Focus: New PBS reforms to affect pharmaceutical manufacturers
21 August 2012
In brief: The recent pricing reforms to the Pharmaceutical Benefits Scheme, which will come into effect shortly, will have implications for manufacturers of pharmaceuticals. Senior Associate Ric Morgan and Lawyer Ben Mee report.
How does it affect you?
- The amendments to the Pharmaceutical Benefits Scheme (the PBS) take effect on 1 October 2012.
- The key focus of the reforms is on creating uniform pricing for all brands of a pharmaceutical item on the PBS, by expressing all PBS prices at an 'ex manufacturer' level, rather than the 'approved price to pharmacists'.
- Approaching pricing arrangements between the Commonwealth and manufacturers of pharmaceuticals on this basis better reflects industry practice, recognising that the supply chain, and associated costs, from manufacturer to patient will not always be the same.
- The intention is that the reforms will have a neutral effect on overall PBS prices. However, some cases will require pharmaceutical companies to negotiate a new price, or risk a lower 'default price' applying.
- The reforms also have implications for future listings and price disclosure reporting obligations.
The National Health Amendment (Pharmaceutical Benefits Scheme) Act 2012 (Cth) was passed by Parliament on 20 June 2012.
Currently, an 'approved price to pharmacists', which includes the manufacturer price and a wholesale margin, is used to determine the reimbursement arrangements, and the price that pharmaceutical companies can charge, for a pharmaceutical item in a particular quantity. Where a pharmaceutical item has multiple pack sizes or quantities listed on the PBS, each pack size has a price agreement or determination that specifies the approved price to pharmacists.
The reforms create uniform pricing for all brands of a pharmaceutical item on the PBS, by expressing all PBS prices at an 'ex manufacturer' level, rather than the 'approved price to pharmacists', reflecting industry practice.
Under the current system, some aspects, such as price disclosure calculations, or where an item is supplied without going through a wholesaler, require further conversions to enable an 'ex-manufacturer price' to be calculated from the 'approved price to pharmacists'. The change to uniform ex-manufacturer pricing obviates the need to 'calculate back' in these circumstances.
A new section 84AK to be inserted into the National Health Act addresses the key concepts of 'pricing quantity' and 'pack quantity'. For a listed brand of a pharmaceutical item, the Minister may determine that one or more quantities or numbers of units is a 'pack quantity' of the brand of the pharmaceutical item. The lowest pack quantity of any listed brand of a pharmaceutical item is the pricing quantity for any listed brand of that item. It is from that single pricing quantity that the 'approved ex-manufacturer price' (AEMP) for the pharmaceutical item is calculated.
The AEMP replaces 'approved price to pharmacists' throughout the amended Act and applies to the lowest listed pack quantity of any brand of that item (pricing quantity), and the AEMP for every brand of a particular item is the same even where the pack quantity is different.
For other pack sizes or quantities, a 'proportional ex-manufacturer price' (PEMP) can be calculated from the AEMP, based on the ratio of the pack quantity to the pricing quantity.
Existing 'approved price to pharmacist' values for a brand of a pharmaceutical item will be 'converted' to a single approved ex-manufacturer price. This conversion will occur either by agreement or as prescribed by regulations. If there is no agreement and no AEMP is prescribed, an AEMP will be determined by the use of a specified default calculation.
While, in most cases, the AEMP that will result from the default calculation will be equivalent to the current ex-manufacturer price, and can be automatically substituted into existing price agreements or price determinations, in certain circumstances the default calculation may result in something different from the current ex-manufacturer price. This can be the case where different pack sizes or quantities of an item are listed, and will result in the AEMP being lower than the current ex-manufacturer price for one or more brands or pack sizes of that item.
- 'Single brand' combination items, the prices of which are affected by the prices of their component drugs, will require a new price agreement.
- In the case of items with existing special patient contributions (or premiums), existing claimed prices will be subject to an equivalent reduction to the ex-manufacturer price, unless a new price agreement is negotiated. This means that the manufacturer's pricing point remains unchanged.
The Department of Health and Ageing's intention in relation to special patient contributions is that:
- existing brands with a claimed price determination in force can negotiate a new claimed price determination to come into force on 1 October 2012 (and thereby avoid the 'default' conversion); and
- brands without a current premium in force can make an application, under the usual procedures, for a premium to apply from the next price change date (in December 2012).
New smaller packs cause pricing changes
The new concept of 'pricing quantity' requires new price agreements for all brands of a pharmaceutical item when a new 'lowest' pack size is to be listed. This will mean that any such new small pack listing for a brand will take longer because of the requirement for the Department to deal with the additional processing and negotiations required for such changes. The Department has indicated that the result of this will be that new smaller packs will only be listed in the months where other price change listings occur, ie only three times per year.
Although the Department suggests this event will be uncommon, it is difficult to see why, beyond the initial conversion, an existing pricing quantity could not be retained, and used to calculate a (lower) PEMP for the smaller pack size.
Calculation of special patient contributions
The previous calculations for special patient contributions were based on the difference between price to pharmacy claimed by the manufacturer and the price the Commonwealth was prepared to reimburse the pharmacists. These concepts have been removed from the Act. The basis for the calculations has changed and is now the result of the difference between the actual Commonwealth price (calculated from the AEMP), and the Commonwealth price that would have applied if calculated from the claimed ex-manufacturer price. There is no impact on manufacturers.
In addition, because of the new concept of pricing quantity, some further changes have been made to enable claimed price determinations to be referable to a pack quantity, rather than the pricing quantity allowing premiums to apply only to selected pack sizes.
Under the regulations, the weighted average disclosed price is currently determined by reference to the 'maximum quantity' for an item determined under the Act.
The regulations are to be amended so that, consistent with a single AEMP existing for a pharmaceutical item from 1 October 2012 (based on the pricing quantity), the calculations will be determined as if each pack sold were of the same quantity as the pricing quantity: ie the smallest pack size and not the maximum quantity. This should simplify the process from an administrative perspective but is not expected to have any substantive impact on the price disclosure process.
- Sarah MathesonPartner,
Ph: +61 3 9613 8579
- Philip KerrPartner,
Ph: +61 2 9230 4937
- Richard HamerPartner,
Ph: +61 3 9613 8705
- Andrew WisemanPartner,
Ph: +61 2 9230 4701