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Focus: Pharmaceuticals – September 2007

Amendments to the Pharmaceutical Benefits Scheme – Part 3

In brief: In the final instalment of our three-part series examining the amendments to the Pharmaceutical Benefits Scheme, Senior Associate Ric Morgan addresses the price disclosure obligations and how the information will be used to further reduce the price of pharmaceutical benefits to government. 

• Introduction
• Price disclosure requirements
• Price reductions based on price disclosure
• Conclusion

Introduction

The amendments to the Pharmaceutical Benefits Scheme (the PBS) are part of a range of changes to reform the PBS. The amended National Health Act 1953 (Cth) (the Health Act) took effect on 1 August 2007 and introduces three new elements to the PBS – statutory price cuts, price disclosure obligations and supply guarantees – with the aim of driving down the cost of the PBS to the Federal Government. The implementation of the amendments is to be staged between 1 August 2007 and 1 January 2012.

In this article, we address the price disclosure obligations and how the information will be used to further reduce the price of pharmaceutical benefits to government. This builds on Part 1 of our series where we examined the new concepts introduced by the amendments. These new concepts included subcategorising pharmaceutical benefits into drug, items, and brands, formularies, therapeutic groups and special patient contributions (SPC). Part 2 of our series examined the statutory price cuts and the requirement for suppliers of new brands to guarantee supply.

Price disclosure requirements

Price disclosure requirements are being imposed to assist the Federal Government to determine the actual price of pharmaceutical items sold to pharmacies inclusive of the value of all discounts, rebates and other benefits. Price disclosure information will drive further price cuts to the approved price to pharmacists agreed by the government to bring this closer to the actual price paid by the pharmacy (see 'Price reductions based on price disclosure' below).

When must price disclosure occur?

(a) Mandatory disclosure – triggered by entry of a new brand of an existing item

A responsible person must commence price disclosure for a new brand of an item (mandatory item) when, in relation to an existing item:

• the new brand is bioequivalent or biosimilar;
• has the same drug; and
• has the same manner of administration.¹

Price disclosure does not apply to drugs in formulary F2T (see 'Formularies' in Part 1 ).² This means that where a drug is in F2T, price disclosure and any related price reductions can only apply after the merger of F2A and F2T on 1 January 2011.

(b) Voluntary disclosure – opting in

If a responsible person is required to disclose for a mandatory item, another responsible person may volunteer to disclose price information for that item. Once the decision to opt in has been made, the volunteering responsible person cannot withdraw, except where the supply guarantee is breached for the mandatory item (see 'New concepts' in Part 1 ).³ Having opted in, the responsible person must comply with all disclosure requirements, including the requirement to disclose for all related items, brands, and products (see 'Disclosure required for related items and brands' and 'What must be disclosed' below).

(c) Disclosure required for related items and brands

Where a responsible person is required to provide price disclosure either as a mandatory requirement or as a volunteer, the disclosure must be made for all of its brands that have the same drug and manner of administration as the mandatory item (related brands).⁴

Consequently, where a manufacturer supplies second brands under different business names – as is a common practice for originator pharmaceutical manufacturers – unless the responsible person for the second brand is a separate legal entity, a manufacturer will be required to report on second brands (and any other brands of the related items).

What must be disclosed?

(a) Information about related items and brands

The information required, when it is required, and the form in which it must be disclosed are found in the National Health (Pharmaceutical Benefits) Regulations 1960 (Cth)⁵ The regulations prescribe that information must be provided within two months of the end of either the quarterly reporting or the annual reporting period.

The commencement of the quarterly reporting period depends on when the reporting obligation arises.

• For a mandatory brand, or related brand of that mandatory brand, the period commences on the 1st of January, May or September first occurring after the listing of the mandatory brand. Where there is a subsequent mandatory brand listed after the start day for a first mandatory brand, that subsequent mandatory brand's reporting period commences on the same day as the first mandatory brand.
• For a volunteered brand, the period commences at the same time as the next occurring reporting period for the first mandatory brand.

The annual reporting period commences at the start of the first day of the month after listing where the brand is a mandatory brand or after the election by a volunteered brand. Where reporting has not yet commenced for the mandatory brand, a volunteered brand is also not required to commence reporting until the commencement of reporting for the mandatory brand.

This means that although a quarterly report will only be required after the first occurrence of the 1st of January, May or September, the annual reporting period may commence earlier where the first month after the listing or opting in occurs on a month other than January, May or September.

The reports require the following information:

The regulations capture most incentives given by manufacturers, including:

• before the supply but conditional on taking supply;
• at the time of the supply;
• at some later date;
• over a period of time; and
• directly or indirectly in relation to the brand, including for a group of brands or for other products. This would include bundling and volume-based discounts.

It is noted that the government intends to issue forms that may specify sub-categories of incentives that are required to be listed.

The methodology for allocation of incentives provided for brands over time or across different brands is not specified; however, the regulations require the method used by a responsible person to be documented and reasonable.

(b) Information about other benefits, including other drugs

The regulations may also require reporting of any other benefit provided by the responsible person.⁶ Where that benefit includes the supply of other pharmaceuticals or is related to the supply of items, including the price disclosure items and other pharmaceutical items (related products), the regulations may impose the price disclosure obligations for price and volume on supplies of the related products.⁷The regulations as currently in force do not require reporting for related products. However, as noted above, where a responsible person provides whole-of-order discounts, bundles products or rebates, the price disclosure obligations do apply.

Interestingly, given the aim of price disclosure – identifying the actual price at which brands of an item are sold to pharmacists – some of this information (such as the price and volume of each supply, the person to whom the supply was made and any wholesaler bundling, discounting and rebating) will be in the hands of wholesalers, but the obligation to make disclosure will fall on the responsible person (usually the manufacturer or importer).

The relationship between the price at which manufacturers sell to wholesalers and the price as sold to pharmacists is to be calculated according to a regulatory formula rather than reflecting actual arrangements. Further, discounting and other benefits provided by wholesalers, without the involvement of the responsible person, do not require disclosure and hence will not be included in the calculation of any price reduction.

These factors undermine the aim to reduce the government-agreed price at which to reimburse pharmacists to the price actually paid by pharmacists. It also opens ways for indirect incentives to flow to pharmacists from manufacturers. It is also indicative of a narrow view by government of available pharmaceutical distribution channels, and discriminates against manufacturers using direct-to-pharmacy channels.

Consequences of failure to disclose

It is a criminal offence not to supply the required information. Each failure, regardless of the length of delay, is punishable by a fine of $6600.⁸

In addition, the Health Minister may revoke or vary the listing of any existing brand of any of the responsible person's pharmaceuticals or to refuse to list a new brand for the responsible person.⁹

Strategic considerations

(a) Related brand disclosure only applies to those brands with the same responsible person

The choice to opt in can be restricted to a particular dose or manner of administration of a drug, or enable a second brand or even related items of a brand to be quarantined from the price disclosure requirements by having a separate legal entity as the responsible person for the brands or items.

It should be noted that choosing to disclose only the higher priced of two brands could result in a smaller price cut by increasing the weighted average price used to determine the market price.

(b) When to opt in?

Where the responsible person has a higher actual price to pharmacies than its competitors, then choosing to stay outside the price disclosure system will result in larger price disclosure-based price cuts.

However, before opting in, a responsible person will need to consider the breadth of the obligations, including taking into account the potential for very broad reach to any other brands, including any other drugs that are related products (see 'What must be disclosed' above). This needs to be weighed against the risks of not opting in.

Price reductions based on price disclosure

When will they apply?

Price reductions will occur on prescribed days (expected to be the 1st of April, August and  December of each year).¹⁰ It is anticipated that the first price reduction for any items subject to the price disclosure regime will occur on the first relevant date that occurs at least 22 months after the disclosure for that drug first occurs. This allows for the mandatory six months' notice and at least 12 months of collected data.¹¹ The remaining four months will be taken up by up to a two-month time lag in receiving the data and by allowing two months to process the data. In any event, price reductions based on price disclosure information cannot occur before 1 August 2009.¹²

For drugs on F2T on 31 December 2010, the reductions cannot occur before 1 August 2012.¹³ This is to allow for the delayed application of the price disclosure requirements to F2T.

How are the reductions calculated?

The Health Act provides some of the key concepts used in the calculation of reductions based on the price disclosure data, but largely leaves the methods and formula to be used as a matter for regulation.¹⁴ Broadly, these include the following.

• At least 12 months' data will be used to determine any price reduction. However, 12 months' data for any one brand of an item will be sufficient.
• Even though the disclosure requirements apply from when a brand is listed, only the most recent 12-month period will be used to determine any price reduction.
• The Health Act requires the weighted average of the ex-manufacturer price (WEMP) to be determined. The method or formula to be used is a matter for regulation. The relationship between the price to pharmacist and the price to wholesaler is calculated according to the methods in the 4th Community Pharmacy Agreement (4CPA). This may pose significant difficulty and disadvantage for manufacturers who supply directly to pharmacies.
• The WEMP will be compared with the approved ex-manufacturer price (AEMP). The AEMP is determined by a method prescribed by regulation that is in accordance with the methods in the 4CPA and may disadvantage manufacturers supplying directly to pharmacies.
• If the difference between WEMP and AEMP is more than 10 per cent, a price reduction of the actual percentage difference will be applied to the approved price to pharmacy.

Where a special patient contribution applies to a brand, then it will be reduced by the same percentage and cannot be otherwise changed on the same day as the disclosure reduction.¹⁵ The criticisms of the application of price reductions to special patient contributions noted in Part 2 also apply here.

Conclusion

These amendments are likely to achieve the government's objective of lowering the cost of the PBS. However, the full impact and effectiveness of the price disclosure provisions will remain difficult to determine until some time after implementation. Implementation of the price disclosure provisions may also present challenges for manufacturers and suppliers, as the strategic considerations associated with opting in are complex.

The most significant long-term impact of the two cost-cutting mechanisms – statutory price cuts as described in Part 2 and the price cuts based on disclosure – will be to reduce the price that originator manufacturers can charge once a drug becomes subject to competition. While the PBS amendments examined here will also have the effect of reducing the profit margins of pharmacists, PBS reforms outside the Health Act amendments provide specific compensation for pharmacists in this regard.

Footnotes

1. National Health Act 1953 (Cth), s99ADD(1).
2. National Health Act 1953 (Cth), s99ADA.
3. National Health Act 1953 (Cth), s99ADE.
4. National Health Act 1953 (Cth), s99ADD(2).
5. National Health Act 1953 (Cth), s99ADC(1).
6. National Health Act 1953 (Cth), s99ADC(2)(e).
7. National Health Act 1953 (Cth), s99ADC(2)(f).
8. National Health Act 1953 (Cth), s99ADF.
9. National Health Act 1953 (Cth), s99ADG.
10. National Health Act 1953 (Cth), s99ADH(2).
11. National Health (Pharmaceutical Benefits) Regulations 1960 (Cth), r37.
12. National Health Act 1953 (Cth), s99ADH(2).
13. National Health Act 1953 (Cth), s99ADH(2).
14. National Health Act 1953 (Cth), s99ADH(1).
15. National Health Act 1953 (Cth), s99ADH(4).

For further information, please contact:

• Sarah MathesonPartner, Melbourne
  Ph: +61 3 9613 8579
  Sarah.Matheson@allens.com.au
• Philip KerrPartner, Sydney
  Ph: +61 2 9230 4937
  Philip.Kerr@allens.com.au
• Peter JamesPartner, Brisbane
  Ph: +61 7 3334 3360
  Peter.James@allens.com.au
• Andrew PascoePartner, Perth
  Ph: +61 8 9488 3741
  Andrew.Pascoe@allens.com.au
• Ric MorganSenior Associate, Sydney
  Ph: +61 2 9230 4093
  Ric.Morgan@allens.com.au