New PBS Bill Receives Senate Approval in Australia

The new legislation, whose full title is the National Health Amendment (Pharmaceutical Benefits Scheme—PBS) Bill 2007, is aimed at making structural changes to Australia's reference pricing system. Currently, there is just one formulary for products that are approved for inclusion on the PBS (i.e., the list of subsidised drugs). However, the new bill proposes to create two separate formularies, which would not be linked for pricing purposes. The new formularies would be set out as follows:

• F1: Single drugs (i.e. brands);
• F2: Drugs that have multiple brands or are interchangeable with drugs that have multiple brands (i.e., mainly generics).

There is also a further provision for F2 drugs to be divided into two separate categories until 2011. These would be comprised of products with low competition (F2A) and high competition (F2T). Other changes proposed in the new bill include a requirement that drugs companies disclose market price data to the Department of Health and Ageing (DHA) in order to ensure that the price that the government pays for F2 drugs reflects the actual price paid by pharmacies. Generic drugs would also be subject to the following price reduction measures:

• A minimum 12.5% price reduction on the price of any new bioequivalent (i.e., generic) brand of a medicine that lists on the PBS, as well as any existing brands of that medicine/those in the same therapeutic group that share the same manner of administration as the new brand (though not if they have previously undergone a 12.5% reduction);
• A price reduction of 2% per year for three years (from 1 August 2008) for F2A medicines;
• A one-off price reduction of 25% on 1 August 2008 for F2T medicines;
• Mandatory price reductions in those cases where it is found that the difference between the price paid by a pharmacy for a medicine and the price approved by the government is 10% or more.

Australian Senate Proposes Minor Modifications

The bill has now been approved by the Australian senate, albeit with a minor modification with regard to combination products. The senate recommended that a combination product comprised of two F2 drugs should not be subject to an automatic price reduction if the prices of its component drugs are forcibly reduced. Instead, the pricing should be left to the discretion of the health minister, who should take into account the recommendations of the Pharmaceutical Benefits Advisory Committee (PBAC). This is because a combination drug may have advantages over its component drugs in terms of compliance or toxicity.

The senate also requested that the health minister reports back 12 months after the new reforms have been implemented in order to discuss their impact.

Outlook and Implications

The main thrust of the new bill is aimed at breaking the link between generics and brands. Under the current system, generics are widely discounted to pharmacies, while brands are not, and so prices of brands get dragged down to unsustainable levels. If the new bill is adopted, it would pave the way for reasonable pricing of innovative branded drugs, while generics would be subject to heavy price cuts. According to official figures, the bill is expected to deliver savings of A$588 million (US$491 million) over the next four years, largely through price cuts for generics, while savings of as much as A$3 billion (US$2.5 billion) are forecast over the next 10 years.

The bill has been broadly welcomed by key organisations, including the research-based industry association, Medicines Australia; the pharmacist lobby group, Pharmacy Guild; and the doctor's group, the Australian Medical Association (AMA). However, unsurprisingly, the Generic Medicines Industry Association (GMiA) has been fiercely critical. The GMiA calls for certainty over pricing, and also claims that the new bill will encourage "evergreening", as companies go an extra mile to ensure that their brands remain listed on the F1 formulary. However, some critics argue that the reforms do not go far enough, given that generics will still be more expensive than in comparable developed markets such as the United Kingdom, the United States, and New Zealand. One alternative suggestion has been the introduction of a closed bidding system for generics.

The lack of a big price gap between brands and generics is one factor that has led to a low generic penetration rate in Australia. Generics account for only 28% of the country's prescriptions compared with 50% in the United States and as much as 75% in the United Kingdom. Meanwhile, branded drugs have been subject to increasingly severe price cuts in order to maintain a PBS listing (see Australia: 4 May 2007: Prescription Surcharges Planned to Offset Heavy Price Cuts in Australia).