Australians visit the pharmacy more than any other health service. But what’s happening behind the scenes? How does the price you pay at the counter get set? How’s the pharmacy sector funded?
For years, decisions about pharmacy policy have been made through closed-door negotiations.
In this podcast, Grattan Associate Reilly Polaschek talks to Grattan Health Program Director Peter Breadon about our report, Future pharmacy: A better deal for patients and taxpayers which charts a path to a fairer, more efficient pharmacy sector.
Transcript
Reilly Polaschek: Australians visit the pharmacy more than any other health service. Pharmacies dispense hundreds of millions of prescription medicines a year and are paid billions of dollars to do so.
But what’s happening behind the scenes? How does the price you pay at the counter get set? And who’s paying for it? How’s the pharmacy sector funded? And who’s deciding the rules?
For years, decisions about all of these things have been made through closed-door negotiations, and through this process, pharmacy owners have blocked reforms that would deliver better value to taxpayers and patients.
This isn’t good enough.
Community pharmacists are among the most accessible health professionals in Australia. As our population gets older and sicker, and as more medicines are developed, pharmacies will play an increasingly important role in our healthcare system.
Grattan’s latest report, Future pharmacy: A better deal for patients and taxpayers, charts a path to a fairer, more efficient pharmacy sector. It asks the big questions about how the current system is working and what meaningful reforms can be implemented to improve it for the future.
Welcome to the Grattan Podcast.
This podcast is being produced on the lands of the Wurundjeri people. Grattan acknowledges and celebrates the First Nations people on whose traditional lands we meet and work, and whose cultures are among the oldest in human history.
I’m Riley Polasek, associate at the Grattan Institute, and I’m here today with Peter Breadon, program director of Grattan’s Health Program and lead author on Grattan’s new report, Future pharmacy. Peter, welcome to the podcast
Peter Breadon: Thanks Reilly
Reilly Polaschek: So the report covers a lot of ground. It details how pharmacies could deliver better value through a range of reforms, including changing the rules on how much they can discount medicines and the kinds of services they offer.
But before we get to those solutions, the report’s really arguing that the current system is not working as well as it should be for both patients and taxpayers.
What are the big problems with the current pharmacy sector, Peter?
Peter Breadon: Well, you said in your introduction how vital this part of the health system is.
Patients go there more than they go to any other part of the health system, and we’re already spending billions of dollars on it between government and consumers, and it’s going to have to do more because Australia’s getting older, Australians are getting sicker, more drugs are being added to the PBS, more people are taking more medicine.
So really important to make this system work as well as it can. But, what do we want? What do we want it to look like? We want affordable medicines. That’s probably number one, because it’s clear from surveys that a lot of people can’t afford their medicine today, particularly people on lower incomes.
So that’s absolutely key and affordable for government as well, because health spending is really rocketing up at the moment . So we need to make sure government’s getting good value as well as consumers. So that’s affordability, goal number one.
The second thing we want to see in this sector is robust competition. Why is that? Because these are actually private businesses making profits and so the deal there should be, if we’re gonna set you up to fund you and you’re gonna make profits, we know those profits are growing, you need to be working as hard as possible to give patients the best experience, to make sure you’re providing the highest quality care.
But we don’t see that level of competition in the system for reasons we’ll no doubt get into.
And finally, there’s been a long debate about should pharmacies provide more different kinds of services. In recent years, they’ve started vaccinating. Should they do more kinds of care? And we want to see that happen, but in a way that is carefully planned, in line with evidence, and gets the best results for both taxpayers and patients.
So those are the things we want to see, but each of those is systematically blocked by bad policy.
So affordability, we’ve got rules that stop pharmacies offering discounts to patients. We’ve got random made-up fees and numbers that government is tipping into the system that aren’t based on any evidence.
For competition, it’s throttled by really unusual rules that stop the system competing to improve care for consumers. And on services, we’ve seen this patchwork of state trials that we keep churning through, and we’re not really getting anywhere in terms of working out what the future should look like.
So as we’ll get into, there are big reasons for all those barriers, but each of them needs to be dismantled to set this sector up to serve Australia into the future.
Reilly Polaschek: Thanks, Peter. Those are all very concerning issues, and they seem like issues where we treat pharmacies differently to any other part of the healthcare system. There’s lots of unusual things happening in the pharmacy sector that would be unthinkable really in other healthcare or policy areas: closed-door agreements, limited public evidence, and a very powerful industry body at the center of the process.
How have we ended up here?
Peter Breadon: If you wind the clock back to 1990, that’s kind of the original sin in community pharmacy policy because there was an independent tribunal that set the prices before 1990, and there were problems in the system.
So at that time, small pharmacies were paid more per script than big pharmacies. That led to a proliferation of pharmacies right along high streets in major cities. And so this independent tribunal said, “We’re going to stop that and pay everyone the same price for dispensing, and we’re gonna bring that price down.”
The sector understandably freaked out. There were strikes. They pushed back. And then the government did a last-minute deal, but they went around the independent tribunal. They did a special deal with the group that represents pharmacy owners, the Pharmacy Guild of Australia, and that was the first community pharmacy agreement, and we’ve had them ever since, about every five years.
Now, that is not the right way to run any part of the health system. This is really where a lot of these problems are stemming from because what we’ve got is a bilateral closed-door negotiation directly between the government and the business owners who stand to benefit from government policy. And if you look right around the healthcare system, we don’t do that for any kind of doctor or allied health or, any other kind of care. And even if you look right around the world, we really struggle to find any other country that does it as badly as Australia.
So this is the history that led us to where we are today. And the way we do it really can’t be defended. If you were to look up, the guidebook for how to get a bad deal for taxpayers and for consumers, it would probably just say, “See Community Pharmacy Agreement.”
This is the worst way we can do it. That’s where most of these problems are coming from, and that’s one thing we really need to change.
Reilly Polaschek: What does the report propose, for, how we can get the governance working better for the community pharmacy sector?
Peter Breadon: Unsurprisingly, we’re saying we should do something more like we do for medical services or hospitals where we have this independent pricing authority, and we think they should be in charge of setting the prices. And then you wouldn’t really need this bilateral negotiation at all because we have a separate agreement to deal with wholesale arrangements. We have a separate agreement coming to deal with pharmacy services, so we should abolish that.
Now, this will be hugely controversial. This is a powerful lobby group. They will obviously push back. We’ve said that if government doesn’t take that big step, the right step, get rid of these shadowy agreements that are really ripping off everyone else in the system then in that case, they could still make it better.
So that bilateral negotiation between the government and the Pharmacy Guild of Australia, it’s behind closed doors. There’s no public evidence about how they come to their decisions, unlike in other countries. And unlike in other countries, there’s so few people that are parties to this agreement.
So in other countries, we’ve got consumers, we’ve got the workforce. In other countries where they have the pharmacy owners represented, they at least represent all the owners. We only have the Pharmacy Guild at the table. They represent just about 70% of the pharmacies in Australia, so excluding some big players such as Chemist Warehouse.
We could have an agreement where there’s more people around the negotiating table, where we have patients represented, where we have the workforce represented. Many other countries do that.
But look, that’s the wimpy fallback option. We’d love to see the government really go back to what we had a system of independent pricing and governance where decisions are made based on evidence in the best interests of Australian consumers.
Reilly Polaschek: The report focuses on three major areas that would improve if we had proper governance in the community pharmacy sector. The first being lower costs for patients and taxpayers, the second, a more efficient pharmacy sector without unique protections for owners, and the third, more effective and evidence-based pharmacy services.
Let’s start with the first of those, and one that no doubt will be appealing to our listeners: lower costs. Peter, how do you propose reforms that will make medicines more affordable for consumers?
Peter Breadon: Well, there’s a couple of pieces to this: the first, and perhaps most obvious, is let pharmacies offer discounts.
So currently, discounting is allowed, but it’s heavily constrained, right? So for things that are below the maximum co-payment that consumers can pay, after all the fees are added on for the drug and for the services for those drugs they can offer discounts.
So above that level, there’s this weird band up to around $50 price to government, where you can also offer a discount. But for that band of drugs, every time a pharmacy offers a discount, they give up all their other government funding. So there’s this huge financial penalty on offering discounts within this, again, arbitrary and historical band of prices.
Then above that band, you basically can’t offer any discount at all. It’s basically illegal. This is very bizarre. These bands are historical artifacts. Why does the cost to government, not the cost to consumer, dictate which medicine people can get a discount on?
And why are we punishing pharmacies for trying to offer a better deal for patients? So it’s very strange. Now, there is, there was one little policy that was developed by Susan Ley, which is this $1 discount. Now, I shouldn’t say little because it was actually fiercely contested and eventually abolished, and it’s now being phased out.
We’re saying bring back the $1 discount, increase that level of discount that’s allowed over time until, subject to checking by the ACCC that it’s not an issue in terms of competition. We can just completely deregulate this and let people discount drugs. So that- that’s number one.
The other part of affordability is there are some fees that pharmacies are allowed to add for no reason at all to the cost of a drug. That again is hard to justify. There’s no clear reason why this should be the case, so we should just scrap those kind of extra fees that just add cost for no clear reason. So those are the two big changes we propose in terms of changing the way dispensing fees work so that patients can get a better deal.
Reilly Polaschek: I mean I mean, those sound like great reforms from a consumer’s perspective Peter, but what about affordability for government? Does the report go into that as well?
Peter Breadon: Yes, we do. And the other part of this story is there’s this dispensing fee. So there’s many components to it, which we talk about in detail. It adds up to at least fourteen dollars per script, and that’s the money that the pharmacies get for doing the dispensing, giving you the advice about the drugs, checking it’s all going okay and so on.
And they’re separately paid for the actual wholesale cost of the drug. So what’s um, wrong with this picture? Well, That dispensing fee typically adds up to around fourteen dollars. That level is basically random, a made-up number as far as we can tell, right? So there’s no public evidence that says this is how long it takes, this is how much it costs to provide that advice and dispense that script. In fact, the Guild has tried to quash evidence over time where you might have had studies or reports that would tell us what’s the right price here.
Now, again, this is not a sensible way to run a multi-billion dollar system that Australians rely on every day for crucial healthcare services. If you just step back from what we’re used to, it’s truly bizarre. So we’re saying, as I mentioned before, let’s get an independent body on the case, do the calculations, work out the right fee that’s based on the cost of delivering care plus a reasonable profit for the sector. So that’s our main recommendation for getting better value for government.
Reilly Polaschek: That brings us to our second major area of the report, removing unique protections for pharmacy owners. Those bans on discounting you mentioned are just one example. The report also discusses other ways that pharmacies are insulated from competition that other businesses face.
Why is competition important in the pharmacy sector? Aren’t they providing a public service?
Peter Breadon: Great question. They are providing an essential public service, but they’re also private businesses. And, we want them to have to work hard to improve care, to compete for patients, to get continual improvement in the system.
It might be longer opening hours, it might be online dispensing, it might be even better advice to patients about how to manage their medications. Whatever it is, we want them to be pushing hard for that. But when you have these unique regulatory controls, this crazy thicket of red tape that we have in the sector where only pharmacists can own pharmacies, that’s not the case for any other kind of healthcare.
Anyone can own a GP or a medical clinic. Then you’ve got these really complicated rules about how far apart pharmacies have to be. Now, that’s a legacy from back in the nineteen eighties when we had too many pharmacies clustered together because of a weird quirk in the funding back then that’s been fixed.
So that’s solving a problem that doesn’t exist anymore, but it’s creating a problem of stopping new people coming into the sector, new owners to bring new ideas more competition and drive value ultimately for consumers.
Now, if we have these really big protections, what you end up with is you don’t have that pressure to make care better, to compete, and you end up with these profits that flow in without having to fight to, to improve value.
And we do see signs that profitability is quite high. Again, this is a bit of a shadowy area where, you know the evidence isn’t really clear, and we’ve argued in the report the government should really carefully monitor the profitability of the sector to make sure it’s viable with our reforms, but also to make sure that they’re not paying too much.
But we do know, according to the Pharmacy Guild’s own data profits from their member survey show that they’ve gone up, more than doubled in ten years. So that’s pretty healthy profit growth. And then, Chemist Warehouse we’ve seen really rapid growth in profits for that big player in the sector who are outside the the Pharmacy Guild group.
So look, the long and the short of it is we-we’re paying a lot of money as the Australian government and taxpayers to private businesses. The quid pro quo is you’ve got to fight for the consumer experience and quality of care every day to make it better. And if you’re protected from competitors, you’re just not gonna be pushed as hard to do that.
Reilly Polaschek: I think you’ve made a pretty good case for why competition would be a good thing in the pharmacy sector. What does your report propose to improve competition in the sector?
Peter Breadon: We’re not the first to say this is ridiculous, and other people and reviews have recommended simply abolishing those protections on ownership and location rules. So we think that’s clearly what should happen.
Reilly Polaschek: The third big area of the report is a very topical one. There’s a lot of talk, and at times quite heated debate about pharmacies being able to offer more services beyond just dispensing medicines.
And from a patient perspective, it certainly seems attractive. Less time spent waiting in the GP reception, more convenient access to care, and potentially lower costs. What’s Grattan’s view on these services?
Peter Breadon: Let’s start with the existing services. So we’ve seen a massive expansion of vaccination from a pretty low base of nearly nothing since the pandemic. That’s great. And we’ve got some important services that are unfortunately a bit mismanaged. So two that we look at are meds checks, is giving people advice on their medicines and then dose administration age- aids, like the the pill packs you get if you’ve got lots of medicines to organize.
Now, they’ve got some problems, rapidly growing spending, but not great value, and the reasons are different for each program. For the administration aids, probably the price is too high, so we haven’t seen that price come down as we’ve seen more automation and so on. So you would expect, really need to review that price.
The other one is the medicines checks, and they’re the ones that happen in the pharmacy. Now, the problem there is the evidence shows they can be good value if they’re well targeted. In other countries, for example, they’ll target them to older people and people with specific chronic conditions.
But in Australia, the rules are much looser, and so we’re probably getting a lot of them that are poor value. So what the government’s done for both programs is they’ve imposed these arbitrary caps. Each pharmacy can only deliver so many per month. Now, that’s not a good way to control cost. The better way is to say, “Let’s make sure each service is valuable and beneficial. Let’s price it and let’s get rid of those arbitrary caps.”
So those are some issues with current programs. You will have heard, as you mentioned, this roiling debate about what new services are we gonna add. These are things that you see in other countries like chronic disease management advice and prescribing for some minor ailments and screening for chronic disease, that kind of thing.
Now, the sector’s been pushing hard for this. There’s been a range of state trials of a whole lot of different services. But unfortunately, the evidence is very discouraging on value for money. I- it’s good on things like patients thinking the service is good and the quality and safety of care. But on that, is it working to take pressure off other parts of the system?
When you look at the evidence for these new services, there’s some positives which are that consumers tend to like and accept the services in a pharmacy on the whole. The quality and safety is typically as good as it would be in another part of the system. But the challenge is the evidence for cost-effectiveness is very weak.
Now, why is this? We see a lot of duplication where people go to the pharmacist but still go to the GP. We see quite a bit of low-value care, and that means it’s easy and quick to get into the pharmacy, which is good, but it means you might get care you didn’t really need, the problem would have resolved on its own. And also, these are retail settings where the pharmacists have a lot of contact with patients, and they can tend to advise and promote these services even when, in some cases, they’re not needed. So these are all risks to value for these services.
That’s why we need to set a really high threshold of evidence to make sure we’re getting the best results. We think that threshold has been reached for urinary tract infection advice and prescribing based on a really well-designed study that recently came out in New South Wales and well-designed study the ACT. So we think that’s ready to go, and we need to get out of this purgatory of these fragmented state trials that go nowhere. That’s one that’s ready to go for prime time.
But the other new services, we need to focus them more narrowly on the things with the strongest evidence, things like collaborative chronic disease management with GPs for hypertension and diabetes.
But we need to do that with much better trials. We’ve had more than twenty government-funded trials giving insufficient evidence to make decisions. So more focused, better trials to chart a clear path forward, but making sure we take into account all those risks to value when you provide these kinds of services in community pharmacies.
Reilly Polaschek: I noticed the report also talked about pharmacy services outside of the actual pharmacy. Can you tell us a little bit more about that, Peter?
Peter Breadon: Having a pharmacist work within the GP clinic or within the Aboriginal controlled clinic is a really great model, and we’ve seen it succeed a lot overseas and some really promising programs here.
And the reason it’s so good is you don’t have any of those conflicts of interests where the prescriber is also the dispenser. And you don’t have any of those problems of fragmentation and loss of communication because they’re really working within a team uh, in general practice setting. So it’s a great model, and the evidence is really strong that it works. We don’t have those kind of qualms about cost-effectiveness that we have for some of the services within community pharmacy settings.
So we’re proposing government invest eighty million dollars here rolling out over three hundred and fifty pharmacists around the country into general practices. And they will be providing the same kind of services we talked about before. Checking people’s medicines, giving advice, giving them support to take all the medicines they need, and also a range of sort of preventive care and other advice.
So it’ll really enrich that general practice team and provide great, value for the funder the government to make sure we’re getting better health outcomes.
Reilly Polaschek: I look forward to seeing a pharmacist at my local GP.
Peter, it’s clear that this report would like to see big changes in the sector. What do you say to people who might be worried that these changes will be too disruptive or get in the way of them accessing their medicines?
Peter Breadon: Great point. So we do think this is a big change. We’re taking really, unparalleled regulatory red tape away and we’re changing how the sector is funded.
And so these are big shifts and potentially also starting to change, the suite of services they offer. Now, there are some risks here, and we have to make sure we manage those risks. So one risk is you get rid of the rules and some big corporate players gobble up too much of the sector.
They get a lot of market power, and then they can drive up prices or drive down quality after that. So that is a risk. So we’re proposing that the the watchdog for competition the ACCC, do a special review of this sector and then ongoing monitoring to make sure we’re putting the right rules in place about market share and competition so that deregulation doesn’t backfire.
Another key recommendation we have is having some measurement of quality that’s much more robust to make sure there’s no unintended consequences of shifts in the market structure. Now currently the main quality program is actually run by the Guild, which again is a real conflict of interest and doesn’t make a lot of sense. So we’re proposing that we have an independent quality regime that uses data that government holds to really understand are services working, and let’s make those results public so people can understand, how well the system’s performing. So that’s another key safeguard.
And then, finally there is this anxiety about, will pharmacies close down? Over time the Pharmacy Guild has often given the impression that a sector is on a knife edge and any policy change, such as sixty-day dispensing, will lead to literally hundreds of pharmacies closing, is their claim. Now, we don’t think there’s any evidence for that. We think it’s part of a negotiating ploy.
But again, if this is a concern, and especially if we’re wanting the sector to have more competition and change, let’s shine a light on it. Let’s make sure government has a rigorous program of monitoring the viability of the sector. And they can do that with tax data. And then if any segment of the sector is struggling, under pressure, might be small rural pharmacies, for example let’s measure those challenges and then if it’s required in order for patients to get the medicines they need, let’s provide an evidence-based subsidy that’s based on those financial pressures instead of the arbitrary sort of poorly targeted handouts we have today.
Because we have a blanket guarantee for the whole sector to get a minimum level of funding, which no other part of the healthcare sector enjoys, and then we also have these rural subsidies that aren’t linked to the financial challenges that a specific type of pharmacy may have.
So that’s three safeguards basically, where we say, Let’s keep an eye on viability and then support pharmacies that really need it. Let us have a quality regime so we understand that, care is getting better, not worse, and let’s make sure the competition watchdog is keeping an eye on particularly that point of market concentration and market power.
Reilly Polaschek: Peter, we’ve talked a lot about pharmacy owners and patients, but what about the pharmacy workforce? What will your report mean for them?
Peter Breadon: There’s a lot in here that I think is good for pharmacists. The first thing is getting rid of these caps on the services they provide, by making sure the services are better designed, they can provide more care, which they want to do.
Then new services, so the being able at scale nationally to provide advice and prescribing for UTIs, that’s a big win because pharmacists want to do more and provide more care.
I think one about quality. If we measure quality, that starts to orient the whole system more towards providing better care. And again, that helps give an extra incentive for businesses to support pharmacists to do their best work. And, talking to pharmacists, one of the things they obviously hate is seeing patients not being able to afford their medicines and having to sometimes make agonizing choices about which drug they actually get. These are terrible things that unfortunately happen, and if we get more affordability for patients, they will be confronted with that less than they are today.
So lots of reasons there, I think, why the workforce can actually thrive under these reforms.
Reilly Polaschek: And finally, Peter, the question I guess in the back of our minds on reports like this is always, will the government actually do anything about this? Especially given the influence of lobbying in this space, it seems like it’ll require a brave government to step up to the plate on these issues. Are you hopeful?
Peter Breadon: It’s a lot for government to take on. But I’m hopeful for a few reasons. The first is we have seen this government stand up to the Pharmacy Guild when it came to sixty-day dispensing, and that’s where a patient can get basically two boxes of pills in one visit to simplify a little bit, to save them having to go back and having to pay the dispensing fee twice. So that was really fiercely contested and the government, although they ended up overcompensating the sector, at least they held their ground on the underlying reform.
And, as we mentioned at the top of this discussion the government’s under real financial pressure w-with these growing healthcare costs. So they’re looking for value more than ever before. So that’s another hopeful sign.
And, we’ve got a changing sector already with Chemist Warehouse coming into the picture and they favor, I think, deregulation in terms of ownership and location rules. So again, that’s a bit of a change from some of the previous agreements that have been negotiated.
So that’s a good set of reasons to hope that on top of the underlying policy arguments we’ve made, that maybe the time is ripe for striking a better deal for Australians.
Reilly Polaschek: The report Future pharmacy: A better deal for patients and taxpayers is now available. If today’s conversation sparks something for you, we encourage you to dig in and have a read.
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