It’s time to end pharmacy entitlements

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ScreenHunter_2078 Apr. 16 12.28

By Leith van Onselen

Following Janet Albrechtsen’s cracking article last week attacking Australia’s pharmacy racket, The AFR’s Tony Boyd has written an detailed article today outlining the rorts taking place across pharmacies, as well as some of the pressures for change:

There was a time when joining Australia’s $12 billion retail pharmacy industry was a passport to guaranteed wealth creation thanks to a stack of business-friendly factors. Territorial oligopolies were clearly marked, limits were placed on the number of pharmacies one entity could control and above all, there was a handsome profit arbitrage between government pricing of drugs and the discounted price from drug manufacturers.

The government-friendly regulations were guided and shaped by the Pharmacy Guild, which was one of the most powerful lobby groups in Canberra.

The industry was considered virtually gold plated and this manifested itself in the willingness of wholesalers of drugs to guarantee the bank loans of pharmacists.

…70 per cent of the turnover came from drugs sold at gross profit margins of more than 70 per cent.

That gross profit margin was thanks to the difference between the heavily discounted wholesale price and the price paid by the federal government under the Pharmaceutical Benefits Scheme (PBS).

Boyd goes on to explain how the emergence of Discount Chemists Warehouse, which is owned by an elaborate network of 300 separate pharmacists, is challenging the old protected model and lowering pharmacies’ margins. He also explains how price disclosure rules implemented in the final months of the Howard Government, which shortened the time limit required for drug manufacturers to tell the Federal Government the price at which they sell medicines to pharmacists to 18 months (reducing the cope for pharmacies to earn fat margins at taxpayers’ expense), has crimped pharmacy margins. And how the Pharmacy Guild is nervous of potential changes to their entitlements in the upcoming Federal Budget.

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While these incremental changes to the industry are good for both taxpayers and consumers alike, they do not go nearly far enough.

The Productivity Commission has for more than a decade pushed for changes to pharmacy ownership rules to enable pharmaceutical products to be sold in supermarkets (amongst other places), and has described the current restricted arrangements as adding “to health care costs for little apparent benefit”. The fast emergence of Discount Chemist Warehouse has shown that there is a strong appetite amongst consumers for more competitively priced pharmaceuticals. So why not enhance competition even further by allowing pharmacies to also operate in supermarkets, as is the case in New Zealand and the United States?

As for price disclosure, why give drug manufacturers 18 months to report the price at which they sell medicines to pharmacists, allowing pharmacies to gouge taxpayers in the process (i.e. by paying a lower price for drugs that have come-off patent while still receiving the original higher subsidy from the Government)? Surely a time limit of three to six months would be more appropriate and fair?

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If the Government was fair dinkum about ending the age of entitlement, it would place pharmacy reform front-and-centre, and in the process save consumers and taxpayers significant money in the process.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.