Rent, Regulatory Reform & Rx

Paul K Gorecki

The Competition Authority

3 July 2008

Presentation to ESRI

STRUCTURE OF PRESENTATION

• What is the impact of the entry & price controls?

• Rents: magnitude, distribution, dissipation & seeking

• Sequencing regulatory reform: circa 2000 forward

• Record of regulatory reform: circa 2000 forward

• Lessons for regulatory reform

PROHIBITION ON RETAIL FORMATS: CIRCA 2000

Format IrelandUK US

% of retail outlets/sales

Internet/mail order 0 0 18

Supermarket 0 4 22

Chain pharmacy 12 35 41

Independent 88 61 18

Total 100 100 100

PHARMACISTS’ SHORTAGE: CIRCA 2000

• Irish trained – lack of places

- Exclusive supply agreement between PSI & TCD

- Output 50% below competitive level

• EU/EEA trained – three year rule

- Discouraged entry of foreign trained pharmacists

RESTRICTIVE LICENSING: 1996 PHARMACY REGS

• Limitations on eligibility for State funded Rx progs

• Impact

- inherently anti-competitive

- 50% reduction in growth in pharmacy numbers

- 40-50% increase in value of a pharmacy

• CONCLUSION: EFFECTIVE RESTRICTION ON NEW PHARMACY CREATION

RESTRICTIVE LICENSING: 1996 PHARMACY REGS

c. Rationale

• Over competition – low prices? excessive entry?

• Quiet life? Promote non-Rx business?

• Quality improvement under the 1996 Regs?

• US/UK evidence on quality & competition

• CONCLUSION: EVIDENCE NOT SUPPORT RATIONALE

ANTI-COMPETITIVE ENTRY CONTROLS: CIRCA 2000

• Retail formats prohibited

• Retail formats prohibited/discouraged Shortage of pharmacists

Irish trained

EU/EEA trained

• 1996 Pharmacy Regs ½ entry rate

• CONCLUSION: EFFECTIVE SELF REINFORCING SET OF ENTRY CONTROLS

PRICE CONTROLS ON Rx DRUGS: CIRCA 2000

Comprehensive State Price Controls

• Ex factory price

• Wholesale margin (%) on ex factory price

• Retail pharmacy dispensing fee/margin (%) on wholesale price (ie ex factory price + wholesale margin)

HIGH EX FACTORY Rx PRICE: CIRCA 2000

• Based on a basket of EU countries

• High priced member states

• High prices not offset by generic dispensing

• CONCLUSION: HIGH EX-FACTORY PRICES

HIGH WHOLESALE MARGIN: CIRCA 200

Wholesale margin: circa 2000

85 85

158

7

Theory Practice

Price

Retail Pharmacy

Wholesale

Ex Factory

CONCLUSION: WHOLESALE MARGINS X2 COMPETITIVE LEVEL

HIGH RETAIL MARGINS: CIRCA 2000

Customer Group Retail margin

Medical card – dispensing fee

DPS - dispensing fee + 50% mark-up

Private - dispensing fee + 50% mark-up

Pc

Pm

QcQm

P

Q

LD

d

d

MC=AC

€

Quantity

M = Price + entry controlsC = Competitive solutionD = Deadweight lossL = Transfer to producers

Social Costs of Price and Entry Controls: Rent

RENT

• Magnitude – how large?

• Distribution – who gains?

• Dissipation – how spent?

• Seeking – competing for rents?

RENT: MAGNITUDE• 7% drug bill (excessive wholesale margin)

• 4% drug bill (restrictions on advertising)

• 40-50% increase in value of a pharmacy (1996 Pharmacy Regs)

• CONCLUSION: RENTS SUBSTANTIAL & BARRIER TO REFORM

RENT: DISTRIBUTION

• 1st Round

- Pharmacy owners

- Pharmacy employees

• 2nd Round

- Irish-trained pharmacy owners (three year rule)

RENT: DISSIPATION

• Excessive entry and expansion?

• Excessive service levels?

• Inefficient retailing structure? (low ratio of pharmacists to pharmacies – 1.1)

• Misallocation of pharmacists time on non-pharmacy activities

RENT: SEEKING

• Competition to enter TCD pharmacy (1998: pharmacy, 550 pts; medicine, 560; science, 445).

• 1996 Pharmacy Regs (filing of application, filing objections, court cases)

SEQUENCING REGULATORY REFORM

• What is Regulatory Reform? (consumer welfare)

• Circa 2000 forward

• Time horizon

• Sequence important (eg NZ 1980s radical liberalization)

• Consider relaxing entry; then price controls

ENTRY & PRICE REFORMS

Entry Reform – abolition of

• Internet/mail order ban

• Advertising ban

• Increased supply of pharmacists

- Irish trained

- EU/EEA trained

• 1996 Pharmacy Regulations

Pricing Reform

• Ex factory – basket of lower-priced reference countries

• Reducing wholesale margin

• Reforming retail pharmacy rules

RECORD OF REGULATORY REFORM

• 2002 abolition of 1996 Pharmacy Regs

• 2002/03 increase in university pharmacy places

• 2006 lower priced Rx ex-factory basket

• 2008/09 reduced Rx wholesale margin

• 2008 abolition of EU/EEA pharmacists restrictions

• 2008 Dorgan setting Rx dispensing fee

INCREASED NUMBER OF PHARMACIES POST 2001

Annual average net change in number of pharmacies with publicly funded contracts (%)

1991-95 1.51

1996-01 0.75

2002-05 4.43 (2005 7.28%)

LESSONS FOR REGULATORY REFORM

• Research/evidence matters

• Sequencing reform matters

• Pharmacy is not unique: no exemption from Competition Act