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Australian Journal of Pharmacy : September 2006
news news N independent review of a study undertaken last year by Woolworths, which claimed to identify savings that could be extracted by convincing the Fed- eral Government to deregulate phar- macy, has shown four basic flaws in the study’s design. Flawed assumptions discredit Woolies’ savings projections A If implemented, the mooted changes to pharmacy regulations would have per- mitted large retail chains to own and locate pharmacies within supermarkets. The Woolworths study claimed that savings of up to $500m per annum could be generated by deregulation ‘several years’ after the entry of supermarkets. Over a period of 37 years from 2004, the Woolworths model claimed savings would net out to a total of more than $30bn. After the Pharmacy Guild of Australia disputed the findings, the Federal Gov- ernment decided against deregulation, but left the issue ‘alive and on the table’, according to senior Guild sources. Following the signing of the Fourth Community Pharmacy Agreement— which enshrined the principle of phar- macy ownership under the personal guar- antee of the Prime Minister John Howard—the Guild commissioned a study by Canberra-based econometrics firm, CRA International, to interrogate assumptions used in the Woolworths modelling. The CRA study revealed the modelling to be ‘fundamentally flawed’, according to a Guild spokesman. ‘The CRA findings clearly reveal four major flaws,’ he said. These were: • The Woolworths model wrongly assumed deregulations would lead to a 50 per cent reduction in PBS medicines distribution costs. • It assumed—‘inappropriately’—that there was no opportunity cost associ- It is reasonable to expect that the deregulation of community pharmacy would impose potentially substantial social costs on the Australian community. ated with the space occupied by phar- macies located in supermarkets. • It assumed all pharmacies would adopt a consumer service standard that enabled them to achieve ‘supermarket levels of efficiency’. • It assumed a real discount rate of 3 per cent—significantly lower than the seven per cent real discount rate normally used by economic agencies undertaking cost benefit studies in Australia. CRA found the Woolworths study, undertaken by ACIL Tasman, showed savings which ‘dramatically declined’ when the errors in the model were cor- rected. ‘Using a real discount rate of 7 per cent rather than the 3 per cent used by ACIL Tasman, the $30bn claimed over a 37- year period is cut by $20bn,’ the CRA report said. ‘Similarly, adjusting the initial savings to remove the spurious rent and wholesale distribution savings in the ACIL Tasman modelling reduced the discounted savings by a further $6.8bn. ‘Overall, the discounted present value of ACIL Tasman’s saving fell from $30bn to $2.5bn if a more appropriate discount rate is used and if implausible initial sav- ings are removed from the analysis, as well as more modest rates of adoption of 4 ? THE AUSTRALIAN JOURNAL OF PHARMACY VOL 87 SEPTEMBER 2006 supermarket levels of efficiency (sic) are assumed,’ CRA said. CRA estimated the actual saving in the ACIL Tasman model to be closer to $186m over the 37-year period, as the estimate still relied on the assumption that deregulation would generate a substantial reduction in total operating costs—some- thing that was not supported by ‘sound empirical analysis’. ‘CRA believes that ACIL Tasman pro- vides an estimate of potential savings to pharmacy and not an estimate of net ben- efit to the Australian community from allowing large retail chains to own and co- locate pharmacies in supermarkets.’ The ACIL Tasman study did not evalu- ate wider social costs and benefits associ- ated with such deregulation, the CRA report said. ‘It is reasonable to expect that the deregulation of community pharmacy would impose potentially substantial social costs on the Australian community. For example, vulnerable groups in soci- ety, such as the elderly, may be dispro- portionately affected by deregulation if it results in pharmacy closures. ‘Such closures could impose social costs by causing pharmacy customers to travel greater distances to have their prescrip- tions filled. ‘Even modest social costs of deregula- tion could outweigh a (hypothetical) sav- ing of $0.82 cents per script if the real sav- ings figure of $186m were applied,’ the CRA report said. Pharmacy business advisor and analyst, Bruce Annabel, told the AJP that there was no doubt that the pharmacy supply chain could be improved but some fun- damental changes were required to drive the improved efficiencies. ?continued on page 54