Commonwealth of Australia Explanatory Memoranda

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NATIONAL HEALTH AMENDMENT BILL (NO. 1) 2000

1998-1999-2000

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES















NATIONAL HEALTH AMENDMENT BILL (No. 1) 2000


EXPLANATORY MEMORANDUM















(Circulated by authority of the Minister for Health and Aged Care,
the Hon Dr Michael Wooldridge MP)



ISBN: 0642 437734


NATIONAL HEALTH AMENDMENT BILL (No. 1) 2000



OUTLINE



The National Health Amendment Bill (No. 1) 2000 proposes amendments to the National Health Act 1953 in relation to the Pharmaceutical Benefits Scheme.

The purpose of these amendments is to implement changes arising from the Third Community Pharmacy Agreement. The new Agreement will operate from 1 July 2000 to 30 June 2005.

The Pharmaceutical Benefits Remuneration Tribunal will continue to be required to give effect to any agreement in force between the Commonwealth Government and the Pharmacy Guild of Australia, in making a determination of the manner in which the Commonwealth (dispensed) price of pharmaceutical benefits is to be ascertained for the purpose of payments to approved pharmacists for supplying pharmaceutical benefits. It will also have any other functions conferred on it under such an agreement. The new Agreement contains a dispute resolution mechanism which provides for a dispute to be referred to the Tribunal by either party, but only as a last resort after attempts at direct negotiation and mediation have been exhausted.

The Australian Community Pharmacy Authority will continue to have responsibility for making recommendations on applications by pharmacists for approval to supply pharmaceutical benefits where those applications relate to the establishment of a new pharmacy or the relocation of an existing pharmacy. The location rules themselves will, however, be considerably streamlined and relaxed, particularly in rural areas, in accordance with the new Agreement with the Pharmacy Guild of Australia.

The Bill removes from the Act the provisions that govern payment of isolated and remote pharmacy allowances and professional allowances. Until 31 December 2000 payments of these allowances will be made administratively. The Australian Community Pharmacy Authority will no longer have a role in approving the payment of these allowances to pharmacists.

The new Agreement contains a set of initiatives, totalling $76 million over five years, to improve access to pharmacy services in rural and remote areas, and to encourage pharmacists to work in these areas. As part of these arrangements, the Isolated Pharmacy Allowance and the Remote Pharmacy Allowance will be replaced by a new enhanced Rural Maintenance Allowance from 1 January 2001.

The existing medication reviews in residential care facilities will also be replaced by new arrangements with effect from 1 January 2001, totalling $114 million over five years. An extended medication management program will be developed, in conjunction with the medical profession, to assist elderly persons in residential care and at home to properly manage the various medications they may receive.

The new Agreement also introduces a range of measures that will benefit the community and pharmacists, such as a new Pharmacy Development Program which will cost $188 million over five years, to support and encourage quality pharmacy services across Australia. Included under this program is better information for consumers and achievement against quality accreditation benchmarks by pharmacists or pharmacies.

FINANCIAL IMPACT


Under the new Agreement, the existing Isolated Pharmacy Allowance (expenditure $4.0 million per year), Remote Pharmacy Allowance (expenditure $0.4 million per year) and the current professional allowance (expenditure $4.5 million per year), which are being removed from the National Health Act 1953 by this Bill, will be replaced from 1 January 2001 with a new enhanced Rural Maintenance Allowance (estimated to cost $57 million over five years) and an enhanced medication management scheme (estimated to cost $114 million over five years).

NATIONAL HEALTH AMENDMENT BILL (No. 1) 2000
REGULATION IMPACT STATEMENT


PART A BACKGROUND


The Pharmaceutical Benefits Scheme (PBS)

The purpose of the PBS is to provide reasonable (that is, timely, reliable and affordable) access for the Australian community to necessary and cost-effective prescription medicines. About 95 per cent of prescription medicines dispensed in Australia by community pharmacies are covered by the PBS and the Repatriation PBS.

One of the basic assumptions of the PBS as a health program is that all Australians should have reasonable access to prescription medicines, regardless of their capacity to pay for these, and of where they live. Because of the nature of the demographic and geographic distribution of the Australian population, some members of the community have more difficulty than others in obtaining reasonable access to PBS services.

Through its PBS subsidies, in conjunction with patient co-payments, the Commonwealth effectively purchases such a volume of medicines that it has a near monopsony for the prescription drug market (that is, the ability as a buyer to dominate the market because of its purchasing power). Effectively, the monopsony operates through Commonwealth’s negotiating the price to pharmacists of PBS subsidised pharmaceuticals, and its setting out of any conditions under which these medicines may be dispensed for subsidy, and its giving effect to the level of remuneration paid to pharmacists to dispense each subsidised item.

As part of ensuring that the delivery of PBS services is efficient and equitable, the Government approves pharmacists to supply PBS benefits (ie, to dispense subsidised items) under section 90 of the National Health Act 1953. As part of that power of approval, it may also approve where pharmacies are located for the purpose of supplying PBS benefits.

The Community Pharmacy Agreements

Situation prior to 1990


Immediately prior to 1990, remuneration for pharmacists was set by the Pharmaceutical Benefits Remuneration Tribunal, and consisted of a dispensing fee and a 25 per cent mark-up on PBS listed items.

These arrangements provided no specific incentives for improving the efficiency in the structure and performance of community pharmacy in terms of either the total number of pharmacies, or the distribution of pharmacies. Indeed, pharmacy location and the national “network” of community pharmacies supplying PBS benefits was at the time characterised by marked inconsistency. In 1987, a Senate committee found that 25 per cent of pharmacies had a competitor within 100 metres and 62 per cent had a competitor within 1 km. Other areas, particularly in regional Australia, struggled to attract or retain even one.

Over and above such evidence, it was also apparent that there was an oversupply of pharmacies nationally. In 1985 there were just under 5,500 pharmacies, with a pharmacy: population ratio of 1:2,900. Organisation for Economic Cooperation and Development (OECD) data suggests that the pharmacy: population ratios for most member countries range from 3,000 to 5,000. When local overcrowding is taken into account, many local pharmacy markets were well below this OECD range in the late 1980s, while some underserviced localities, such as rural and remote communities, were well above it.

In 1989-90, almost 105 million prescriptions were dispensed. Between 1985-86 and 1989-90 related Government PBS outlays, including pharmacist remuneration, grew from $616 million to $1,179 million. Overall, this 91 per cent spending growth represented an average compounded growth rate for related PBS outlays during that period of 17.6 per cent.

In the late 1980s, there was a dispute between the Commonwealth Government and the Pharmacy Guild of Australia (the Pharmacy Guild) around the issue of whether the price paid for dispensing PBS drugs should be based on the average cost of dispensing across all pharmacies, or the cost of dispensing in an “efficient pharmacy”. No agreement on calculating the price on an efficient pharmacy basis could be reached. The Government and the Pharmacy Guild ended this period of unrest after the 1990 election, with the negotiation of the first Community Pharmacy Agreement.

The first Community Pharmacy Agreement 1991-95


To address lack of incentive issues in a way that would minimise the potential for conflict between them, the Government and the Pharmacy Guild agreed to set out a new remuneration framework. This was coupled with a more rational distribution of pharmacy services, and with industry restructuring that would lower pharmacy numbers and encourage greater efficiency, profitability and economies of scale in individual pharmacy businesses.

The first Agreement contained specific measures to:

• Reduce the size of the per-item mark-up from 25 per cent and introduce a “taper” on the mark-up dependent on the price to pharmacists of the item
- This adopted a mark-up structure of 10 per cent on the Government agreed price to the pharmacist of up to $180, a flat $18 for items with an agreed price between $180 and $360, and 5 per cent for items with an agreed price over $360. This was linked to an indexed dispensing fee of $3.43 for ready-prepared (RP) items and $4.96 for extemporaneously-prepared (EP) items;

• Provide financial incentives – in the form of closure and amalgamation payments – for pharmacies to close or amalgamate in areas (eg Central Business Districts) where closure would not affect reasonable access to pharmacy services. From 1991-95 the program assisted 630 pharmacy closures and 64 amalgamations, at a cost to Government of $52 million;
• Restrict where a pharmacy could relocate its existing PBS approval (in the first instance, to a site not less than 5 km from an existing pharmacy, and subsequently in 1 km steps from the new site at intervals of not less than two years), and imposing strict restrictions on approving a new pharmacy unless defined community need criteria were met; and

• Provide additional financial support to community pharmacies in rural and remote areas through an Essential Pharmacy Allowance, eligibility for which was dependent on the distance from the nearest pharmacy and dispensing volumes. By the end of the first Agreement, just over 400 pharmacies were receiving the allowance.

The number of pharmacies operating in 1995 was reduced from around 5,500 to 4,950, with a 1995 pharmacy: population ratio of 1:3,650. The overall number of pharmacies has stayed more or less constant ever since, although the ratio has risen to about 1: 3,800 as the population has increased.
Over the life of the first Agreement, related PBS outlays grew at an average annual rate of 17.5 per cent (from 94 million PBS funded prescriptions in 1990-91 to 119 million in 1994-95). In terms of estimated pharmacist remuneration from dispensing fees and mark-ups, outlays grew from about $427 million to $644 million, at an average annual compounded rate of 14.7 per cent, from July 1992 until June 1995[1].

The second Community Pharmacy Agreement 1995-2000


The second Agreement sought to consolidate the remuneration structure and efficiency gains of the first, while wherever possible reducing related regulatory restrictions, such as those on the location of pharmacies.

The second Agreement:

• Retained the dispensing fee and mark-up taper arrangements of the first Agreement, indexed annually;
• Maintained pharmacy location restrictions, both in terms of requiring the satisfying of definite community need criteria to establish a new pharmacy, and to satisfy primarily distance-based criteria for relocated pharmacies. The key provisions were:
- New pharmacies could be approved if a location satisfied eight geographic and demographic criteria;
- Pharmacies could be relocated to a site within 2 km of another pharmacy;
- An existing pharmacy could relocate within 1 km of its current site;
- Pharmacies could be relocated into designated shopping centres without reference to distance from another pharmacy on the basis of a pharmacy: other shop ratio of 1: 30, 2: 100 and 3: 200 and more; and
- Pharmacies could be relocated into private hospitals with more than 150 beds.
• Discontinued the direct industry restructuring assistance of the first Agreement; and
• Provided for a number of consumer access-linked allowances available to eligible pharmacists, such as:

- Remote Pharmacy Allowances (RPA), payable to any approved pharmacist whose premises are at least 10 km from the nearest other approved premises, at a rate of 20 per cent of the dispensing fee for RP items, to a maximum of 1,000 claimable prescriptions a month (RPA outlays to eligible pharmacists have totalled about $18 million over the life of the second Agreement);
- Isolated Pharmacy Allowances (IPA), payable in addition to RPA where a pharmacy has a claimable prescription volume of less than the Australian median prescription volume in the preceding 12 months, and having no other pharmacy within 25 km (IPA outlays to eligible pharmacists have totalled about $2 million over the life of the second Agreement); and
- Fees for service to accredited pharmacists conducting limited medication reviews for nursing home residents.

Over the life of the second Agreement related PBS outlays grew at an average annual rate of 11.1 per cent (from 125 million PBS funded prescriptions in 1995-96 to an estimated 139 million in 1990-2000). Estimated pharmacist remuneration from PBS dispensing grew in this period by an average annual rate of 7 per cent. This slower growth reflects PBS growth and demand trends generally over the second Agreement period (as prescription volume and average pricing are not Agreement-driven).

Third Community Pharmacy Agreement 2000-05[2]


The Government and the Pharmacy Guild have now negotiated the terms of a third Agreement, and its central measures are considered in this Statement.


Key components of the Agreement are:

• Remuneration arrangements for Community Pharmacies dispensing PBS prescriptions. Arrangements in the Agreement involve some restructuring of remuneration that reduces the emphasis on prescription-based remuneration compared with continuation of current arrangements. The Agreement includes new “risk sharing” provisions to deal with situations where estimated prescription volumes and/or average prescription prices and related income exceed or fall short of agreed estimates;
• A new Pharmacy Development Program (PDP), which will provide remuneration to pharmacists that is linked directly to achieving quality of service and related outcomes;
• Significant modifications to the rules governing the location of pharmacies to supply PBS benefits, including relaxation of both new and relocated pharmacy approvals rules, particularly in rural and remote areas;
• An enhanced program of targeted measures designed to give pharmacists positive incentives to relocate to, continue working in, or to set up new businesses in rural and remote Australia; and
• An enhanced medication management service, which will extend and improve the assistance provided for elderly persons and allow improved management of the various medications they receive.

During the period of the third Agreement, total overall PBS outlays are forecast to grow at an annual compounded average rate of 5.8 per cent, and prescription volumes about 2.7 per cent. The difference in these growth rates indicates that the expected increase in average price per PBS item dispensed will be a key cost driver over the Agreement period.

In terms of pharmacist remuneration outlays, however, the principal purpose of the third Agreement is not necessarily to achieve significant savings against present remuneration settings. The predicted annual average growth of 5.3 per cent is comparable to the projected 5.4 per cent average if setting do not change. It is, rather, about changing the settings mix, better to reflect the Government’s goals and objectives for the PBS and community pharmacy as its principal delivery mechanism.

The first two Agreements assisted in moderating the rate of growth in estimated PBS outlays, while promoting reasonable access to community pharmacy services. The third Agreement is intended to retain these priorities, but add to them the objective of promoting quality enhancement in the provision of funded pharmacy services.

National Competition Policy Review of Pharmacy


The National Competition Policy Review of Pharmacy chaired by Warwick Wilkinson AM (the Wilkinson Review) was established by the Council of Australian Governments (COAG) in June 1999. It was a mechanism enabling the Commonwealth, States and Territories simultaneously to meet their National Competition Policy obligations to review their respective legislation regulating the operation of the pharmacy industry and pharmacy professional practice.

The Wilkinson Review’s report was submitted to COAG on 8 February 2000.
Of the three legislative areas that the Review was directed to examine by COAG, the Commonwealth has specific responsibility for the location of pharmacies to supply subsidised medicines to the Australian public. The Government has taken into account the advice of the Wilkinson Review in negotiating the third Agreement with the Pharmacy Guild.

2. OVERALL PROBLEMS AND OBJECTIVES

Overall problems


Regulatory arrangements are in place across the PBS medicine delivery system to ensure that the Commonwealth subsidy on PBS drugs is passed on to consumers in a way that best achieves the purpose of the PBS. These arrangements produce both benefits and costs. Essentially, the general issue is how to maximise the benefits while minimising the costs, and keeping the growth of pharmacist remuneration within justifiable bound, and with reference to the overall number of pharmacies.

As part of its responsibility for administering pharmaceutical benefits, the Commonwealth has a number of other relevant issues that it needs to address by appropriate policy and program responses. These include the following considerations:

• Broadly, current regulatory arrangements restrict competition between pharmacies. Restrictions on competition can reduce the incentives for pharmacies to:
- Lower prices to consumers for non-PBS items;
- Raise the overall quality of services provided; and
- Increase innovation in the way that services are extended to meet consumer needs;
• The arrangements in place over the first two Agreements are not best placed to:
- Ensure service quality; and
- Manage PBS remuneration outlays when there are strong increases in PBS volumes and in the average prices of PBS prescription items; and
- Promote qualitative policy goals, such as emphasising the quality use of medicines;

• Payments to pharmacists are, under second Agreement settings, based on the quantity and price of the medicines that they dispense. This raises issues around both the rate of growth of pharmacy remuneration and the fact that current arrangements do not specifically take account of the quality and degree of care with which prescriptions are dispensed;
• There is a need to maintain the improved distribution of pharmacies made in the first Agreement and consolidated in the second; and
• There are still gaps in the community pharmacy network that are at odds with the Government’s social objective of reasonable access to PBS medicines regardless of a person’s place of residence.

General objective


In relation to these general problems, the Government aims, through a formal five-year Agreement between it and the Pharmacy Guild, to ensure reasonable access to, and quality provision of, pharmaceutical services at least cost to Government outlays.

PART B SPECIFIC MEASURES AND OPTIONS


The remainder of this Statement is structured around options relating to the three principal areas of PBS and community pharmacy activity that the Agreement seeks to address, these being:

• Pharmacist remuneration;
• The community pharmacy network; and
• Reasonable access to community pharmacy services, quality assurance and enhancement of community pharmacy infrastructure.

The following sections in this Statement outline key measures, identify competing options to address the identified problems and objectives, and draw conclusions as to why a given option or set of options has been preferred.

1. REMUNERATION OF PHARMACISTS

Problem


What is the problem being addressed?

Pharmacists provide a service to the Government, consumers and the wider community in dispensing PBS medicines. Pharmacists are entitled to fair recompense for their services, as an integral part of the PBS. The second Agreement arrangements are nevertheless based almost entirely on the volume of prescriptions dispensed and their price, and do not include any specific mechanism for pharmacists to deliver high quality pharmacy services.

On the whole, high quality professional pharmacist advice and assistance are provided to consumers through community pharmacies, but there is no direct remuneration incentive to provide such quality services, to promote a culture of continuous improvement in community pharmacy, or to minimise consumer concerns and complaints through consistently good performance.


Why is government action needed to correct the problem?


Remuneration arrangements are based on the second Community Pharmacy Agreement, which expires on 30 June 2000. The Government needs to ensure that these are replaced with arrangements negotiated through the third Community Pharmacy Agreement, which is due to commence on 1 July 2000.


Objectives

The Government’s objective is not only to implement a pharmacist remuneration framework which delivers reasonable access to high quality community pharmacy services to Australians at the least cost, while ensuring that pharmacists receive fair recompense for their services. It is also to introduce a direct link between the quality of the pharmacy services provided by PBS approved pharmacies, and the PBS remuneration that pharmacists receive for providing those services.

Options

Within the framework of a Community Pharmacy Agreement, the Government could:

• Make no changes to existing pharmacist remuneration measures;
• Implement the package of remuneration measures in the third Agreement; or
• Introduce new measures based on alternative remuneration principles.


Option 1 No change to existing measures

Description of existing measures


The first and second Agreement dispensing fee and mark-up measures, which have been operating since 1990, are outlined in Part A of this Statement.


If left in place, it is estimated that existing remuneration settings would, on the basis of projected growth in prescription volume and average price per prescription item, translate to an average compounded annual growth rate for pharmacist remuneration of 5.4 per cent over the third Agreement period.

Who would be affected?

Government: The Government would not have any specific incentives within the Agreement to promote quality pharmacy services. Cost outlays would continue to be determined solely by the numbers of PBS prescriptions dispensed by pharmacists, and the average price to pharmacists of dispensed pharmaceuticals. If both these cost drivers continue to rise, as expected, the overall level of remuneration outlays would continue to rise commensurately with them.

Community pharmacy: PBS payments to pharmacists would grow commensurately with increases in the volume of prescriptions and growth in the average mark up on PBS pharmaceuticals. There would be no obligation on community pharmacists to guarantee the quality of their services in return for their PBS-derived income.

Consumers: Consumers would see no change in the cost of services at the point of sale and would continue to experience the current quality of service provision from community pharmacy (which can vary from very good to inadequate) without any guarantees as to minimum standards.

Wider community: The wider community would see no change on current outlay and service provision trends, nor in the quality of service obtained. Taxpayers could also perceive that pharmacist remuneration is growing at a faster rate than wages and salaries generally, and may wish to be better assured of the quality value of the return on the community’s investment.

Effects on existing regulation and regulatory authorities

Effectively, existing arrangements would not change, with the exception of sunset clauses on specific legislative provisions being extended for the life of the new Agreement.

Likely benefits or likely costs

Maintaining existing Agreement-based remuneration structures undoubtedly would create continuity and stability in terms of the pharmacist remuneration structure, with pharmacists deriving income benefits from any rapid growth in the number of prescriptions dispensed and/or the average price of prescription items.

The focus of pharmacist remuneration therefore would remain on the level of dispensing activity and the wholesale prices of PBS medicines and there would be no specific mechanisms in place under the Agreement to promote continuing improvements in the quality of pharmacy services. Nor would the remuneration structure offer much direct incentive to improve the overall efficiency and competitiveness of pharmacy businesses.


Option 2 – Agreement-based remuneration setting

Description of measures in the Agreement

Prescription based remuneration and risk sharing


Under the third Agreement, pharmacists will continue to receive a dispensing fee and mark-up for each PBS prescription item dispensed.

The mark-up formula will be modified. This will involve a tightening of the taper applying to higher priced drugs, thus reducing the growth in pharmacist remuneration as higher priced drugs come on to the PBS. Under the second Agreement, the mark-up is 10 per cent to $180, $18 from $180 to $360 and 5 per cent above $360; under the new Agreement, the mark-up is 10 per cent to $180, $18 from $180 to $450 and 4 per cent above $450.

Additionally, a risk sharing arrangement will reduce the exposure of the Commonwealth to unexpected significant growth in drug prices and mark-ups, and prescription numbers, by triggering a reduction in the flow-on effect of this high growth to pharmacist remuneration, and share the additional costs and income from that unexpected growth between the Commonwealth and community pharmacy.

Broadly, the trigger will apply if average mark-up on prescription items grows by more than 4 per cent above forward estimates, and in this case part of the excess growth will flow to the Commonwealth as saved outlays. Similar triggering arrangements will also apply to excess prescription volume growth.

There are to be similar arrangements for prescription volume growth that falls below forward estimates, in order partly to ameliorate the remuneration effects for community pharmacy of lower than expected prescription volume outcomes[3].


Comparative outcomes between current and intended pharmacist remuneration settings

In terms of shifting from the second to third Agreement, the Government’s strategic focus is on changing the mix of components comprising PBS remuneration to pharmacists. For the third Agreement, the net annual compounded outlay growth of core pharmacist remuneration will be around 5.3 per cent, compared to estimated annual average compounded outlay growth on second Agreement remuneration settings of around 5.4 per cent.
Of this, the rate of growth in prescription-based remuneration only will be around 4 per cent annually during the third Agreement period. Most of the balance of the projected growth is accounted for by the new quality-referenced Pharmacy Development Program (PDP). The PDP would provide for up to $188 million over the life of the new Agreement, and would keep the great bulk of the anticipated growth savings from changed prescription-based settings in the pharmacist remuneration stream.

The overall net savings in outlays against projected outcomes for present remuneration settings are estimated to be about $27 million over five years, or an annual average net saving of under $5.5 million. When the new rural pharmacy allowances, described in Part B3 of this Statement, are taken into account there will be, however, a moderate net growth in remuneration-linked outlays of $25 million over the life of the Agreement. This represents an annual average net outlay growth of $5 million.


The Pharmacy Development Program and pharmacists’ remuneration


As indicated above, the new Agreement also incorporates the new PDP. This will provide outcome-based grants to pharmacists, to promote identified quality outcomes in pharmacy care and service. The introduction of the PDP therefore is a significant step in restructuring pharmacists’ remuneration from the Commonwealth.

This restructuring will:

• Specifically link some community pharmacist remuneration to quality rather than quantity and price-driven criteria. This will be in the form of grants, for example, to reward quality accreditation, and to achieve defined quality related outcomes (such as pharmacists providing consumers with detailed information about their medicines); and
• Reduce the proportion of pharmacists’ remuneration that, unlike dispensing fees and mark-ups, is directly linked to growth in prescription volumes and average drug prices. Total remuneration under the PDP is for an agreed level over the period of the Agreement.

The operation of the PDP is considered in greater detail in part B4 of this Statement.


Who would be affected?

Government: The base from which the Government pays pharmacists for PBS related services will be altered. It will also need to adjust its machinery for managing both the PBS generally, and pharmacist remuneration in particular. The measures would also give the Government a direct interest in the community pharmacy industry’s quality assurance and standard-setting processes. In general, the Government will be better placed to manage longer-term growth in pharmacist remuneration outlays.

Community pharmacy: The new remuneration framework will alter the composition of pharmacists’ PBS income base, which Wilkinson estimates is about two-thirds of an average pharmacy’s turnover. It would also reconfigure business and professional processes to conform with quality assurance and accreditation requirements to be eligible for the quality-linked components of the remuneration package.

If a pharmacy proprietor wants to maximise his or her pharmacy’s return from PBS-derived turnover they will need, however, to be an active participant in the Pharmacy Development Program.

Consumers: The modified PBS remuneration framework should not affect out of pocket PBS costs to consumers, as they will not affect patient co-payments or the safety net. On the other hand, the new remunerative emphasis on quality enhancement and improved consumer services should, over time, be enjoyed by consumers, and ideally flow through to increased consumer confidence in pharmacists, and more general satisfaction with their services.

Wider community: Measures of this sort should better ensure that pharmacist remuneration conforms to community expectations of high quality professional service at least cost. On a broader level, the community would have an element of pharmacist remuneration linked to pharmacies giving quality health care to consumers. As a direct incentive to pharmacists, such an approach should encourage pharmacists to offer good value for the community’s overall investment in the PBS structure.

Effects on existing regulation and regulatory authorities


Limited amendments to the National Health Act 1953 would be required to give effect to these measures.

Likely benefits or likely costs


In net terms, the remuneration package set out in the third Agreement will mean modest savings on prescription-based remuneration payments to pharmacists.

The third Agreement arrangements will:

• Reduce the extent that quantitative volume and cost measures will flow through to pharmacist remuneration;
• Incorporate a risk sharing arrangement whereby the community pharmacy industry will give up a portion of additional income that would accrue if prescription volume and average mark-up estimates are exceeded; and
• Through the PDP, introduce a quality-driven remuneration pool that will not increase if the script volumes and drug prices exceed those predicted in the agreed forward estimates.

On the cost side, the measures themselves will apply for five years, restricting further structural change during that period, except by agreement between the parties. The components of the PDP can be adjusted over time as circumstances dictate.

Whether the risk sharing mechanism is triggered depends on the accuracy of the forward estimates of prescription volumes and the prices of dispensed medicines.

Option 3 Alternative bases to remuneration structures


As an alternative to the package of remuneration measures, remuneration structures provided for in the third Agreement could be based on different foundations to achieve the desired objectives of PBS cost management, promoting efficiency and enhancing service quality.

While commenting primarily on regulating pharmacy location, the National Competition Policy Review of Pharmacy suggested the option of moving the cost calculation basis for dispensing fees and payments from an industry average cost formula to marginal or best practice cost basis. This would reward good practice, and discourage the continuation of relatively inefficient pharmacy businesses.

Who would be affected?


Government: Pharmacist remuneration structures would be more complex to design and administer. They would involve redeveloping cost and statistical models to calculate pharmacist remuneration, and to predict outlay trends. On the other hand, the mechanism would promote the Government’s service quality objectives, as less efficient and less well-managed pharmacies would find it difficult to keep pace with their competitors unless they strive for continuous professional and commercial improvement.

Community pharmacy: Such a cost calculation basis would reward more efficient pharmacies over less efficient competitors. It would make less efficient pharmacy businesses harder to sustain without significant improvements in their internal efficiency and commercial performance, and thus may provide direct incentives to such pharmacies to improve in order to survive. On the other hand, lower rates of remuneration may put pressure on some pharmacists' operation to the extent that some affected pharmacy proprietors may reduce the range of pharmacy and related health care services that they provided to consumers.


Consumers: Consumers should see no difference to existing arrangements at the point of sale. More efficient businesses should be able to provide a better quality and wider range of professional and allied services to their customers, at little or no extra cost. The main issue would be reasonable access to pharmacy services. Consumers may, however, find some gaps in the overall community pharmacy network as some less competitive pharmacies fail.

Wider community: An efficiency-based cost formulation may encourage pharmacies generally to maximise their commercial performance by improving their internal efficiency. The taxpayer could effectively gain more value for the community’s investment in community pharmacy through the PBS.


Effects on existing regulation and regulatory authorities

As for Option 2.


Likely costs and benefits


Different cost and remuneration calculation bases, appropriately designed and targeted, may achieve the Government’s pharmacist remuneration objectives. Moving remuneration structures to a cost calculation basis that rewards efficiency and good professional practice as well as volume and average price would be direct incentives for less efficient and marginally viable pharmacies to consider their operating futures, either by improving their performance, relocating to a more commercially viable location (taking into account what other location incentives may be available), amalgamating with other pharmacy businesses, or by closing.

On the cost side, however, there is a major question of whether such changes to pharmacist remuneration, and thus to the PBS generally, could be achieved without major disruptions in the PBS, the distribution of the community pharmacy network (and hence reasonable access to services) and the overall ability of Government to work constructively and cooperatively with the community pharmacy industry. In practice, it is unlikely that consensus could be reached on workable cost formulation or dispensing fee structures of the nature raised by the Wilkinson Review.

The location implications of the Wilkinson report’s relevant recommendations are considered in part B2 of this Statement.

Conclusion and preferred option

Any setting of pharmacist remuneration by a formalised structure is a de facto restriction on competition. Effectively, the Community Pharmacy Agreements have set out pharmacists’ contractual relationship with the Commonwealth for PBS purposes. Through them, pharmacists receive remuneration on agreed terms and conditions for the provision of PBS medicines to the community.

On balance, there is a net public benefit in regulating pharmacist remuneration to safeguard a substantial taxpayer investment. The PBS is a major spending program for the Government, currently involving total Government outlays of more than $3,000 million a year and increasing steadily year to year, as well as $600 million in direct patient contributions through PBS co-payments. Pharmacist remuneration – dispensing fees and related mark-ups – currently accounts for about 28 per cent of this expenditure. There are also other expenditures, such as allowances for specific services or operating in given locations, which also flow to many pharmacists.

On consideration of its overall pharmacist remuneration objectives, and the options available to pursue the objectives, the Government favours Option 2 as the basis of pharmacist remuneration in the next Community Pharmacy Agreement. The new payment arrangements in the Agreement reconfigure the remuneration structure in a way that reflects not just the volume of dispensing activity and the price of medicines, but also how well pharmacists perform their dispensing and related professional roles. At the same time, a lower rate of prescription based remuneration growth over the Agreement would be achieved.

The negotiated package of measures therefore has the ability to meet the Government’s objectives of delivering high quality community pharmacy services to the Australian community at a sustainable cost. Over the life of the new Agreement, overall pharmacist remuneration growth rates will be comparable to outcomes based on current settings, but there may be some divergence in subsequent years as demographic changes to the Australian population flow through to demand trends for pharmaceuticals and pharmacy services.

In terms of the background environment, what constitutes a sustainable cost refers not just to financial outlays under pharmacist remuneration structures. It also refers to the ability of Government and community pharmacy to implement new arrangements efficiently, and with a minimum disruption of services to the community pharmacy network.

Compared to the third Agreement package, measures as contained in Option 3 may in theory achieve lower pharmacist remuneration growth rates. It is unlikely, however, that a most efficient cost base could be progressed without strong opposition, with the likelihood that pharmacy services to the community would suffer significantly in the process. It would also not provide the focus on the quality of service that is included in the third Agreement.

2. THE COMMUNITY PHARMACY NETWORK

Background


Under section 90 of the National Health Act 1953, the Government has the power to approve pharmacists to “supply pharmaceutical benefits on demand from particular premises”. Further to this power, the Commonwealth regulates the approval of new pharmacies to supply pharmaceutical benefits, and the relocation of existing pharmacies from one site to another. This means that the Government can:

• Determine how many pharmacies may provide PBS subsidised products and services; and
• Determine where pharmacies may be located for this purpose.

Since 1991, the Commonwealth has exercised these powers though a set of regulations authorised by a ministerial determination under section 99L of the Act. These regulations have reflected consensus reached between the Government and the community pharmacy industry through the two Community Pharmacy Agreements.

The Wilkinson Review was asked, as part of its Terms of Reference, to examine this regulation and the effects of its operation. It made several related conclusions, including:

• Some retention of limits on the overall number of pharmacies are justifiable; but that
• Existing regulation on pharmacy new approvals and relocations is operating to place significant restrictions on competition between pharmacies; and
• Existing regulations should be replaced by other measures and, for any transitional period, be reformed to make them more efficient and equitable.

Problems

What is the problem being addressed?


In terms of the location of pharmacies, and taking into account the Wilkinson report’s findings, there are essentially two general problems influencing the environment:

• Not all Australians have reasonable access to health services, including pharmacy and pharmaceutical services through the PBS, because they live in areas with inadequate services, including rural and remote localities and developing new suburban areas; and
• The pharmacy market is already very regulated – not just by the Commonwealth in terms of the PBS, but also by the States and Territories in terms of pharmacy ownership, professional practice and acceptable commercial relationships between pharmacies and outside interests.

While the National Competition Policy Review of Pharmacy suggested that the overall number of pharmacies (4,950) is about right in terms of meeting community needs, it highlighted some specific matters arising from the existing restrictions. These include:

• In the life of the first two Community Pharmacy Agreements, there have been few new pharmacies approved to supply PBS benefits (only 98 until late 1999, from 640 applications). Evidence to the Review from country pharmacists, rural health groups and pharmacists in or wanting to serve rural, remote and new suburban growth areas highlighted the difficulty of satisfying local needs for an adequate pharmacy service.
• The existing eight preconditions to show a “definite community need” for a new pharmacy have served to make new pharmacy approvals extremely difficult for applicants to justify. These criteria include the proportion of aged persons and other social security beneficiaries being more than 10 per cent of an area’s population; inadequate services by other approved pharmacists, isolation from or poor access to general shopping facilities, and a relatively immobile population; and
• The location restrictions, particularly the second Agreement’s 2 km distance radius protecting pharmacies from relocated competitors for at least two years, have created market distortions of their own. This includes the dampening of competition in local pharmacy markets.


Why is government action needed to correct the problem?


The Government has a responsibility to ensure that the Australian health care system that it funds, which includes pharmaceutical services, is reasonably accessible.

The community pharmacy network is, broadly, the distribution system for the PBS.
If the pharmacy market, left unaided, cannot deliver reasonable access, then some regulatory intervention in the market is needed to ensure that necessary medicines are available to all Australians efficiently and equitably through the PBS.

If greater competition in the community pharmacy industry is to be encouraged, however, the Wilkinson report makes it clear that the Government’s existing pharmacy location measures need to be relaxed to at least some extent. Indeed, it suggests that alternative approaches to existing location approvals may be preferable.

The Government accepts the Wilkinson Review’s overall conclusion that the existing body of pharmacy location regulation cannot be left unchanged. It therefore needed to consider the alternatives available to it, and has negotiated changes in the context of the third Community Pharmacy Agreement.

Objective

While not wanting to return to the much less regulated situation existing before 1991, the Government is seeking to ensure that any regulatory intervention in the size and distribution of the community pharmacy network is consistent with both:

• The need to ensure reasonable access to pharmacy services for all Australians; and
• Only restricting competition between pharmacies to the extent justified by this need.

Specifically, the Government wishes to ensure that the prime focuses of relevant regulation are that:

• All areas have reasonable access to pharmacy services, including rural and remote areas, and outer and new suburban areas; and
• The existing spread of services is not reduced in a way that compromises reasonable access.

Options


The Wilkinson report, in commenting on its reference to examine the Commonwealth’s regulation of pharmacy location, proposed three alternative approaches to improving the current situation and promoting greater competition between pharmacies:

• Modifying new pharmacy and relocated pharmacy approval rules to relax these location restrictions as far as practicable;
• Using PBS remuneration-based incentives and disincentives to rationalise the overall number and distribution of community pharmacies, to reward more efficient pharmacy businesses, and to encourage the closure or amalgamation of inefficient pharmacy businesses; and
• Competitive tendering for PBS services by community pharmacies.


Option 1 Agreement-based modifications to existing pharmacy relocation rules

Description of measures


Under this option, the existing close restrictions on where new pharmacies may be established, and on where existing pharmacies may be relocated, to supply PBS benefits would be relaxed, and exemptions from distance-based restrictions widened, with a view to regulation eventually being reduced as far as is consistent with the Government’s objective of promoting reasonable access.

Briefly, the measures that are included in the third Agreement include:
• Reduced and reformed definite community need criteria for approvals to open new pharmacies for PBS purposes from the current eight to three, coupled with the site being more than 1.5 km from an existing pharmacy. These revised criteria will be:
- The catchment area proposed to be serviced by a pharmacy has a population of more than 3,000 for most of the year;
- The catchment has the equivalent of a full-time medical practitioner; and
- The catchment has general shopping facilities;
• An existing pharmacy may relocate to a site up to 1.5 km from its present site (“short” relocation) in any direction except where a relocation is a distance greater than 1 km and less than 1.5 km, the pharmacy could not be closer than 0.5 km from that other pharmacy. This 0.5 km requirement will be reviewed in 2004 as part of a review of all location requirements. As in the second Agreement, the pharmacy will need to be in place at least two years before it could make a short relocation to a new site;
• An existing pharmacy may relocate from any other location (“long” relocation) to within 1.5 km of another existing pharmacy, replacing the current 2 km limit;
• Simplifying the distance measure for both short and long relocations, and new pharmacy approvals to a straight line door to door;
• Without reference to distance criteria, a pharmacy may relocate to:
- A private hospital with more than 150 beds (about 10 per cent of all private hospitals); and
- Large shopping centres according to a pharmacy: commercial establishment ratio of 1: 30; 2: 100 and 3: 300 and over, with simplified definitions of what constitutes a large shopping centre and what other businesses constitute a commercial establishment in such a shopping centre.
• A commencement date for the new approval and relocation distance measures of 1 July 2002 (giving pharmacy business fair notice of the changed arrangements), with the remaining measures commencing on 1 July 2000. This is coupled with a Government-Pharmacy Guild commitment to review the operation of elements of the new location rules in 2004 (ahead of the Agreement’s expiry in June 2005); and
• The introduction of a category of new pharmacy approvals for rural and remote areas by removing the need for applicants to satisfy definite community need criteria if the proposed site is more than 10 km from an existing approved pharmacy. The approval will be linked directly to the locality, and will not be able to be relocated elsewhere; and
• The introduction of “exceptional circumstances” approvals, where a defined catchment area may have an existing pharmacy yet that area may, because that pharmacy prevents the entry of a new or relocated pharmacy within the defined radius, be disadvantaged in terms of reasonable access to adequate pharmacy services by the strict application of the distance-based location rules. These areas are:
- Urban areas (usually new suburbs or residential developments) where the population of the local area exceeds 8,000 residents and has an average rate of growth over the previous two years of 7 per cent; and
- Rural locations with one pharmacy, where it can be demonstrated that the pharmacy’s provision of PBS services is substantially inadequate to meet local need.


Who would be affected?


Government: The Government, with the advice of the Australian Community Pharmacy Authority (ACPA), will continue to administer pharmacy location rules for PBS purposes. It will therefore retain the ACPA, and related machinery in the Department of Health and Aged Care and the Health Insurance Commission. It will also thus continue to intervene in the distributional side of the community pharmacy market to meet its objectives.

The changes to the new approval and relocation rules, including the special approval categories, may increase the overall number of pharmacies. It is unlikely, however, that this number will be significantly greater than the present 4,950, and certainly would fall far short of the pre-1991 number of 5,500.

Community pharmacy: Restrictions will continue to be imposed on where new and relocated pharmacies may be established for PBS purposes, but will be less restrictive than under the second Agreement.

On the other hand, existing community pharmacies will continue to benefit from being able to plan and grow their businesses with some certainty of the size of their local catchment area, and of the relative stability of competition between pharmacies in that area.
The approach will also help to sustain the value and turnover of pharmacy businesses, although average PBS business per pharmacy falls with each new extra pharmacy approved.

If the overall number of pharmacies increased significantly through the new approval rule relaxation, and given that it is unlikely that PBS dispensing volume would be affected as it is prescriber rather than pharmacy driven, the growth in average PBS incomes per pharmacy would be lower as the PBS “cake” was cut marginally more thinly.

Consumers: The effects on consumers of the modified location regulations will depend largely on where they live.


Consumers in most metropolitan areas: Given that these areas are where local pharmacy markets are more likely to be crowded, it is more likely that these consumers will benefit from service competition between pharmacies, and price competition on items beyond the PBS (given that PBS items have fixed prices to consumers).

Consumers in outer and new urban areas with rapid population growth: Under present rules, a pharmacy that can establish itself in that area can also establish a degree of protection from competition, by way of a minimum distance requirement separating a new or relocated pharmacy from an established pharmacy from moving within that radius unless by 1 km hops at minimum intervals of at least two years. The exceptional circumstances rule for urban growth areas will broaden the potential choice of pharmacy services for residents in eligible localities, and the prospect of better service competition between pharmacies to the benefit of local consumers in those areas.

Consumers in rural and remote areas: The simplification of new pharmacy approval criteria will make it considerably easier to make a case to establish a new pharmacy, compared to the rigorous demographic criteria of current requirements.

Linking special approvals to a designated locality will ensure that if a pharmacist moves from a town, or retires, the town would be able to use the existing approval to attract a new pharmacist. This could be in association with other Commonwealth incentives, as well as any locally devised incentives. The new exceptional circumstances provision for specific rural locations with one existing pharmacy also has the potential to improve the adequacy of local services by enabling access to additional pharmacies, in eligible areas, notwithstanding the general distance-based restrictions on pharmacy location.

As a whole, these regulatory will complement the targeted assistance for pharmacists operating in rural and remote areas considered later in this Statement.

Wider community: The wider community will be affected by any measures influencing the level of competition in the community, as well as the distribution of services.

The community at large will benefit if relaxing the new approval and relocation rules offers greater incentive to pharmacies to move to those areas of need, particularly when coupled with appropriate material incentives to encourage pharmacists to establish and maintain pharmacies in areas of need.

Effects on existing regulation and regulatory authorities


Existing pharmacy location regulations will be modified and simplified wherever possible, rather than replaced. The existing ministerial determination under section 99L of the National Health Act 1953 (which promulgates the location rules) will need to be amended to reflect the terms of the third Agreement.

The ACPA will be retained to consider applications to establish new and relocated community pharmacies.


Likely benefits and likely costs


Recommendation 9(c) of the Wilkinson report supported the reform of existing and new pharmacy restrictions, if remuneration-based measures to encourage more efficient and better-distributed pharmacies “are not practical”.
The simplified new pharmacy approval criteria, the special measures for underserviced rural localities, and for potentially underserviced outer suburban and rural areas that may be disadvantaged by a strict application of the regulations in general, are significant improvements in second Agreement arrangements.

By progressing incrementally to less regulation of pharmacy numbers and location, community pharmacy as a sector also can more readily adjust to change as it is phased in. Actual and potential pharmacy proprietors may also make longer-term planning and investment decisions with reasonable certainty. The industry has indicated that business development, and building up professional linkages with allied professionals, pharmaceutical wholesalers and other support services, needs sufficient lead-time to adjust to a changed regulatory environment.

Nevertheless, there are also costs to this approach.

Primarily, any ongoing regulation of community pharmacy location places significant restrictions on competition, and involves the Government in setting the parameters of the community pharmacy market. Given, however, the symbiotic relationship between the PBS monopsony and the community pharmacy industry, at least some measure of government involvement in the market cannot be avoided.

Maintaining any such regulations also imposes a cost for Government in servicing the relevant regulatory structures, and for community pharmacy in dealing with them. The location approvals process, overseen by the ACPA, involves costs for applicants and Government. Simplifying regulatory requirements will lessen that burden.

Additionally, there are costs to Government, industry and consumers in maintaining a regulatory framework that is formalised, relatively static for the life of the Agreement, and that may lag behind relevant developments in health care trends and evolution in consumer demand for community pharmacy services. These costs would be trade-offs for the benefits that settled medium-term measures can provide.

Option 2 Remuneration-based incentives and disincentives


In considering the distribution of community pharmacies for PBS purposes, the Wilkinson Review recommended that restriction of the number of pharmacies could be realised by considering, “...in the interests of greater competition in community pharmacy, a remuneration system for PBS services that restricts the overall number of pharmacies by rewarding more efficient pharmacy businesses and practices, and providing incentives for less efficient pharmacy businesses to merge or close” (Recommendation 9(b)).

Wilkinson suggested two remuneration-based approaches that could achieve the recommended result. These are differential dispensing fees for pharmacy services, and calculating pharmacist remuneration on industry better practice rather than industry average costs.


(a) Differential dispensing fees


As both positive and negative incentives to pharmacists in siting their businesses, Wilkinson suggested that the per item dispensing fee could have a loading, or carry a penalty, depending on where the pharmacy is located. If a pharmacy is in an area overserviced by pharmacies (ie the pharmacy: population ratio for the locality is too low against an agreed measure), the pharmacist’s dispensing fees would be discounted. If the area were underserviced or otherwise disadvantaged, the dispensing fee would carry a loading. Pharmacies in areas of equilibrium in terms of their pharmacy: population ratio would carry neither a loading nor a penalty.

Differential dispensing fees could apply generally (ie to all pharmacies in the defined area), or selectively (eg to pharmacies establishing themselves in the defined area after a commencement date). There are issues, however, as to whether selectively applied fees and related determining criteria could be seen as a consistent treatment of all PBS approved pharmacies receiving Government remuneration.

Who would be affected?


Government: A differential dispensing fee regime could meet the Government’s reasonable access objectives for pharmacy services. There would be savings from discounted dispensing fees to pharmacies in overserviced areas, but higher outlays on dispensing fees for pharmacies in designated underserviced areas. This income differential would influence pharmacists’ location decisions. It is difficult to assess the net effect required, however, to maintain current distributional patterns. It is also difficult to determine the net effect of such an approach on overall pharmacist remuneration outlays.

Community pharmacy: Differential remuneration could also influence pharmacy business planning and purchasing decisions, by making the incentive or disincentive of dispensing income a factor in the pharmacy’s turnover calculations. If the pharmacy is in, or moves to an area where its PBS derived income will be increased or penalised because of its location, then that financial incentive or disincentive could affect a proprietor’s decision to remain at, or move to, a given pharmacy site.

Consumers: If a differential fee model were introduced, and operated as suggested by Wilkinson, people using pharmacies in relatively crowded local pharmacy markets should see little or no difference in terms of their reasonable access to services, although clearly their choice of service providers could be reduced. In less well-serviced areas, local consumers may see more pharmacies appearing to meet local needs as pharmacists move their businesses to take advantage of remuneration incentives and any other available assistance.

Wider community: The wider community could benefit from a more widely distributed community pharmacy network, as pharmacy proprietors adjust to the system.

Direct remuneration incentives, coupled with targeted aid to pharmacists wishing to open or sustain pharmacies in rural, remote and other designated areas of need, could be more successful than previous strategies to attract pharmacies to those areas, where commercial considerations alone may not be sufficient to attract and retain pharmacy businesses.


(b) Efficiency-based remuneration formulations


The other mechanism suggested by Wilkinson relates to the method by which pharmacist remuneration is calculated.

This would involve moving the cost calculation base for community pharmacy dispensing remuneration from an average industry cost of dispensing PBS medicines to benchmarks based on industry good practice, however defined. Such a shift, Wilkinson argues, would reward more efficiently operating pharmacy businesses, and place much greater pressure on smaller and less efficient pharmacies to improve their performance, relocate to a more commercially viable site, or else close up or amalgamate with other pharmacies.

How benchmarks would be defined and measured would be a matter that would have to be settled before a new cost calculation system could be implemented. The system could apply for instance, to all pharmacies, or it could be confined only to newly established or relocated pharmacies. It may also benchmark against a range of criteria besides those that may relate to the provision of PBS products and services, insofar as the sale of non-PBS goods and services affects the business profile and profitability of pharmacies.

Similarly, a broad range of criteria could compensate for local biases that may influence efficient performance, such as the relative affluence of the catchment, the age and health and disposable income profiles of pharmacy catchments as these may affect prescription and related business volumes.

Who would be affected?


Government: A “most efficient pharmacy” cost calculation would reduce the Government’s need for direct regulatory intervention in the size and national distribution of community pharmacies. Instead, the dispensing remuneration flowing from the PBS, and how it may be affected by a pharmacy’s location, size or relative efficiency, would become the indirect policy lever for influencing the community pharmacy market. As Wilkinson notes, this approach may also need some compensatory adjustments to ensure that services are not lost in some rural and other relatively disadvantaged localities.

The Government would also need to undertake the research, analysis and modelling to ensure that the necessary and appropriate cost calculation criteria, benchmarks and performance indicators are identified, tested and set. It would also need to keep these under continuous review to ensure that they remain fair, accurate and relevant.

Community pharmacy: Efficiency-based cost remunerative arrangements would have a particular effect on smaller, lower prescription volume pharmacies. Unless concessions were built into the new system to allow for some specific circumstances (eg a pharmacy’s location in an area of pharmacy need), such pharmacies may find it relatively difficult to survive.

Consumers: Implementing measures of this type could benefit consumers by providing more direct encouragement for pharmacy businesses to operate efficiently and effectively. This could relate both to greater competition and greater choice between pharmacies in areas where such choices are available. They may, however, affect reasonable access in relatively underserviced communities if a smaller, notionally less efficient pharmacy has to close or rationalise services to the public as a consequence of the remuneration structure.

Wider community: As for the differential dispensing fee option, the wider community could have the potential benefit of a remuneration-based mechanism promoting greater pharmacy efficiency, and better and more diverse pharmacy services.

Effects on existing regulation and regulatory authorities


For either of these alternatives, legislation and statutory instruments enabling the regulating of pharmacy location for PBS approval purposes would lapse or be repealed. The ACPA, as the body whose main responsibility is applying those regulations, could be abolished, as the market would essentially be left to adjust without Government intervention.

Likely benefits or likely costs


If calculated appropriately, PBS pharmacist remuneration arrangements can meet two objectives: promoting reasonable access to community pharmacy services, and giving direct incentives to pharmacies to maintain and enhance their overall efficiency and effectiveness as both professional service providers and as commercial businesses.


(a) Differential dispensing fees


Differential dispensing fees, if incentives are set at an appropriate level, could be genuine factors in persuading all pharmacy proprietors to think about the location of their pharmacies as a part of maximising the return on their investments. If any pharmacy wishes to trade in an overserviced area, under this approach it would have to take the consequences of that decision for its PBS income, which for most pharmacies is their single largest source of turnover.

It would be consistent with the Government’s desire to ensure reasonable access to pharmacy services and an effective national PBS distribution network. It could be expected that at least some pharmacies would close in overserviced areas, and move to locations where they could maximise their income. Coupled with other incentives, such as those considered later in this Statement, rural and remote areas could become more attractive for pharmacy proprietors.

On the costs side, there would be a high degree of administrative complexity to overcome. Areas and other relevant criteria would have to be defined (eg an area with a high proportion of elderly residents may need more than an average number of pharmacies to service its needs), and pharmacy distribution monitored and reviewed. Adjustments would have to be made periodically to the service status of designated areas, with other criteria ensuring that the differential fee system operates fairly and in the best interests of the community at large. This would require a considerable ongoing administrative effort.

Also on the costs side, it is very difficult to estimate in advance the level of fees required to achieve given distributional results. There would be risks, and relative uncertainty, both for Government and the pharmacy sector.

Beyond this, there would be many pharmacists (those in areas considered to be overserviced) who would potentially experience reductions in their income, and this could occur for both efficient and inefficient operators. In practice an attempt to introduce a system of this kind would be difficult and controversial, and is likely to result in considerable dispute with community pharmacy.

(b) Efficiency-based remuneration

PBS remuneration, as underpinned by the second Agreement and pharmacy location regulations, does not acknowledge relative efficiencies between pharmacies. If remuneration more directly rewarded better performers, and encouraged less efficient pharmacies to consider their operating future, the community pharmacy industry may become more responsive to pursuing and adopting best practice in pharmacy service provision. This could flow through to cost savings for Government and consumers. It could also lead to more consumer responsive and professionally innovative pharmacy services in areas where there is a more competitive community pharmacy market.

There are, however, significant costs in moving towards an efficiency-based model of community pharmacy distribution. Many of the smaller, lower prescription volume pharmacies are found in rural, remote, and suburban locations. Without appropriate adjustments, such pharmacies may close and leave an unfilled gap in local services, to the detriment of the Government’s reasonable access goal.

Similar to a differential fee model, moving from an average to better practice cost calculation for remuneration would also have implementation costs in terms of determining what constitutes better practice, how it should be measured, and what remunerative value should be ascribed to it.

Given the sensitivity of the issue, it is also likely that either of the two Wilkinson approaches would require a strong and effective mechanism for consultation, arbitration and dispute resolution between Government and community pharmacy. While this may be achieved, whether such a mechanism could achieve a satisfactory and implementable accommodation between the Government and the community pharmacy industry is problematic.

Option 3 Tendering for the supply of PBS medicines


The Community Pharmacy Agreement is effectively a contract between the Commonwealth and the Pharmacy Guild, on behalf of its members and community pharmacy generally. It lays down common terms and conditions for the remuneration of pharmacists that are to apply to all pharmacies, whether or not they are owned and operated by Guild members.

A third option considered by the Wilkinson Review, however, is to abandon this collective negotiating approach in favour of contracting out the provision of PBS medicines directly to individual pharmacies. Under such an option, the Commonwealth would call for tenders for approvals for PBS services to be provided for a given locality or geographical area. Pharmacies would tender competitively for the contract, and the Commonwealth would select the successful providers against the tender criteria.

The Wilkinson report appears to envisage that community pharmacies would tender for a service in a given area, with contract remuneration determined either on a flat fee for the total service or a fee per dispensed item. Tendering processes could also be general (all providers tendering for the PBS service) or partial (tendering for new entrants only or for specialised services – such as medication reviews for aged care facility residents - or for designated localities). Questions of the fair application of rules and processes for all players in the market would need to be considered in this regard.


Who would be affected?


Government: Tendering would allow the Government to take fuller advantage of its market position, as a monopsony purchaser of PBS services, to encourage community pharmacies to provide efficient service at reasonable cost. It would also allow the Government to maintain a direct interest in the distribution of PBS services, by determining the areas or localities for which contracts are to be let, the number of contracts within those areas and, if desired, the terms and conditions of service delivery specific to either a locality or a pharmaceutical consumer group.

Community pharmacy: A major issue for community pharmacy of a move to a tender basis is the impact it would have on the value of existing pharmacies. Many existing businesses could be expected to suffer losses in value. If applied generally, the basis of the industry as a whole would change, as the present insulation against commercial and professional competition for PBS services would disappear, and successful tenders would only provide a degree of certainty for the period of the tender. To make realistic tenders, pharmacists would need to ensure that their businesses are viable, efficient and able to offer services of a standard expected in the Government’s tender criteria.

If applied partially to specific localities or services, it may be that tendering would appeal only to those pharmacies and pharmacists interested in delivering them. This may promote the greater specialisation or sub-specialisation of pharmacists in specific areas of activity (eg pharmacy services for geriatric or post-acute patients).

Consumers: Consumers may see relatively little change in their ability to obtain reasonable access to PBS services in local catchments. It may be, however, that some consumers would find the community pharmacy with which they may have developed a professional relationship disappear, depending on the results of a tender process.

Wider community: The wider community could benefit from a more aggressively cost and service competitive community pharmacy industry, with flow-ons for the level of public outlays on pharmacy services, and potentially also for the quality of those services.

Effects on existing regulation and regulatory authorities

Second Agreement-linked regulations and machinery applying to the location of PBS approved pharmacies would be removed. These may, however, need to be replaced with new principal or delegated legislation to oversee the operation of the competitive tender process, the tender criteria, and the supporting administrative arrangements that would be required to implement the new system.

Likely benefits and likely costs


Putting PBS-funded community pharmacy services to competitive tender would be a major change both to PBS pharmacists remuneration, and to the relationship between the Government as the principal purchaser of PBS services from pharmacists on the one hand, and community pharmacists as the providers of those services on the other. It could be expected to be difficult and controversial to implement, with community pharmacy stakeholders and some individual pharmacists having indicated strong opposition to proposals of this kind.

Tendering would allow the community pharmacy market to determine the level of remuneration on a pharmacy-by-pharmacy basis. Successfully tendering pharmacies could offer both greater value for money, and a guaranteed quality of professional service.

On a day-to-day level, such an approach may foster heightened competition between pharmacies in local pharmacy markets. The results of such competition could thus have a positive effect on the cost and quality of related service delivery.

Notwithstanding the potential benefits, the Wilkinson report notes that there are some significant risks in a competitive tendering approach. Indeed, the Review was reserved on the workability of a tender option. It commented that a successful tender may not in itself ensure that quality of service is guaranteed, notwithstanding safeguards being built into either the tender process or the monitoring of successful tenderers’ performance.

The Government administrative machinery required to develop, implement and oversee a tender-based system would also need to be relatively comprehensive. Tendering processes would need to be devised, tender criteria developed and implemented, transparency of decision-making ensured, successful tenderers selected and performance against tender requirements monitored and, if necessary, enforced. Provision would also need to be made for dealing with disputes arising of both tendering processes and the performance of successful tenderers, and payment systems would also need to be able to handle remuneration levels that may vary from pharmacy to pharmacy.

Community pharmacy proprietors would also incur significant costs in developing their tenders, and in adopting and using business and professional systems geared to assist them in meeting their contractual obligations. These costs may be passed on both to Government in terms of the bottom line tender price for the PBS-related services, and to consumers in the form of prices paid for goods and services in a pharmacy, if these costs have a significant effect on operating margins.

There is also an inherent cost, also noted by the Review, of the risk of contracted providers not being able to meet the obligations of their tender, and having to cease operating services to the detriment of the affected local catchment. This is a matter of risk and contract management, and could require contingency arrangements for localities that may have no alternative service provider in the event of an unexpected pharmacy closure.

Conclusion and preferred option


The Government prefers Option 1, the strategic reform of existing regulation through the third Community Pharmacy Agreement structure.

In terms of regulating the location of pharmacies for PBS purposes, the Wilkinson Review strongly recommends that the Government and the community pharmacy industry progress towards maximum deregulation and commensurately greater levels of competition. The medium-term reforms of existing location regulations in the new Agreement may not be, in some respects, as far-reaching as this recommendation, or the alternative mechanisms suggested by the Review that are considered as Options 2 and 3.

The Wilkinson report itself, however, also acknowledged that any reform of pharmacy location regulation needs to be practical if it is to be successful, and recommended to this effect. The Government broadly supports this view, and sees its preferred option as consistent with it.

The Government has a critical need to ensure that Government-funded pharmaceutical services are delivered efficiently and affordably to all Australians. It also needs to ensure that wider Commonwealth, State and Territory funded services, including general medical practice, home and community care, and acute care services, are not made less efficient and less effective because of significant holes in the national coverage of community pharmacies as the PBS distribution network.

There is also an obligation on the Government to ensure that any restrictions on competition between pharmacies are as justifiable in terms of balancing the benefits and costs of those restrictions to the community as a whole. The agreed modified regulatory improvements are a progression to better achieving both health care and pharmacy competition objectives.


While they are incremental and a targeted easing of existing regulations, the new simplified and more relaxed pharmacy location measures would:

• Address clear shortcomings in current regulation that have worked to the detriment of the underserviced rural, remote, and outer metropolitan communities that they are intended to assist;
• Provide a better platform for the targeted measures to nurture the overall enhancing of services quality, and the adequacy of pharmacy services in rural and remote areas, in the third Agreement;
• Reduce the barriers to effective competition between pharmacies in the industry generally, and in better-serviced local markets in particular; and
• Provide a base for longer-term deregulation.

While they will be simplified and relaxed, some restrictions on the location of new pharmacies for PBS purposes will remain necessary under the third Agreement. The overall number of pharmacies affects average per pharmacy income. Restricting the overall number of pharmacies influences the overall sustainability of many pharmacy businesses, particularly in less well serviced areas. Beyond this, however, relaxing eligibility criteria for new approvals should improve the chances of underserviced communities attracting and retaining adequate levels of pharmacy service, with greater prospects of bringing in some fresh competition for existing pharmacies. It should therefore improve local access to pharmacy services in these areas.

In terms of the agreed changes to pharmacy relocation rules, shortening the distance radius around existing pharmacies should increase competition, particularly in terms of the quality of services to consumers as relocated pharmacies can move closer to competitors.

The preference to proceed on a more incremental basis also relates to the need to promote a well-distributed community pharmacy network providing high quality pharmacy services. This objective could be compromised if rapid and substantial deregulation was implemented in the short term. If the present pharmacy location restrictions are relaxed too broadly, or too quickly, there is a distinct possibility that the more rapidly deregulated environment would skew already imbalanced community pharmacy services, as pharmacists could be expected to favour more lucrative locations. Such a situation could also jeopardise the distributional improvements achieved through the first and second Agreements.

In particular, such rapid change may affect the viability of at least some suburban and regional pharmacies providing reasonable access to older and less mobile pharmacy consumers. These pharmacies may be relatively small and localised, and less able than some of their competitors effectively to realise economies of scale and scope.

Changes of this nature could only be progressed against the resistance of community pharmacy, and possibly the wider community. The costs of introducing such arrangements, in terms of both PBS outlays, and the likely effects of such changes on reasonable access to pharmacy services, outweigh the benefits of radical change to the community pharmacy market, and reduce the value of the integrated range of measures in the Agreement as a whole.

This reduced package of regulation integrates with other third Agreement measures, particularly the quality-linked package and associated Pharmacy Development Program, and specific assistance for pharmacies in areas of relative disadvantage. Modified regulation of pharmacy location is an integral part of a third Agreement approach to achieving a potentially more strategic, efficient and effective community pharmacy network.

As discussed in this section, efficiency-based remuneration and remuneration incentives to encourage better pharmacy distribution, and tendering by pharmacies for PBS and/or related services, may well offer real alternatives to the above approach.

The Government needs, however, to balance the aspiration for greater efficiency in the community pharmacy sector with the need to ensure reasonable access to quality community pharmacy services. The preferred option is more likely to achieve an appropriate balance than the other alternatives canvassed.


3. RURAL ACCESS AND SPECIALISED SERVICE MEASURES

Problem

What is the problem being addressed?


Many people in rural and remote Australia have difficulty in obtaining reasonable local access to pharmacy services.

Problems in attracting pharmacists away from metropolitan areas are common. Many pharmacists are concerned about the prospects of running a successful business, about lifestyle factors and about the welfare of their families in rural and remote locations. Business costs in country areas can be higher, even allowing for the cross-subsidisation of supply lines by pharmaceutical wholesalers keeping the cost of PBS item stocks comparable across Australia. On the other hand, the cost of bringing in non-pharmaceutical stock, and of infrastructure such as telecommunications and, increasingly, going on-line, can be relatively more costly for rural businesses generally, including pharmacies.

Even relatively financially lucrative areas near capital cities – for example, towns on the Mornington Peninsula near Melbourne, an affluent resort area with both established and passing trade – have found it difficult to attract pharmacists. More remote localities have far greater challenges in this regard. In many localities, the sale of going pharmacy concerns is also difficult, as buyers are not coming forward, even if purchase prices are much lower than for pharmacies in prime urban and suburban locations. Evidence of this phenomenon came to the Wilkinson Review from rural pharmacists and rural health organisations.

Existing location restrictions, such as those preventing pharmacists moving elsewhere if they leave behind an area of need, have not worked effectively. As the Wilkinson Review noted, a pharmacist wishing to leave can close down his or her business in a difficult locality, and purchase a new one elsewhere or simply retire. Additionally, the restrictive nature of new approval rules for pharmacies, with very specific community need criteria, have tended to compound the difficulties for rural communities in attracting a pharmacy. The proposals in the new Agreement for the relaxation of rural new pharmacy approval criteria, and the definition of special circumstances categories for rural and outer suburban localities with only one pharmacy will, however, assist in easing this pressure.

As Wilkinson noted, existing rural-focused incentives such as the Isolated (IPA) and Remote (RPA) Pharmacy Allowances of the second Agreement appear to have limited effect. This may simply be that their scope (an average 1998-99 payment per eligible pharmacy of $9,000 for IPA pharmacies and $11,000 for pharmacies receiving both IPA and RPA) is not in itself sufficient to persuade a pharmacist to keep trading, or to relocate to an eligible area. It may also be that existing measures do not take into account lifestyle, distance, professional interaction and other challenges that rural and remote pharmacists may face, compared to their metropolitan and provincial colleagues.

Additionally, some particularly vulnerable Australians – including the frail aged – have difficulties in gaining reasonable access to the full range of professional pharmacy services because they are residents of an aged care facility, or housebound and dependent on domiciliary care. Previous measures, including the medication review provisions of the second Agreement, have been relatively minor, and have not fully addressed the special needs of this high-use patient group.

The problem therefore is to find measures that, collectively, can offer real incentives and practical assistance to pharmacists willing to serve relatively disadvantaged rural and remote localities, and particular special need consumers, at a reasonable cost to the taxpayer.


Why is government action needed to correct the problem?


As with the regulation of pharmacy location, the Government’s limited intervention to offer incentives to operate pharmacies in regional areas is justifiable if it assists in addressing the problems identified above, so as to ensure that the PBS distribution network is, as far as possible, capable of delivering reasonable access to pharmacy services to all Australians.

Objectives


The Government’s objective is to achieve an enhanced coverage of face-to-face pharmacy services in areas where there are access difficulties for residents. This relates particularly to rural and remote areas.

A related objective is to ensure that, as far as is practicable, strategic policies and programs are implemented to both foster the growth of new pharmacy services in areas of need, and that existing pharmacists are in time succeeded by others, to the ongoing benefit of the local and regional communities that they service.

Options


The Government has two broad options in this area:

• To implement appropriate targeted measures to assist reasonable access for relatively disadvantaged population groups to community pharmacy services; and
• Not to introduce such measures, and instead let the market and the industry respond to community needs for pharmacy services without government intervention.

Option 1 Implement appropriate targeted measures

Description of measures in the Agreement


The option is intended to work in combination with the relaxation in location controls considered earlier (simplified definite community need criteria for new pharmacies, special approval categories for designated rural towns and exceptional circumstances approvals for some one-pharmacy towns).
The targeted measures include:

• A Rural Pharmacy Maintenance Allowance, paid to pharmacies within agreed categories of the Australian Remote and Isolated Area (ARIA) index, and varying with the remoteness and dispensed prescription output of eligible pharmacies. Essentially, the allowance will replace the existing RPA and IPA, but will be paid at higher levels and on a wider basis. The new allowance will offer a significantly improved financial incentive for pharmacy proprietors to remain in a rural or remote locality;
• A Start-up Allowance for establishing new pharmacies establishing in eligible rural and remote areas. To be eligible, the pharmacy will have to be sited in a locality covered by the new Special Rural Approval location rules considered earlier;
• A Succession Allowance to assist, within criteria to be specified, a pharmacist wishing to purchase an existing pharmacy in a designated rural or remote area. Eligibility criteria would include degree of remoteness, and a history of an inability to attract a purchaser for an existing pharmacy;
• A Rural Pharmacy Workforce Development Program offering assistance in areas including emergency locum support, pharmacy infrastructure, scholarships to pharmacy students from rural and remote areas, improving access to continuing pharmacy education for rural and remote pharmacists, and promoting the recruitment of pharmacists with an Aboriginal or Torres Strait background; and

• An allowance for support given by eligible pharmacists undertaking quality use of medicines activities with Aboriginal Health Services.

The gross estimated cost of this package is $76 million for the life of the Agreement. This includes an estimated $24 million that would have paid under the existing rural support programs, giving a net cost of $52 million.

The third Agreement also contains measures to promote the delivery of some specialised services to specific consumers. These include an expanded program of medication management assistance for frail aged Australians in residential and domiciliary settings. The medication management initiative is to be funded separately to the rural access package, and is estimated as having a gross cost of $114 million over the life of the third Agreement.

Who would be affected?

Government: The Government will be committing a significant level of resources to meet its reasonable access objective for particular areas and classes of pharmacy users, and to improve the overall quality of health infrastructure in regional Australia. It will also be providing forms of assistance to community pharmacists to operate in rural and remote areas that are not generally available to most small businesses.

Community pharmacy: Targeted assistance may make a financially or personally marginal decision to establish or retain a pharmacy in a rural or remote area a more viable proposition for a community pharmacist. Eligible pharmacists will be able to obtain assistance that may make life in these localities a more attractive proposition to them as health care professionals.

Consumers: If pharmacists and pharmacy services are attracted to, or retained in rural and remote localities, consumers in those areas can have improved access to local and personal pharmacy advice and care, based on face-to-face contact with professional pharmacists and their staff. Older people with multiple medication needs will also be provided with improved medication-related services.

Wider community: If pharmacists and pharmacy services are attracted to, or retained, in rural and remote localities, many gaps in the distribution of pharmacy services outside rural and regional centres will be closed. The quality of health care services generally received by people in those areas would at the same time be enhanced. The new arrangements provide
for closer working relationships between pharmacists, general practitioners and other health care professionals as part of a wider health care team in terms of the overall quality of resident care in a nursing home or in community care.

Effects on existing regulation and regulatory authorities

Under the arrangements, the ACPA will not have any power of determination over the new rural practice allowances. This contrasts with its administrative responsibility for determining pharmacists’ eligibility for the present Remote and Isolated Pharmacy Allowances.

Likely benefits and likely costs

(a) Rural measures

These measures, when implemented, should reduce existing distribution gaps that exist in the overall PBS network, especially in rural and remote areas.

The measures were developed with the benefit of considerable research and analysis from both the Government and the Pharmacy Guild. This included extensive consultation with rural pharmacists, and with representatives of potentially affected communities.

The proposals also have benefited from the experience of useful precedents, notably the successful General Practice Rural Incentives Program. This program has analogous components to the rural pharmacy package.

The anticipated result is an improved community pharmacy presence in regional Australia. By taking positive measures to attract pharmacists, as well as to retain them in country areas, the outcome will be that younger and more recently trained pharmacists may be more likely to try their hand at running a pharmacy in a rural or remote location. This may be either by succeeding pharmacists who are approaching retirement, or by moving into localities presently not served by a pharmacy at all, or served inadequately by an existing pharmacy where location rules permit. The Agreement includes a provision that the progress of these initiatives will be reviewed.

(b) Specialised services

Under the second Agreement, medication management reviews for the frail aged have also played a constructive role in giving increasing numbers of older persons better access to personalised reviews of their medication needs. The follow-on measures in the third Agreement will build on acquired program experience and on pharmacists’ resulting exposure to what was, until recently, a new method of professional service delivery. The new arrangements include much greater integration with other health care providers than the earlier model, particularly with general practitioners.

Option 2 No targeted measures for rural or specialised services

The other option for the Government is to leave these matters to the commercial pharmacy market, on the assumption that community pharmacists will operate pharmacy businesses wherever they can find a community or niche need that may sustain a commercially viable pharmacy. This would apply to all areas, whether urban or rural.

This assumes that the Government would maintain the regulation of pharmacy location, as outlined in the new package of measures considered earlier. It also assumes that the already comprehensive pharmacist remuneration structure, whether or not it includes a separate quality-linked component in future, is capable of providing sufficient incentive to establish and operate a profitable pharmacy business, anywhere in Australia.

Who would be affected?

Government: If rural-specific measures as outlined were not implemented, the Government notionally would save on gross pharmacy-related outlays in rural and remote areas of $76 million over five years. There would be minimal savings from not undertaking the expanded program of medication reviews, as these would be offset against other savings in PBS outlays. It would, however, have to rely on the community pharmacy market to address distribution gaps in the network for PBS-funded community pharmacy services.

Community pharmacy: Pharmacists would have to make their own cost judgments about moving to, or staying in, a rural or remote area, or taking on medication management services. These judgments, as things stand, may be made in conjunction with pharmacy location rules. If the viability of a location or a pharmacy service is marginal without external assistance, the proprietor may decide to close or sell it.

Consumers: If a pharmacy in an underserviced rural or remote area closes down, consumers may have to travel some distance for face-to-face service, or otherwise rely on remote dispensing (ie prescriptions sent to a pharmacy at which the customer is known, that are filled and delivered to the customer without direct personal contact) or mail-order pharmacy (ie prescriptions lodged by post or Internet with a distant supplier, and dispatched by post by that supplier) for their pharmaceuticals. A number of the current difficulties in managing medication for the elderly who are confined to their homes or an aged care facility would continue. This is contrary to the goal of ensuring reasonable access to pharmacy services.

Wider community: If gaps in rural and remote area pharmacy services are at least partly due to these localities being commercially unattractive to pharmacists, the social goal of reasonable access to pharmacy services for those Australians living in more sparsely populated areas would not be met fully.

Similarly, not providing a medication review service for frail aged persons, particularly nursing home residents, would not improve the quality of access to personalised pharmacy services for a class of high-use consumer who generally finds the physical act of going to a pharmacy for advice to be difficult or impossible.

Effects on existing regulation and regulatory authorities

Legislative authority for the existing Remote and Isolated Pharmacy Allowances, and for medication reviews, would lapse on 1 January 2001 if they were not renewed.

Likely benefits and likely costs

Non-intervention would clearly have the benefit reducing the Government’s financial commitments. It would also put a heavy onus on community pharmacy to be seen as taking some responsibility in meeting community concerns about both the relative lack of community pharmacy services in some areas, and the overall ability of community pharmacists to provide consistently high-quality professional and business environments.

On the other hand, pharmacists as individuals are free to make their own decisions as to where they live or set up businesses. They need to make a reasonable return on their commercial investments. They cannot be forced to work in a location that is unattractive to them, nor can they be expected to undertake a difficult task – providing services in what are often commercially challenging localities – merely for the well-being of others.

Given these factors, there would be no likelihood that shortages of pharmacists in rural and remote Australia would be addressed effectively simply by unaided professional and market activity.

Conclusion and preferred option


Overall, it is desirable to proceed with the package of measures outlined in Option 1, on the grounds of net public benefit.

As argued throughout this Statement, the Government has a policy objective of ensuring that all Australians have reasonable access to PBS services. This also applies to access to basic health care generally. This set of measures, particularly those relating to services in rural and remote areas, represents a justifiable intervention in the public interest.

While mail order pharmacy and remote dispensing have a role to play, and can and do operate to ameliorate the lack of a close pharmacy presence in significant parts of rural Australia, they are not a fully effective substitute for direct client interaction with a professional pharmacist capable of giving customers advice and counselling about their medicinal needs.

In making this judgment, it is noted that Recommendation 12(a) of the National Competition Policy Review of Pharmacy states that “Legislation to support specific programs and services to assist the retaining and enhancing of pharmacy services in rural and remote areas is considered to be of a net public benefit”. The package of rural measures outlined in the negotiated approach is consistent with the Wilkinson report’s position.

The measures are limited, strategic and targeted interventions in areas of the community pharmacy market where consumer demand is otherwise failing to be met adequately. They will provide incentives to assist community pharmacists to consider country practice, but they would not compel them to relocate. That is ultimately a matter for pharmacists’ personal and commercial judgment.

Similarly, the measures relating to medication reviews for the frail aged provide targeted assistance to some of the most vulnerable health consumers in our society. They could enhance the general quality of funded care that these people are able to receive, and they support the efforts of those pharmacists accredited to provide such specialised care, in collaboration with general practitioners.


4. QUALITY ASSURANCE AND INFRASTRUCTURE MEASURES

Problem

An effectively distributed community pharmacy network needs to be linked to an effective delivery infrastructure, and services of consistently high quality.

As health care, including pharmacy and pharmaceutical services, is becoming more and more complex and sophisticated, the public is seeking more assurances that it is receiving the best possible service at all times at the best price. Pharmacy is no exception, and concerns expressed by consumers suggest that there is room for improvement in at least some pharmacies.

As considered earlier, current pharmacist remuneration arrangements do not in themselves promote quality pharmacy outcomes and related quality assurance (QA) mechanisms, as they pay on the basis of number and cost of prescriptions dispensed by an approved pharmacist, and not on the quality of the services provided.

While States and Territories themselves regulate pharmacist registration and professional practice, this regulation is concerned only with meeting minimum standards for competent practice. It does not address quality of service against appropriate standards, nor does it seek to assure the public about the quality of a pharmacist’s performance beyond the point of basic competence.

Why is government action needed to correct the problem?


While the good management of a pharmacy business is basically a matter for the proprietor, the Government has, as the major purchaser of PBS subsidised services, an interest in the overall quality of pharmacy services and advice to consumers, and in supporting reliable QA mechanisms in the community pharmacy industry. This is especially so, given that other regulatory interventions mean that pharmacies do not operate in a fully competitive market, and that service quality needs to be safeguarded in these circumstances.

On behalf of the wider community, the Government is entitled to expect value for its taxpayer-funded outlays in terms of high quality services being obtained in return for PBS dispensing and associated remuneration.

The Government is also expected, by the community, to act to ensure that the Australian health care system, including pharmacy and pharmaceuticals, is not only administered effectively, but is calibrated to ensure the good health of all Australians through the sensible use of drugs, medicines and other health consumables. The PBS, as the delivery mechanism for most prescription pharmaceuticals, is integral to this broad health system objective, as well to the Government’s National Medicines Policy that encourages the quality use of medicines through the sensible prescribing, dispensing and use of prescription and non-prescription drugs and medicines.

Objective

The Government’s objective is to promote access to and the delivery of high quality pharmacy services across the national community pharmacy network. It also is seeking to address particular quality issues, for example, the provision by pharmacists to consumers of appropriate information about the proper use of dispensed medicines.

Options

The Government essentially has two broad options:

• Providing some support and encouragement to the community pharmacy industry to improve the overall quality of its performance and related infrastructure; and
• Not intervening with specific program measures, and leave QA and good performance concerns to the industry and the market to resolve.

Option 1 Agreement-based measures to enhance professional quality
and professional service delivery

Related measures in the third Agreement include:


• Moderate information technology assistance to the community pharmacy industry to enhance its ability to contribute to improving pharmacy records and professional management systems, and through these enhance the quality and safety of prescribing, dispensing and medication management. This measure is estimated to cost $10 million over the life of the Agreement; and
• A Pharmacy Development Program (PDP) that can:
- Promote the involvement of community pharmacy in pursuing quality service delivery;
- Build on previous initiatives between the Government and the pharmacy industry and profession to promote quality and best practice in community pharmacy;
- Provide a mechanism to enhance the overall quality of the provision of information on drugs and medicines to consumers, such as Consumer Medicine Information provided to patients when medicines are dispensed;
- Provide a funding pool for specific quality initiatives, evaluation and research;
- Provide periodic grants to community pharmacists for their participation in identified quality activities, or the achievement of particular quality outcomes;
- Help fund the ongoing development of quality assurance and professional practice standards for community pharmacy; and
- Promote community pharmacies’ accreditation against benchmarked standards.

The PDP as a whole will be funded to $188 million over the life of the Agreement, with allocations of resources within the program still to be quantified, and likely to shift over the period of the Agreement as relative priorities continue to evolve.


How would the Pharmacy Development Program work?

The objective of the PDP would be to promote the enhanced involvement of community pharmacy in the pursuit of quality and cost effective service delivery.

The Government and the Pharmacy Guild have agreed that the Pharmacy Guild’s Quality Care Pharmacy Program (QCPP), which embodies Professional Practice Standards, and Standards for the Provision of Pharmacist Only and Pharmacy Medicines as developed by the Pharmaceutical Society of Australia (the Pharmaceutical Society), is the appropriate accreditation mechanism. It will therefore be incorporated into the PDP as the Program is phased in from 2000-01 onwards.

The details of the grants element of the PDP, and related eligibility criteria, are still being discussed between the parties to the Agreement. It is likely, however, that pharmacies would be eligible for grants linked specifically to their attainment of specific QCPP milestones.

The PDP is to be available to all PBS-approved pharmacies, whether or not they are owned and operated by Pharmacy Guild members.

Administration of the PDP

The Pharmacy Guild would partner the Government in setting priorities within, and administering, the PDP. The Pharmaceutical Society’s role of developing appropriate professional practice standards, would also be relevant to the administration of the PDP. The PDP itself would be overseen by a joint Government-Guild Agreement Management Committee. This committee would also be a source of advice to the Minister on Agreement matters generally.

Within the PDP funding envelope, the Guild will receive funding of $7.5 million over five years to administer the program. A fund to support research, development and analysis relating to the objectives of the PDP, would also be created to the value of $15 million over five years. The purpose of these activities would be to explore innovative ideas in improving the provision of pharmacy services that could lead to cost savings and greater efficiency, and to share any savings realised from implemented innovations between the Commonwealth and community pharmacy.

Who would be affected?

The remuneration implications of the PDP measures are considered in section B1 of this Statement.

In quality-related terms, these measures would affect:

Government: The Government, as the custodian of the PBS, would better be able to respond to the community’s undoubted interest in ensuring that its pharmacy services are delivered by skilled and fully competent pharmacists, while relying on the expertise of pharmacists for advice on professional matters. The Government would therefore be supporting QA and infrastructure development that, in other sectors, would be the province of individual businesses and the competitive market.

The PDP would also send a clear message to pharmacists, nor currently sent by remuneration structures prior to the third Agreement, that both Government and consumers expect them to provide consistently high pharmacy services to the community as all times. It would also be indicating to pharmacists that the Government seeks to pursue and implement improvements in quality and service outcomes in cooperation and partnership with the profession and industry, by entrusting to the Pharmacy Guild and the Pharmaceutical Society significant roles and responsibilities in the PDP’s implementation.

Community pharmacy: The community pharmacy industry would have a specific funding mechanism to continue developing its quality and professional standards, over and above prior Government-supported professional standards and practice development initiatives. Through the PDP, direct assistance would also be provided to pharmacists and pharmacies to improve their quality of overall performance.

Consumers: Consumers should see benefits flow through to the overall quality of the care and advice that they receive when they visit a pharmacy, as more pharmacists become involved in QA and quality accreditation.

It is expected that as PDP-supported quality assurance and compliance processes are adopted by more and more pharmacies, the general quality of service to consumers will both improve and be more transparent.

Wider community: The wider community stands to benefit if pharmacists are encouraged actively to commit themselves to improving the quality of the care they provide, and improve the overall professional effectiveness of their businesses.

Pharmacy Guild and Pharmaceutical Society: The Pharmacy Guild and Pharmaceutical Society would have a close relationship with the PDP as the relevant industry and professional associations. The adoption of the Pharmacy Guild’s Quality Care Pharmacy Program as a preferred benchmark mechanism clearly gives that program an advantage against any competing QA arrangements. As it is an industry-devised and managed mechanism, however, supporting the QCPP is consistent with the principle of encouraging professional self-management and self-regulation wherever possible.

The Pharmacy Guild and Pharmaceutical Society would be entrusted by the Government with contributing to the management of the PDP as a whole, and to developing and enhancing their wholly owned QA and standard-setting mechanisms. The Pharmacy Guild would also be fully accountable for the administrative and research funds that it manages.

Likely benefits and likely costs

By linking quality assurance directly to pharmacist remuneration, and by providing direct incentives for participating in QA accreditation and continuous performance assessment, the PDP will provide financial benefit to participating pharmacists. By creating a direct link between quality outcomes and pharmacist remuneration, the PDP will act as a specific incentive to pharmacists to be more responsive to consumer needs, and providing a potential quality reference point for consumers themselves.

A targeted investment in quality and infrastructure support, through related Agreement measures, should also help to ensure that pharmacists develop and retain the capability to develop professional practice systems that keep up with professional and information technology best practice.

Such commitments would, however, not take away from community pharmacists the responsibility for ensuring that they are equipped to operate professionally and commercially in a contemporary environment. This includes pharmacists having the obligation to ensure that they are aware of, and make appropriate use of, available professional and technological support services.

The quality measures involve considerable financial outlay for the Government. The return for that commitment is relatively difficult to quantify or to predict with accuracy. Nevertheless they can be expected to improve the focus on quality pharmacy outcomes during the third Agreement, and to provide a springboard for further innovation in the future.

Option 2 Not intervene directly

On the other hand, the Government could also decide to leave infrastructure maintenance and improvement entirely to community pharmacy. It could be argued that, as going into business is a voluntary act, it is up to proprietors to ensure that they are sufficiently equipped to provide the professional support services they need to remain competitive with other pharmacies, and to meet their obligations to the Government and the community as approved PBS suppliers.

This obligation relates to any possible remuneration model. It would also not preclude Commonwealth, State and Territory governments from relaxing the regulation of the operating environment of community pharmacy further, in the interests of promoting service competition between pharmacies.

Who would be affected?

Government: The Government would not need to provide funds for measures that could be seen as going beyond the “core business” of remunerating pharmacists for their professional services. On the other hand, it would lose the opportunity to link quality and benchmarking of performance and pharmacists’ commitment to performance to remuneration structures.
Not making these commitments could add to savings from the third Agreement from reductions in prescription-based remuneration. On the other hand, it is unlikely that such reductions would be available without some trade-off and flow back to pharmacists under arrangements such as those under the PDP.

Community pharmacy: Pharmacists may continue to take an ad hoc approach to improving the quality of their performance and their QA mechanisms. The quality of service provision then would largely depend on the degree of commitment shown by individual proprietors and staff pharmacists. In business terms, quality might suffer to improve margins.

Consumers: Consumers would have to be prepared to take the quality of a given pharmacy business as they find it. In less crowded and underserviced pharmacy markets, it may be difficult for a consumer to take their business to a competing pharmacy better able to meet their quality and service expectations.

Wider community: The wider community would have to rely solely on individual pharmacists, and self-regulation by professional associations, to assure them of the quality of the professional services that pharmacists receive.

Likely benefits and likely costs

There would be a potential outlay saving of $188 million over the five years of the new Agreement if the quality and related measures in the PDP were not taken up. On the other hand, there would be a reduced incentive for community pharmacy to foster a greater profession-wide commitment to quality and infrastructure development. It is also unlikely that the anticipated reductions in prescription-based remuneration would have been achievable without the establishment of the PDP.
It may well also be that the community pharmacy industry would be less likely to work cooperatively with Government and other health providers to deliver a broader range of professional services, if it does not have an active incentive to equip itself to do so.

Conclusion and preferred option

The Government considers that the package of the PDP and related measures as being justifiable regulatory intervention in community pharmacy to the net benefit of the public.

Recommendation 8 of the Wilkinson report proposed that:

Commonwealth, State and Territory governments ensure that legislation and agreements for the delivery of professional pharmacy and health care services negotiated with pharmacy proprietors and their representatives require:

(a) An acceptable range of services to be provided; and
(b) Appropriate quality assurance and professional practice standards to be adopted by community pharmacies covered by the agreements.

The quality-related measures of the PDP conform to Wilkinson’s recommendation.

While quality and infrastructure improvement must and will remain the province of individual pharmacy businesses, the Government has a justifiable interest in making some investment in promoting a greater industry propensity to pursue quality assurance and improvement. This is particularly so given that the Government, and not individual consumers, bears most of the end user cost of prescription pharmaceuticals, through PBS outlays.

Ultimately, however, the Government also relies on community pharmacy to provide PBS subsidised prescription and other medicines to consumers competently, safely, and effectively. This includes ensuring that the consuming public receives adequate point of sale advice and counselling when appropriate.

The quality improvement and infrastructure measures complement the overall outlook of the Agreement package as being a partnership between the Government and community pharmacy. In return for substantial remuneration, and a demonstrated willingness to work in partnership, the Commonwealth is signalling to community pharmacy that it expects qualitative as well as quantitative returns on the taxpayer’s considerable investment.

Beyond the issue of value for money for services received, the quality use of medicines is also an important social objective for the Government and the wider community. It is therefore to the public benefit to invest in appropriate and accountable structures and programs that may better assure the community that its pharmacists, pharmacies and pharmacy services are of high quality. It is similarly appropriate to encourage professional pharmacists and pharmacy providers to be committed to these goals, and that they have adequate resources to deliver results against these social goals.

5. CONSULTATION

Who are the main affected parties?


Besides the Government, the main affected parties are the Pharmacy Guild of Australia and its member pharmacists operating pharmacy business providing PBS pharmaceuticals and related services to the public. The Guild represents over 90 per cent of current pharmacy proprietors.

What are the views of those parties?


The Pharmacy Guild has been the party with which the Government has negotiated the third Community Pharmacy Agreement, and its members’ views were taken into account by the Guild in those negotiations. In the public interest, both Agreement parties have expressed a commitment, through the negotiating process, to respond positively to the outcomes of the National Competition Policy Review of Pharmacy by relaxing as far as possible regulations restricting competition in the community pharmacy industry.

As a party to the overall Agreement, the Pharmacy Guild supports the preferred measures, and is committed to their implementation.

Why was full consultation not appropriate?


The Agreement is primarily a matter between the two parties (the Commonwealth and the Pharmacy Guild). The Pharmaceutical Society of Australia, as the professional association of pharmacists was, however, represented in the negotiations to advise on professional matters as appropriate.

Reference to submissions and other publicly available evidence to the Wilkinson Review from the pharmacy industry and profession, pharmacy proprietors and individual pharmacists, consumers and other stakeholders also assisted the Government’s consideration of related issues.

6. IMPLEMENTATION AND REVIEW

The measures to be adopted in the Agreement mainly will commence on 1 July 2000. The major exceptions to this commencement date will apply to changes to the distance criteria for new and relocated pharmacies supplying pharmaceutical benefits. These would commence on 1 July 2002, in order to give potentially affected pharmacists reasonable notice of impending changes, and to make provision accordingly. Some of the new allowance measures would commence on 1 January 2001.

Effectively, all measures in the third Agreement will be reviewed as part of preparations for a fourth Agreement, or for any other arrangements that will be put in place from July 2005 onwards. There will also be a specific review of the location arrangements, by the Government and the Pharmacy Guild, twelve months prior to the expiry of the Agreement.
Some related legislative measures, such as those relating to the continued operation of the Australian Community Pharmacy Authority, will contain sunset clauses that will lapse on the conclusion of the third Agreement. Specific amendment of the National Health Act 1953 therefore would be required to continue their operation past 30 June 2005.

7. CONCLUSION

The new Agreement achieves real and deliverable improvements in the way that pharmacists are remunerated for their dispensing services, in how pharmacies are sited to provide pharmaceutical benefits, and in how qualitative and quantitative gaps in pharmacy service delivery are identified and addressed.

Within the framework of the new Agreement, there is significant scope for lessening the degree of regulation of the community pharmacy industry, and for reducing government intervention in the size and distribution of the community pharmacy market.

The pace of medium-term deregulation needs to be tempered, however, by the need to maintain reasonable access to community pharmacies, and to ensure a reliable and stable community pharmacy industry capable of supplying those services to all Australians at a sustainable cost.

The third Agreement also includes innovation in the composition of pharmacy remuneration. In particular, it introduces a new risk-sharing arrangement around growth estimates, and a new payment system of grants to pharmacists to replace some of their prescription-based remuneration in a way that links their PBS remuneration to the quality of their performance as service providers.

The package of integrated measures in the third Community Pharmacy Agreement is a positive step forward from current arrangements. It offers benefits to the Australian community in terms of maximising the value of the very large public investment in pharmaceuticals and related professional pharmacy services, meeting community expectations that these are delivered to consumers in a timely, efficient and cost-effective manner, and promoting a more competitive operating environment in the community pharmacy industry while addressing gaps in pharmacy distribution that disadvantage rural, remote and other underserviced areas.

NOTES ON CLAUSES

Clause 1 – Short title


Clause 1 provides that the amending Act may be cited as the National Health Amendment Act (No. 1) 2000.

Clause 2 – Commencement


Subclause (1) provides that, subject to subclauses (2) and (3), the amending Act will commence on the day on which it receives Royal Assent. Subclauses (2) and (3) provide that the amendments made by Schedule 1 will commence on 1 July 2000, except that items 2 and 10 of that Schedule will commence immediately before the end of 30 June 2000.

Clause 3 – Schedule(s)


Clause 3 provides that the National Health Act 1953 is amended as set out in Schedule 1.

Clause 4 – Regulations

Clause 4 enables regulations to be made before 1 January 2001, should they be required, to deal with matters of a transitional or saving nature that might arise from the amendments made by this Bill. However, this provision will not prevent the repeal of any such regulations after 1 January 2001.


SCHEDULE 1 – AMENDMENT OF THE NATIONAL HEALTH ACT 1953

Item 1


Item 1 repeals the definition of professional allowance in subsection 84(1) as a consequence of the repeal of section 99ZDA by item 11.

Item 2


Item 2 amends subsection 90(3C) to provide that subsections 90(3A), 90(3AA), 90(3AB) and 90(3B) will continue in force until 30 June 2005 unless sooner repealed. These provisions require an application by a pharmacist for approval to supply pharmaceutical benefits to be referred to the Australian Community Pharmacy Authority (unless the application arises from a change of ownership of a pharmacy business that is to continue to operate from the same premises), and permits the Secretary to grant approval of such an application only if the Australian Community Pharmacy Authority has so recommended.

Item 3


Paragraph 98B(1)(b) provides that it is a function of the Pharmaceutical Benefits Remuneration Tribunal to determine the rate of professional allowance if the Minister and the Pharmacy Guild cannot reach agreement. Item 3 repeals this provision as a consequence of the repeal of section 99ZDA by item 11.
Item 4

Item 4 amends paragraph 98B(1)(c) to provide that the functions of the Pharmaceutical Benefits Remuneration Tribunal will include any functions provided for in an agreement under section 98BAA between the Minister (acting on the Commonwealth’s behalf) and the Pharmacy Guild of Australia (or another organisation that represents a majority of approved pharmacists), in relation to the manner in which the Commonwealth price for the supply of pharmaceutical benefits is to be ascertained.

Item 5


Paragraph 99AAB(2)(d) provides that an approved pharmacist who is receiving a remote pharmacy allowance is not required to use the Claims Transmission System to submit claims for payment for the supply of pharmaceutical benefits. Item 5 repeals this provision as a consequence of the repeal of section 99ZAA by item 11. The determination of guidelines under subsection 99AAC(2) will be amended to continue that exemption for those approved pharmacists who are currently receiving a remote pharmacy allowance and who are not using the Claims Transmission System.

Items 6 and 7


Items 6 and 7 amend the functions of the Australian Community Pharmacy Authority set out in subsection 99K(1) by limiting its role to considering, and making recommendations in respect of, applications by pharmacists under section 90 for approval to supply pharmaceutical benefits. Its functions in relation to applications for isolated pharmacy allowance, remote pharmacy allowance and professional allowance have been removed as a consequence of the repeal of Division 4C of Part VII by item 11.

Items 8 and 9


Item 8 amends subsection 99L(1) under which the Minister must determine rules subject to which the Australian Community Pharmacy Authority is to make its recommendations, by removing references to isolated pharmacy allowance, remote pharmacy allowance and professional allowance as a consequence of the repeal of Division 4C of Part VII by item 11. It is intended that a new determination of rules under subsection 99L(1) will be made with effect from 1 July 2000, in which the rules governing applications under section 90 for approval of pharmacists will be relaxed in accordance with the terms of the agreement with the Pharmacy Guild of Australia, and the rules relating to applications for isolated pharmacy allowance, remote pharmacy allowance and professional allowance will be repealed.

Item 9 is a consequential savings clause, necessitated by the redrafting of subsection 99L(1), under which the rules made under paragraph 99L(1)(a) that are in force immediately before the commencement of item 8 are taken to be rules made under the amended subsection 99L(1).

Item 10


Item 10 amends section 99Y to provide that Division 4B of Part VII will continue in force until 30 June 2005 unless sooner repealed. Division 4B contains the provisions that relate to the
establishment, membership and functions of the Australian Community Pharmacy Authority and the requirement for the Minister to determine the rules subject to which the Authority is to make its recommendations.

Items 11 and 12


Item 11 repeals Division 4C, which contains provisions relating to isolated pharmacy allowance, remote pharmacy allowance and professional allowance. Financial assistance to the pharmacy industry, other than payments to approved pharmacists for the supply of pharmaceutical benefits, is to be transferred to an administrative structure.

Item 12 makes it clear that, with the repeal of Division 4C effected by item 11, there will be no statutory entitlement for approved pharmacists to receive isolated and/or remote pharmacy allowance/s in respect of periods commencing on or after 1 July 2000 or for pharmacists to receive professional allowances for services provided on or after 1 July 2000. However, these allowances will continue to be paid administratively until 31 December 2000, after which they will be replaced by the enhanced arrangements provide for in the Agreement with the Pharmacy Guild of Australia.

Should any difficulties arise in the transition from statutory to administrative payment of these allowances, regulations of a transitional or savings nature may be made before 1 January 2001 as provided for in clause 4.

Items 13, 14 and 15


Items 13, 14 and 15 amend sections 105AB and 105AD concerning applications for review of decisions by the Administrative Appeals Tribunal, by removing references to the provisions relating to isolated pharmacy allowance, remote pharmacy allowance and professional allowance as a consequence of the repeal of Division 4C of Part VII by item 11.


[1] Prior to 1991-92, pharmacist remuneration was not estimated separately as a PBS outlay component.
[2] The Agreement is a public document, obtainable at www.health.gov.au/haf/docs/pharmagreement.htm
[3] The risk sharing mechanism and formulas are set out in detail in Clause 13 of the third Community Pharmacy Agreement document.

 


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