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Rent, Regulatory Reform & Rx

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

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Rent, Regulatory Reform & Rx

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  1. Rent, Regulatory Reform & Rx Paul K Gorecki The Competition Authority 3 July 2008 Presentation to ESRI

  2. 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

  3. PROHIBITION ON RETAIL FORMATS: CIRCA 2000 FormatIrelandUKUS % 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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)

  9. 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

  10. HIGH WHOLESALE MARGIN: CIRCA 200 Wholesale margin: circa 2000 CONCLUSION: WHOLESALE MARGINS X2 COMPETITIVE LEVEL

  11. HIGH RETAIL MARGINS: CIRCA 2000 Customer GroupRetail margin Medical card – dispensing fee DPS - dispensing fee + 50% mark-up Private - dispensing fee + 50% mark-up

  12. € M = Price + entry controls C = Competitive solution D = Deadweight loss L = Transfer to producers d Pm L P D MC=AC Pc d Quantity Qc Qm Q Social Costs of Price and Entry Controls: Rent

  13. RENT • Magnitude – how large? • Distribution – who gains? • Dissipation – how spent? • Seeking – competing for rents?

  14. 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

  15. RENT: DISTRIBUTION • 1st Round - Pharmacy owners - Pharmacy employees • 2nd Round - Irish-trained pharmacy owners (three year rule)

  16. 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

  17. 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)

  18. What is Regulatory Reform? (consumer welfare) Circa 2000 forward Time horizon Sequence important (eg NZ 1980s radical liberalization) Consider relaxing entry; then price controls SEQUENCING REGULATORY REFORM

  19. 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 ENTRY & PRICE REFORMS

  20. 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

  21. 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%)

  22. LESSONS FOR REGULATORY REFORM • Research/evidence matters • Sequencing reform matters • Pharmacy is not unique: no exemption from Competition Act

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