Wednesday, 23 May 2012
National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2012; Second Reading
That this bill be now read a second time.
The PBS is a major government health program with expenditure expected to reach $9.7 billion in 2012-13. The bill reflects the Gillard government's commitment to ongoing improvement of Australia's health system to ensure that every health dollar continues to be used as effectively as possible.
The bill is also in keeping with the statement of principles signed by the government with industry and consumer organisations in September 2011. The main amendments in this bill relate to the pricing structure for PBS medicines. From 1 October 2012, PBS prices will be expressed at ex manufacturer level based on one price for each pharmaceutical item. This is instead of pricing at approved price to pharmacists which includes the ex manufacturer price and a wholesale margin. This will create uniform pricing for all brands of a medicine across different PBS programs and mechanisms of supply.
The new pricing structure will be carried through to all functions involving PBS prices, including calculating the Commonwealth price for subsidies, provisions for price disclosure, and applying price reductions.
Current arrangements — nature of the problem
Under the current legislation, the price of a PBS medicine includes a margin for the wholesaler, but this margin varies depending on the price of the medicine. A percentage rate applies for less expensive items and changes to a flat fee for very expensive items over $1,000. The margin also varies depending on where a medicine is supplied. For example, the margin is different for supply of a medicine through a community pharmacy or a hospital. For some PBS supplies there is no wholesale margin. In this circumstance, a notional approved price to pharmacists is used to satisfy the requirement to price at that level.
This is further confused by different PBS pricing calculations applying at different points in the pricing process. For example, statutory price reductions apply to the approved price to pharmacists, but price disclosure calculations take place at manufacturer price level.
In essence, the difficulties arise because the approved price to pharmacists is not at the beginning of the pricing sequence and is no longer suitable as the core PBS pricing level.
This means that pricing amounts continually need to be converted administratively between the two pricing levels. This is cumbersome. It can create inconsistencies due to rounding and it increases the risk of error in PBS listing and pricing processes.
The amendments in the bill remove the concept of approved price to pharmacists, as the level at which pricing agreements are made, and replace it with approved ex manufacturer price—the price set at the beginning of the process.
In doing so, only one ex manufacturer price will need to be agreed or determined for a brand of pharmaceutical item—by reference to the quantity in the lowest PBS pack size for any brand of the item. The price for different pack sizes of any brand will then be calculated from the approved ex manufacturer price as a proportional ex manufacturer price.
There are many provisions and functions in the act that currently rely on approved price to pharmacists. They will work equally well, or better, using ex manufacturer prices.
For example, the bill also amends provisions for calculating the Commonwealth price, the 16 per cent price reductions for new brand listings, and price disclosure, so they operate using ex manufacturer prices. However, the processes for undertaking those calculations remain effectively the same.
The Commonwealth price includes the manufacturer price, wholesale margin, pharmacy or hospital mark-ups, and pharmacy dispensing and other fees. It is the amount which determines the government subsidy and the safety net amount for the patient.
Wholesale mark-ups will continue to be based on the pricing provisions in the Fifth Community Pharmacy Agreement. They will be included in the existing legislative instrument that determines the manner for calculating the Commonwealth price. In moving from approved price to pharmacists to approved ex manufacturer price, the pharmacy level price, which includes the wholesale mark-up, will now be referred to as the price to pharmacists or PTP.
The new pricing arrangements will still allow for a premium or special patient contribution to be claimed by companies in addition to the amount the Commonwealth is willing to agree for a subsidy. As is currently the case, this becomes the additional amount payable by the patient for higher priced brands.
Transitional — convert to ex manufacturer prices
Transitional provisions in the bill set out the method for converting current PBS prices to an ex manufacturer amount. This involves the applicable wholesale margin being subtracted from each price in force on the day before the commencement date.
For over 98 per cent of the 2,400 pharmaceutical items on the PBS, the conversion calculation will result in a single ex manufacturer price for the quantity in the lowest pack size. For those items, the converted price is expected to become the approved ex manufacturer price.
Indicative ex manufacturer prices calculated using this method will be made available publicly on the PBS website by the end of May, with notice of this being provided to all companies and other stakeholders. This gives companies over six weeks to review prices and discuss them with the department before they need to be finalised for 1 October 2012.
A small number of conversion calculations from current prices will result in multiple prices, so adjustments will be necessary to achieve a uniform ex manufacturer price. This will occur for around 40 pharmaceutical items, which is less than two per cent of total PBS items. For many of those 40 items, the difference in price will be only one or two cents.
The legislation provides that, where a price change is required, the new price may be negotiated with companies or, failing this, a default price will apply.
All pharmaceutical companies with a listed brand of an item requiring any price adjustment will be contacted by the department and invited to negotiate a new price on a case-by-case basis.
The transitional arrangements are designed to achieve new prices that are as close to equivalent to current prices as possible, either directly or through new agreements.
There are no savings associated with this proposal. The intention is that the move to the new pricing structure will have a neutral effect on PBS prices overall, and no impact on PBS expenditure.
For the vast majority of negotiations, the Commonwealth will advise companies of a weighted average price for the item based on prices and volumes of supply of different pack sizes or supply via different PBS programs. Once a new price is agreed it will apply for all brands.
The weighted price has not been legislated as the new price for these items because it would not produce the best result in all situations. Importantly, it would not provide the necessary flexibility for negotiating based on individual circumstances where appropriate. The aim is not to get a price reduction, but to arrive at an average across existing prices that is most representative of the effective PBS price and, thus, give the most neutral pricing impact.
However, for the PBS to operate, all listed products must have a known price. In the event that a price is not negotiated for an item, a default price which is the lowest of the converted ex manufacturer prices for the item will apply.
In a very small number of cases, about 11 items, the method in the bill does not arrive at the current lowest ex manufacturer price. For these items, the default will be set in the National Health (Pharmaceutical Benefits) Regulations.
Reliance on a default price is not the government's preferred method. The bill makes clear that a negotiated price will always take precedence over a converted default price. Nonetheless, the default provision is important and necessary to ensure continuity for the PBS.
Once an approved ex manufacturer price is in place, prices for different pack sizes of those items will be calculated proportionally. For all brands, the price for the same quantity is the same.
Premiums on transition
Where brands currently have claimed prices resulting in premiums or special patient contributions, those premiums are expected to remain very similar to current amounts. Claimed prices will be converted to ex manufacturer level by applying a change equivalent to the change in the approved price.
This is the same approach used for premiums affected by statutory price reductions and price disclosure. Companies can discuss with the department any impact on a premium resulting from a converted price.
If a new ex manufacturer price is negotiated for an item, the existing premium for a brand can also be adjusted.
Single brand combination pharmaceutical items will need new price agreements as there are special considerations when pricing these medicines. The new prices will be negotiated taking into account the converted ex manufacturer portion of the component drug prices.
In keeping with agreements
The government understands the importance of the agreements it has with pharmaceutical industry, consumer, wholesaler and pharmacy bodies.
When the expanded price disclosure arrangements were put in place, it was as a result of the policies negotiated with industry in the 2010 memorandum of understanding between the government and Medicines Australia.
Consistent with this government's approach to partnering with industry, the amendments in this bill formed part of the 2011 statement of principles of commitment between stakeholders. This was signed by the government, the Consumers Health Forum, the Generic Medicines Industry Association and Medicines Australia.
The amendments in this bill are in keeping with those agreements and honour commitments made in good faith. The transitional arrangements regarding negotiation of prices are true to the method described in the statement of principles.
Each year there are generally three price change dates—in April, August and December.
Transitioning to the new structure in October, a month that is not normally subject to pricing changes, will reduce complexity for industry and provide transparency for any price differences.
In the event that a company wishes to pursue a price that is different from the 1 October pricing outcome, they will of course be able to use the usual price change processes for 1 December 2012.
Relevance of the changes—a better more efficient PBS
This bill recognises that pricing practices that have grown up with the PBS and served us well in the past are no longer the best fit for the many different subsidy and supply arrangements in use now.
The changes will support improved pricing practices generally, and more efficient application of price disclosure across an increasing number of PBS medicines.
The bill also contains a technical change which will improve the efficiency of listing medicines on the PBS for supply only via PBS prescriber bags.
Industry cooperation and acknowledgement
This legislation is due in no small part to the commitment shown by the pharmaceutical industry to support pricing changes needed to improve the efficiency of the PBS pricing structure. It also reflects the support of consumer, wholesaler and pharmacy groups.
Implementation will rely on government and industry working together to achieve the outcomes needed to fulfil the undertakings given on both sides in the agreements.
I have asked my department to work with pharmaceutical companies so that, in the relatively small number of cases where prices need to change, the effects are shared between companies, and with government, as evenly as possible.
Summary—efficiency and benefits
Sound pricing arrangements are vital to the PBS. In effect, the pharmaceutical industry has always used ex manufacturer prices. There are benefits for the government and users if the PBS does the same.
The new pricing structure will improve the application of current PBS policies with no change to the operation of the scheme for patients, pharmacies and suppliers. There is no effect on PBS funding, on the medicines listed on the scheme, nor access to them.
However, the benefits from better, more efficient PBS practices will flow on indirectly to all users of the PBS—and that is a good outcome for everyone.
I am confident that, based on the goodwill shown thus far, that result will be delivered. I commend the bill to the House.