Among the most significant reforms proposed by recently released Harper Competition Policy Review is the removal of regulatory restrictions that greatly limit competition in the community pharmacy sector. But implementing the recommendation will require politicians who are up for a real challenge.
Any changes to how the pharmacy sector works involves taking on what has been described as “the most powerful lobby group you’ve never heard of.” The Pharmacy Guild of Australia, which represents the interest of pharmacy owners, is widely perceived as one of the most influential lobby groups in Australia.
Monoploy rents
Australian pharmacies are currently protected from competition by two sets of government regulations that form part of what’s known as the Community Pharmacy Agreement. Negotiated every five years between the Federal government and Pharmacy Guild of Australia, the agreement regulates most aspects of the pharmacy sector, from remuneration for supplying government-subsidised drugs to rules about the ownership and location of pharmacies.
The ownership rules disallow non-pharmacists from owning a pharmacy. So they effectively keep supermarkets and large international pharmacy chains, such as the UK’s Boots, from owning pharmacies in Australia.
The location rules were introduced as part of the first pharmacy agreement in the early 1990s. It prevents new pharmacies opening within a kilometre and a half of an existing pharmacy.
These ownership and location restrictions have effectively prevented new entrants into the sector and created what economists call monopoly rents for existing pharmacy owners. Monopoly rents represent the benefits that an industry gains from politically-enforced regulations to restrict competition.
While reform of the pharmacy sector by removing these restrictions has been championed by commentators from as diverse political backgrounds as Paul Howes and Janet Albrechtson, none of Australia’s politicians from any of the major political parties have so far taken up the cause.
Report after report
The competition review recommendation is unequivocal:
the pharmacy ownership and location rules should be removed in the long-term interests of consumers.
And it comes after a similar recommendation from the 2014 National Commission of Audit report, which advocated:
opening up the pharmacy sector to competition, including through the deregulation of ownership and location rules.
Then there’s the report from the Australian National Audit Office (ANAO), which conducted a performance audit of the administration of the fifth Community Pharmacy Agreement (ending June 2015). The ANAO found so many shortcomings in administration of the agreement by the Department of Health that it was:
not well positioned to assess whether the Commonwealth is receiving value for money from the agreement overall.
The ANAO report quantified the remuneration pharmacies have received from government since the early 1990s, when the first Community Pharmacy Agreement was put in place. The figure below shows payments pharmacies receive for dispensing and mark-ups (the amount of money added to the price of drugs, to cover overheads and profit) have tripled from around $750 million in 1991 to over $2 billion by 2013 – even after adjusting for inflation.