use.

So this is the real problem. The whole success of the Celtic Tiger was built on cultivating a wealth friendly ethos in Ireland. At one level this applied to the multinational companies (e.g. IT companies and financial services) where a low corporate tax and undemanding regulatory environment were skillfully used as the primary means of their attraction.
Also everything possible has been done in recent years to facilitate domestic wealth creators through offering numerous tax breaks and allowances thus increasing their power, status and privilege in our society.
Putting it bluntly, we have created a culture over the past few years which has sought to appease the wealthy and privileged in our society at every turn. And when all appeared to be going well with the economy, this was not really questioned despite the growing inequality that it actually fostered in our midst.

Now however that the bubble has burst, a dramatic clash in cultural values has emerged.

The root problem with the Celtic Tiger related to wholesale acceptance of the most dubious capitalist ethos which fostered profit, greed and monetary success as positive virtues. Though traditional community based values of service to the common good became rapidly eroded in the process, this was easily overlooked in an increasingly materialist culture where the majority could aspire to be winners.

Not only are we greatly in debt financially (both in private and public terms) but in a deeper sense we are spiritually in debt due to eagerly embracing a false set of values. These are serving us very poorly indeed in dealing with this present crisis.

Just look! Though there is now a truly great need to come together in a spirit of genuine solidarity, all that one can see is group after group attempting to look after their narrow sectional interests.

Thus the present crisis is really one relating to values. Having ignored the basic issue for so long, we finally have to ask ourselves this question. What kind of society do we really want here in Ireland? Do we wish to embrace gross materialism where monetary gain is pursued above everything else or one based on true community values (though this may risk a considerable drop in economic prosperity)?
At the moment, unfortunately we have merely the pretence of seeking the common good while remaining firmly locked in a materialistic culture. Until this issue is faced, no real solution to our immediate economic problems will be attainable.

So in the end, how we should deal with wealth depends on the kind of society we wish to choose. We now need to honestly face up to that choice!