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Focus: Pharmaceuticals – August 2007

Amendments to the Pharmaceutical Benefits Scheme

In brief: The Commonwealth Parliament has passed legislation to amend the Pharmaceutical Benefits Scheme. In the first of a three-part series, Senior Associate Ric Morgan provides an overview of the changes and examines the new concepts introduced by the amendments.

How does it affect you?

    The amendments:
    • impose prices 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 to government of the PBS. The implementation of the amendments is to be staged between 1 August 2007 and 1 January 2012.

In this first of a three-part series, we provide an overview of the changes to the PBS and examine the new concepts introduced by the amendments. Part 2 will examine the way the statutory price cuts operate and detail the supply guarantee requirements. In part 3, 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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Overview

The 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 for some time after implementation.

The most significant long-term impact will be to reduce the price that originator manufacturers can charge once a drug becomes subject to competition. The amendments will also reduce the profit margins of pharmacists. However, arrangements as part of the PBS reforms, but outside the amendments, provide compensation for pharmacists. There will be limited impact on consumers.

The amendments restrict the ability of pharmaceutical manufacturers to set their own prices because of the application of price reductions to special patient contributions. The implementation of the sections associated with special patient contributions may be problematic, as the relevant amendments to the Health Act are not entirely consistent. Implementation of the price disclosure provisions may also present challenges, as the strategic considerations associated with opting-in are complex.

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New concepts

To understand the amendments, it is important to understand the new or modified concepts used in the PBS.

Drugs, items, and brands

Pharmaceutical benefits are now classified into subcategories. A drug is the active substance in the pharmaceutical benefit. An item is a drug in a particular form, such as dosage or strength, and able to be administered in a particular manner, such as orally or by injection.1 For each item, there may be multiple brands, which are different trade names for a particular item. The relationship between these subcategories is shown below, using the example of ondansetron.

Therapeutic groups

Therapeutic groups – groups of drugs that are interchangeable in treating patients – have been used in the PBS pricing schemes for some time but without specific support in the legislation. The amendments provide a statutory basis for therapeutic groups.2

Decisions about both which therapeutic groups should exist and the allocation of drugs to those groups has been the subject of significant consultation between the government and pharmaceutical manufacturers, and are listed in regulations. In the future, these will be determined by the Minister. Therapeutic groups will only have relevance until 1 January 2011, at which time the two parts of formulary F2 merge (see 'Formularies' below).

If an item in a therapeutic group is subjected to price reduction based on price disclosure (this will be explored in more detail in part 3 of this series, which will be published within the next few weeks), then the drug itself (not just the relevant item) must be removed from the therapeutic group,3 even if the 'group' will then consist of only one drug.4

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Co-marketed brands

The PBS recognises that two brands are co-marketed rather than in competition with each other where:

  • an application for inclusion on the ARTG5 for a subsequent co-marketed brand of an item is made within four months of the inclusion on the ARTG of the first co-marketed brand;
  • the first of the co-marketed brands to be listed on the PBS is the first listing of the item on the PBS; and
  • no other brands of the item are listed on the PBS.6

Co-marketed brands are treated as one brand for the purposes of classifying them into formularies.

Formularies

To enable the government to drive down the price of pharmaceutical benefits where the market price is subject to competition, the benefits have been split into two categories, called formularies. In general, the allocation to a formulary is based on whether there are multiple brands of a drug.7

Formularies allow the de-linking of reference pricing between the two formularies. Reference pricing ensures the price of drugs with similar effectiveness is pegged to the cheapest of those drugs. This enables the government to impose competitive pricing selectively for drugs with multiple brands by imposing statutory reductions and market pricing only on drugs in the formulary for multiple brands. In the past, reference pricing has restricted the government's ability to reduce prices on some drugs. This is because there has been a reluctance by government to put downwards pressure on the price of a drug where there is no price competition, even where another reference priced drug has multiple brands.

Initial allocation to formularies has been made by regulation and follows significant consultation between the government and pharmaceutical manufacturers. Future allocations will be determined by the Minister.

(a) Formulary F1 – Drugs with a single brand

When a new brand is listed, the drug in the item will be on F1 unless:

    • the new brand contains and is bioequivalent or biosimilar to a drug that is already on the PBS (or was on the PBS the day before the determination);
    • the new brand:
      • is in the same therapeutic group; and
      • is bioequivalent or biosimilar

        to a drug that is already on the PBS (or was on the PBS the day before the determination); or
    • subject to the co-marketing provisions (see 'co-marketed brands' above), more than one bioequivalent or biosimilar new brand with the same drug (or in the same therapeutic group) are listed within two days of each other.

(b) Formulary F2 – Drugs with multiple brands

If a drug is not eligible to be on F1, it is on F2. Multiple brand drugs or multiple brands of items within a therapeutic group are on F2.8 This is also the case where the brand is the only brand of a drug within the therapeutic group, ie when it would otherwise be eligible to be on F1. Once a drug is on F2, it stays there, even if all other brands are delisted.9

Until 1 January 2011, F2 will be divided into two parts.10 Part A, or formulary F2A, is for drugs where there is limited price competition. Part T, or formulary F2T, is for drugs where there is significant price competition. Initially, these allocations have been made by regulation. Future allocation to Part A or T will be determined by the Minister. An item will be in F2T if the drug is in F2T or in the same therapeutic group as a drug in F2T, or both.

(c) Combination items

Drugs used in combination items where there is no other bioequivalent or biosimilar brand of the combination item are not listed in the formularies. However, once there are multiple brands of the combination item, it will be on F2.11

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Exempt items

In circumstances where an item contains a drug on F2 (ie there is more than one brand of the drug) but the item has only one brand, and there is no bioequivalent or biosimilar brand, the item is an exempt item.12 Exempt items are not subject to statutory price reductions, despite the drug being on F2.

It appears that the concept of the exempt item is to ensure that items that have a specific manner of administration required by some patient populations (such as paediatric or palliative care) are not subject to the same price cuts, which could lead to the manufacturer delisting the item as unprofitable.

Responsible person

The responsible person is the person (either a natural person or other legal person such as a body corporate) on whom obligations and liability will be imposed in relation to a brand listed on the PBS.13

Special patient contributions

Before the reforms, the provisions dealing with special patient contributions (SPC) allowed wide discretion to the Minister and did not reflect the administrative practices of the PBS scheme.14 SPCs now apply where the responsible person and the Minister are unable to agree on a price for a brand. The SPC is the difference between the Commonwealth price and the price claimed by the responsible person as determined by the Minister. SPCs are treated uniformly regardless of whether the SPC is a brand price premium, a therapeutic group premium or some other special patient contribution.

It is not possible for a listing of a new brand to include an SPC.15

Transitional provisions operate to ensure that price determinations and SPCs in place under the PBS prior to the introduction of the amendments are treated as if they were made under the amended PBS.16

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Conclusion

The new concepts introduced with the amendments are important in understanding how the PBS reforms impact on manufacturers and suppliers of pharmaceuticals. Many of the terms used are familiar; however, the amendments to the Health Act clarify and, in some cases, alter their meaning.

In part 2 of this series, we will examine one of the two main mechanisms used to cut the cost of the PBS to government: statutory price cuts and the requirement to guarantee supply for new listings. Part 3 will examine the other mechanism: the price cuts driven by the disclosure price of the actual price of pharmaceutical benefits as sold to pharmacies.

Footnotes
  1. National Health Act 1953 (Cth), s84AB.
  2. National Health Act 1953 (Cth), s84AG.
  3. National Health Act 1953 (Cth), s84AG(4).
  4. National Health Act 1953 (Cth), s84AG(5).
  5. Australian Register of Therapeutic Goods.
  6. National Health Act 1953 (Cth), s84AE.
  7. National Health Act 1953 (Cth), s84AC and s85AB.
  8. National Health Act 1953 (Cth), s85AB(4).
  9. National Health Act 1953 (Cth), s85AB(4)(c).
  10. National Health Act 1953 (Cth), s84AD and s85AC.
  11. National Health Act 1953 (Cth), s85AB(5).
  12. National Health Act 1953 (Cth), s84AH.
  13. National Health Act 1953 (Cth), s84AF.
  14. National Health Act 1953 (Cth), s85B.
  15. National Health Act 1953 (Cth), s99ACB(4).
  16. National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007 (Cth), s99.

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