New Zealand has an awful lot of odd little cartels.
At least if we define ‘cartels’ using an economist’s definition rather than a lawyer’s definition.
Consider the current regulation of pharmacies. The forthcoming Medical Products Bill will go some way to solving the problem. But before getting to that, let’s consider the status quo.
Every pharmacy in New Zealand must be majority-owned and controlled by registered pharmacists.
It is an odd rule. You do not need to be a chef to own a restaurant. You do not need to be a mechanic to own a garage. People who are not journalists can own newspapers, and nobody needs a Class 5 licence to own a trucking company so long as they don’t want to drive the trucks on the road.
But if you own a shopfront, and your friend is a pharmacist, you cannot fit out your building as a pharmacy and hire your friend to be the pharmacist. Instead, your friend must have more than a 50% ownership share and effective control of the company. Even if you are the one who put up the capital and is taking the risk, and your friend just wants a steady salary.
The ownership restriction creates a substantial regulatory barrier to entry.
If you see that your town’s bakery makes terrible pies and your friend is a great baker, you can just open a pie shop, hire your friend, and offer your town a better option. But if the town’s pharmacy offers terrible service, opening a competing pharmacy is forbidden unless members of the pharmacist guild have a majority ownership stake and effective control.
Requiring that prescriptions be dispensed by pharmacists has a defensible logic to it. Requiring that the shop be owned by a pharmacist has a different logic. One that benefits the owners of existing pharmacies who do not want new competitors.
If you hire a lot of expensive specialist lawyers and come up with an ownership structure that satisfies the regulations, there’s still another hurdle to clear.
Dispensing funded medicines requires an Integrated Community Pharmacy Services Agreement with Te Whatu Ora.
When the government decides whether you should get one of those agreements, it weighs existing local service coverage. Proposed pharmacies in places considered to already be well-served will have a harder time of things. A Bargain Chemist in Upper Hutt that opened in 2022 near other chemists still cannot provide prescriptions.
Restrictions that protect incumbents against competitive entry provide by regulation that which would likely be illegal to do by private agreement.
If pharmacists agreed amongst themselves to never work for a pharmacy that was not pharmacist-owned, and to punish any pharmacist that did, the Commerce Commission would launch prosecution under the Commerce Act. It would obviously count as cartel conduct.
And so much the more so if they also agreed to boycott new pharmacies in places that already had ‘enough’ existing pharmacies. Geographically segmenting markets is forbidden. Unless it is mandated by regulation and government contracting practice.
These kinds of restrictions against entry protect existing pharmacies against competition.
They are not perfect protection. Some supermarkets have hurdled legal challenges and opened in-store pharmacies with complicated ownership and lease structures. And Chemist Warehouse has also made it in. But the regulations still make it much harder than necessary and impose a substantial barrier to real competition.
The forthcoming Medical Products Bill promises to abolish the rule that requires pharmacies be owned by pharmacists.
The Regulatory Impact Statement from the Ministry of Health says the Ministry has “not seen any clear evidence that the ownership restrictions contribute to patient safety or service quality”, and sees no reason why pharmacies are treated differently to medical clinics or other health services.
Instead, the Ministry sees removing this and other restrictions as potentially supporting healthcare innovation, including multidisciplinary health clinics – which are difficult where pharmacists must currently own and control the pharmacy part of those clinics.
The Bill will remove those restrictions, while requiring a ‘supervisory pharmacist’ to maintain standards company-wide.
It is a very good start.
People wanting to start new pharmacies and bring more affordable products will not have to hire armies of corporate lawyers to design their ownership arrangements.
But the government also needs to look closely at how contracting by Health NZ affects effective competition in medical services.
If it becomes easier to open a new pharmacy, but no easier to get a contract to dispense funded medicines, benefits for competition will be more limited.
It points to a broader problem.
Restrictions on effective competition often come from a complicated mix of overlapping regulatory and policy regimes. Fixing any one part without fixing the others provides underwhelming results. But different parts of the problem are often under different Ministries’ or Ministers’ jurisdiction.
The Commerce Commission’s market studies powers seem uniquely suited to investigating whether those regulatory thickets hinder workable competition. The Commission should consider shedding light on New Zealand’s odd little regulatory cartels.
To read the article on The Post website, click here.