NATIONAL HEALTH AMENDMENT (PHARMACEUTICAL BENEFITS SCHEME) BILL 2010 [PROVISIONS]

The inquiry

Previous inquiry

1.2        On 16 June 2010, the Senate, on the recommendation of the Selection of Bills Committee, referred the provisions of the National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2010 (the bill) to the Community Affairs Legislation Committee for inquiry and report by 26 August 2010.

1.3        The committee received eight submissions to the inquiry.

1.4        No public hearings were held.

1.5        On 26 August 2010, the committee tabled a brief report concluding:

On 19 July 2010, the Governor-General prorogued the 42nd Parliament and dissolved the House of Representatives. After due consideration, the committee has resolved not to continue its inquiry into the bill. If the bill is reintroduced in the new parliament, the Senate may again refer it to the committee for inquiry.[1]

1.6        The evidence received by the committee was tabled in the Senate at that time.

Current inquiry

1.7        On 30 September 2010, the Senate, on the recommendation of the Selection of Bills Committee, referred the provisions of the National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2010 for inquiry and report by 16 November 2010.

1.8        In accordance with usual practice, the inquiry was advertised in The Australian and on the Internet inviting submissions by 20 October 2010. The committee wrote directly to a number of organisations and individuals inviting submissions to the inquiry. Having decided to consider the evidence received in the 42nd Parliament, the committee also wrote to those organisations and individuals that had submitted to the previous inquiry advising that they need only re-submit should they wish to update or amend their previous submission.

1.9        The committee received 32 submissions in total (including those received during the 42nd Parliament), listed at Appendix 1.

1.10      The committee held a public hearing in Canberra on 9 November 2010. The witnesses are listed at Appendix 2. 

Background

The Pharmaceutical Benefits Scheme

1.11      The Pharmaceutical Benefits Scheme (PBS) was created in 1948 and is governed under the National Health Act 1953.[2]

1.12      The scheme enables Australians to access government-subsidised prescriptions at a cost of $33.30 for general patients and $5.40 for concessional patients.[3]

1.13      There are currently over 760 medicines in more than 1900 forms available on the PBS.[4]  In 2009-10, approximately 184 million PBS prescriptions were dispensed at a cost to government of $8.4 billion.[5]

1.14      Before being listed on the PBS, medicines must be considered by the Pharmaceutical Benefits Advisory Committee (PBAC).[6] The PBAC is an independent, statutory body comprising health professionals (doctors, academics, a pharmacist and a health economist) and a consumer representative.[7] The PBAC considers the clinical and cost-effectiveness of a medicine in comparison to other available treatments and provides advice to the Minister for Health and Ageing as to whether a medicine should be listed on the PBS.[8]

PBS reform

1.15      In 2007, the government implemented a major reform to the PBS. The goal of this reform:

...was to recognise the different market circumstances within which single brand and multiple brand medicines are sold, and to enable more effective targeting of savings measures while ensuring continued patient access to medicines.[9]

1.16      The reform comprised a range of measures, including:

• Formularies – medicines on the PBS were divided into two separate formularies, F1 comprising single brand medicines (except those interchangeable at a patient level with multiple brand medicines) and F2 comprising multiple brand medicines and single brand medicines interchangeable at the patient level.[10] The division was intended to address the difficulty the government experienced in paying competitive (lower) prices for multiple brand drugs by separating single brand medicines from multiple brand medicines for the purposes of reference pricing.[11] 

At the time, the F2 formulary was further separated into two parts, F2A (drugs where price competition between brands was low) and F2T (drugs where price competition between brands was high) until 1 January 2011 when the two sub-formularies would be merged to form a single F2 formulary.[12]

• Pricing – pricing rules for the medicines on each formulary were specified; in particular the circumstances in which price reductions would occur. In summary, the following pricing rules were applied:
• a minimum 12.5 per cent reduction in the price of any bioequivalent or biosimilar brand of a drug upon PBS listing (so long as the drug had not previously been subject to a 12.5 per cent reduction);
• from 1 August 2008, a staged two per cent price reduction every year for three years for drugs in F2A; and
• on 1 August 2008, a one-off price reduction of 25 per cent for drugs in F2T.[13]
• Price disclosure – price disclosure provisions for medicines listed on the F2 formulary were introduced to ensure that the price the government paid for multiple brand drugs more closely reflected the actual price at which those drugs were being supplied to pharmacies. The price disclosure requirements were applied to all new brands of a drug listed on F2A from 1 August 2007.[14] Upon merging the F2A and F2T sub-formularies (originally scheduled for 1 January 2011), the price disclosure requirements apply to all drugs listed on the F2 formulary.[15]

Memorandum of Understanding

1.17      On 6 May 2010, the Minister for Health and Ageing and Medicines Australia signed a memorandum of understanding (MOU) with effect until 30 June 2014. The MOU is intended to 'promote the efficiency and sustainability of the PBS and support, by the provision of a stable pricing policy environment, a viable and responsible medicines industry in Australia'.[16]

1.18      The MOU seeks to address the following issues regarding PBS reform and the listing and pricing of pharmaceuticals on the PBS:

• price reductions;
• price disclosure timing and calculations;
• therapeutic groups;
• consistent treatment of brands of drugs sold at the same price;[17]
• comparators;
• parallel Therapeutic Goods Administration (TGA) and PBAC processes;
• a managed entry scheme from 1 January 2011;
• timing and maximum time frames for PBS pricing negotiations and consideration by Cabinet; and
• resolution of issues in good faith.

1.19      Paragraph 6 of the MOU requires Medicines Australia 'to support legislative changes required to effect policy changes arising from, or which reflect, this MOU'.[18]

Overview of the bill

Introduction of the bill

1.20      On 2 June 2010, the National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2010 was first introduced into the House of Representatives.

1.21      In her second reading speech at that time, the Minister stated that the bill was intended 'to achieve a more efficient and sustainable [PBS], better value for money for Australian taxpayers, and policy stability for the pharmaceutical sector'.[19]

1.22      The bill lapsed on 19 July 2010 with the dissolution of the 42nd Parliament.[20]

1.23      On 29 September 2010, the bill was (re-)introduced to the House of Representatives.

1.24      Upon re-introduction of the bill, the Minister explained the need for the bill given the continued growth of the PBS:

The bill sets out new PBS pricing arrangements aimed at reducing growth in PBS expenditure, ensuring access to quality medicines at a lower cost to the taxpayer, and providing certainty to the pharmaceutical industry in relation to PBS pricing policy.

The PBS plays a vital role in Australia’s health system, particularly for the prevention and management of chronic disease, and for the treatment of life-threatening conditions. The PBS provides reliable and timely access to a wide range of medicines at a cost individuals and the community can afford.

In the coming years, medicines will continue to be a significant and growing component of health expenditure. Since the previous major pricing reforms in 2007, the growth rate for PBS expenditure has increased from 4.3 per cent in 2006-07 to an estimated 10.5 per cent for the 2009-10 financial year.

...

In conclusion, the reforms in this bill provide a firm basis for achieving a more efficient and sustainable PBS while, at the same time, providing a period of certainty to industry in relation to medicines pricing policy.[21]

1.25      The bill seeks to give legislative effect to a number of arrangements, including some of those outlined in the MOU agreed between the Minister for Health and Ageing and Medicines Australia, by amending the National Health Act 1953 in relation to:

• price reductions for certain drugs listed on the PBS;
• price disclosure arrangements;
• the collection of under co-payment data; and
• section 100 medicines.

1.26      The bill seeks to make consequential amendments to the Health Insurance Act 1973 and the Medicare Australia Act 1973.

Main provisions of the bill

Price reductions

1.27      Schedule 1 of the bill increases to 16 per cent the current statutory price reduction of 12.5 per cent applied to an existing PBS-listed brand of a medicine upon the listing of the first bioequivalent brand of that medicine.[22] The increase in price reduction will come into effect from 1 February 2011.[23]

1.28      Schedule 2 introduces one-off statutory price reductions of two and five per cent to be applied to all medicines that were listed in the F2A and F2T sub‑formularies (as at 11 October 2010), respectively.[24] These price reductions will take place on 1 February 2011.[25]

1.29      In the case of medicines that were allowed to take a staged 25 per cent price reduction (a one-off 25 per cent price reduction was applied to all medicines in the F2T formulary on 1 August 2008)[26] the five per cent price reduction will be applied as if the full 25 per cent reduction had already occurred.[27]

Merging the F2A and F2T sub-formularies

1.30      Schedule 3 of the bill provides for the merging of parts A and T of the F2 formulary.[28] The separation of the F2 formulary 'was always intended to be a temporary measure when the concept of formularies was introduced' during the 2007 PBS reform.[29] However, the bill brings the merge forward from 1 January 2011 to 1 December 2010.[30] Merging the F2A and F2T sub-formularies will mean that price disclosure applies to all medicines in F2 and not just to those in the F2A sub‑formulary.

Price disclosure

1.31      The bill provides for mandatory price disclosure to be applied to all (non-exempt) medicines on F2 from 1 December 2010.[31]

1.32      Clause 99ADB(1) defines the terms "adjusted approved ex-manufacturer price", "agreed quantity", "applicable approved ex-manufacturer price" and "unadjusted price reduction" for the purposes of price disclosure.

1.33      Arrangements for the price disclosure round concluding on 1 April 2012 are outlined in clause 99ADJ of the bill, including:

• a minimum average price reduction of 23 per cent for brands of pharmaceuticals where the average unadjusted price reduction for all brands of the relevant pharmaceutical item are less than 23 per cent;
• calculation of the average unadjusted price reduction; and
• calculation of the adjusted approved ex-manufacturer price, including the guaranteed adjustment proportion (GAP) and GAP-adjusted reduction.[32]

Under co-payment data

1.34      "Under co-payment data" is data collected on the dispensing of a PBS-listed medicine to a patient where the Commonwealth does not make a payment to the supplier because the price of the medicine does not exceed the applicable patient co-payment[33] (currently $33.30 for general patients and $5.40 for concessional patients).[34]

1.35      Under co-payment data is not currently collected by the government.

1.36      Clause 98AC of the bill requires an approved supplier (pharmacist, medical practitioner or hospital)[35] of a "pharmaceutical benefit"[36] to provide information about that benefit to the government. This change will mean that prescriptions dispensed to general and concessional patients where the cost of those medicines is under the co‑payment amount will be included in future data collection.

1.37      The minister is responsible for determining, by legislative instrument, the rules specifying the information which suppliers must give regarding the supply of a pharmaceutical benefit.[37]

1.38      The collection of under co-payment data will commence on 1 April 2012.[38]

Special arrangements

1.39      The bill provides a clearer method for listing drugs supplied under section 100 of the Act.[39] [40] The proposed amendments in schedule 6 of the bill seek to simplify and streamline the listing process for section 100 medicines, resulting in section 100 medicines being considered a "pharmaceutical benefit", a "pharmaceutical item"[41] and a "listed drug"[42] under the Act.[43] This means that the provisions of the Act will apply to section 100 medicines in the same way that they apply to all other PBS medicines (however, a section 100 arrangement may modify the application of those provisions).[44]

Relationship between the bill and the MOU

Price reductions

1.40      The MOU provides for an increase in the price reduction applied to single‑brand PBS drugs upon listing of a competitor brand from 12.5 per cent to 16 per cent from 1 February 2011.[45] This is outlined in schedule 1 of the bill.[46]

1.41      The MOU also provides for a one-off statutory price reduction of two per cent to be applied on 1 February 2011 to all drugs listed on the F2A sub-formulary[47] and a one-off five per cent price reduction to be applied on 1 February 2011 to all drugs listed on the F2T sub-formulary.[48] These price reductions are outlined in schedule 2 of the bill.[49]

Price disclosure

1.42      The MOU outlines 'strengthened price disclosure arrangements' to apply from 1 October 2010.[50] These strengthened arrangements include the application of price disclosure to all brands of all drugs in the F2 formulary (except for exempt items).[51] This is provided for in clauses 99AD and 99ADA of the bill.

Price disclosure cycle of 1 December 2010 to 1 April 2012

1.43      The MOU details arrangements for the price disclosure cycle from 1 October 2010 to 1 April 2012, including:

• A minimum average price reduction of 23 per cent for brands of pharmaceuticals where the average unadjusted price reduction for all brands of the relevant pharmaceutical item are less than 23 per cent;
• Calculation of the average (unadjusted) price reduction; and
• Calculation of the guaranteed adjustment proportion (GAP).[52]

1.44      Clause 99ADJ of the bill provides for these arrangements for the price disclosure cycle concluding on 1 April 2012. However, given the delay to the bill's passage through the parliament due to the federal election, the price disclosure arrangements in the bill will commence on 1 December 2010 (rather than 1 October 2010 as outlined in the MOU).[53]

Other issues addressed in the MOU

1.45      The other issues addressed in the MOU, as listed below, are not covered by the bill:

• the creation of new therapeutic groups;
• consistent treatment of brands of drugs sold at the same price;
• comparators;
• parallel Therapeutic Goods Administration (TGA) and PBAC processes;
• a managed entry scheme from 1 January 2011;
• timing and maximum time frames for PBS pricing negotiations and consideration by Cabinet; and
• resolution of issues in good faith.

Issues raised during the inquiry

1.46      While a number of submitters were in support of the bill and recommended that it be passed, numerous submitters raised issues regarding the bill during the course of the inquiry. These concerns included lack of consultation, particularly with the generic medicines sector which claimed to have been excluded from consultation; the potential impact of the bill on the supply of medicines; and the commencement date for price disclosure proposed in the bill.

Consultation

1.47      Some submitters said that the Department of Health and Ageing had not undertaken proper consultation when developing the MOU and the bill by failing to negotiate with all parties affected by the proposed changes.

1.48      The Generic Medicines Industry Association (GMiA) expressed dissatisfaction that the generic medicines sector had not been consulted on the bill, or the MOU.[54] Individual generic manufacturers agreed.[55]

1.49      The GMiA's concerns were based primarily on the argument that their membership represented a majority of the off-patent medicine market:

There was no consultation, negotiation or agreement about the MoU or the underpinning Bill with the GMiA. Members of GMiA supply approximately 70% of the volume of generic products. Without the insight and contribution of this significant sector of the industry, both the MoU and the Bill lack balance and detail flawed and irresponsible public policy. Sectional interests have been promoted at the expense of unfavourable financial consequences for the PBS, taxpayers and other sectors of the industry.[56]

1.50      The Consumers Health Forum (CHF), whilst supportive of the bill, indicated that consumers should also have been consulted on the MOU:

...it is clear from other submissions that we are not the only group to consider that the negotiation of the MOU would have been strengthened by consultation with other affected parties. CHF argues that the process for the negotiation of future agreements of this kind should involve consumer consultation. We are the people who pay for and use medicines in Australia.[57]

1.51      The Department of Health and Ageing gave evidence regarding the consultation it had undertaken with respect to sustainability of the PBS, and the invitation the department had extended to numerous stakeholders, including the GMiA and Medicines Australia, to contribute to those discussions.[58] Mr David Learmonth, Deputy Secretary, Department of Health and Ageing, explained that this was the context in which the MOU had come about, but was keen to point out that the government had not entered into discussions with the intention of arriving at an MOU: 'We did not start the process with a notion of an MOU or agreement—indeed, that was not our suggestion; it came late in the piece'.[59] Mr Learmonth went on:

It was relatively late in the piece. As I said, it was not the intention upfront. Indeed, it was a suggestion from Medicines Australia and not us. My guess would be that it was April this year but I do not think we could even nail down a day. It was not an a priori objective.[60]

1.52      Medicines Australia could not recall who had suggested the MOU but described their experience of consultation with the department:

...I think certainly the process that we went through in discussing with the government in 2010 was very similar to the process we had in 2006 in discussing the reforms of the previous government. The similarities are eerie in some ways. In both cases, the government of the day approached us to ask how to find savings in the PBS. Then as now, the areas for efficiency were in the off-patent generics market because generic prices are too high. Then as now in 2006 and 2010, we decided we wanted to be part of the solution not part of the problem and we worked collaboratively with the government of the day.[61]

And:

We had certainly been discussing with the government since probably the middle of last year. We talked a lot about the PBS and growth trends and, in fact, put some of the proposals the generics had previously put to the government as well. Further discussions went through. I think we were talking about this before. February or March of this year was when we started conceptualising. There was enough agreement on the policy tools that could be used that we started talking about finding some sort of agreement on this. We had our issues and the government had their issues. So it was probably around February or March that we started talking about it. I am not ‘memorandum of understanding’ is the right phrase—it was too embryonic at that stage—but we talked about some sort of understanding or agreement about the PBS.[62]

1.53      The GMiA informed the committee that they had been invited by the Department of Health and Ageing to provide a review of the 2007 PBS reforms.[63] In response, the GMiA submitted 'a number of concerns with the 2007 reforms and put forward an integrated package of amendments'.[64]

1.54      Ms Kate Lynch, Chief Executive Officer of the GMiA, went on:

GMiA became aware subsequent to putting that submission to the department, which was early November 2009, that some of the overarching principles such as the government’s commitment to the price disclosure policy were to remain in place. As a consequence of that GMiA, in a desire to stay engaged, contributed to policy amendments moving forward and then was in the unenviable position of needing to put suggestions forward. We continued to have the opportunity to put suggestions forward but we were unaware of where the mainstream debate was happening, which was clearly around the construction of the MOU.

In a vacuum we had an opportunity to put forward some suggestions, which we continued to do in good faith. But there was no opportunity to debate the merits of those particular suggestions because any policy from this needs to be considered in the context of the overarching reform or changes. It was not even a constructive dialogue. It was, ‘Here are some suggestions that we think have good merit.’ The response was, ‘Well, we don’t think they will work.’ That was pretty much the response: ‘They’re just not going to work. Go back and think of some more.’ Without the ability to know where the mainstream debate was happening, it was impossible to have a robust discussion and real input.[65]

1.55      The GMiA claimed that, ultimately, they became aware of the MOU on budget night and 'had no input into the actual reform'.[66] The committee notes, however, that the GMiA informed the committee that they had been offered a briefing by the Department of Health and Ageing 'on what was to be announced on budget night' several days prior to the budget announcement.[67] The GMiA:

...did not take up the briefing, because we could wait 24 hours. Frankly, we did not want the department to be able to say, ‘We had consulted with all parties prior to the publication.’ There was zero consultation with us during the MOU or anything to do with this legislation.[68]

1.56      The department explained the outcome of its discussions with Medicines Australia and the GMiA:

In the case of Medicines Australia, we had a discussion over months that started off with the same general proposition: how can we make the PBS more sustainable? Clearly we would look to what we already have by way of price disclosure and the other framework as a good starting point for discussion. I think that if I were to characterise the discussion with Medicines Australia, I would say that it was a bit like grief, denial and anger. It started off with a discussion about why we would still need it and the whole issue around the 2007 reforms and how they played out in terms of the sustainability in the future of the PBS. There was a degree of acceptance of the need for us still to look to more, so the discussion then turned to, ‘Well, what can we do?’ There was a process that led ultimately, very late in the piece, to the notion of an agreement—that is, the MOU that was struck.

In the case of GMiA, again we had a range of discussions. Some of them came off the back of submissions that GMiA had put in before about various ideas, and we talked about sustainability. There were a number of meetings that we detailed in our submission. I would add that no meeting was ever refused—it all was opened to GMiA—but I could not really characterise the way discussions evolved with GMiA as a negotiation in the same way as I could with others. We put our view that we were looking for sustainability, and GMiA made their views extremely clear on what they thought about the notion of price disclosure and any further saving. In other words, they did not really want to be a party to that. They did have some other ideas that were fundamentally about increasing competition. From our perspective, there would be two things to say about that. One is that competition generated by asking for consumers to pay more for the same product was not going to be something that was attractive...The proposition was that consumers would pay $5 more for a script that came from their competitor-originated off-patent as opposed to a generic off-patent. As she acknowledged in her testimony, it was made very clear to Ms Lynch that the government would not support that, so it is not as though there was not an exchange of views on those things; there very clearly was. In relation to the other measures to generate competition, there was some exchange. In looking at them, part of how we responded was to ask ourselves, ‘Well, what benefit is the competition?’ That is part of the issue— where does the benefit of competition lie? So if you were to do things that generate competition—competition in this context kind of means market share for GMiA, and the benefits of that competition or market share essentially remain private; in other words the profit derived up and down the supply chain from heavy discounting rather than the public sharing in some of that benefit of competition by taking a share of that discounting—it was going to be less attractive in terms of the sustainability of the PBS. So those discussions ultimately were not fruitful.[69]

Percentage share and representation of the off-patent market

1.57      The question of what percentage of the off-patent medicine market was represented by members of the GMiA versus Medicines Australia arose during the course of the inquiry. This was at issue due to the question of which association best represents the off-patent medicine market and therefore should have been engaged in consultation about the changes proposed in the bill.

1.58      The GMiA claimed that 75 per cent of the volume, or 68 per cent by value, of the off-patent PBS market in Australia is supplied by its members and that, as the companies most affected by the changes proposed by the bill, the GMiA should have been consulted on the MOU and the bill.[70]

1.59      Medicines Australia disputed the GMiA's claim and argued that members of Medicines Australia accounted 'for about 60 per cent of the off-patent market by value'.[71] Dr Brendan Shaw, Chief Executive of Medicines Australia, stated 'Whichever way you cut it, our members account for the majority of the off-patent market'.[72]

1.60      The GMiA acknowledged difficulties with determining market share because of a paucity of data, and stated 'that this is an imperfect world for market share'.[73] Medicines Australia similarly acknowledged that the GMiA 'may have other data that we are not privy to', suggesting that this may account for the different figures for share of the off-patent market.[74]

1.61      The Department of Health and Ageing advised the committee that members of Medicines Australia represented 60 per cent of the off-patent market by price, whilst members of the GMiA represented around one-third by price.[75] The department informed the committee that percentage share of the off-patent market by value, rather than volume, was the relevant statistic:

...when it comes to the impacts of PBS reform, it seems to be a reasonable assumption that those who have the majority of the sector by price will also have the majority of the impacts of price cuts. So, in that sense, that is our view.[76]

1.62       Mr David Learmonth, Deputy Secretary of the Department of Health and Ageing, also acknowledged difficulties with data: 'I think everyone has got an imperfect view of the market because there is no one source...We have a perfect view of what we pay for, which is the overwhelming majority of the PBS'.[77]

1.63      In response to the arguments about whether the GMiA or Medicines Australia best represented the off-patent medicine market, the department stated:

...in the context of a discussion about representative organisations who, as I think someone said earlier, have skin in the game, from any reckoning we can do, based on any data that we have, Medicines Australia represents the majority share of the off-patent sector by price, and, thus, the majority of the impact.[78]

1.64      The department provided the committee with charts illustrating the percentage share of the off-patent market by both value and volume:[79]

Potential impact on the supply of medicines

1.65      The National Pharmaceutical Services Association (NPSA), The Pharmacy Guild of Australia and the GMiA all raised concerns about the impact of the bill on the supply of medicines.[80]

1.66      The NPSA explained the role of their members as wholesalers in 'ensuring that products are passing from manufacturers and suppliers through to every pharmacy not just those pharmacies that perhaps are located in major metropolitan settings' and:

Beyond pure logistics, the facilities of putting products into a shed, putting them onto a truck and sending them to a pharmacy, we play a role that I think is not well understood—that is, to help support the financing of the sector. What I mean by that is that, when we buy products and inventory from all of the manufacturers and the suppliers, they have confidence that we will pay their bills. When pharmacists order all of those products, including the very low-volume items—those products that are stocked by pharmacists only when they need them—so products that are on the PBS but are not used particularly frequently, the pharmacists have confidence that the wholesalers will have that inventory available for them.[81]

1.67      The NPSA was particularly concerned about the potential impact of price reductions applied on 1 April 2012 as a result of price disclosure and the implications this would have for supply of medicines:

When prices are reduced, wholesalers are at risk of holding stock that reduces in value significantly overnight. This risk is very real in the face of the need to forecast stocking requirements in a manner that ensures that wholesalers are able to deliver medicines to pharmacies generally within 24 hours of when the order is placed whilst working with manufacturers and delivery lead times to each distribution centre around Australia. With pharmacists also needing to keep their stocks low when price reductions are imminent, the management skills of the [Community Service Obligation] Distributors are critical to ensure that patient access remains timely and viable.[82]

1.68      The NPSA acknowledged their obligations to supply medicines under the Community Service Obligation (CSO), and that they had experienced price reductions as a result of price disclosure on 1 August 2008, but stated:

...we are facing, on 1 April 2012, an unprecedented impact on the sector. We cannot look back necessarily to what happened in August 2008 as a guide to what might happen in April 2012. In August 2008, although it was a frantic time—and I am referring to a 25 per cent price cut that occurred on 1 August 2008—we did ultimately work with the suppliers, with the manufacturers, to help the wholesaler and ultimately the pharmacist deal with the price reduction.

What I am hearing from GMIA and from others, more loosely, is that the scale of the change that we are facing in April 2012 does not necessarily assure that they will step forward in the same way as they did in the past. For the wholesale sector to absorb stock devaluations that will tally into the tens of millions of dollars on a single day puts the viability of the businesses at risk. Whether we are obligated to the CSO or not, we have to run a business to have people employed and be able to move the products around. We are juggling two very significant obligations at the same time. My point is: without the supplier community giving us commitments in advance—and there are typically two things that happen. Either the supplier community allow us access to the lower prices well in advance so we can manage our inventory carefully or they provide us with what is known as a stock-on-hand claim. On the day that the devaluation hits, 1 April, we tell them that we have 100 units of the products that are their products in our warehouse and they compensate us for the devaluation impact, because it is typically not the role of the wholesaler to wear those massive devaluations. But this time we do not have that...[83]

1.69      The Pharmacy Guild of Australia was also concerned about potential disruptions to the supply of medicines as manufacturers adjust to the price disclosure arrangements and the associated price reductions. The Guild suggested that community pharmacies may:

...be faced with a rapidly changing purchasing environment and may suddenly face a deterioration in margins if they do not react immediately. It could involve purchases being delayed, switched to different suppliers...[84]

1.70      Ms Toni Riley, Chair of The Pharmacy Guild of Australia's Health Economics Committee, emphasised the impact this could have on the ability of community pharmacies to fill consumers' prescriptions:

We are the last point in the supply chain, as you would well know. We are the link between the wholesaler, or the manufacturer, and the consumer. As a community pharmacist, somebody comes in with a prescription and you need to be able to dispense that and give it to them at the time they need it. Usually that is when they come into the pharmacy. If we are unable to order and receive stock in our normal routine manner, that creates quite a problem in community pharmacy.[85]

1.71      The GMiA was more forthright about the impact of price reductions applied on 1 April 2012:

What will happen is that they will destock the supply chain and then on 1 April we will be asked to supply seven weeks of stock into the market. We are not going to be able to do that. There will be stock outs and patients will not get their essential medicines.[86]

1.72      In response to these claims, the Department of Health and Ageing noted the 'range of contractually enforced standards in operation' under the CSO and stated:

(a)          In recognition of the impact of the transition to the 2007 PBS reforms on wholesalers, in August 2008, the Community Service Obligation (CSO) was increased by around $23 million a year.  This is an indexed amount and continues to be paid today, well after wholesalers have adjusted to the original reforms.

(b)          The Department does not believe there will be any supply issues as a result of the Further PBS Reforms.  The Department will provide over three months notice of which medicines are affected by the further PBS reforms under price disclosure arrangements. This allows time for wholesalers and community pharmacies to effectively manage stock levels, as they have demonstrated with previous price reductions under the 2007 PBS reforms.

Australian Pharmaceutical Industries (API), a pharmaceutical wholesaler and member of the National Pharmaceutical Services Association, has noted in a release to the Australian Stock Exchange on 28 October 2010 that ‘The impact of PBS reforms announced this year is significant, however we are confident that initiatives are in place to offset or mitigate any major impact on the business’.

This statement reflects that eligible wholesalers are sharing in some $950 million over five years to distribute medicines under CSO arrangements, 43 per cent more than the previous agreement.  The payments from the CSO are in addition the wholesale margin of 7.52 per cent for most drugs which is paid under the Fifth Community Pharmacy Agreement (5CPA).  Further, the wholesale remuneration for PBS medicines that are priced over $930.06 is a fixed payment of $69.94 and is not impacted by price reductions.

Australia’s biggest supplier of medicines to wholesalers and community pharmacies, DHL Supply Chain (DHL), in their submission to the Inquiry is supportive of the Bill.  Further, DHL suggest that the Commonwealth pays too much in wholesaler remuneration ($3.24 per prescription on average in 2008‑09, including both wholesale margin and CSO) and recommends the application of a significantly reduced unit rate for all PBS items of $0.70 per unit.

(c)          The Department expects that the management of stock levels in the context of changing stock prices is an aspect of their business operations that wholesalers are responsible for and that the arrangements already in places [sic] are sufficient to ensure the continued supply of medicines, and as such no additional measures are considered necessary.

Finally, it should be noted that $1 billion in savings were achieved under the 5CPA, however in recognition of the important role pharmaceutical wholesalers play in the PBS medicines supply chain wholesale remuneration remained unchanged.[87]

Commencement date of price disclosure arrangements

1.73      The Pharmacy Guild of Australia was supportive of the bill but expressed concern about the short period of time between the bill's expected passage through parliament and the commencement date of 1 December 2010 for the collection of data for the April 2012 price disclosure round.[88]

1.74      Ms Riley explained that December was 'an extremely busy prescription month and of course an extremely busy retail month for pharmacies' and that implementation of the extended price disclosure and associated data collection arrangements at this time 'would be fraught with danger and inevitably lead to mistakes in data and, ultimately, calculations that do not correctly match the market situation'.[89]

1.75      In answer to a question on notice, Mr Kos Sclavos, National President of The Pharmacy Guild of Australia, clarified the Guild's concern with respect to data collection:

I also wish to elaborate on the Guild's assertion that manufacturers will be subject to an unprecedented increase in data management. Even where systems are in place, rushing this expansion in December is likely to cause problems for these companies and, ultimately, for PBS pricing and our members.[90]

1.76      The Guild recommended that data collection for the purposes of the April 2012 price disclosure round commence on 1 February 2011, to ensure 'a sufficient timeframe for manufacturers to start data collection' and 'a sufficient timeframe for community pharmacies to react to potential changes in trading terms from suppliers as a result of the changes'.[91] The Guild emphasised that a commencement date of 1 February 2011, whilst shortening the data collection period from 10 months to eight months, would cause 'no change to savings estimates or the timing of price reductions'.[92]

1.77      Mr Patrick Davies, President of the NPSA, supported this view:

On the timing in relation to the start of price disclosure–I think the government are currently proposing 1 December–I agree with the guild that that date should be pushed backwards...My knowledge of the industry is that that would be a dangerous time to bring in the implementation. I support the guild's position on the revised timing for that.[93]

1.78      The Department of Health and Ageing clarified the issue of the commencement date for data collection:

There is no impact on pharmacies of this measure over the Christmas period.

The 1 December 2010 date marks the commencement of the period in which pharmaceutical companies (not pharmacies) will begin collecting data about the prices at which they sell their drugs to pharmacies and wholesalers.  The data is not required to be submitted to the Department until mid-May 2011.  The data will be the same type and format that is collected under the existing program which commenced in 2007, and is sales data that pharmaceutical companies already collect in the operation of their businesses.

The collection of data from 1 December 2010 does not change trading terms or prices in the in the [sic] 2010 pre Christmas period because any price changes as a result of price disclosure will not take effect until 1 April 2012.[94]

Conclusion

1.79      The committee recognises the vital role of the PBS in ensuring Australians have reliable, timely and affordable access to medicines. The committee also acknowledges the need to ensure the ongoing sustainability of the PBS so that Australians can continue to have access to affordable medicines when they need them.

1.80      PBS costs are growing quickly. In 2008-09 the cost of the PBS was 9.2 per cent higher than that in 2007-08, and in 2009-10, the PBS grew a further 9.3 per cent to an annual cost of $8.4 billion.[95] This continued growth has been acknowledged by the Intergenerational Report 2010 Australia to 2050: Future Challenges which forecasts that spending on the PBS will increase in real terms from $443 per capita in 2012-13 to $534 per capita in 2022-23.[96]

1.81      Managing the high growth of the PBS will help allow continued investment in new, innovative drugs. For example, there have been $1.4 billion in new drug listings during 2008-09 for conditions like multiple sclerosis, heart disease and cancer.

1.82      The 2007 PBS reforms show that price disclosure is an effective mechanism for getting better value from medicines prices by taking advantage of discounting that is occurring in the market. The first four completed rounds of price disclosure have seen a number of drugs take a price reduction ranging from 13 per cent to 72 per cent.[97]

1.83      However, it is the committee's view that the 2007 PBS reforms do not go far enough. While the 2007 PBS reforms are anticipated to provide more savings than originally estimated, these will be more than outweighed by higher than expected growth in PBS costs. The February 2010 Impact of PBS Reform report to government stated that on current projections, PBS outlays in 2018 will be in the order of $13 billion to $13.7 billion.[98]

1.84      Price disclosure currently applies to only about 45 medicines[99] – only about one fifth of the medicines where there currently is competition and discounting is occurring in the market. Medicines that have come off patent but are not currently subject to price disclosure, such as simvastatin, have decreased significantly more in price in some countries like the United Kingdom than in Australia.[100]

1.85      Expanding the 2007 PBS reforms through the measures in the bill will improve the sustainability of the PBS. The projected savings to taxpayers generated from the combined package of further pricing reform are estimated to be some $1.9 billion over five years.[101] At the same time patients will benefit from lower prices for medicines where the price falls below the general patient co-payment.

1.86      The 2007 reforms were estimated to benefit consumers through direct reductions in prices for some prescriptions by $600 to $800 million over the ten years to 2018.[102] The additional direct savings to consumers from the new measures under the bill have been independently estimated to double this previous estimate, and to save general patients on average almost $3.00 per prescription over the ten years to 2018.[103] With current price disclosure arrangements producing savings of between 13 and 72 per cent, some general patients will see significant price cuts for their medicines.[104]

1.87      Two key goals of the bill are to contribute to the sustainability of the PBS and maintain access to quality medicines at a lower cost to the taxpayer. The committee acknowledges that the ways in which the bill seeks to achieve these goals are not new but rather build on the reforms made to the PBS in 2007 by extending the pricing policies introduced at that time, whilst maintaining the separation of medicines in the F1 and F2 formularies, and retaining the concepts of statutory price reductions and price disclosure. The committee further notes that the changes proposed in the bill are expected to deliver substantial savings to government.[105]

1.88      The committee believes that the National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2010 will assist in achieving the goal of a sustainable PBS into the future. On that basis, the committee recommends that the bill be passed.

Recommendation 1

1.89      The committee recommends that the bill be passed. 

Senator Claire Moore

Chair

November 2010

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