Financial and economic impact of 60-day dispensing

19 June 2023

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The Pharmacy Guild of Australia asked Professor Henry Ergas AO to review, draw policy conclusions and make recommendations based on a Technical Report prepared by Tulipwood Advisory Pty Ltd (Tulipwood Economics) and the Relational Insights Data Lab (RIDL) at Griffith University in relation to the Australian Government’s 60-day Maximum Dispensing Quantity (MDQ) policy. 

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The financial impacts on the community pharmacy sector were estimated using a ‘top-down’ approach based on aggregated PBS dispensing data and a ‘bottom-up’ approach using a large sample of actual pharmacy financial data supplied by several accounting firms. 

The national level analysis measured the reduction in dispensing revenue only (the first of the two dot points above). Based on the analysis of the publicly available PBS data, at a national level, over the four-period 2023-24 to 2026-27:

In the Central Scenario: 
o    The estimated reduction in dispensing volumes is 348.2 million scripts over four years based on the assumed GP take-up rate that ramps-up from 63% in Year-1 to 90% in Year-4.
o    The corresponding estimated reduction in community pharmacy revenue is $4,532.9 million in nominal terms over four years. 

In addition, the financial impact modelling included a pharmacy-level based (i.e. bottom-up) approach to quantify the financial impact of the MDQ policy change. This approach was based on a large sample of actual pharmacy financial data sourced from commercial online pharmacy calculators (e.g. Nostradata and Strongroom), accounting firms, valuation firms and finance brokers. The dataset, which represents a large sample of pharmacies from all states and territories, was used to account for regional variations in economic circumstances, population health, demand for services and existing financial performance (which is relevant to understanding the impacts of the MDQ policy change). 

Based on individual community pharmacy level financial data, the estimated impact on pharmacy net profit of the MDQ policy in the Central Scenario is as follows:

-    Average reductions in net profit per pharmacy per year range between $169,332 (at the 63 per cent GP take-up) and $183,925 (at the 90 per cent GP take-up).
-    Reductions in net profit per year in median terms range between $160,138 (at 63 per cent GP take-up) and $174,887 (at 90 per cent GP take-up). 
-    A ‘lower bound’ net profit point has been defined as the lower bound of 1 standard deviation around the average net profit. This lower bound net profit point falls from being positive (+$9,472 in the Base Case) to negative (between -$132,407 and -$147,024 in the Policy Case). What this means is that many pharmacies even within the first standard deviation of financial performance will be vulnerable in the Policy Case.
-    Moreover, it is estimated that at least one-sixth of all pharmacies (i.e. a further 944 pharmacies in the second and greater standard deviations below the average net profit level) are likely to be in a negative net profit position after the MDQ policy change and will be, therefore, forced to take action such as reducing staff to remain financially viable.

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The consequence of the reductions in community pharmacy income and profitability will, ultimately, be the closure of some community pharmacies and job losses. Community pharmacies are likely to shed jobs and reduce their operating hours first to remain viable for as long as possible. However, some community pharmacies will not be able to cover their operating costs, even with reduced staff costs, and will be forced to close. Those pharmacies noted above that will fall into a negative net profit position will obviously be most vulnerable. 

In the central scenario, the individual community pharmacy level modelling indicates that:
-    At least 200 community pharmacies will likely close as a result of the MDQ policy change based on cautious assumptions. If a debt servicing obligation or return on investment (ROI) requirement is added to the financial analysis, it is estimated that more than 600 community pharmacies could close.
-    The MDQ policy could put up to an estimated 944 additional community pharmacies under significant financial strain where staff numbers would likely need to be reduced to maintain a positive net profit that could cover debt (principal) payments or ROI obligations as both the MDQ policy ramps up (in terms of the number of medicines in-scope) and the GP take-up rate ramps up. 

At an aggregate level, in the Central Scenario, it is estimated that:
-    4,938 full time equivalent (FTE) jobs will be lost over the four-year timeframe due to the MDQ policy change, before considering debt or ROI obligations.
-    In a sector with a high proportion of part-time jobs (35 per cent of community pharmacists work less than 34 hours per week), the employment impacts are more significant when viewed as actual jobs (i.e. headcount) rather than in FTE terms.  In the central scenario, a total of 10,863 actual jobs are lost in the central scenario over four-years (or 14.7% of all community pharmacy workers), including 801 community pharmacists and 10,062 pharmacy assistants. 

 

In terms of the economic impacts, in the central policy case, the total impact of the 60-day dispensing policy on the Australian community is a loss of $1,209.9 million in net present value terms over 4-years. The estimated benefit-cost ratio (BCR) is 0.73, which is well below the threshold where the benefits of a policy exceed its costs of 1.0. In the Central Case, any benefit to the Australian community from a reduction in patient co-payments and government savings on dispensing fees is outweighed by the significant impact on the Community Pharmacy sector

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