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Focus: Pharmaceuticals – September 2007

Amendments to the Pharmaceutical Benefits Scheme – Part 2

In brief: In Part 2 of our Focus: Pharmaceuticals series examining amendments to the Pharmaceutical Benefits Scheme, Senior Associate Ric Morgan examines the way the statutory price cuts operate and details the supply guarantee requirements.

How does it affect you?

The amendments:

  • impose price cuts on manufacturers and suppliers of pharmaceuticals;
  • require the disclosure of information about the actual price that pharmaceuticals are sold to pharmacists; and
  • ensure that suppliers of a new brand of pharmaceutical that triggers a price cut actually supply that new brand.

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 examine the way the statutory price cuts operate and detail the supply guarantee requirements. This builds on Part 1 of our series of three articles, 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).

In the final instalment next week, we will address the price disclosure obligations and how the information will be used to further reduce the price of pharmaceutical benefits to government.

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Statutory price reductions

Statutory price reductions include:

  • a 12.5 per cent reduction on the first new entry of a brand of an existing listed drug;
  • annual 2 per cent reductions in August 2008, 2009 and 2010 for all brands where multiple brands already exist for a listed drug (ie brands in formulary F2A, see 'Formularies' in Focus: Pharmaceuticals – August 2007); and
  • a 25 per cent reduction for drugs that have become genericised which will apply where there are multiple brands of a drug in a therapeutic group (ie brands in formulary F2T, see 'Formularies' in Focus: Pharmaceuticals – August 2007).

Further price cuts can be imposed on combination products where one of the drugs in the combination product is subject to a price cut.

12.5 per cent reductions on first entry of additional brands

While the 12.5 per cent reductions are not new, the amendments provide a legislative basis for the price cut. The 12.5 per cent reduction is imposed by allowing the Minister to make a price agreement for the new brand but requiring the price agreement to be at least 12.5 per cent below the applicable approved price to pharmacists. The reduction flows on to other brands of:

  • the same item as the new brand;
  • other items with the same drug and manner of administration as the new brand; and
  • other items that have the same manner of administration and are in the same therapeutic group as the new brand.1

The reduction does not apply where (1) the new brand; (2) any other brand of the same item; or (3) any other brand of an item that has the same manner of administration and is in the same therapeutic group as the new brand:

  • is in a class of items that has had the 12.5 per cent price reduction applied administratively under the previous price reduction policy; or
  • has already been subject to any statutory price reduction.2

If the price agreed for the new brand is reduced by 12.5 per cent, the price for existing brands is deemed to be reduced by 12.5 per cent.3  No SPC can be added to a brand, but if an SPC already applies to a brand, the 12.5 per cent reduction is applied to the SPC (see relevant section within this article).

Where the price agreed for the new brand is reduced by more than 12.5 per cent, a different method for determining the new price for existing brands applies (see below).4

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Price reductions for combination items
Reductions where component drugs are subject to a reduction

Where there is a single brand of a combination item (ie the item is excluded from the formularies) and a component drug in the item is subjected to a statutory 12.5 per cent (see above), 2 per cent (see below) or 25 per cent price reduction (see below) then a new price agreement must be entered into for the combination item.5 This can be for the same price as the old agreement. In determining any price reduction, the Minister may have regard to the proportion of each component drug and to the price reduction applicable to that drug.

12.5 per cent reductions on first entry of additional brands of a combination item

When a new brand of a combination item is listed that is:

  • bioequivalent or biosimilar;
  • has the same combination of drugs; and
  • the same manner of administration,

as an existing combination drug, a 12.5 per cent reduction is imposed in the same way as the first entry of a new brand of a non-combination item and is subject to the same exclusions (see above).6The reduction also flows on to other brands of the item in the same way as a non-combination item.7

However, if the combination item has already been subjected to statutory reduction due to a component drug having a statutory reduction as a result of the entry of a new brand of a drug (see above) then this must be taken into account and reduce the percentage by which the combination item's price is reduced.8

Reductions for existing multiple brands with limited price competition (annual 2 per cent reductions for brands on F2A)

As a general rule, the approved price to a pharmacist for all brands of all items of a drug in F2A will be reduced by 2 per cent on 1 August in 2008, 2009 and 2010.9

This will not occur:

  • if any 12.5 per cent statutory reduction has occurred in the 12 months prior to the date; or
  • at any time after the item has been subjected to a price reduction based on price disclosure;10  or
  • if the item is an exempt item.11

No SPC can be added to a brand but if an SPC already applies to a brand, the 2 per cent reduction is applied to the SPC (see below).

Reductions for existing multiple brands with significant price competition (25 per cent reductions for brands in F2T)

The approved price to the pharmacist for all brands of all items of a drug in F2T on 1 August 2008 will be reduced by 25 per cent of the approved price to the pharmacist on 31 July 2008, unless the item is an exempt item.12

For a subgroup of the items in F2T prescribed by regulations, the price reduction occurs over two or more days and the total reduction can be no more than 25 per cent of the approved price to the pharmacist on 31 July 2008.13

No SPC can be added to a brand, but if an SPC already applies to a brand, the 25 per cent reduction is applied to the SPC (see below).

Statutory reductions and special patient contributions

A difficult aspect of the operation of the statutory reductions is the operation on SPCs. Where the statutory reduction is the same as the statutory reduction amount (ie 12.5 per cent, 2 per cent or 25 per cent), both the approved price to the pharmacist and the SPC are deemed to be reduced by the statutory percentage.14

It is not possible for an SPC (which includes brand price premiums and therapeutic group premiums) to be changed or added on the same day as a statutory reduction. This undermines the basis for SPCs as set out in both the old and the amended provisions of the Health Act. It changes SPCs from being the difference between the price claimed by a responsible person for their brand of the item and the price that the government is prepared to pay for the item. This is achieved by deeming the price claimed by a responsible person to have been reduced by at least the statutory amount. In effect, this imposes price controls on the responsible person.

This may have only a short-term effect as there is no restriction on entering into new arrangements to increase or decrease the SPC after the statutory reduction has occurred.15  However, it would appear that the timelines for making such changes with the Pharmaceutical Benefits Pricing Authority could mean that the government sets the price for a considerable period of time. Some commentators have questioned whether these provisions allowing the government to set the price are constitutionally valid.16

If a statutory price reduction occurs and the reduction is for more than the statutory percentage, the deemed changes do not occur and a different method for determining the approved price to pharmacist price and any SPC (see below).

Statutory price reduction for more than the statutory amount

If a statutory reduction occurs but the amount of the reduction is more than the specified amount (the greater discount) (ie more than 12.5 per cent, 2 per cent or 25 per cent as the case may be) the flow-on reductions for other brands are not deemed but will be agreed between the responsible person and the Minister or determined by the Minister17. While this is not specifically restricted to the reduction 12.5 per cent on first entry of additional brands, it is difficult to see how it would have any practical application to any of the other statutory reductions.

The Explanatory Memorandum to the Health Act amendments states that the subsection operates to require the responsible person to agree to the same percentage price cut as the greater discount. Where an SPC (including a brand price premium and a therapeutic group premium) applies to a brand, the Explanatory Memorandum states that the price determined by the Minister for both the Commonwealth price and the claimed price by the responsible person (and, hence the SPC) will be reduced by the greater discount.

It is not clear that the Health Act supports the position stated in the Explanatory Memorandum. To narrow the operation in this way, the subsection must be read as if the words 'more than the percentage or amount specified' is in fact a fixed percentage equal to the greater discount. An alternative view is that the responsible person and the Minister can agree to any price as long as that price is discounted by at least the statutory amount (ie at least 12.5 per cent, 2 per cent or 25 per cent, as the case maybe) regardless of the greater discount agreed for the item triggering the statutory price cut. Such an interpretation could be problematic to implement due to the prohibition on changing or adding an SPC. It may result in different approved prices to pharmacies for different brands of the same item.

The obvious solution would be to allow an SPC to be imposed or varied. This requires the Health Act to permit the Minister to make a determination that allows the responsible person to claim any price regardless of any reduction determined for the Commonwealth price. It is not clear that this is permitted by the relevant section.18

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Guarantee of supply
When does it apply?

Supply of a brand must be guaranteed for up to two years where a supplier:

  • introduces a new brand of a drug;19 or
  • enters into a new pricing agreement for an existing brand where more than one brand of the drug is listed on the PBS.20

The period can end earlier if:

  • another new brand of the drug that is bioequivalent or biosimilar is listed;
  • a new price agreement for a lower price is entered into for an existing brand of the same item or an item that is bioequivalent or biosimilar; or
  • the guarantee brand is no longer a listed brand.21

This is designed to prevent the imposition of price reductions to all other suppliers where a new price is set due to the actions of a supplier who has no intention or ability to actually supply at that price.

What constitutes a breach of the guarantee?
  • The inability to supply a pharmacist or a wholesaler of any amount within a reasonable period of a request.22
  • The failure to supply the specific amount requested by a wholesaler or pharmacists within a reasonable period (or a prescribed period if regulations prescribe a period).23
Obligations to notify of a breach

Where a responsible person considers that it will either be unable to supply or will fail to supply, the Minister must be notified in writing. Notice is also required where there is an inability or failure to supply.

A breach of the obligations to notify is an offence with a maximum fine of $6,600.24

Consequences of breach
For the responsible person breaching the guarantee

The Minister may revoke or vary the listing of the brand subject to the guarantee or any other brand of the responsible person, or refuse to list a new brand, item or drug of the responsible person.25

For other brands

If, as a result of a breach of the supply guarantee, the Minister delists the brand subject to the guarantee, the Minister may:

  • undo any price reductions that have occurred as a result of the entry of the delisted brand;
  • undo any price reductions that have occurred due to a price agreement that triggered the guarantee;
  • put a drug back onto F1 (if it meets the criteria and would, apart from the previous listing of the delisted brand have been on F1);
  • remove a drug from the formularies (if it is a combination item that would, apart from the previous listing of the delisted brand, not be on F1 or F2); and
  • revoke a decision to opt into price disclosure where the delisted brand was the mandatory brand that triggered price disclosure.26

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Conclusion

These amendments will provide significant savings in the cost of the PBS. However, there will be significant long-term impact on the price that originator manufacturers can charge once a drug becomes subject to competition. The amendments also reduce the profit margins of pharmacists. However, arrangements as part of the PBS reforms but outside the Health Act amendments provide compensation for pharmacists.

The amendments also restrict the ability of pharmaceutical manufacturers to set their own prices due to the application of price reductions to SPCs. The implementation of the sections associated with SPCs may be difficult as the amended Health Act is not entirely consistent in this respect.

In our final part next week, we will examine the other mechanism used to cut the cost of the PBS to government – price cuts driven by the disclosure price of the actual price of pharmaceutical benefits as sold to pharmacies.

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Footnotes
  1. National Health Act 1953 (Cth), s99ACF and s99ACH.
  2. National Health Act 1953 (Cth), s99ACB.
  3. National Health Act 1953 (Cth), s99ACF(1)
  4. National Health Act 1953 (Cth), s99ACF(2)
  5. National Health Act 1953 (Cth), s99ACC
  6. National Health Act 1953 (Cth), s99ACD
  7. National Health Act 1953 (Cth), s99ACE
  8. National Health Act 1953 (Cth), s99ACD(6)
  9. National Health Act 1953 (Cth), s99ACF and s99ACI
  10. National Health Act 1953 (Cth), s99ACG
  11. National Health Act 1953 (Cth), s99ACI(1)(c)
  12. National Health Act 1953 (Cth), s99ACF and s99ACJ
  13. National Health Act 1953 (Cth), s99ACF and s99ACK
  14. National Health Act 1953 (Cth), s99ACF(1)
  15. National Health Act 1953 (Cth), s99ACF(4)
  16. Submission to the Senate Community Affairs Committee, National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2007, Medicines Australia, 13 July 2007
  17. National Health Act 1953 (Cth), s99ACF(2)
  18. National Health Act 1953 (Cth), s99ACF(2)
  19. National Health Act 1953 (Cth), s99AEC
  20. National Health Act 1953 (Cth), s99AED
  21. National Health Act 1953 (Cth), s99AEC(3) and s99AED(3)
  22. National Health Act 1953 (Cth), s99AEF
  23. National Health Act 1953 (Cth), s99AEE
  24. National Health Act 1953 (Cth), s99AEG
  25. National Health Act 1953 (Cth), s99AEH
  26. National Health Act 1953 (Cth), s99AEI, s99AEJ and s99AEK

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