Think for a moment about how some pharmacy services are funded. Or rather, not really funded.
It underlies a lot of the angst about changes in regulations around pharmacy ownership and the agreements that let pharmacies dispense funded medicines.
For a long time, the implicit deal worked like this. It wasn’t spelled out this way and perhaps was not even intentional. But it is how it worked.
A community pharmacy would get an agreement with the government, currently Health New Zealand, to dispense funded medicines. People with prescriptions would be able to pick up those medicines from that pharmacy for a very low co-payment, with the government picking up the tab for the medicine. The government pays the pharmacist to dispense the medicines. A new prescription is more work for the pharmacist than a repeat prescription, so the government sets different payments for each.
Whether a new pharmacy can provide those government-subsidised prescription medicines depends on whether it can secure a dispensing agreement. Sharon Brettkelly reported for Newsroom yesterday that Health New Zealand can be reluctant to sign a new agreement if it thinks there are already ‘enough’ pharmacies in the area. That sets one barrier to entry.
And not just anyone is allowed to set up a pharmacy. Pharmacies must be majority owned and controlled by pharmacists. The law also limits how many pharmacies a person or company can own and restricts prescriber ownership. That sets another barrier to entry.
Obviously, pharmacies do not charge much at all for prescriptions. But some non-prescription medicines can only be sold from pharmacies, and a smaller group must be sold by a pharmacist.
The restrictions on entry meant that pharmacies could charge higher prices for the things that only pharmacies can sell, as well as for other products typically bundled together in that shopping run. Pharmacies have been protected against competition.
In exchange, pharmacies are expected to provide a bundle of related services for patients who come through the door.
Pharmacists are already paid by the government for their time checking that a patient’s prescriptions will not interact badly with each other, and for their time advising patients about their prescriptions. That’s part of their Integrated Community Pharmacy Services Agreement with Health New Zealand.
But they also provide more general health advice. If you go to your GP for a consult, the GP will be paid for the service. If you spend time chatting with your pharmacist about the best alternatives for whatever ails you, and it is not about anything covered by a government funding agreement, the pharmacist only gets paid if you buy things at the pharmacy.
Let’s leave Chemist Warehouse and the like out of the picture for now and just think about the implicit funding model in the traditional system.
In exchange for protection against competitors, a pharmacy majority owned and controlled by a pharmacist voluntarily, as part of the pharmacist’s professional ethics, provides a lot of health advice to those coming through the door – without charge.
The pharmacist’s time must be paid somehow. There are two main sources of revenue. The government pays pharmacies for dispensing medicines and for other explicitly funded service lines like immunisation programmes and long-term care services. And protection from competition means the pharmacy can charge more for its products.
Relying on higher charges on non-prescription items means that the pharmacy’s customers pay for that health advice, but in a roundabout way. The chat with the pharmacist is free, but the packet of a hundred paracetamol tablets and some Voltaren or its generic equivalent is more expensive.
Governments often worry about the equity implications of things, and particularly about things related to health.
People in poorer communities may have more complicated health needs and put larger demands on their pharmacist’s time. Funding those services through markups on the things that the pharmacy sells might be less than ideal – even if shops like Chemist Warehouse had never entered the picture.
It means that everyone who shops at the pharmacy in the poorer community winds up covering the cost of the health consultations provided by their pharmacist.
And when new competitors find a way to hurdle New Zealand’s hefty barriers to entry and attract patients who do not want to spend a long time chatting with the pharmacist, the whole model starts to fall apart.
Patients who cost little to serve buy their products for delivery from online chemists or pop in at Chemist Warehouse. Smaller pharmacies are left with the patients whose more complex needs demand more of the pharmacist’s attention.
The government pays pharmacies for core dispensing services. But those payments will be based on average costs. If dispensing payments do not account for whether a patient likely needs a small or large amount of the pharmacist’s time, there will be difficulties.
The Community Pharmacists have also been lobbying for continued regulatory protection against competition, drawing a fairly sympathetic ear from journalists.
But the underlying problem isn’t that businesses like Chemist Warehouse, online pharmacies, and pharmacies in some supermarkets can outcompete smaller pharmacies for a lot of customers. Or that proposed reforms will make it legal for non-pharmacists to own pharmacies while hiring pharmacists, further eroding barriers to entry and improving competition.
Even if none of that had ever happened, it would still arguably be inequitable to have those health services de facto funded through regulatory restrictions against competition.
The problem rather is that the government has expected pharmacists to provide health consultation services out of a sense of professional obligation rather than for direct payment.
The Pharmacy Guild has been negotiating with the government for more direct funding of those services, through ‘extended pharmacy services’ provisions.
If the government believes these services to be valuable and wants their provision to be subsidised, it should do so directly for those with Community Services Cards.
Legislated restrictions against competition are rarely a good way of improving outcomes for anyone other than the protected businesses.
To read the article on the Newsroom, click here.