Thursday, April 29, 2010
Leave to one side for a moment the fact that how much money you make isn't the president's decision to make; let's instead focus on the anti-market rhetoric and why he's got it all wrong. Like always, we'll use a pharmacy-related example.
Take lipitor. Do you think Pfizer should stop selling it when the president decides they've made enough money from it? Or, more importantly for the millions of people who have benefitted from taking it, do you think Pfizer (Parke-Davis Warner-Lambert, as was) would have spent millions of dollars developing it if they knew that was a possibility?
As helpful as modern drugs are, I think we can all agree that drug companies don't develop them out of the goodness of their hearts. Curing diseases is grand, to be sure, but if there's no money in selling the cure, no one (except the government) will be willing to spend money finding the cure.
This is just the latest in a long line of President Obama's anti-market quips. This time he's complaining about Wall Street banks. Last year it was insurance companies and drug manufacturers.
But take heart, my friends. He's only the President of the United States. Like water seeks its own level, the market will find a way around the inefficiencies of our misguided dear leader.
Thursday, April 1, 2010
I recently carried my son with me to run some errands. On the way back home he asked me why we waited in line so much longer at the DMV than at the drug store. My ears perked up: Here was a chance to educate my son about incentives, competition, and inefficient bureaucracy. I answered as follows:
The difference has everything to do with incentives. At the drug store (an independent outfit close by our house), the pharmacist/owner depends on his customers for his living. He knows he must keep his customers happy or risk losing them to a competitor. He keeps his customers happy by calling them by name, treating them courteously, and filling their prescriptions quickly. His employees are likewise dependent on the customers. They know that, if they upset the customers or cause them to have their prescriptions filled elsewhere, the pharmacist will fire them. So, everyone at the drug store has an incentive to give fast and friendly service.
That's not the case at the DMV. For one thing, there is no competition. The law requires that motor vehicles display current registration decals, and those decals are only available at the DMV. No matter how unhappy one is with the service, he must still purchase his decal from the DMV. Because of this lack of competition, the employees and managers at the DMV have little or no incentive to give fast and friendly service, so they usually don't.*
People respond to incentives. In the absence of incentives to work efficiently, people will work inefficiently. If there were a way to make employees at the DMV more dependent on the humor of the public, I think we'd see a rise in the level of satisfaction with that element of the bureaucracy.
*I note one exception to this "rule": When I recently purchased a new car and went to the DMV to get a new tag for it, the clerk that handled my request was the most friendly and efficient I have ever come across. I told her so and sent a letter to her supervisor to let him know as well. Still, I think you will agree, this experience was an exception, not the rule.
Sunday, March 28, 2010
I recently read an article in a pharmacy trade publication bemoaning the cheaper prices Walgreens, CVS, and other large pharmacy chains pay wholesale drug suppliers compared to their independent and small chain brethren. Even when these smaller pharmacies form buying groups that order in quantities as large as the big chains, the author says, the price cuts magically disappear.
Allow me to correct the author's misconception. The price cuts do in fact disappear, but I'd attribute it more to economics than magic.
Assume arguendo that Walgreens orders 100 bottles of Lipitor. Assume also that twenty small pharmacies form a buying group that also orders 100 bottles of Lipitor, 5 bottles per pharmacy. If you were the supplier, would you charge Walgreens and the buying group the same price? I wouldn't; here's why:
By selling 100 bottles of Lipitor to Walgreens, the supplier prepares and sends one shipment and one bill. By selling 100 bottles of Lipitor to the members of the buying group, the supplier prepares and sends twenty shipments and twenty bills. So even before the first Lipitor is sold to the first customer, the supplier has already incurred twenty times the cost of doing business with the small pharmacies versus doing business with Walgreens. Who should bear the extra cost?
Wednesday, March 24, 2010
Prices reflect the relative scarcity of and the relative demand for goods and services. Because nothing we value is in infinite supply, prices help society determine who gets what. There's nothing sinister or classist about it.
But that's not what proponents of the recent healthcare legislation would have you believe. They want you to picture doctors and insurance companies as greedy fat cats who aim to reap huge profits on the backs of the sickly poor. This couldn't be further from the truth. Insurance companies and doctors are no different from owners of grocery stores, clothing stores, home improvement warehouses, or any other retail outlet. Their aim: To trade their scarce resources to others who value them more highly so that they can in turn acquire scarce resources they value more highly.
Like milk, cotton, and lumber, a doctor's time and advice are scarce resources. Currently, the market allows doctors to trade those resources for something to doctors value more highly--his fee. When your doctor agrees to see you in his office, he is signalling that he values the $50 he charges you more than the 15 minutes he spends with you. Likewise, you are signalling to the doctor that you value the 15 minutes he spends with you more than you value your $50. If he didn't, he wouldn't see you. If you didn't, you wouldn't see him.
If your doctor suddenly began charging you $100 for 15 minutes of his time, you might re-think whether you should go see him, especially for a minor ailment like a cough. You might decide that you value your $100 more than you value his time.
So why don't proponents of the recent healthcare legislation realize that the reverse is also true? Do supporters of this legislation really think that the doctors will continue to see patients when fees drop to $25 or $30? Do they think insurance companies will continue to stay in business when the law requires them to set their premiums artificially low? Just as you reach a point where you value your money more than your doctor's time, so, too, will your doctor reach a point when he values his time more than he values your money.
And then who will cure your cough? Your government? Not very likely. The president and Congress can't understand the simple concept of supply and demand. Do you think they are likely to understand the complexity of the human body?
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