Don’t alter a framework that works: economist

Prof Ergas

A leading economist has backed the existing location and ownership rules of community pharmacy.

Delivering the annual Judy Liauw address at the Pharmacy Connect conference in Sydney, economist Professor Henry Ergas analysed the two main pillars of community pharmacy regulation and found they deliver significant benefit to consumers and to taxpayers.

“The critical starting point is that community pharmacy is not merely another retail service; rather, it is a crucial part of the health system, providing services to consumers on behalf of the Commonwealth,” Prof Ergas said.

“Those services, which include dispensing and a host of quality control, advisory and ancillary services, have a major impact on health outcomes—if they are not readily available to those who need them, or are not provided correctly, they can seriously damage the health and quality of life of consumers.

“That means the Commonwealth, and the community more broadly, have a vital interest in their provision; that interest is made all the greater by the fact that community pharmacy, if it does its job well, reduces the costs of achieving the health’s systems overall objectives, while poor performance in community pharmacy increases costs, including in terms of the burden that then falls on other parts of the health system, such as medical practices and hospitals.”

Prof Ergas drew on work commissioned by the Guild from MacroPlan Dimasi which showed the effect of the Location Rules was to ensure a very high level of access for Australian health care consumers.

For example, in the capital cities, the study showed the average resident is located one kilometre from the nearest pharmacy, while 95% of consumers are no further than 2.5 kilometres from a pharmacy.

Outside the capital cities, country residents are just 6.5 kilometres on average from the nearest pharmacy, with 72% having a pharmacy within 2.5 kilometres. 

Prof Ergas said that the “difference between the location pattern that would be chosen on a purely financial basis, and the location pattern that reflects the community need for pharmacy services, justifies a measure of Commonwealth involvement in location decisions”.

“Achieving the twin goals of providing for pharmacies to be located where they are needed, and yet avoiding duplication, requires a geographical pattern of pharmacy location that has some degree of dispersion to it, with less clustering of outlets—and so less close duplication—than usually characterises retail markets.

“In other words, to meet the Commonwealth’s aims, pharmacies should be located in places which differ from those that would likely be chosen simply under profit-maximisation and in a manner that limits purely overlapping outlets.”

He also backed the ownership rules, saying they ensure owner-pharmacists have considerable “skin in the game”. 

“That gives them strong incentives to maximise the goodwill in their asset, not least by providing excellent customer service; this ‘skin in the game’ aspect also enhances owners’ incentives to conduct themselves and their pharmacies ethically and professionally, and not risk loss of registration and, therefore, loss of value in the pharmacy,” he said.

“It is inconsistent with the evidence to claim that the location and ownership rules reduce access or undermine efficiency—on the contrary, that evidence suggests they result in a high level of community access while underpinning a dispersed ownership structure which serves the interests of the Commonwealth, of individual proprietors and of consumers. Whatever claims might be made in theory, these practical outcomes demand and deserve substantial respect.

“In short, one needs to be extremely cautious in altering a framework that is well grounded in economic analysis, compellingly supported by evidence and—most importantly— works,” Prof Ergas said.


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