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Is it time to revisit pharmacy ownership?

With the Government desperately trying to revive a co-payment policy that has been declared DOA by Senate balance-of-power holder Clive Palmer, attention is turning to other areas of health financing that could deliver Budget savings.  A senior health policy analyst and regular Croakey contributor who writes under the name of “William Foggin” has provided the following analysis of the current regulatory environment for pharmacy. He proposes a number of reform measures, in particular lifting current ownership restrictions, that would both save health dollars and leave the door wide open for major chain stores and corporations to enter the previously closed pharmacy market.

“William Foggin” writes:

As the Government struggles to find savings to replace those that may be lost in the Senate, it could usefully return to the pharmaceutical benefits scheme.  The budget included significant savings to the budget from increasing co-payments under the scheme: a simple cost transfer from taxpayers generally to sick people.  But it did nothing to address the cost of the scheme as a whole.

In post-budget commentary Ross Gittins in the Sydney Morning Herald on 26 May observed that

Much could be done to reduce the cost of the pharmaceutical benefits scheme by taking a tougher line with foreign drug companies over generics and the “evergreening” of patents, not to mention the chemists’ union.

Better use of generic alternatives has been canvassed frequently by various commentators over recent years, but the chemists’ union has largely escaped notice.

The chemists’ union – the Pharmacy Guild – has been highly successful over the years in looking after its members’ interests.  Pharmacy legislation in every jurisdiction limits pharmacy ownership to registered pharmacists (with some exemptions for friendly societies) – in distinction to legislation covering dentists or doctors which places no restrictions on practice ownership.  The Guild managed to persuade the 2000 National Competition Review of pharmacy ownership to conclude that

While they are serious restrictions on competition, the current limitations on who may own and operate a pharmacy are seen as a net benefit to the Australian community as a whole[1].

Anybody reading the full discussion of the costs and benefits of the limitations[2] is likely to find this conclusion somewhat surprising.

On the costs side, the review noted that:

…current State legislation keeps non-pharmacist entrepreneurs, managers and enterprising non-pharmacist businesses out of the community pharmacy market.

This particularly excludes owners and managers of non-pharmacist retail enterprises that could either host or integrate a pharmacy as part of their wider infrastructures and cost bases. Businesses that could easily own integrate a pharmacy into their complementary operations could include supermarkets, department stores, specialty health and beauty chain stores, experienced overseas-based pharmacy chain operators, and large shopping centre complexes.

In turn, integrating into large corporate structures could enable pharmacies to be operate at a lower unit cost per item sold, by lowering average overheads through sharing infrastructure with other parts of a retail shop or complex. Pharmacies in chain companies, and even franchises, could benefit from the benefits of shared corporate and administrative costs, and from common stock purchase and ordering arrangements with wholesalers and manufacturers of medicines and general products.

The consumer may expect that lower overheads and better operating margins in these circumstances may lead to lower unit costs, and hence to lower prices and more services.

One could add that the Government could also benefit from lower unit costs and prices by reducing dispensing fees and the allowable mark-up on medicine wholesale prices.

On the other side of the coin, the alleged benefits were:

  • underpinning the ease of Australians’ access to community pharmacies wherever they live;
  • assisting the efficient allocation of scarce public resources on pharmacy services, and medicines generally;
  • improving the capability to link community pharmacy, through professional proprietorial involvement, to overall health care provision and multi-disciplinary service provision;
  • promoting industry-wide awareness of professional pharmacy objectives as well as commercial objectives; and
  • maintaining a direct line of accountability for professional services conducted in pharmacies.

It is not at all clear that restricting pharmacy ownership to pharmacists has a positive impact on access in rural areas.  Were Boots, Walgreens or CVS ever to be allowed into the market, they may find it easy to persuade a young pharmacist to spend three years on rotation in a rural area on a promise of a later job in town.

The “efficient allocation of resources argument” correctly notes that pharmacists provide diagnosis and treatment for minor ailments, thus saving the health system money.  It then asserts without evidence that pharmacy-owning pharmacists are more likely to provide these services.

There is then a somewhat bizarre argument that dealing with the Guild (as an organisation of pharmacy-owning pharmacists) had allowed the Commonwealth to achieve savings through the community pharmacy agreements.

The last three arguments essentially boil down to a claim that pharmacist-owners need to be in charge to ensure professional behaviour:

A benefit of restricting pharmacy ownership is that a pharmacist proprietor is arguably more likely to place professional judgments before commercial considerations than a nonpharmacist or, as it is sometimes expressed, “put people before profit”. This assumes that a pharmacist is prepared not to sell or provide a given medicine or service to a consumer, if there is a professional judgment that the sale would be unwise or unnecessary.

Readers who remember the “fries and coke” deal between the Guild and Blackmores to sell complementary medicine in association with some prescriptions[3] may be inclined to discount this benefit somewhat.  So would readers finding homeopathic remedies on pharmacy shelves, given the NHMRC’s recent finding, after an exhaustive review of the evidence, that “there is no reliable evidence that homeopathy is effective for treating health conditions”[4].

In any event, since 2000 the restrictions on pharmacy ownership have been maintained.  At regular intervals (usually just before an election) the Guild extracts commitments from both major political parties not to weaken those restrictions, and in particular not to let supermarkets enter the pharmacy business.

Minister Dutton at a pharmacy conference in March “re-committed to the government’s pre-election undertaking that retail giants will not be allowed into pharmacy” – a statement “greeted with pleasure by Guild national president George Tambassis”[5].

Over a quarter of PBS expenditure goes on supply chain remuneration[6]. While it is hard to identify exactly the distribution between the wholesaler and the pharmacy, estimates are that around 15% of PBS expenditure finishes up in the hands of the pharmacist. That works out at well over $250,000 per pharmacy annually, including a 10% mark-up and a $6.60 dispensing fee.  (In addition, pharmacies are remunerated for scripts that cost less than the general co-payment.)

Would greater competition allow the Government to pay less for dispensing PBS scripts?  Surely a Government interested in market solutions, competition and fixing the “Budget emergency” would want to give it a go.  At the very least, given it is almost fifteen years since the last review, it should commission a hard-edged re-examination of the current restrictions on ownership.

 

 

 

 

 

 


Comments 4

  1. Scott says:

    Agreed.. The business model is crying out for disruption.

    The process from prescription, to pharmacy, to purchase is so quaint. it should be online and automated, and even available via post for simple things like the pill etc.

    Lots of efficiencies available to reduce costs, but won’t happen while the pharmacy guild is in charge. They are happy with the status quo.

  2. helmutson says:

    As a non-owner pharmacist, I agree that the pharmacy ownership regulations does need another review. However any potential government savings (of which there is no gaurantee or evidence that there would be) need to be carefully balanced against the probably cost to the community in job losses due to pharmacy closures, and the likely increase in hospitalisation rates of patients caused by medication misadventure due to the complex health needs of many elderly (and not so elderly) patients being subject to “efficient dispensing” from supermarket pharmacies.

    In regards to the 15% PBS expenditure and $250,000 average per pharmacy figures quoted in this article, people should realise that there are some very large turnover pharmacies and some very small turnover pharmacies dotted across the country, so some will be getting much more than $250k and some much less than $250k. Also, many state-run and owned hospital pharmacies also access the PBS nowadays, and it is in the hospital environment that most of the hideously expensive drugs are dispensed and funded. However, if we take the $250k figure as an average, let’s see what this yearly investment buys the Australian taxpayer.

    1. An extensive network of around 5400 community pharmacies servicing the vast majority of small country towns regional and capital cities across the country. These pharmacies are effectively adminstering the supply side of the PBS on behalf of the federal government.
    2. Roughly 3500 pharmacy owners paying income and company taxes.
    3. Roughly 20,000 employed pharmacists paying taxes.
    4. Roughly 80-100,000 non-pharmacist employees (pharmacy assistants, pharmacy students, etc)employed directly by these pharmacies and paying taxes.

    Also,let’s look at the costs involved in running a pharmacy:
    $100,000 – $1,000,000 a year for Rent (Depends on size and location of the pharmacy)
    $140,000 a year for pharmacists ( about 2 pharmacists per store ~$70k each)
    $160,000 a year for pharmacy assistants (4 per pharmacy ~$40k each)
    Many thousands of dollars for other incidentals like power, phone, internet, materials, etc etc.

    So that $250,000 investment has to pay for a lot of things, it is not all going into the pocket of greedy pharmacy owners like many would have you believe. I don’t think the Australian public is getting that bad of a deal already, do you?

  3. Scott says:

    I love the comment “Think of the tax revenue and employment prospects of pharmasists!!”. Because that is what a government funded health care system is for…to employ staff and make revenue.

    Codes of conduct (administered by the Pharmacy Guild if you like) can be used to stop medication misadventure. As for networks, I dare you to find a better logistical network than Coles or Woolworths stores.

    As for your stats, maybe check the ATO pharmacy expences to get accurate figures instead of just putting your finger in the air.

    According to the ATO 2011-2012 tax statistics, rent is specified as no more than 2% – 4% of turnover. Labour at 11% – 13%, With turnover listed at between 400,000 – 3.5 million (I have no pharmacy listing turnover below $400,000), you are looking at rents of no more that $140,000 and labour costs of no more than $455,000.

    As for profits, most pharmacies have a Net Profit ratio of 10% (not quite a competitive market place) meaning profits of between $40,000 to $350,000 minimum per pharmacy. Not bad going.

    Time for some innovation, Pharmacy Guild! Either do it on your own time, or be dragged kicking and screaming into the modern 24/7 world.

  4. Jennifer Doggett says:

    Posted on behalf of “William Foggin”

    It is a sign of the interest in this topic that none of my other contributions to Croakey have attracted such detailed comments. There are three observations I would like to make in response.

    First, if there was any evidence (as opposed to assertion) that pharmacist-owned pharmacies have lower rates of medication misadventure I’m sure it would have been presented by now.

    Second, if operating a pharmacy business was so unrewarding pharmacies would be changing hands for peanuts. They aren’t.

    Third, regardless of who ran pharmacies, there would still need to be 20,000 employed pharmacists paying taxes.

    While I am writing, I would also like to explain further how the ownership laws actually work. The argument for pharmacist ownership is that only if pharmacists own pharmacies will professional standards be maintained. This argument asserts that personal supervision is essential to safeguarding the quality of pharmacy practice. The unspoken premise behind this model is of a pharmacist owner toiling away in the dispensary of every pharmacy. However, that is not what the legislation requires.

    While details differ between states, the core requirement is that only a registered pharmacist can have a pecuniary interest in a pharmacy business. But under SA law they can have a pecuniary interest in as many as six pharmacies in that state. Under NSW, Victorian and Queensland law the limit is five, and under WA and Tasmanian law four.

    However, there is no requirement for the owning pharmacist to ever enter the pharmacies that they own. There is not even a requirement for the pharmacist to live in the state where the pharmacies are located. As a result pharmacists in Canberra can and do own pharmacies on the Gold Coast. Those pharmacies receive a great deal of personal supervision during the winter months.

    So under the laws as they stand it would be possible for a pharmacist to own several dozen pharmacies across Australia.

    I don’t think the incentives facing an employed pharmacist in a Coles pharmacy would be any different to an employed pharmacist in a Soul Pattinson franchise owned as part of a set by a pharmacist who lives in another state.

    Ultimately the community relies on health care professionals to act ethically. If we accept that doctors, dentists, nurses, midwives, optometrists, podiatrists, physiotherapists and psychologists can be trusted to act ethically when working for a business owned by a non-professional, why do we think pharmacists cannot?

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