The King Review’s interim report is riddled with serious errors and can’t be taken seriously, according to an assessment requested by the Guild
The Pharmacy Guild engaged Green Square Associates’ Henry Ergas and Jonathan Pincus to conduct an assessment of the interim report, which the Guild attaches as an appendix to its formal response.
The assessment is scathing, stating that “in applying economic concepts and analyses, the Panel makes errors so central and egregious as to suggest that the Interim Report does not deserve to be taken seriously”.
“The Panel’s ‘vision’ is to eliminate many smaller pharmacies, through a large cut in the remuneration for dispensing—a 13% cut is highlighted,” write Mr Ergas and Mr Pincus.
“How many would go? The Panel did not trouble to ask. Using a report that the Panel relied upon, we estimate up to 1,700.”
This vision, which would see around a third of Australian pharmacies close down, is one of a greatly diminished pharmacy network, the two argue.
The pharmacies threatened by the Report’s vision include those with a turnover of less than $2 million each year – so-called “micro pharmacies”. These makes up 3,300 of Australia’s community pharmacies.
“The economic and social costs would be large and a reasonable assessment would have estimated those costs before making such a sweeping recommendation,” Mr Ergas and Mr Pincus write.
“Eliminating a large number of small pharmacies would impose costs on society, especially of access, that do not feature in the Panel’s reasoning: there is an obsessive focus on cost reductions in the simplest sense—reducing Commonwealth spending is confused with securing efficient outcomes for consumers, the health system and the Australian community.
“The Interim Report concludes that the ‘smallest, and potentially least efficient’ pharmacies receive the highest ‘effective rates of assistance’.
“This claim depends on a piece of complicated economic nonsense, a calculation that—astonishingly—assumes that, in the absence of a government fee, pharmacists would dispense for free.
“There is, to the best of our knowledge, no precedent for using the concept of ‘effective rates of assistance’ in the way adopted by the Interim Report.”
On dispensing fees, Mr Ergas and Mr Pincus write that Interim Report recommendations are again aimed at reducing the number of small pharmacies, with cuts to dispensing fees being a means to that end.
The “economic theory” set out in the Interim Report does not hold up to scrutiny, the two argue.
They refer to the recommendation to set the dispensing fee equal to the efficient long-run incremental cost of dispensing (ELRIC) as “simply arbitrary”.
“Setting the dispensing fee at ELRIC implies that a pharmacy would have to recover all of its overhead and similar costs from (retail) sales of non-PBS products,” they write.
“If a typical pharmacy, which derives about 20% of turnover from retail sales, were to apply corresponding mark-ups on the retail products that it sells and where it competes with other retail outlets, it would soon go out of business.”
Other Interim Report recommendations include removing community pharmacy’s ability to sell some retail lines, particularly complementary medicines.
“The Panel also presents no evidence that the existing structure of dispensing fees is unrelated to the costs of providing specific dispensing services (and is therefore inefficient).
“The Panel nonetheless recommends that the existing differentiated structure of dispensing fees should be rolled into a single, flat fee. Yet none of the claims made in the Interim Report –that a flat fee would reduce the deadweight loss of tax, and that a flat fee would increase overall efficiency –has any basis in economics.”
The discussion around inefficiencies arising from the deadweight loss of taxation, for example, confuses two different effects, the two write: “the Interim Report calculates the Treasury savings from cutting the level of the fees, and wrongly attributes the saving to the flattening of the fee structure”.
Further, “the Panel relies, in its pricing recommendations, on a commissioned study of what is called the ‘effective rate of assistance’ (or ERA) for several types of dispensing.
“That analysis conflates tasks with size of pharmacies by assuming that small pharmacies undertake ‘low value’ tasks, while large pharmacies undertake ‘high value’ tasks.
“The larger point is that the purported calculations of ERAs bear no relationship to conventional measures of ERAs, and are best considered as complicated economic nonsense.
“These calculations assume that, if the Government ceased paying a dispensing fee, it would continue to prevent pharmacists from setting their own dispensing fees, and that pharmacists would then continue the activity of dispensing, but do so for free.
“We know of no precedent for defining ERAs in this way.”
And the two warn that the Panel’s “preoccupation” with achieving narrowly-defined budget savings would fundamentally change the incentives of community pharmacy in relation to service quality.
“If only large pharmacies with a focus on commercial retailing and a minimalist approach to providing dispensing and related advisory services can stay in business, then it is clear that commercial retailing, rather than patient care will be prioritised.”
Read the Guild’s submission, including the Green Square assessment, here.