It’s time to bust open the pharmacists’ closed shop

IN his bestselling autobiography Lazarus Rising, former prime minister John Howard singled out Australia's community pharmacists for special mention.

"I confess to usually siding with the small operator, even if some violation of free-market principles may be involved," he wrote.

Howard overlooked that most of these venerated professionals are also members of the country's most-feared interest group, the Pharmacy Guild of Australia. For decades, the guild has reduced stout-hearted politicians to quivering jelly as it zealously pursues the best commercial and professional interests of the proprietors of Australia's 5000 or so local pharmacies who themselves comprise a fraction of all pharmacists.

The guild has succeeded spectacularly. With very few grandfathered exceptions, only pharmacists can own chemist shops, including retired pharmacists more likely to be found on the Noosa shopping strip than running a pharmacy.

Moreover, the guild negotiates exclusive funding agreements, with the federal government dictating what is paid to distribute and dispense medicines. These include severe restrictions on where new shops can be opened for Pharmaceutical Benefit Scheme purposes, generally not within 1.5km of an existing pharmacy. Incumbent proprietors are therefore protected from unwanted competition, whether or not they run competent and efficient businesses and provide professional services.

The dispensing fee regime under the PBS is exceedingly generous by normal commercial standards. While most retailers apply a simple mark-up to cover their costs, including labour, under the PBS pharmacies receive not only a mark-up but professional dispensing fees and a host of other payments, with the revenue per dispensing blurred by complex cost and volume formulas. Nice work if you can get it!

Indeed, pharmacist proprietors thrive even as the PBS itself has been through the most rigorous reform and restructuring of its 63-year existence. Since an automatic 12.5 per cent price cut on generic medicines was announced in 2004, successive federal governments have pursued systematic reform and medicine price cuts to reduce the burgeoning cost growth of an open-ended scheme that's now pushing $9 billion a year — and that's before ageing baby boomers radically increase demand for PBS-funded services.

To make PBS reforms palatable to the guild, successive governments bent over backwards to ensure that, while medicine manufacturers (the ever-demonised Big Pharma) took most of the savings hits as the softest political target, guild members not only were cushioned but over-compensated against price cuts. The government's modelling shows that for the period 2009-18, manufacturers will lose revenue of up to $9 8.5bn through PBS reform, while retail pharmacists will gain by almost $2bn to $2.5bn.

To the government, the net saving is what matters. So much for sharing pain equally. As a result of successive governments appeasing the guild, the only area of the pharmaceutical industry largely untouched by reform is retail pharmacy. If the PBS needs to keep evolving to be sustainable as our population ages, this can't be permitted to continue.

There are a number of points where useful reform can be pursued to make retail pharmacy more competitive and affordable, but three stand out. Each is politically unpalatable but overdue.

First, break pharmacists' anti-competitive ownership monopoly. If outside players want to enter retail pharmacy, including supermarkets and medical centre operators, let them. They can bring with them extensive retail experience, fresh ideas and economies of scale that keep operating costs manageable and promote good customer service.

Provided that the owner is responsible for the safe and competent provision of dispensing and related professional services in their pharmacies, that's all that should matter to regulators.

Second, sweep away the cosy restrictions on where new pharmacies can be located. Both government and the guild assert that these allow for rational medicine distribution: the commercial reality is that keeping serious competition out of your patch means more profit. If someone thinks they can operate a profitable pharmacy business on your doorstep, that's their challenge and your lookout. And who knows, you might enhance the quality of your own professional services under the hot breath of direct competition.

Third, make pharmacists' PBS remuneration simple and transparent. Ordinary retail businesses charge consumers for the cost of a good, distribution and handling, and a modest provision for a retail profit. Medicines are potentially dangerous when not handled by trained professionals, but they are still goods sold over a counter.

PBS payments to pharmacists should be structured in the same way as any other retail business: the price of the medicine itself, adequate provision for wholesale, and dispensing and operating costs, and a profit margin.

By sweeping away double dipping on dispensing fees and a host of miscellaneous fees for doing what essentially are routine tasks in running a pharmacy (such as required paperwork), government, pharmacists and taxpayers will all know where they stand. Perhaps, for mischievous synergy with manufacturers, pharmacists' standard PBS mark-up should be 12.5 per cent. If pharmacists want to charge above that they should be free to do so, but at a direct cost to the patient rather than the taxpayer.

Pharmacists are vital healthcare professionals. But as Julia Gillard and Tony Abbott look to keep the nation's health budget sustainable, it's also clear that very substantive savings can be made from the retail side of the PBS.

However, innovative reform of retail pharmacy remains highly unlikely while it means confronting the Pharmacy Guild of Australia's zealous guard.

Terry Barnes advised Howard government health ministers. His reform proposals for pharmacies are in the next edition of The Centre for Independent Studies' journal, Policy.