Regulators on drugs

Pharmacies: case study in Germany's protectionist and backward services

Bayer einigt sich auf Millionenzahlung wegen Aspirin
That's €8.35 just for the fizz. Source: DPA

While the German manufacturing sector keeps breaking records in output and exports, Germany’s service sector has long been lagging behind that in neighboring countries. One reason for this lack of competitiveness: outdated regulations that in some cases originated in centuries-old trade codes. And perhaps the best (or rather, worst) example of this backwardness is Germany’s drugstore industry.

Most Europeans have convenient access to drugs (the kinds prescribed by doctors, at least) around the clock, and can order online. Not so the Germans. They not only have to purchase medicine in person but also face restricted opening times, and cartel-inflated prices on top. This is because Germany’s pharmacists have successfully lobbied their regulators to shield themselves from modernization, and thus competition.

In most developed nations, large pharmacy chains are the norm — such as Walgreens or CVS in the US. But Europe’s largest economy does not allow multi-branch operations. German law says that a pharmacist may only own up to four drugstores. The largest “chain structure” possible has eight pharmacies, and this works only when both spouses are pharmacists. It goes without saying that there’s a suitably intimidating German word for this: It is the Mehrbesitzverbot, the “ban on owning multiple pharmacies”.

These limits on the size of a pharmacy business might sound Byzantine enough, but they are only the start. Drugstore ownership is restricted to pharmacists only. Non-pharmacists are not even allowed to own shares in pharmacies. The relevant German term is Fremdbesitzverbot, a “ban on ‘foreign’ ownership”. “Foreign” is defined as not being a pharmacist.

The pharmacy lobbies want to delay innovation and competition as long as possible.

And it still gets more absurd – for instance, when a pharmacist dies. That is because the children of deceased pharmacists are only allowed to inherit and keep their parents’ business if they are pharmacists themselves. If they are not, they have until their 23rd birthday to sell the pharmacy before it gets shut down.

Did I mention the part about bricks and mortar? Some pharmacists will boast that their trade was liberalized a few years ago, and that online pharmacies are now allowed in Germany as long as they are fully owned by pharmacists. Don’t believe them. It is still extremely cumbersome to actually order prescription medicine online. Because Germany does not allow prescriptions to be electronic, patients need to send the physical prescription via snail mail to the online pharmacy of their choice.

For contrast, just look at another EU member state such as Estonia. Only two decades ago it was part of the Soviet Union. And yet today, a mere 3 percent of prescriptions are still scrawled on pieces of paper, because 97 percent are issued electronically. The digitization of the German health system is years behind. And one reason is the influence of corporatist stakeholders such as the chambers of pharmacists that would like to delay innovation as long as possible.

German law also prohibits discounts on drugs sold by pharmacies. That means a pharmacist cannot decide to offer his customers a better price than that mandated by the government. The pharmacy lobby ABDA is doing its best to keep competition at bay. ABDA eve sued a group of Parkinson’s patients who received discounts on drugs procured from a Dutch online pharmacy. That case, fortunately, ended with the European Court of Justice ruling that patients are free to buy discounted drugs from other EU countries.

Americans walking into a German pharmacy might be reminded of flying before the Airline Deregulation Act: no differentiation in prices. But the US deregulated its aviation sector in 1978. Germany to this day regulates margins for every drug being sold. For every sold prescription drug pharmacies receive a €8.35 cut, no matter what the wholesale price of the drug is. So even if a generic drug costs one euro wholesale, the pharmacy gets €8.35 as a flat fee. The amount also does not change by package size, so selling three boxes of ten pills brings in three times the profit of one box of 30 pills. But hey, at least German pharmacies hand our free candy to the kids.

Aspirin is probably one of the most iconic pain killers in the world. It is produced by giant German company, Bayer. So you would think that Aspirin is cheaper in Germany than elsewhere. Not so, because of yet more archaic regulations. Even over-the-counter drugs such as Aspirin may only be sold by pharmacies; no Aspirin can be bought in grocery stores or supermarkets. That’s why, even though a pill of Aspirin retails for around five cents in the US, Germans pay eight times more.

Germany’s pharmacy lobby is a successful rent-seeking cartel. Its members make an annual income of six figures on average, which comes at the expense of 82 million German patients and consumers. Germany should liberalize its pharmacy market – for the sake of most Germans.

To contact the author: gastautor@handelsblatt.com

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