The Pharmaceutical Journal
Vol 270 No 7234 p156-157
1 February 2003

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Office of Fair Trading pharmacy report summary

The OFT has dropped a bombshell on community pharmacy

Kirit Patel, chief executive of Day Lewis Ltd, says that in the light of the report on control of entry from the Office of Fair Trading, community pharmacists should hope for the best but plan for the worst

On 17 January the Office of Fair Trading (OFT) dropped a bombshell on the community pharmacy sector. I was one of the stakeholders invited to the launch of the long-awaited report investigating control of entry. I do not believe that anybody present expected a total abolition of all regulations controlling entry. To quote John Vickers, Director General of Fair Trading: "There is no question about the importance of the provision of high quality pharmaceutical services to the community, and the industry's commitment and professionalism in providing them. The question is whether the regulations that currently control entry into the industry are unduly impeding the way that the market works — to the ultimate detriment of the public. Our study leads us to conclude that the control of entry regulations should be lifted. They inhibit price competition. They stifle efficiency improvements and innovation. They limit the availability of pharmacy services. And they impose substantial regulatory burdens."

Major recommendation

The report then goes on to make one major recommendation: that the control of entry regulations across the United Kingdom be ended, thus allowing all registered pharmacies to dispense National Health Service prescriptions. It also calls for an end to controlled area regulations for England and Wales and for arrangements covering dispensing doctors to be left to the Department of Health.

The OFT recommendation deals with pharmacy related issues only. While removing control of entry across the UK, the OFT has opted to leave the current requirement of registration of pharmacies and pharmacists as it is. It made it clear that all registered pharmacies may dispense NHS prescriptions.

Ending controlled area regulations unshackles all current requirements affecting dispensing doctors and pharmacies in rural areas. A dispensing doctor should not be prevented from providing pharmaceutical services to those within a one-mile radius even if there is a pharmacist in the neighbourhood. Neither will the presence of a dispensing doctor or pharmacy in a rural area prevent the others from providing full services. However, the OFT left arrangements for dispensing doctors to be a matter on which the DoH should take a view.

At the launch, I asked Martin Graham, who chaired the meeting, whether in deregulating one sector in favour of competition, the OFT was paving the way for the creation of a possible monopoly, in this case for in-surgery pharmacies owned by doctors. What was to stop all surgeries from setting up their own pharmacy corporate bodies in urban areas and dispensing doctor practices in rural areas?

Mr Graham responded that no evidence had been found that would lead to such a situation, which I find surprising. In Midhurst, Sussex, for example, doctors acquired the smallest of the three pharmacies in town and relocated it into the surgery, thereby killing off our shop and damaging the local branch of Boots The Chemists. The National Pharmaceutical Association has now amended its rules, making 51 per cent ownership by pharmacists a requirement for membership. This was done in the wake of a surge in membership applications from doctors.

One of the reasons stated at the meeting by Charles Whitworth, who headed the OFT inquiry, for the abolition of the control of entry was that it would help reduce the drugs bill. It is common knowledge that dispensing doctors' drug costs are much higher then those of GPs whose prescriptions are dispensed at community pharmacies. The Department of Health knows this, too. I believe that the OFT has got it wrong. I predict that doctors will divert the income stream from the pharmacy sector either by owning the pharmacy or by charging extortionate rents and premiums. Also the Government will play into the hands of doctors, thus making them far more powerful than they already are.

Under the NHS plan, 750 primary care centres are planned and a number of them are to have a pharmacy. It is the developers funding these projects through LIFT (local investment financial trust) and not the DoH that will decide who gets the contract. No amount of tendering from a multiple or independent contractor will be entertained if doctors decide upon owning the pharmacy.

According to the OFT, the abolition of resale price maintenance did not result in any significant reduction in the prices of pharmacy medicines. But by allowing supermarkets to have a pharmacy, they project a savings to public of £25m in P medicines and a further £5m in general sale list medicines. In a total market worth £1.8bn, this is a relatively small saving when one considers the quality of service and free advice that an independent community pharmacist provides while making a sale.

How can one compare health advice from a pharmacist in a local area to that provided impersonally at any major supermarket pharmacy? More likely than not, when the current restriction on the display of P medicines is changed, consumers will be able to pick up medicines from open display. This could prove to be detrimental to the patient's health in the long run, because medicines would be taken without proper advice. This would then contradict the OFT view that easy accessibility of over-the-counter medicines would improve public health, as suggested by Mr Whitworth at the stakeholder briefing. The reasoning for allowing supermarkets to have pharmacies in order to achieve this saving of £30m in OTC medicines market is short-term thinking. I predict that the cost in secondary care as a result of taking medicines without proper advice will negate this saving many times over.

Consumer survey

The OFT quoted its own consumer survey, which found that not everyone preferred having their prescriptions dispensed in the in-surgery pharmacy. According to Mr Whitworth, only 46 per cent of consumers when questioned said that they preferred to do so. In reality, this is not the case. My experience shows that over 70 per cent of the prescriptions are dispensed within these pharmacies. The percentage is even higher when the doctors own the pharmacy. It is often the doctor's receptionist who has the greatest influence as to where the prescription is directed and hence dispensed.

The OFT stated that it wishes to encourage entry of more pharmacies at lower costs. I find this surprising considering the high premiums and rents currently charged by doctors and developers. The OFT, when questioned on its investigation into these extortionate rents, responded by stating that it was for the market to decide. I wonder which start-up pharmacy would have strong enough covenants, let alone the courage needed to sign up to the onerous term of leases offered to them. The OFT may well end up creating a monopoly where most pharmacies would be owned either by the national multiples, supermarkets or doctors. The Government will end up paying more for the pharmaceutical services, since any future cost of service inquiry will have to take into account the additional cost of premises. As if that were not enough, district valuers have been reappraising the rateable values of "in-surgery" pharmacies and this has resulted in substantial increases in the uniform business rate. Furthermore this would lead to the polarisation of services in or near surgeries, supermarkets and high streets.

The OFT recognised the pharmacy workforce shortage, but argued that the availability of pharmacists would control the opening of new pharmacies. I believe there will be an influx of foreign pharmacists to fill the gap. The OFT is also of the opinion that pharmaceutical services in certain areas can be safeguarded through the current Essential Small Pharmacies Scheme and dispensing doctors.

One of the other reasons given for scrapping control of entry was the regulatory burden to NHS in the order of £10m to cover NHS tribunals, appeals authorities etc. If I may quote Charles Whitworth again: "High Court judges should not get involved in determining the provision of pharmacy services." Surely there is a better way of easing the complex regulation than bringing about an abolition and thus creating an unlevel playing field in the industry.

Many pharmacists consider the goodwill value of their business as their future pension. This has been destroyed overnight. If the Government wishes to encourage public-private partnerships, then surely it is not by taking away the very security the banks rely on in financing start-ups and acquisitions. What will the wholesalers do when their loan guarantees are called upon? Which entrepreneurial individual would risk his livelihood in a business start-up that offers no long-term security? To open any pharmacy from scratch would require a minimum of £100,000 to fund the legal costs of renting premises, fitting out costs, inventory costs, installation of all computers as well as funding the NHS debtors. The owner would also need to fund the negative cash flow generated until a breakeven point is reached. To raise this amount of money, a pharmacist would be required to give a personal guarantee to the bank and suppliers. When the business becomes successful and viable, what is to stop another individual from opening a new pharmacy next door, thus bankrupting the original retailer?

Flawed argument

I also believe that the OFT's argument that its recommendation will allow new entrants is flawed: it will only allow larger players and doctors at the expense of independent community pharmacists. The OFT made it clear at the hearing that the competitive tendering for a contract in the health centre was of no concern to it. I certainly hope that I am proved wrong and that the DoH can recognise the shortsighted thinking of the OFT and intervene. It should, if it wishes to implement the Government's health agenda successfully, influence the Department of Trade and Industry over the next three months. It should not fail to recognise the damage that will be done to the pharmacy infrastructure if doctors are to be allowed to own pharmacies in health centres and all supermarkets are allowed to dispense.

I have little doubt that the DoH will use the OFT's recommendations to drive through some harsh terms in the new pharmacy contract. Thus we must be prepared to do more for the same money. This is the price we will have to pay if we expect the DoH to help resist this change.

My advice to pharmacy owners is to check if they are situated in the best location and whether they are vulnerable. It is time to revert back to our core business. Competition from supermarkets and the high street is looming. I believe that we have nine months to a year to put our houses in order if we are to militate against losses in sales due to competitive prices. One should look to reduce unwanted overheads and make businesses leaner. One should reduce space allotted to toiletries and sundry items and increase the space allocated to medicines. We must revise staffing levels, especially at off-peak hours, and make some harsh decisions if need be. Leaving it until next year could be too late. Pharmacists thinking of selling their businesses may have left it too late, as the market is well down. Goodwill values have already fallen by 20 per cent and are likely to fall even more if the recommendation is accepted. Many national and regional multiples have suspended buying pharmacies and I can predict a surge in application for new contracts by supermarkets and the national multiples. Developers and doctors surgeries will be the first point of target. My advice is to hold back on unwanted capital expenditure not related to increasing sales. But check to see if the shop can be relocated to a better location. Plan for the worst and hope for the best