A Bargain Chemist in Upper Hutt has been unable to dispense prescriptions since it opened in 2022. Its website simply notes “Prescriptions not currently available”.

The problem seems to have nothing to do with the chemist itself. Instead, it is just one symptom of a much broader public policy problem.

When government regulates, it pays little heed to the effects on competition and potential competition. Outcomes that would warrant cartel prosecution if achieved through private action by colluding parties do not seem to require even the most basic checks if they are the consequence of regulatory processes.

Part 2 of the Commerce Act governs restrictive trade practices. It prohibits arrangements that substantially lessen competition, including cartels and misuse of market power. Section 43 of the Commerce Act grants a broad exception for activities specifically authorised by legislation or Orders in Council made under legislation.

Regulatory action can potentially be justifiable even if it results in the kind of substantial lessening of competition that would otherwise draw Commerce Commission scrutiny. But no part of the regulatory process reliably weighs the harm caused by the restraint on competition against the benefits of the regulation. And nothing checks whether less intrusive measures might achieve the desired policy objective.

Competition Law and Policy Institute of New Zealand deputy-chair Ben Hamlin presented a potential solution to that broader problem at the CLPINZ annual workshop earlier this month. His presentation drew on his article on the same topic published last year in the New Zealand Law Review.

But before getting back to his solution and the arcana of the Crown exception, let’s go back to chemists.

Pharmacies require (at least) two permission slips to operate. They need a licence, and they also need to enter into an Integrated Community Pharmacy Services Agreement with Health New Zealand. These agreements fund community pharmacy services including dispensing medicines and providing professional advisory services.

The decision-making criteria when evaluating proposals for new Integrated Community Services Agreements puts high weight on “Proximity to other pharmacy services in the proposed location – what services, distance from proposed site, staffing”.* 

If Health New Zealand had a backlog of potential agreements to consider and process, prioritising those in places with no access to pharmacy services would make sense. In a better world, if that prioritisation kept other applications at the bottom of the stack, the anticompetitive effects of prioritisation would be weighed. It would amount to not authorising new pharmacies that are too close to existing pharmacies. Protecting existing competitors should not generally be the goal of regulation.

But panels evaluating pharmacy agreements are blunter than that, seeming to treat competition as a harm rather than a benefit. In one case, they worried that a new grocery store pharmacy would make operations harder for existing pharmacies. The regulatory structure seems to deliberately and substantially lessen competition.

If there is a beneficial public purpose to that substantial lessening of competition, on top of ownership restrictions that work to similar effect, it really ought to be tested. Is it the most effective way of achieving that purpose, or would alternatives do less harm?

For example, as alternative, Health New Zealand could provide higher payments to pharmacies providing more comprehensive advice and service to higher-needs patients. It would seem more direct than providing local pharmacies with legally enforced local monopolies.

Potential anticompetitive effects of regulatory regimes from medical licensing to liquor licensing, and from tertiary degree approval processes to council zoning and consenting simply are not considered. Those anticompetitive effects might be justifiable as the least-bad way of achieving a legitimate public purpose, but surely that should be assessed rather than assumed.

Existing process provides little protection. Regulation rarely comes with a comprehensive cost-benefit assessment. And the Ministry of Regulation’s sector-by-sector reviews will take a long time to reach every sector.

Hamlin suggested a fairly simple solution.

Rather than abolish Section 43’s Crown exception, as would be my preference, Hamlin would limit the Crown’s exception to conduct reasonably necessary for the purpose of a public activity. Exceptions to the Commerce Act set out in other statutes would be no wider than reasonably necessary to achieve the exception’s purpose. Ministries would provide regular reports to their Ministers on exceptions they oversee, and the Minister could ask for the Commerce Commission’s input into the process.

Hamlin’s proposal would not bind Parliament against creating cartels through regulation. It would instead make it easier for legislators, and the public, to see and consider the effects of regulatory regimes. It would then be harder for legislators to unintentionally create cartels and monopolies, and easier for voters to weigh which of those were worth maintaining.

And perhaps it would be easier to tell whether barring a Bargain Chemist from dispensing prescription medicines makes any kind of sense.

* Particularly keen readers are encouraged to check Paragraph 71 of Gwyn J’s decision in New Zealand Independent Community Pharmacy Group v Te Whatu Ora – Health New Zealand. The whole decision provides excellent background and seems easily comprehensible for non-lawyers. The decision takes the law as read – as judicial decisions ought to do. But does any of this really make sense?

To read the full article on the Newsroom ($) website, click here.