A recent High Court decision on the funding and licensing of two Countdown pharmacies confirms that it was open to District Health Boards (DHBs) to contract with 'discount' community pharmacy providers that do not charge patient co-payments for dispensing medicines. However, the Court's decision to quash the licences issued to those pharmacies by the Ministry of Health on the basis that the pharmacies do not meet the licensing requirements in the Medicines Act could have significant repercussions for the community pharmacy sector. This update covers the Court's finding on the judicial review of the DHBs' decisions to contract with the Countdown pharmacies. See our separate update on the pharmacy licensing decision.
DHBs, and now Te Whatu Ora Health New Zealand (Te Whatu Ora), contract with over 1,000 pharmacies across New Zealand, using a standard form agreement called the Integrated Community Pharmacy Services Agreement. Under that agreement, Te Whatu Ora funds the provision of community pharmacy services, including the dispensing of medicines to patients and providing professional advisory services to patients about their medicines, as well as a range of other services such as vaccinations.
The agreement allows community pharmacy providers to charge a co-payment of up to $5 for each medicine that they dispense to a patient aged over 14 years old (and more to dispense medicines prescribed by a specialist). $5 is then deducted from the funding paid to the community pharmacy provider for dispensing the medicine. However, Countdown pharmacies and some other 'discount' pharmacy providers choose to 'waive' the co-payment for each medicine they dispensed, in effect absorbing that cost themselves.
The New Zealand Independent Community Pharmacy Group (ICPG) is a group of community pharmacy owners. The ICPG's stated purpose is to represent New Zealand independent community pharmacy owners and to promote, protect, and improve owner-operated community pharmacies in New Zealand.
The ICPG commenced judicial review proceedings against two former DHBs (Hutt Valley DHB and Hauora Tairāwhiti) in respect of their decisions to enter into community pharmacy agreements with a Countdown-related company in relation to two Countdown pharmacies in Gisborne and Wainuiomata.
The ICPG argued that the DHBs' contracting decision was unlawful. This argument centred on the Countdown's pharmacies' 'waiver' of the $5 co-payment. The ICPG alleged that the DHBs' decision to contract with the Countdown pharmacies assumed that, because the co-payment was not charged, there would be a positive equitable impacts and benefits to the relevant communities (as patients would be able to collect prescriptions at no charge to them). However, the ICPG alleged that there was no evidence to suggest that the 'waiver' of the co-payment does in fact have equitable benefits, and that the DHBs' decisions were therefore unlawful.
The ICPG also alleged that both DHBs breached te Tiriti o Waitangi by failing to enable Māori to contribute to decision-making on the Countdown pharmacy contracts in the appropriate way.
A narrow scope of review of the DHB decisions was appropriate
The Court held that the decisions of the DHBs were commercial contracting decisions and not reviewable except on the narrow grounds of fraud, corruption and bad faith or something analogous, none of which were alleged.1
The starting point for the Court's analysis was Mercury Energy, where the Privacy Council concluded that contractual matters of a State-owned Enterprise are not generally subject to judicial review, unless there is an element of acting in the public interest.2 In this case, the Court found that the provision of community pharmacy services "no doubt" has a public interest component, but it noted that the same could be said of virtually every decision made by a DHB. That public interest component is not sufficient to attract the availability of public law remedies. More is required for the broader scope of judicial review that ICPG's case relied upon.
In assessing which scope of judicial review was appropriate here, the Court considered that the quasi-regulatory nature of the DHBs' community pharmacy contracting decisions did point towards a broader scope of review. Gwyn J noted that the decisions involved a different contracting environment than previous judicial review decisions in which a narrower scope of review had been adopted, which involved contestable tender processes and commercial decisions about how to make cost savings. In contrast, the DHBs held a monopoly over the ability to enter into community pharmacy agreements, and the agreements were standard form agreements not subject to negotiation between the parties. As such, the Court stated that this was therefore not a case where imposing onerous procedural obligations may unduly fetter the DHBs' ability to negotiate effectively.
However, Gwyn J commented she could not ignore the "clear commercial nature" of the ICPG's interest as a critical contextual factor. The ICPS is a special interest business group, incorporated shortly before the proceeding to represent and promote the interests of independent community pharmacy owners. Its members include commercial competitors of the two Countdown pharmacies. While having a level of commercial interest in the outcome of a judicial review is not a disqualifying factor, the Court noted that (as in Problem Gambling) "it is not the function of judicial review to advance private interests in a competitive business market".3
Other factors supporting a narrow scope of review were:
- No specific statutory process: The Court noted that, when assessing whether a commercial contract of a public body should be subject to judicial review, it is important to consider whether there are any limits imposed on the public body's exercise of powers, and then assess whether those limits were complied with.4 The New Zealand Public Health and Disability Act 2000 (NZPHD Act) did not impose procedural requirements on the DHBs for granting service agreements. The DHBs could negotiate and enter into service agreements on any terms and conditions without following a specific statutory process, and they adhered to their own policies and procedures when deciding whether to grant ICPSAs. Gwyn J noted that the Court should be reluctant to impose its own procedural requirements.
- Legislative accountability mechanisms: DHBs were governed by a largely elected board and accountable to the Minister of Health. These accountability mechanisms reduce the need for broad supervision by the Court.
- Public safety regulatory context: Gwyn J found that the public safety regulatory context points against a broad scope of review. While there is a public safety factor to the provision of community pharmacy services, public safety concerns are more directly addressed by the Ministry's licensing regime under the Medicines Act. As such, a DHB's decision to enter into an community pharmacy agreement does not require close supervision by the Court to ensure public safety.
Even with a broader scope of review, the grounds of review would fail
The Court also concluded that, even if a broader scope of review should be applied, all grounds of review would fail. Gwyn J considered it common sense that reducing or removing the $5 co-payment would reduce the cost barrier to access and increase access to everyone, but most particularly to patients for whom the cost was a significant barrier to medicines access. The Court also held that the DHBs' decisions to contract with the Countdown pharmacies were based on a number of factors and made in accordance with the DHBs' contracting and commissioning policies, and that the contracts were not entered into solely because of the waiver of the co-payment.
DHBs discharged Te Tiriti o Waitangi obligations
Both DHBs were also held to have discharged their Treaty obligations under the NZPHD Act. Gwyn J began her analysis by noting DHBs were not the Crown and therefore not a Treaty partner. The intention at the time the NZPHD Act was passed was that the Crown's Treaty obligations would be discharged through imposing specific obligations relating to Māori health outcomes in the NZPHD Act. Both DHBs were aware of the issues facing Māori and the decisions were informed by local Māori voice and Māori-specific advice.
Te Whatu Ora had also questioned whether the ICPG is an appropriate body to make a Treaty-based argument, given it is not affiliated with any iwi or hapū of the regions associated with HVDHB and Hauora Tairāwhiti, and had not sought to obtain the views of those iwi or hapū in relation to the decisions under review.5 Given Gwyn J's finding that both DHBs had discharged their Treaty obligations, she did not consider it necessary to express a view on this issue.
What the decision means
The Court's decision is a relatively conventional application of existing judicial review precedent and principles, reflecting the approach taken in a number of significant cases, going back to the Mercury Energy case. The Court's emphasis on the commercial interests of the ICPG also reflects the fundamental public law nature of judicial review, in that it cannot be used as a vehicle to advance private interests.
While the decision confirms that contracting with a 'discount' community provider is not unlawful, there have been some key changes relevant to the community pharmacy sector since the proceedings were commenced.
First, the Government recently announced that the $5 prescription co-payment would stop on 1 July 2023. That means that there will be no $5 deduction to the amount paid to community pharmacy providers for dispensing most medicines, and providers will no longer be able to charge a co-payment for most medicines. The $5 co-payment waiver was a key feature of the ICPG's case so, unless the co-payment is reintroduced in the future, any challenges to Te Whatu Ora pharmacy contract decisions would have to be made on different grounds.
Second, community pharmacy contracting decisions are now made by Te Whatu Ora under the Pae Ora (Healthy Futures) Act 2022. There are some key differences between the Pae Ora Act and the NZPHD Act, including that the Pae Ora Act sets out health sector principles relevant to decision-making that strongly emphasise the importance of equity, including that Māori and other population groups have access to services in proportion to their needs, receive equitable levels of service, and achieve equitable health outcomes. The Court was asked to make declarations as to Te Whatu Ora's powers to enter into community pharmacy agreements under the Pae Ora Act. The Court subsequently reissued the judgment with an addendum, which notes that as the Court found there were no errors by the former DHBs in relation to the agreements, declaratory relief is not required (particularly given that the NZPHD Act has been repealed and DHBs no longer exist). Gwyn J also commented that it would not be appropriate to make declarations about the relevant provisions of the Pae Ora Act, in the absence of a specific challenge to a decision made under that Act.
Buddle Findlay acted for the second respondent, formerly Hauora Tairāwhiti, now Te Whatu Ora, in this proceeding.
In addition to the authors listed, this article was co-authored by Honor Kelly (solicitor).
1 In making this decision, the Court followed Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd  2 NZLR 385 (PC) and Ririnui v Landcorp Farming Ltd  NZSC 62,  1 NZLR 1056.
2 Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd  2 NZLR 385 (PC).
3 NZICPG v Te Whatu Ora [2-23] NZHC 1486 at , referring to Attorney-General v Problem Gambling Foundation of New Zealand  NZCA 609.
4 NZICPG v Te Whatu Ora [2-23] NZHC 1486 at , quoting New Zealand Institute of Independent Radiologists v Accident Compensation Corp  NZHC 3547 at .
5 Similar arguments were made in Student for Climate Solutions Inc v Minister of Energy and Resources  NZHC 2116