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Pharmaceutical Benefits Scheme (PBS) Reform

The Government is making changes to the Pharmaceutical Benefits Scheme (PBS) to give Australians continued access to new and expensive medicines while ensuring the PBS remains affordable into the future.

PDF printable version of Pharmaceutical Benefits Scheme (PBS) Reform (PDF 234 KB)

2 February 2007

Fact Sheet

1. Introduction

The purpose of this paper is to provide further detail about the PBS reform measures and associated implementation timeframe in addition to that released on 16 November 2006. Further details about the reforms will be released by the Department from time to time as they become available.

2. Background

The Government is making changes to the Pharmaceutical Benefits Scheme (PBS) to give Australians continued access to new and expensive medicines while ensuring the PBS remains affordable into the future.
The reforms comprise a range of inter-connected measures:

• Changes to the pricing of PBS listed medicines;
• Pharmacy and pharmaceutical wholesaler compensation arrangements;
• Streamlined authority approvals for some medicines; and
• Establishment of an access to medicines working group.

The Government is also considering a generic medicines awareness campaign.
It is timely to introduce these changes, with the PBS entering a phase of lower, more stable growth and with the knowledge that patents for over 100 drugs will be expiring in the next ten years. These changes will make the PBS an even stronger system with the government paying less for certain medicines without increasing the cost to patients.

3. Measures

3.1. Changes to the Pricing of PBS listed medicines

3.1.1 Creation of formularies

From 1 August 2007, PBS medicines will be listed on two separate formularies:

• Formulary 1 (F1) will comprise single brand medicines. However, it will not contain single brand medicines which are interchangeable at the patient level¹ with multiple brand medicines² ; and
• Formulary 2 (F2) will comprise multiple brand medicines and any single brand medicines which are interchangeable with multiple brand medicines at the patient level.

A medicine will be classified into only one formulary. If one formulation or strength of a medicine has multiple brands, then the entire molecule will be listed on the F2 formulary, even if multiple brands are not available in other formulations or strengths of that medicine. Formulary lists as at 1 December 2006 were distributed to stakeholders on 20 December 2006.
Over the counter medicines subsidised through the PBS will be separately flagged and distributed across the formularies subject to the same pricing arrangements as apply within each formulary.

3.1.2 Ongoing price links

• There will be no ongoing price links across medicines listed on F1 and those listed on F2. Attachment A provides examples of how current reference pricing groups will apply when the formularies take effect.
• Reference pricing will continue to apply between medicines that are linked within reference pricing groups on F1.
• Reference pricing will continue to apply within Therapeutic Group Premium (TGP) groups and across different brands of the same medicine listed on F2.

3.1.3 Pricing mechanisms

3.1.3.1 Price disclosure

Over time, medicines listed on F2 will move to a system of price disclosure where the price that the Government pays will reflect more closely the actual price at which the medicine is being sold.
A transitional pricing arrangement will apply to F2 with two sub-formularies being created:

• Formulary 2A (F2A) will comprise medicines that did not attract significant trading terms to pharmacy at 1 October 2006 (i.e. less than 25%).
• Formulary 2T (F2T) will comprise medicines that did attract significant trading terms to pharmacy at 1 October 2006 (i.e. 25% or more).

3.1.3.2 All medicines on F2A

Medicines on F2A will be subject to the following pricing arrangements:

• Staged price reductions of 2% per year for three years will apply commencing on 1 August 2008.
• The 12.5% price reduction policy will continue to apply, where relevant.
• Price reductions for medicines on F2A will apply to all brands, forms and strengths of that medicine and to products that are interchangeable with that medicine.
• Price disclosure:
  • Suppliers listing a new brand on or after 1 August 2007 must agree to disclose the actual market price as a condition of listing. Staged price reductions for that medicine will apply until such time as the price of the medicine is based on the disclosed price.
  • The first price reductions resulting from disclosure will take effect from 1 August 2009. Price reductions will reflect the weighted average disclosed price. (refer Section 3.1.5)
  • Pricing based on disclosure will then continue on an annual cycle.

3.1.3.3 All medicines on F2T

Medicines on F2T will be subject to the following pricing arrangements:

• A one-off 25% mandatory price reduction will apply on 1 August 2008.
• The 12.5% price reduction policy will continue to apply, where relevant.
• Price reductions for medicines on F2T will flow on to all brands, forms and strengths of that medicine and to medicines that are interchangeable with that medicine.
• For a defined list of patented medicines on F2T, the 25% price reduction will be phased over the remaining patent life.
• Price disclosure:
  • Suppliers listing a new brand on or after 1 January 2011 must agree to disclose the actual market price as a condition of listing.
  • The first price reductions resulting from disclosure will take effect from 1 August 2012. Price reductions will reflect the weighted average disclosed price. (refer Section 3.1.5)
  • Pricing based on disclosure will then continue on an annual cycle.

3.1.3.4 F1 medicines entering F2 after 1 August 2007

• Medicines moving from F1 will, as a general rule, join the F2A formulary.
• The 12.5% price reduction policy will continue to apply, where relevant.
• Staged price reductions of 2% will apply as per F2A up to and including 1 August 2010.
• Price disclosure:
  • Suppliers listing a new brand on or after 1 August 2007 must agree to disclose the actual market price as a condition of listing.
  • The first price adjustments resulting from disclosure will take effect from 1 August 2009. Price reductions will reflect the weighted average disclosed price.
  • Pricing based on disclosure will then continue on an annual cycle.

3.1.4 Price disclosure

The following principles will apply:

1. Price disclosure arrangements will be triggered by the listing of a new brand of a listed medicine on or after 1 August 2007 (F2A) and on or after 1 January 2011 (F2T).
2. Unless a 12.5% or 2% price reduction applies, the initial listing price of the new brand will be the same price as other brands of that medicine. However, it will be a requirement of listing that the supplier of the new brand agrees to disclose to the Department of Health and Ageing the actual price at which they sell that brand to wholesalers and/or pharmacies.
3. All other suppliers of that medicine (brands, forms and strengths) will be invited to volunteer to disclose the prices at which they sell their medicine.

3.1.5 Calculation of the weighted average price

The following principles will apply:

1. For the purposes of calculating the weighted average disclosed price, the disclosed price will be the ex-manufacturer price, i.e. excluding the wholesaler mark-up.
2. Price reductions as a result of price disclosure arrangements will reflect the weighted average disclosed price.
3. Calculation of the weighted average disclosed price will exclude the first month of data following listing, although these data will still be collected. This is to ensure that the initial period of market competition does not unduly influence the weighted average.
4. The submission of price data to the Department will be at a specified time (expected to be on a quarterly basis).
5. The weighted average disclosed price will not apply if the required price reduction is less than 10% of the current PBS ex-supplier price.
6. If the reduction is greater than 10%, the weighted average disclosed price will become the government subsidy price for that medicine.
7. All suppliers will be advised of any price reduction six months before the price change takes effect.

An example of how price disclosure would work is at Attachment B.

3.1.6 Guarantee supply

It is anticipated that legislation will protect supply by requiring the suppliers of new brands of medicines listing on the PBS to guarantee to supply for a minimum period and imposing penalties if they fail to meet this commitment.

3.2. Pharmacy and wholesaler support arrangements

Pharmacists will be provided assistance to adjust to the new arrangements. This will take the form of:

• An incentive of $1.50 to dispense a substitutable, premium-free medicine. This applies only to PBS subsidised medicines. Under-co-payment medicines and private scripts will not be eligible for this payment.
• An incentive of 40c for each prescription processed using PBS Online; and
• Increases in pharmacy mark ups and dispensing fees.

Additional funding of $69 million over three years will be added to the Community Services Obligation (CSO) Funding Pool to compensate pharmaceutical wholesalers for the impact on the wholesale margin resulting from the new pricing arrangements. Wholesalers are eligible to access the CSO Funding Pool if they can demonstrate that they meet specified service standards.

3.3. Streamlining authority approvals for some medicines

From 1 July 2007 the PBS-listed medicines that require an authority approval prior to prescribing will be separated into two categories:

1. Medicines that require approval from Medicare Australia prior to prescribing.
   • This category will include medicines for short term use, Section 100 medicines, requests for increased quantities and those medicines with an increased potential for misuse, abuse or adverse effects, such as narcotic medicines.
2. Medicines where the prescriber will not have to obtain approval from Medicare Australia prior to prescribing.
   • This will not negate the need for the prescriber to ensure that patients receiving such medicines meet the prescribing requirements as specified by the Pharmaceutical Benefits Advisory Committee (PBAC) and specified in the PBS Schedule.
   • This will apply to medicines for the treatment of long term chronic conditions (such as diabetes and osteoporosis) where the patient and doctor are both very familiar with the condition and medication. Medicare Australia will undertake education and monitoring to ensure doctors are aware of the changes.

A list of PBS medicines and item codes for which the streamlined authority arrangements will apply was distributed to stakeholders on 20 December 2006.

3.4. Access to medicines working group

A Medicines Australia and Department of Health and Ageing working group will be set up to consider issues regarding timely and appropriate access to new medicines for the PBS. The working group will establish a work plan and performance indicators for its work and report against these indicators. Other relevant bodies, such as the Therapeutic Goods Administration and the PBAC will be involved as required. The first meeting of this group is expected to take place in April 2007.

3.5. Generic medicines awareness campaign

The Government is considering a public awareness campaign to promote the use of generic medicines. The campaign is expected to comprise print, radio and television advertisements, which promote the safety, health and economic aspects of generic medicines. It would focus in particular on high users of the PBS, including concession card holders and those with chronic, long term conditions.
The campaign would commence in late 2007 or early 2008 and continue until 2009-10.

4. Implementation

4.1 Stakeholder engagement

The Department of Health and Ageing will establish a stakeholder reference group as a forum for providing updates to stakeholders on implementation progress and as a forum for seeking feedback on a range of issues.
The stakeholder reference group comprises representation from the Australian Medical Association, the Australia Self Medication Industry, the Generic Medicines Industry Association, Medicines Australia, the National Pharmaceutical Services Association, the Pharmacy Guild of Australia and the Pharmaceutical Society of Australia. The first meeting of this group took place on 19 December 2006.

4.2 Next steps

The Department of Health and Ageing will manage the implementation of the reforms in conjunction with other government agencies and key stakeholder groups. Key issues to be addressed in the implementation process will be:

• Amendments to the National Health Act 1953 by 1 July 2007.
• Development of information for industry, pharmacies, wholesalers and prescribers on the new arrangements.
• Finalisation and publication of F1 and F2 lists.
• Finalisation and publication of authority-required medicines that will be covered by the new streamlined process.
• Development of procedural guidelines outlining price disclosure requirements, an IT system to collect this information, and training for industry on these requirements.
• Redesign of Medicare Australia systems and prescribing and dispensing software to conform to the new requirements.]
• Formation of the Medicines Australia – Department of Health and Ageing working group.
• Development and implementation of a generic medicines awareness campaign.

¹Medicines in the following groups have been recommended by the Pharmaceutical Benefits Advisory Committee (PBAC) and determined by the Minister to be interchangeable at the patient level: ACE inhibitors, angiotensin II receptor antagonists, calcium channel blockers, H2 receptor antagonists, proton pump inhibitors and the HMG Coenzyme A reductase inhibitors (pravastatin & simvastatin only).
²Medicines will move from F1 to F2A from time to time, as new brands of F1 medicines are listed on the PBS and competition for the supply of those medicines commences.

Attachment A

Examples of how current reference pricing groups will be split across formularies³

Reference Pricing Group L01 (1) – Antineoplastic agents (for the treatment of cancers):

Medicines in group	Formulary
Paclitaxel	F2A
Vinorelbine tartrate	F2A
Docetaxel	F1
Doxorubicin	F1
Gemcitabine	F1
Pemetrexed	F1
Topotecan	F1

Reference Pricing Group N06 (3) – Psychoanaleptics (for the treatment of depression):

Medicines in group	Formulary
Citalopram hydrobromide	F2T
Fluoxetine hydrochloride	F2T
Fluvoxamine maleate	F2T
Mirtazapine	F2T
Moclobemide	F2T
Paroxetine hydrochloride	F2T
Sertraline hydrochloride	F2T
Escitalopram oxalate	F1
Reboxetine mesilate	F1

³Schedule of Pharmaceutical Benefits, August 2006

Attachment B

Example of how price disclosure would operate

Note: Assumes drug with single item code, and all manufacturers disclosing price information. Other disclosure scenarios (eg. where only one manufacturer discloses price information) will result in different actions.

Price disclosure - example

1. Single brand medicine, PBS price (ex-manufacturer price) is $100, originator sells with no discount – no disclosing brands

PBS Price	Manufacturer	Actual supply price	Share of volume
$100.00	Originator	$100.00	100%

2. New brand enters after patent expiry, with disclosure a condition of listing. New brand offers 30% discount to pharmacy and secures 20% of volume. In this scenario the originator also elects to disclose.

PBS Price	Manufacturer	Actual supply price	Share of volume
$100.00	Originator	$100.00	80%
	New Brand	$70.00	20%
		WAP price difference Action:	$94.00 6.0% no price reduction

Weighted average pricing (WAP) is less than 10% below ex-manufacturer price, so there is no price reduction.

3. New brand gains 40% market share with 30% discounts to pharmacy

PBS Price	Manufacturer	Actual supply price	Share of volume
$100.00	Originator	$100.00	60%
	New Brand	$70.00	40%
		WAP price difference Action:	$88.00 12.0% price reduction

The WAP is 12% below the ex-manufacturer price, so a price reduction is triggered.

4. New brand gains 50% market share with 50% discounts to pharmacy

PBS Price	Manufacturer	Actual supply price	Share of volume
$100.00	Originator	$100.00	50%
	New Brand	$50.00	50%
		WAP price difference Action:	$75.00 25.0% price reduction

The WAP is 25% below the ex-manufacturer price, so a price reduction is triggered.