Price Disparities – Executive Summary

Disability aids and equipment are essential for assisting people with disability with day-to-day living and participating in the community.  Among the wide range of products covered by this inquiry are mobility devices (e.g. wheelchairs), self-care products (e.g. continence aids) and communication devices (e.g. hearing and speech aids).

The cost of disability aids consumes a significant portion of household and government budgets.  State and Commonwealth governments are heavily involved in the purchase and distribution of disability aids and devices.  However, a substantial portion of purchases are made directly by consumers without government financial support.

Consumers are concerned that the retail prices of aids and equipment are substantially higher in Australia than on overseas internet sites.  In fact, consumers report that they can save money on some products even after paying for shipping.

The National Disability Insurance Scheme (NDIS), which is under development, will provide additional support to individuals with disability and will impact both consumers and suppliers (government and non-government) of disability aids and equipment. 

In this context, the Queensland Government has asked the Queensland Competition Authority (QCA) to:

  • document price disparities for disability aids and equipment sold in Queensland and overseas
  • identify the causes of any price disparities found, including regulatory barriers, price discrimination and market power
  • propose actions that could be taken by the government to address the negative impacts of any price disparities.

A copy of the Direction can be found at Appendix A.

The Direction for this review uses the term 'price disparities' rather than 'price differences'.  The term 'price disparities' is interpreted as referring to price differences that cannot be reasonably explained by factors reflecting the operation of workably competitive markets. (Ref 1.)

Price differences

Price comparisons for a broad sample of disability aids and equipment products confirm that retail prices for many aids and equipment products are higher in Australia than overseas.  However, it is important to note that simple price comparisons do not often tell the entire story.  For example, internet sales do not reflect the costs of holding inventory for inspection and trial or other 'in-store' services provided to consumers.

Other factors to consider when comparing retail Australian prices with overseas prices are the differences between Australian and overseas warranties (or the complete inability to enforce a warranty from an overseas provider in Australia), the time and cost of returning unsuitable or defective equipment, availability of repair parts, and transportation costs and delays.

Even after considering such factors, it is likely that consumers in the United States or the United Kingdom pay less at retail for many aids and equipment items than consumers in Australia.  This can be illustrated with commodity-like products that require little or no after purchase adjustment or servicing such as some continence products or daily living aids such as shower chairs.  Prices for more sophisticated products can be substantially less overseas.  For example, a particular branded manual wheelchair advertised on Australian internet sites for $2236 could be purchased from a United States internet site for $1401 in Australian dollar terms.  Substantial price differences such as these have led many Australian consumers of disability aids and equipment to take on the shipping costs and risks of purchasing overseas.

Potential explanations for price differences

Price differences between overseas sources and Australia are not unique to disability aids and equipment.  Significant price differences exist for a wide variety of products and have been the subject of a report by the Productivity Commission (PC) (2011b), which found a widening productivity gap between overseas and Australian retailing industries.

Factors that contribute to prices differing in large overseas markets and Australia include:

  • Australian labour, rent and other input costs are relatively high.
  • Australia has a small market compared to the United States or the United Kingdom.  The fixed costs of retailing must be recovered from a smaller customer base, which raises costs per unit, and hence prices.
  • Red tape issues such as retail trading hour regulations and burdensome development approvals raise retailing costs and discourage investment in more efficient retail models.
  • Internet retailing models are not well developed in Australia compared with other international markets.

These issues carry even more weight in the market for disability aids and equipment, which is relatively small in the context of retail markets in Australia.  Suppliers in a market this size have limited ability to realise economies of scale and scope.

Collectively, these factors are consistent with the view that Australia is a high-cost economic environment for many goods and services.  Data from the Organisation for Economic Cooperation and Development (OECD) confirm that, on average, currency adjusted prices for most goods and services are some 28 per cent higher in Australia compared with the United States. 

Developing and implementing policies that improve productivity across all sectors of the economy would have a positive impact on aids and equipment consumers.  Specific regulation of disability aids and equipment may increase costs without producing corresponding benefits.  For example, medical devices approved for use overseas must be certified for sale in Australia by the Therapeutic Goods Administration (TGA) at a fixed cost that may have to be recovered from a small number of eventual sales.

Market failure

Price disparities can be caused by market failure.  The main forms of market failure that are relevant for disability aids and equipment are the exercise of market power and information problems.
The Direction asked the QCA to inquire into the exercise of market power in aids and equipment markets.  Market power enables a firm to charge prices that include unreasonably high profits.  Exclusive dealing and price discrimination facilitated by internet 'geo-blocking' — the practice of foreign equipment manufacturers protecting their Australian distributors by not allowing direct sales of their product from overseas to Australia — have been suggested as mechanisms used by suppliers to exercise market power.
Market failure can also occur when consumers do not have all the information they need to make good choices.  Imperfect information can result in consumers not selecting the most cost-effective equipment or aid for their particular situation, which can in turn create a perception of price disparity or otherwise reduce consumer welfare.

Market power

Market power means that firms have the ability to raise and maintain prices above a competitive level.  Competitive prices reflect efficient costs and a reasonable return on capital invested in the business.  Prices that exceed efficient costs reduce economic welfare, in part because some consumers who are willing to purchase a product for what it costs society to produce are unable to do so because the supplier is charging excessive prices.

A firm with market power can raise prices above the level that would prevail in a competitive market.  Market power can be exercised when there are a small number of firms but is dependent on the nature of rivalry in the market and barriers to entry or expansion.  Each firm knows that price competition will hurt all of the competitors, and in markets where there are few competitors and high barriers to entry, firms may adopt strategies that limit price competition. 

Identifying the exercise of substantial market power is technically difficult, particularly in markets where products compete in terms of their non-price characteristics as well as price.  Price differences in themselves do not necessarily indicate a market power problem.  Barriers to new firms or products entering a market are highly relevant for identifying market power.  Very high profit levels can also be caused by the exercise of market power.  However, by themselves these factors do not necessarily mean that market power exists or has been used in a way that breaches competition laws.

In general, the investigation has not identified substantial barriers to entry, the existence of excessive profits or clear evidence of the abuse of market power in disability aids and equipment markets.

Even so, there may be some market segments that are more susceptible to the exercise of market power.  For instance, in some cases consumers in regional areas, and particularly those outside of cities, may not have the choice of suppliers, products or the associated services available in south east Queensland.  Similarly, products that require customisation or repair services are afforded some protection from overseas internet retailers.

Market power resulting from intellectual property is also a potential issue.  For example, a patent holder may have a monopoly for a particular device required by a person with disability.  In this case society through its government has determined that the benefits of rewarding innovation with a monopoly exceed the costs of higher consumer prices.  However, it is important that this policy not be abused. 

This issue is more likely to arise for technologically sophisticated products such as communications devices.

Exclusive dealing

Exclusive dealing refers to a situation where a distributor has the exclusive marketing rights for a product or service.  The submissions to this inquiry confirm that exclusive dealing is a common practice in the disability aids and equipment business in Australia.

Some stakeholders have suggested that exclusive dealing is used to preserve market power and is, in effect, a barrier to entry for other firms that could distribute a particular product.  However, where customer service and customisation is a significant component of the purchase, exclusive dealing arrangements may enhance economic efficiency.  This can be illustrated by looking at an example where a dealer has not been granted exclusivity by a manufacturer, importer or wholesaler.  Such a dealer may be reluctant to carry inventory, provide a showroom and a trained workforce, or offer equipment trials because other dealers may 'free ride' on those services and undercut prices. 

Free riding occurs when customers are able to take advantage of a dealer's showroom and staff expertise to shop for a product and then purchase from an online or no-frills dealer.  Moreover, the costs of carrying inventory and training staff in the use of products may lead a manufacturer or distributor to deal with a single retail provider in any given geographic area.  This is more likely to be the case in smaller markets.  For example, the Magic Mobility submission explains that there is a single distributor of its products for Queensland because it would not make economic sense for two distributors to carry the necessary inventory for display and trials given the low volume of sales for its products in the state.

Price discrimination

Price discrimination occurs when a firm charges different prices to different consumers for an identical good or service, for reasons not associated with costs.  The ability to engage in price discrimination requires some degree of market power.  Absent market power, competitors will take away the customers that are charged higher price-cost margins. 

Some providers of disability aids and equipment may have a degree of market power, and the associated ability to price discriminate, because the small size of the Australian market cannot sustain more competitors.  However, it is unlikely that direct regulation or application of competition policy would provide net benefits.  Direct price regulation would impose costs on both government and the industry that must eventually be recovered from consumers and could introduce market distortions at least as great as those caused by the limited exercise of market power.  For example, if regulated prices are set too low, firms will not invest and will eventually exit the market, reducing consumer choice and potentially restricting innovation.

Geo-blocking

Consumers have raised concerns about geo-blocking.  The Australian Government likely lacks jurisdiction over foreign geo-blocking practices.  In some cases geo-blocking can be circumvented.  For example, purchases ordered from an overseas website can be shipped to an overseas address and then forwarded to Australia.  These 'work-arounds' come at a cost and may not be negotiable by all persons with disability or their carers.

Information asymmetry

Efficient markets require that both buyers and sellers have all the information they need to make informed choices.  Medical markets are particularly prone to asymmetric information where one party to a transaction lacks information that the other party has access to.  In the current case, the consumer — a person with disability or their carer — must often rely on the supplier or a prescriber for help with deciding which product to purchase.

The generic problem caused by insufficient information is that the consumer may not be aware of better price options or may not be able to perform an adequate search to find a better price.  Information asymmetry may also lead to the prescriber erring on the side of ordering an aid or device more sophisticated (and more expensive) than the individual requires, with extra features and functions that are not needed to address the particular disability issue.

Potential policy responses to price disparities

Specific measures to increase productivity within disability aids markets could provide a degree of direct relief from high prices for consumers with disabilities.  In addition, reducing red tape and encouraging more retail competition generally could provide benefits for disability aids and devices consumers.

Improving existing programs

Bulk purchasing of medical services and products to reduce prices is a common practice throughout the world.  Insurance companies negotiate with suppliers to create networks that provide discounts to members.  Affinity groups also may negotiate discounts on behalf of members.

A primary driver of these discounts is the reduction in supplier costs from bulk purchases.  Even highly competitive firms are willing to provide negotiated discounts for bulk purchases because they realise various types of efficiencies from doing so.  Furthermore, if suppliers do have market power, the countervailing power of a large buyer can bring prices closer to competitive levels.

Government purchasing and distribution programs designed to negotiate discounts are common for disability aids and equipment in developed countries.  MASS is the largest such program in Queensland.  MASS receives discounts with suppliers for a range of disability aids and equipment through its tender and purchasing arrangements.  MASS then arranges for distribution of the aids and equipment to eligible consumers at a substantial discount or at no cost.  It is important to note that the process of procuring discounts from equipment suppliers, and arranging to subsidise the supply of equipment provided to consumers, are separate activities.

In terms of price impacts, the MASS program seems to be working well and received support in many of the submissions.  A review of the commercial-in-confidence prices paid by MASS to suppliers shows that they are generally lower than retail prices in Australia, and in many cases are lower than United States retail internet prices.  This demonstrates the benefits of bulk purchasing.  However, some suppliers are concerned that smaller firms are unable to compete for MASS business and some consumers believe that the presence of MASS in the market restricts choice. 
The benefits of aggregating purchases inevitably come at a cost and governments must make trade-offs between the benefits of expanded consumer choice and the benefits of bulk procurement.  It should also be noted that MASS operates under Queensland Government procurement rules that impose requirements on all bidders. 

There are anecdotal criticisms of the quality of MASS performance.  Some submissions highlighted burdensome paperwork and lengthy waiting times.  For instance, the MASS policy requiring equipment prescribers to certify that the equipment chosen is appropriate may impose delay.  MASS responds that, in most cases, its standing order offer arrangements result in immediate delivery of equipment to individuals that qualify.  In addition, other parts of the equipment supply chain (prescribers and suppliers) can be the source of delay.  MASS notes that it 'is working in conjunction with the Department of Health and Department of Communities, Child Safety and Disability Services (DCCSDS) to improve, to streamline and to simplify access to government subsidised aids and equipment'.

This review has identified eight State and four Commonwealth equipment programs in operation in Queensland.  In addition, non-governmental organisations (NGOs) provide support for equipment purchases, sometimes with government support.  Prior studies suggest that there are more than 100 government programs for aids and equipment Australia-wide.  Consolidation and rationalisation of the programs may further reduce total operational costs, enhance efficiency and improve access to the benefits of bulk purchasing for individuals with disability.  Too much consolidation may prevent not only innovative local solutions to problems, but also useful performance comparisons among programs.

Design of future programs

The introduction of the NDIS will require state governments to determine whether existing programs are the most efficient and effective way to meet their objectives, both for those covered by the NDIS (people with disability under 65 years of age) and those who are not (people with disability over 65 years old).  While one 'right' program design is unlikely, there are some key features that governments should consider:

  • Clearly define rationale and objectives.  Programs should have clearly defined objectives that focus on outcomes and not means, and provide a basis for the community to judge program success.
  • Leverage buying power.  Governments should ensure that they do not impose unnecessary barriers to non-government entities pursuing bulk purchasing.  Where it can be determined that governments are best placed to undertake procurement, they should consolidate their buying power rather than operate large numbers of programs.
  • Choice.  Choice is important, even recognising the limits faced by consumers from information asymmetries.  Consumer-orientated programs tend to produce better outcomes for people with disability, and can increase competition and achieve lower prices. 
  • Accessibility.  Programs should be as simple and accessible as possible.
  • Competition.  Programs should avoid unintentional adverse impacts on competition.

Improving consumer information

There may be a role for the government, consumer groups or peak bodies in alleviating information asymmetry problems.  The government can support education programs designed to provide information that consumers require.  For example, the Department of Communities, Child Safety and Disability Services has a web page advising consumers of the potential risks associated with internet purchases.  Another example is the CHOICE website, which educates consumers about the features and functions of hearing aids so that vendor efforts to upsell can be evaluated.

In some cases, it might be necessary to directly address the conflict of interest that exists when the supplier is also the medical professional that the person with disability relies on for relevant information.  The supplier has an economic incentive to sell the consumer more than is needed.  One solution to this potential problem is to separate the business of being a medical professional from the business of supplying aids and equipment.
A less regulatory response would be to encourage voluntary or mandatory codes of conduct.  For example, Assistive Technology Suppliers Australasia (ATSA, 2012) has a voluntary Code of Practice intended to safeguard the interests of all stakeholders by ensuring consistent provision of equipment and services to consumers with disabilities and older people.  Consumers could be encouraged by physicians and prescribers to deal with firms that have subscribed to a relevant code.

Reducing regulation

Excessive government red tape regulation does not appear to be a substantial problem in leading to price disparities in the disability aids and equipment business.  However, there are some areas reforms could be considered.  Suppliers are often required to meet multiple product safety and quality assurance requirements.  For example, although Australian Standards are continuing to align with International Standards Organisation (ISO) standards, submissions suggest that further acceptance of overseas certification for a product rather than re-testing in Australia could reduce costs without putting people with disabilities at risk.
Some suppliers suggest that MASS bidding requirements, such as complying with quality assurance standards, are costly and reduce participation.  MASS operates under Queensland Government procurement rules designed to ensure value for money.  However, if these rules were reformed to provide necessary support for people with disabilities with less red tape, consumers would benefit because the lower costs would likely translate into lower prices.

Enhancing retail productivity

A basic premise of the NDIS is that consumers with disability should be given more choice and control in decisions regarding their support needs.  With or without the NDIS it is likely that a substantial portion of individuals with disabilities will be looking to retail outlets for disability aids and devices.  The PC 2011 Report on retail pricing recommends a number of reforms for enhancing efficiency in retail markets, including reforms to the regulation of planning and zoning, retail trading hours and workplace relations.  The steps recommended by the PC to enhance general retail productivity, as well as other regulatory reforms relating to pharmacies and taxi licensing, would likely enhance the welfare of individuals who purchase aids and equipment.

Price disparities versus funding levels

In the course of consultation, the QCA has heard concerns from individuals with disability and their advocacy groups about inadequate levels of funding for aids and equipment.  The level of government funding is not part of the Direction given to the QCA.  However, any steps that may be taken to reduce price disparities or improve productivity will extend the benefits from funding programs and increase economic welfare of individuals with disability generally.  It is important, particularly with the introduction of the NDIS, that increases in funding are managed to promote an increase in the supply of disability aids and equipment without significant price rises.

 


References

  1. A workably competitive market is one where firms have limited scope to influence market prices through their individual actions or acting collusively and they have effective incentives to reduce costs and to innovate.