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The European Journal of Health Economics

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01-12-2011 | Original Paper

Do you believe in magic? Improving the quality of pharmacy services through restricting entry and aspirational contracts, the Irish experience

Author: Paul K. Gorecki

Published in: The European Journal of Health Economics | Issue 6/2011

Abstract

A constant refrain of policy makers and public representatives is the necessity of improving the quality of public health services. In this paper, two inter-related policies designed to raise the quality of pharmacy services in Ireland are considered. The first was to restrict the opening of new pharmacies, the second to increase the quality of pharmacy services through contract specification. While the first policy restricted entry and raised returns to existing pharmacies, there is no evidence it raised service quality. Equally, the second policy appears to have had little effect on the quality of pharmacy services. The contractual provision itself is largely unenforceable, does not recognize the conflicting motivations of a pharmacist and results in no measurable output. Drawing on this experience, several lessons as presented as to how service quality can be improved, which are likely to have application beyond Ireland.

S.I. No 152/1996—Health (Community Pharmacy Contractor Agreement) Regulations, 1996, which are reproduced in Pharmacy Review Group [32, Appendix 3].

For details see Pharmacy Review Group [32, p. 7], Purcell [33] and Department of Health [10].

Apart that is from regulations concerning possession of professional pharmacy qualifications.

Note that these restrictions on opening a new pharmacy applied to the creation of a new retail pharmacy at location x, irrespective of whether or not it was opened by a new entrant or an existing pharmacy. Existing pharmacies were grandfathered under the 1996 Pharmacy Regulations. However, there were limitations on the degree to which a pharmacy could switch location.

For details of the community drug schemes see Barry et al. [4; Table 1, p. 191].

The survey undertaken covered both contractor pharmacists and employees, with a response rate of 14% yielding a sample size of 371 pharmacists. The IndeconC survey was part of the review of the 1996 Pharmacy Regulations that was envisaged in 1996. For details see Pharmacy Review group [32, pp. 11–12].

The 40% figure is consistent with other estimates. See Purcell [33].

For details see Indecon [21, Table 6.4, p. 43].

The health boards were replaced by the Health Services Executive (“HSE”), which came into operation in 2005, when the functions of the health boards were subsumed into the HSE.

Pharmacy Review Group [32, p. 11].

For example, while the 1996 Pharmacy Regulations place minimum distances between pharmacies of 250 m in urban area/large towns and 5 km in rural areas, the Competition Authority [8, p. 57; pp. 62–63] use 1 mile and 15 miles, respectively, distance radius, in defining separate geographic markets for pharmacy services.

Section 4 (1) of the Competition Act 2002 prohibits agreements that have as their object or effect the prevention, restriction or distortion of competition. Section “Conclusions: lessons for the future” specifically prohibits the sharing of markets or customers. However, section 4 (5) allows otherwise restrictive agreements if, broadly speaking, the benefits outweigh the costs. The discussion below concerning service quality is relevant to these issues. These provisions of the Competition Act 2002 mirror Article 81(1) and 81(3), respectively of the European Treaty. For further discussion see Whish [34, pp. 81–169].

This uncertainty is reflected in the variance of reasons used by the Health Boards to refuse to grant a community pharmacy contract. One would expect that, other things equal, the reasons for rejecting an application for a new community pharmacy would be reasonably consistent across the health boards. However, what is striking is the variance across the health board. For example, Health Board 2 rejected 56% of applications for ‘other reasons.’ None of the other six health board used this reason, bar one and then it only accounted for 5%. This variance is not altogether surprising since it is not usually within the competence or expertise of a health board to evaluate the commercial viability of a pharmacy and/or long term commitment of a pharmacy to a location. The author will provide details on request.

In other words, the assumption is made that if a pharmacy can show that its viability is adversely affected by entry then given the stated concern with over-competition, it is assumed that it follows that quality is assumed to fall, even though, as we shall see below, there is evidence to suggest that competition increases service quality.

Indecon [21, p. 24] claim it is 47% while, based on the same data, the Pharmacy Review Group [32, p. 13] argue for 42%.

For details of these two cases see Purcell [33].

In the early 2000s Ireland had, compared to other EU Member States, a low number of persons per pharmacy at 3,205, with only France (2,579), Spain (2,150), Belgium (1,825) and Greece (1,320) recording a lower number. In contrast, Italy (3,600), Portugal (3,940), Germany (3,800), UK (4,758), Luxembourg (5,260), Finland (6,500), Austria (7,284), Netherlands (10,000), Sweden (10,000) and Denmark (17,000) all had a higher number. For details see Purcell [33, Table 2.1, p. 17].

A corollary of this pattern of new pharmacy openings—given that the population of Ireland grew throughout the period 1991 to 2007—is that, other things equal, the number of persons per pharmacy with a GMS contract is likely to decrease (or may be increase) at a much slower rate between 1996–2001, than either the previous or subsequent period. This is consistent with Table 1.

Studies of entry typically find that entry is positively related to growth in demand. See, for example, Baldwin and Gorecki [2].

The overall costs of medication are taken from HSE, Statistical Analysis of Claims and Payments, various years and General Medical Services (Payments) Board, Annual Report 1998 and Financial and Statistical Analysis of Claims and Payments, various years.

The total number of persons eligible for GMS does not explain these movements in overall demand. The eligible number of persons increased between 1990 and 1995 from 1.221 to 1.277 m, before declining from 1.252 to 1.199 between 1996 and 2001, and then increasing from 1.169 in 2002 to 1.276 m in 2007. These data are from the same sources as the prior footnote.

One of the things that were not equal was the state of the economy. Economic growth, measured as annual average change in GNP at constant market prices, increased from 4.6% over 1991–1995, to 9.0% for 1996–2001, before declining somewhat to 5.5% for 2002–2007. Thus during 1996–2001 economic conditions were particularly propitious for opening a new business or a new branch of an existing business.

Over the period prior to 1996 the ratio falls, after 1996 it increases, while there appears to be no clear trend after 2002.

Indecon [21, Table 4.2, p. 16, and Table 8.8, p. 74].

A survey of the views of pharmacists on this issue conducted by Indecon [21, p. 77] puts the figure at 57.1%.

See Pharmacy Review Group [32, pp. 11–12] for more details.

See Breyer [6] for a discussion of this in the context of the airline and trucking industries in the US.

For a discussion of this rationale for regulation see Noll and Owen [26, pp. 53–58].

Fingleton [17, p. 91] argues that the 1996 Pharmacy Regulations, “appears to have resulted from an increased supply of qualified pharmacists, itself a result of EC measures to increase labour mobility.” However, the 3-year rule referred to in the text limited the ability of pharmacists trained outside of Ireland (even if they were Irish citizens trained in another EU Member State such as the UK) from competing with existing pharmacies since such persons: were not entitled to act as a pharmacist in Ireland in a pharmacy less than 3 years old; and, could not open a pharmacy in their own right, or work (except under the supervision of an Irish trained pharmacist) or manage any pharmacy that is less than 3 years old. It was introduced because of a concern over an alleged influx of pharmacists from other EU Member States (Pharmacy Review Group [32, pp. 14–15]). The 3 year rule was not abolished until 2008. See Department of Health [11].

See Indecon [22, Table 2.8, p. 17].

The overall cost of medicines under GMS increased each year from 1990 to 1996. In inflation adjusted terms the increase was from €162.1 million to €216.1 million or 33.3%. Based on General Medical Services (Payments) Board, Financial and Statistical Analysis Claims and Payments, various issues.

These studies are cited in Muris [25, footnote 52, pp. 38–40] and include Bond et al. [5]. The restriction that these studies examined was advertising restrictions. They typically compared US states where there were restrictions on advertising with those US states where such restrictions did not exist.

For details see OFT [28, p. 44]. The OFT cautioned that given the sample size that these findings “should be treated as indicative rather than providing precise results” (p. 44).

Indecon [21, Table 9.13, p. 96] found that pharmacists spent on average 67% of their time on professional activities in 2001/02.

This applies particularly to pharmacy owners.

Indecon [21, Table 6.5, p. 43; Table 9.17, p. 99] found that 39% of the turnover of a pharmacy is from OTC non-prescription drugs and other goods and services, while of the average pharmacy only 33.8% of the square footage was devoted to prescription drugs, with 24.1% allocated to OTC non-prescription drugs and 42.1% to other goods/services.

If there only two drugs per prescription then there is only one interaction that has to be considered; if there are three drugs there are three interactions that have to be considered. Thus a 50% increase in the number of drugs per prescription leads to a 200% increase in the number of interactions that have to be monitored. However, if the patient is taking non-prescription medicines then the increase will be different, but the point remains valid. For example, if the increase is from three to four drugs, then the increase in the number of drugs is 33.3%, but the increase in the number of possible interactions goes from three to six or a 100% increase.

Indecon [21, fn. 15, p. 95] says that the 1.95 refers to full-time pharmacists and that such data was not available for 1995 on a comparable basis.

There was a “small” increase in pharmacy opening hours per week from 52.2 to 55.6 between 1996 and 2002, which may not be statistically significant (Indecon [21, Table 9.8, p. 93]. Even if it is statistically significant this could be explained as a result of the growth of chain pharmacies since work done in the UK suggests that such pharmacies open for longer hours than do community pharmacies (OFT [28, pp. 50–51]). In discussing non-price competition in pharmacy the Competition Authority [8, p. 53] report that two pharmacy chains remarked on how they opened late, with some of their pharmacies opening on a Sunday. In other words, the increase in pharmacy opening hours could have occurred independently of the 1996 Pharmacy Regulations.

For example, if pharmacies become managed by professional managers and pharmacists specialise in performing their professional duties then the time allocated to such duties will increase.

The Pharmacy Review Group [32, p. 18] estimate the proportion of new pharmacies that are opened by an existing pharmacy as opposed to a new entrant. For the July 1996 to July 2001 the percentage is 67%; for the 9 months following the revocation of the 1996 Pharmacy Regulations, the ratio was 66%.

Another positive impact of chain pharmacies is that employed pharmacists are less likely to be motivated by over-selling, given that the latter are paid by a salary rather than obtaining all the return from selling a product Competition Authority [8, p. 58].

These results on how pharmacist’s allocated their time is difficult to square with the finding by Indecon [21, Table 9.3, p. 89] that 79% of contract pharmacists and 46% of employee pharmacists thought that quality of service had improved between 1995 and 2001. Quality was not defined and Indecon did not report the results of any additional follow-up questions on the issue. While contract pharmacists have an obvious incentive to bias their responses upwards this is less so for employee pharmacists and hence their views may be more accurate. However, in the absence of any definition of quality of service the results are somewhat ambiguous.

The 1996 Pharmacy Contract is reproduced as Appendix 2 of the report of the Pharmacy Review Group [32]. The Irish Pharmaceutical Union is the professional body representing pharmacists. For details see: http://www.ipu.ie. Accessed 6 November 2009.

Pharmacy Review Group [32, p. 12] provides a summary.

There was, for example, no benchmarking of key indicators of professional practice and care. One indicator might have been the incidence of non-compliance with supplying medicines in excess of maximum legal quantities. According to an RGDATA survey conducted in 2001, only 2% of pharmacists surveyed refused to sell a researcher an amount of paracetamol in excess of the legal maximum, while of those that sold paracetamol in excess of the legal maximum only 14% gave any advice to the customer on taking the paracetamol (Competition Authority [7], p. 16).

For the GMS prescriptions the pharmacists was paid a flat dispensing fee, while for the Drug Payment Scheme, the second most important community drug programme, the pharmacist receives not only a flat dispensing fee but also a 50% mark-up on the gross wholesale cost [33, Table 5.2, p. 69]. However, for all prescriptions pharmacists received a 7–8% wholesale rebate thus favouring the dispensing of the higher priced brands/drugs (Brennan Report [9], pp. 80–81; Indecon [22], p. 25). Recently the wholesale margin has been reduced (Department of Health [12]).

While this incentive incompatibility no doubt contributes to the fact that Ireland has the lowest generic penetration across 16 EU Member States, with generic market shares of 13 per cent by value and 35 per cent by volume [16, p. 62], there are other more important factors. These include the fact that a pharmacist cannot select a different brand from that prescribed by the physician except with the latter’s permission and that there is no onus on physicians to prescribe lower priced brands.

The better regulation agenda commenced following an OECD review of regulation in Ireland [27]. For details see: http://www.betterregulation.ie/eng/. Accessed 4 November 2009. There is some evidence that in Ireland this lesson has been learned with efforts to remove the rents that government intervention bestowed on pharmacies. See, for example, Dorgan et al. [14], Department of Health [13], and HSE [18, 19].

There are a number of ways that the incentives of the pharmacist could be better aligned in terms of dispensing lower priced brands such as a flat dispensing fee and associated measures, some of which were recommended previously by the Brennan Report [9, p. 84].

On the issue of entry in general see Kay [24]; on how entrants are more productive that the firms they replace see Baldwin and Gorecki [3].

Kay [23] draws this distinction in regulating safety in airlines, arguing that safety should be regulated and that service provision should be left to market forces. Efforts to control the market in order to ensure quality were a failure.

Bacon, P.: Assessing Supply in Relation to Prospective Demand for Pharmacists in Ireland. Higher Education Authority, Dublin (1999)

Baldwin, J., Gorecki, P.K.: Plant creation versus plant acquisition. The entry process in Canadian manufacturing. Int. J. Ind. Organ. 5, 27–41 (1987)CrossRef

Baldwin, J., Gorecki, P.K.: Entry, exit and productivity growth. In: Geroski, P.A., Schwalbach, J. (eds.) Entry and Market Contestability: An International Comparison, pp. 244–256. Oxford, Blackwell (1991)

Barry, M., Tilson, L., Ryan, M.: Pricing & reimbursement of drugs in Ireland. Eur. J. Health Econ. 5(2), 190–194 (2004)PubMed

Bond, R., Kwoka, J., Phelan, J., Whitten, I.: Effects of Restrictions on Advertising and Commercial Practice in the Professions: The Case of Optometry. (Executive Summary) Bureau of Economics Staff Report. Washington D.C.: Federal Trade Commission (1980)

Breyer, S.: Regulation and its Reform. Harvard University Press, Cambridge (1982)

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Competition Authority: GEHE Ireland/Unicare Pharmacy Chain. Department of Enterprise, Trade and Employment, Dublin (2002)

Commission on Financial Management and Control Systems in the Health Service: Report. Dublin: Stationary Office. This will be referred to as the Brennan Report (2003). Accessed at http://newspaper/special/2003/brennan/index.pdf

10.

Department of Health and Children: 1996 Pharmacy Regulations. Press Release (2002)

11.

Department of Health and Children: Minister for Health & Children Removes the ‘Derogation’ Which Prevented Non-Irish Qualified Pharmacists from Owning, Operating or Managing Pharmacies Which are Less than 3 years old. Press release (2008)

12.

Department of Health and Children: Minister Harney Announces Reductions in the Payments due to Community Pharmacists to Reduce Rapid Rise in State Expenditure on Drugs and Medicines. Press release (2009)

13.

Department of Health and Children: Statement by the Minister for Health and Children, Mary Harney TD re Pharmacy Services. Press Release (2009)

14.

Dorgan, S., Moran, M., O’Dea, M.: Report. Minister for Health and Children, Dublin (2008)

15.

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16.

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17.

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18.

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19.

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20.

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21.

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22.

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24.

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Title: Do you believe in magic? Improving the quality of pharmacy services through restricting entry and aspirational contracts, the Irish experience
Author: Paul K. Gorecki
Publication date: 01-12-2011
Publisher: Springer-Verlag
Published in: The European Journal of Health Economics / Issue 6/2011
Print ISSN: 1618-7598
Electronic ISSN: 1618-7601
DOI: https://doi.org/10.1007/s10198-010-0264-0

At a glance: The STEP trials

Springer Medicine

Do you believe in magic? Improving the quality of pharmacy services through restricting entry and aspirational contracts, the Irish experience

Abstract

At a glance: The STEP trials

Springer Medicine

Abstract

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