File  A1545 WP/:sp

26 November 2004

Mr Gary Banks
Chairman
Productivity Commission
PO Box 80
Belconnen  ACT  2616

Dear Mr Banks

Review of NCP Reforms

On behalf of The Pharmacy Guild of Australia, I write to provide the following comments on the Productivity Commission’s Discussion Draft for its Review of National Competition Policy Reforms.

The two specific issues on which I wish to make comment both relate to the current regulations which govern the operation of community pharmacy in Australia.  The first concerns the requirements around pharmacist ownership contained in the State and Territory Pharmacy Acts; the second covers the location regulations which apply to pharmacies approved to dispense prescriptions under the Commonwealth’s Pharmaceutical Benefits Scheme (PBS).

1.	Pharmacist Ownership of Pharmacies

In 1999/2000 community pharmacy underwent a comprehensive national review conducted according to National Competition Policy guidelines under the auspices of the Council of Australian Governments (CoAG).  The review found that there was a public benefit in the requirement that pharmacies be owned by pharmacists and the Joint Government response to the review, which was published in August 2002, supported this finding.

The Prime Minister, in his letter to pharmacists in September 2004, referred to this review process as follows:  “The major outcome of that review was agreement by all Governments that there are clear public benefits in retaining Australia’s tradition of pharmacies owned and operated by pharmacists.”

He went on to say “As indicated in my letter to you three years ago, this matter is now settled.”

Given this background, The Pharmacy Guild finds it puzzling that the Productivity Commission does not accept this position but again raises the issue of pharmacy ownership in its discussion paper.  The Commission appears to take on the view of the National Competition Council (NCC) which, for some reason, chooses to oppose the findings of the CoAG pharmacy review and the Government’s clearly stated position.  The NCC has, in effect, set itself above the Government and CoAG.  The Productivity Commission now appears to have followed that line without independent analysis.

We believe there is an inherent bias in the National Competition Council’s handling of National Competition Policy, with specific regard to pharmacy, and I have attached to this letter a short paper outlining the Guild’s concerns in this regard.  (See Attachment A.)

Also attached is a detailed report on community pharmacy undertaken by an independent consultancy firm, NECG, which demonstrates the value provided to the community by the current system of pharmacist-owned pharmacies.  (See Attachment B).

Community pharmacies, like all small businesses, need to have some business certainty with regard to the regulatory environment in which they operate.  It is difficult to plan ahead to grow pharmacy businesses when regulations are under constant review.  For almost ten years now, community pharmacy has been the subject of debate about NCP reviews and this has created a great deal of uncertainty for the sector with the result that young pharmacists have sometimes chosen not to go into community pharmacy.  There is already a workforce shortage in community pharmacy and this uncertainty has exacerbated this situation.

It is time that the debate about further reviews for pharmacy ownership was brought to an end and acceptance given to the CoAG review and its major finding.  This would allow the community pharmacy sector to be provided with some degree of certainty so that pharmacists could once again focus their attention on ensuring that they provide a high quality of health care service to the community instead of being concerned about the future viability of their business.

2.	Location Rules for PBS-Approved Pharmacies

The Discussion Paper also referred to the need for a further review in regard to the location rules which apply to PBS-approved pharmacies.  These rules were introduced in 1990 as part of the First Agreement between the Commonwealth and The Pharmacy Guild of Australia.  This Agreement was the outcome of a most successful period of microeconomic reform of the pharmacy sector which involved rationalising the number of pharmacies existing at that time, in order to provide greater efficiencies.

Having reduced the number of pharmacies, the Agreement then placed an ongoing limit on the number of PBS approval numbers and regulated the location of approved pharmacies in order to ensure that there was equal access to pharmaceuticals and to pharmacy services in all areas of Australia – particularly in rural and regional areas.

These rules are subject to an ongoing review process and the next review is already underway.  It will be finalised as part of the negotiations for the Fourth Guild/Government Agreement which must be signed prior to 30 June 2005.

The Pharmacy Guild therefore believes that the community pharmacy sector has already been, or is already, subject to a comprehensive review process in regard to National Competition Policy and should not, therefore, be subject to any further review through other mechanisms as is being advocated by the Productivity Commission and the National Competition Council (NCC).

Yours sincerely

Stephen Greenwood
Executive Director

cc:	The Hon John Howard, Prime Minister

Productivity Commission Review of National Competition Policy

The Guild is concerned about what it sees as the inherent bias of the National Competition Council (NCC) in its handling of National Competition Policy (NCP) and the fact that the Productivity Commission (PC) appears to have accepted the views of the NCC without question and above other points of view.

Where pharmacy is concerned, the NCC has consistently demonstrated negative preconceptions about the industry.  In its reports it has consistently assumed that the community would benefit from deregulation of pharmacy.  It expressed this view even before CoAG had completed its review of pharmacy legislation and, once it had completed this review, it made it clear that it did not accept CoAG’s recommendations and that it would continue to pursue pharmacy.  In its 2003 NCP assessment it said “the Council considers that the review’s conclusions that ownership provisions provide a net benefit to the community is based on questionable evidence”.

The Productivity Commission appears to have accepted the NCC’s views without reservation or analysis, recommending that pharmacy legislation, along with other legislation which the NCC finds ‘problematic’, should be subject to second round reviews.

The Guild is concerned that throughout the review process it has faced difficulty in having its views taken seriously.  The NCC has appeared unwilling to distinguish between the legitimate concerns of the industry and what it sees as industry self interest conveyed through the Guild.  This problem may be far broader than the NCC’s views on pharmacy.  There appears to be innate bias against those industries targeted for reform, others having levelled the same complaints.

There is considerable difficulty in ‘proving beyond reasonable doubt’ concerns about what will happen as a result of reforms, but this does not render such concerns baseless.  This problem is particularly acute in the health sector, a sector focused largely on services, where there are many intangibles and where it is difficult to quantify legitimate concerns about the impact of change.  It is acute in pharmacy, which is unique in that it is a professional health service provided in a retail setting.

In its submission to the Productivity Commission into Competition Policy, the Commonwealth Department of Health and Ageing identifies “a number of unique characteristics of the market for health services (which) make market failure a particular problem and (impose) limits of the extent of competition that is considered desirable”.  These unique characteristics include:

•	“an unequal balance of power and knowledge between patients and health professionals;
•	potentially irreversible and serious, even life-threatening, consequences of wrong decisions or poor quality products;
•	the need to address gaps where affordable and accessible services would not otherwise be available to all consumers, such as in rural areas or for low income earners;
•	an expectation that health care will be accessible to everyone on the basis of medical need, irrespective of financial resources or consumer power; and
•	the need to responsibly manage uncapped publicly-funded health care programs in the face of potentially unlimited demand.”

While many of the Guild’s arguments in support of the current system of community pharmacy are too detailed to include in this brief submission, the essential reality is that pharmacy is, and will continue to be, a highly-regulated industry, because it is dealing with dangerous drugs, many of which are heavily subsidised by Government.  The Australian Government, for example, regulates the prices of medicines and the return to pharmacists through the Pharmaceutical Benefits Scheme, which represents over 65% of pharmacy trade.  It also limits the number of pharmacies and regulates their location through the issue of approval numbers and the application of location rules.  It does these things for social and health care reasons.  In this context it is difficult to apply market theory to the industry in any meaningful way.  Pharmacy is quite different from other industries.

It is also important to note that, while open competition sounds fine in theory, there are potential costs such as, for example, the impact of this model on the distribution system for pharmaceuticals and the impact of this on rural and regional areas.  The fact that these are difficult to quantify with certainty does not render the concerns baseless.

The community pharmacy network is a delicately balanced distribution system, unique in the world, in which community pharmacies, spread uniformly throughout the country, are serviced by three wholesalers who make at least daily, often more frequent, deliveries of sometimes quite small quantities of pharmaceuticals at normal cost, guaranteeing prompt supply to customers of a huge range of medications even including those which are rarely used or quite obscure.  In addition to providing medications, these pharmacists provide health-related education, professional care and advice and an increasing range of professional services reflecting the changing role of pharmacy.

Any development which leads to large, corporatised chain ownership with the eventual capacity to bypass wholesalers and make bulk purchases directly from manufacturers will damage the distribution network with an immediate impact on the supply of these services to rural and regional centres.  It has very little bearing on price, since over 65% of pharmacy business is covered by the PBS, whose prices are fixed.

This was a central concern of the Department of Health and Ageing in its submission to the CoAg Review when it said:

“Access:  The Commonwealth’s principal concern is that changes to the ownership of pharmacies could lead to a shift in the mode of delivery from traditional community based arrangements to arrangements more heavily focussed towards retail objectives.”

In its analysis of the pharmacy industry, the NCC dismisses the Guild’s concerns by deriding them as special pleading by the pharmacy industry.  Of course there is some self interest in the retention of the current system of pharmacy.  Guild members have invested much in their businesses and, if the NCC had its way, many would lose considerable value overnight, threatening property values and retirement incomes.  This is self interest, but it is also a legitimate concern which should be heeded.

More important than this, though, is the potential threat to the health care model of pharmacy which stands up well against the supermarket-style supply-based model, notably in the USA, but also increasingly evident elsewhere.  There is a very real danger that any move towards the deregulated model favoured by the NCC will fundamentally change the nature of pharmacy as currently practiced.  In our view, this would not only be bad for health care, but would be contrary to the policies of most governments, which are investing heavily in expanding the role of pharmacy into areas of professional health care, based on the fact that there is a ready-made network of professionals well distributed around the country, who are perhaps under-utilised and should be brought into the primary health care team.  This is why governments at both State/Territory and Commonwealth levels sought an acceptable compromise, which increased competition whilst retaining a system of pharmacy that works well and is capable of so much more that is useful for both governments and the community.

Nor, in its zeal to deregulate pharmacy, does the NCC voice any concern about the possibility of oligopolistic control over the industry by the two major grocery chains, which between them control over 70% of the retail grocery market and now a substantial share of liquor and petrol and have made it clear that they want to include pharmacy in their supermarket operations.  None of this may mean much to the NCC, but it means a lot to pharmacists, to the community and to governments.

The NCC bases its entrenched views on pharmacy on its claim that a deregulated model would lead to larger, better-managed pharmacies, with improved levels of innovation, able to take advantage of economies of scale and thus able to reduce costs and prices to consumers.  The NCC has made the twin mistakes of basing its analysis on purely economic considerations and also on flawed assumptions drawn from discredited research.  In its analysis, it has shown little understanding of the complexities of pharmacy – a health care service in a retail setting – nor of the social and health consequences of its reforming zeal.  It appears to have taken no notice whatever of the Guild’s expensive and professional commissioned rebuttals of many of its arguments.