Pharmacists will no longer be able to keep the difference between the price paid by the government for generic drugs and the lower price charged by the manufacturer. But they will receive $1.1 billion (over 4 years) to compensate for this loss of income.
Although the proposed changes to pharmacy arrangements received positive media coverage, it was also suggested that these changes to the PBS would ‘dismantle’ the reference pricing system (Metherell 2006). As part of these measures, the subsidised prices of medicines that are patented and offer the same health benefit as those that are off-patent (generic) will no longer be linked. This concept, known as ‘reference pricing’, has operated since 1992 and has been a fundamental tenet of the PBS for many years. Basically, the government pays the lowest price for all drugs that offer the same health outcome. For example, drugs which lower blood pressure are all reimbursed at the lowest price, irrespective of whether the product is patented or not. That is why it has been said that the Australian government buys health outcomes, not drugs (Commonwealth of Australia 2005).
This chapter explores the policy measures put forward by Minister Abbott and the claims that they will ensure continued access to prescription drugs for the Australian people, while also controlling PBS expenditure. Consideration will also be given to whether these measures signal a shift in Australian pharmaceutical policy from reference pricing towards purchasing drugs, as against health outcomes.
A ‘WICKED’ PROBLEM
So these were the two problems – overpricing to government and therefore to taxpayers of generics, and the difficulties of reference pricing in the new system of mandatory price cuts. These were the two problems that these changes are designed to address.
The cost of the PBS has long been of concern to government. Although PBS growth in expenditure has slowed to a rate of about 2.7% per annum, and a cost of 6 billion to government (2005–06), it was previously the fastest growing area of Commonwealth health expenditure, with nominal growth of 12% per annum between 1995 and 2004 (Abbott 2006, Commonwealth of Australia 2007). The federal Treasurer, Peter Costello, has repeatedly identified the PBS as a ‘core challenge’ for government spending (Stafford & Allen 2005). Reflecting this challenge, Minister Abbott has also advocated savings on the PBS so that ‘headroom’ can be created to pay for newer, more expensive pharmaceuticals (Abbott 2006). The fact that both ministers agree that action was required to address PBS expenditure draws attention to the problem that exists between delivering PBS outcomes that satisfy both the main stakeholders on the one hand and PBS ‘sustainability’ on the other.
The PBS has been in operation for almost 60 years. It was designed to provide timely and affordable access to prescription drugs for all Australians (Commonwealth of Australia 2005). It operates as a reimbursement scheme: consumers pay a fixed co-payment for their drug(s) and the government reimburses community pharmacists the difference. For example, a drug which costs $56.00 to government will cost general patients $30.70 and concession card holders, $4.90.
For a drug to be listed on the PBS it must satisfy quality, safety and efficacy criteria. This is primarily assessed by the Therapeutic Goods Administration (TGA). In addition, the cost effectiveness and comparative effectiveness to existing therapies must be assessed by the Pharmaceutical Benefits Advisory Committee (PBAC). Under the National Health Act 1953 a drug that is substantially more costly than alternatives may not be added to the PBS formulary unless, for some patients at least, it confers an additional benefit.
Consistent with this legislative mandate is the concept of reference pricing. As noted above, reference pricing pays a set amount for a therapeutic outcome. Economic evaluation, including cost-effective analysis, provides the tools to determine the value (expressed as a price) of this outcome. It also means that if there are any price changes to the drugs in a therapeutic group (i.e. through a new drug being listed on the PBS that is considerably cheaper than that already listed) these are extended to other drugs in the groups, irrespective of patent status. Usually this is seen when a generic pharmaceutical enters the market at a lower price than the originator brand, either through the government’s policy of a mandatory 12.5% reduction for new drugs being listed, or through the manufacturer offering a lower price to government.
These provisions have caused the pharmaceutical industry considerable angst, both domestically and internationally. The industry has argued that this policy does not adequately reward innovation and undermines the value of pharmaceutical patents (Pharmaceutical Research and Manufacturers of America [PhRMA] 2007).
A consequence of this policy is that the price of generic drugs has remained high in comparison to those that are protected by patents. In an attempt to achieve greater price reductions when the new brands (generics) enter the market, the government introduced the 12.5% reduction policy in 2005. When the first new brand of a medicine is listed on the PBS, a mandatory 12.5% price reduction for all medicines is applied to all medicines in the reference pricing group (Commonwealth of Australia 2005). Usually, this occurs around the time of patent expiry. Once a group received a 12.5% cut, further reductions would not be made when other brands were listed. This proposal was expected to generate savings of about $800 million (Commonwealth of Australia 2005).
Concern over the prices of generic drugs was heightened by the knowledge of imminent patent expiries on a number of ‘blockbuster’ drugs. Over the next 10 years, the patent for over 100 drugs will be expiring (Commonwealth of Australia 2007). When a pharmaceutical patent expires, it is possible for a generic manufacturer to enter the market with an identical product at a considerably lower cost. In Australia, these discounts are typically offered by generic manufacturers to pharmacists and the government was keen to capture these savings.
THE POLICY RESPONSE
On 16 November 2006, Minister Abbott announced a package of PBS-related reforms. Further detail was provided on 2 February 2007. The initial response from stakeholders to the November 2006 announcement was positive, with its promise of considerable savings for consumers. The fine print released in February 2007 failed to attract widespread attention.
The government put forward a ‘range of inter-connected measures’, which included:
- changes to the pricing of PBS-listed medicines
- the introduction of compensation arrangements for pharmacy and pharmaceutical wholesalers
- streamlined authority approvals for some medicines
- the establishment of an access medicines working group made up of government and industry representatives (Commonwealth of Australia 2007).
- the introduction of compensation arrangements for pharmacy and pharmaceutical wholesalers
Each of these measures will be considered in turn.
Changes to the pricing of PBS-listed medicines
This is perhaps one of the most significant policy revisions in the history of the PBS. Rather than being listed on a single formulary, from 1 August 2007, the PBS schedule will comprise two separate formularies. There will be no price linkages between the formularies and the system of reference pricing will no longer apply across the entire PBS. Instead, it will be applied with limitations. In addition, pharmaceutical manufacturers will be forced to disclose to the government the price at which a drug is sold for new drugs listed on the PBS. A summary of these changes appears in Box 17.1.
BOX 17.1 SUMMARY OF PRICING REFORMS
- Creation of two PBS formularies; Formulary 1 (F1) and Formulary 2 (F2).
- Different pricing strategies for each formulary.
- No price linkages between the two formularies.
- Drugs will be able to move between formularies.
- Different pricing strategies for each formulary.
- Single brands (only one medicine of its type listed on the PBS).
- Typically will include on-patent drugs and often first drug of its type to be listed on the PBS.
- No price cuts.
- For medicines in the same reference pricing group, standard reference pricing arrangements apply; that is, the government pays the same price for the same health outcome.
- Typically will include on-patent drugs and often first drug of its type to be listed on the PBS.
- Multiple brands and the creation of two groups with different pricing arrangements.
- Typically will include medicines that are interchangeable at the patient level and where generic drugs are available.
- Staged price cuts (2% per year for 3 years, from 1 August 2008).
- Price disclosure arrangements apply from 1 August 2007.
- Will not impact price until 1 August 2009 and will only be applied if the weighted average disclosed price is 10% more than what is currently being paid.
- Price disclosure arrangements apply from 1 August 2007.
- 25% one-off cut (but for some products this will be phased over life of the patent).
- 12.5% price reduction policy still applies for new brands entering the market.
- Price disclosure arrangements apply from 1 Jan 2011.
- Will not impact price until 1 August 2012 and will only be applied if the weighted average disclosed price is 10% more than that is currently being paid.
- 12.5% price reduction policy still applies for new brands entering the market.
The trigger for price disclosure is the listing of a new product on the PBS. All other suppliers of that product will be invited to disclose the price at which they sell their medicine.
Medicines will only be listed on one formulary. For medicines that have multiple strengths and brands, the entire molecule will be listed on F2.
Importantly, there will be no price links between the medicines listed on F1 and F2. This is a significant deviation from what has been considered a fundamental principle of the PBS. It is conceivable that there will be drugs on F1 that offer the same health benefit as those listed on F2. For example, selective serotonin reuptake inhibitors (SSRIs) will be split between F1 and F2 as they are not interchangeable at the patient level. It remains to be seen whether there will be significant price differences between those listed on F1 to F2.
Price reductions
All products on F2 will be subject to mandatory price reductions and there will be a requirement that the price at which they are being sold by the pharmaceutical manufacturer to the pharmacist be disclosed. Price disclosure will not be retrospective and will apply to new listings on the PBS. This was introduced so that the government could further benefit from the introduction of generic drugs, which are priced at significantly lower levels than their (identical) branded counterparts.
