Rent, Regulatory Reform & Rx
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Transcript of 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
• 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%)